Banks Should Follow Silicon Valley and Split Up Their Services

This week, Facebook notified users that its chat services would be leaving the main Facebook app for iOS and Android, and users would be forced to download Messenger, a separate app developed by Facebook solely for its messaging and chat services. 

All of this is a part of Facebook’s new strategy of decentralizing its mobile services, moving away from having one app do everything, and instead having many apps do one specific thing. According to Strictly VC, Facebook has 40 apps combined on the iOS and Android platforms.

Facebook isn’t the only tech giant separating its services — Google and Apple have been doing this for ages. Strictly VC estimates Google has about 150 apps in the iOS and Android apps store and Apple has a number of stock apps that are preinstalled on every iOS device.

Banks can learn from these tech companies. By dividing services into specific apps, these tech companies can divert attention and funds to projects that work — like Gmail or Instagram — and ditch ones that don’t — like Facebook Poke, Facebook’s attempt at copying Snapchat that is no longer in active development. By finding their core competency, tech companies are becoming more efficient and can easily figure out how they should focus their resources.

Chris Skinner, an expert in the field of financial services, is a proponent of this strategy. Skinner told Bank Innovation that Silicon Valley companies are moving “into an organization structure where you have a lot of small, fast-moving products where you can throw them out [to the public] and let people play with them.”

Skinner thinks that the future of banking lies in separated services — where banks figure out their “core competencies and learn how to leverage them via API, cloud, and app-based services.” What’s holding them back? The fact that banks haven’t identified their core competency is an issue, notes Skinner.

Another issue is banks don’t want to admit that their era of being an organization that integrates a number of services — like lending, retail banking, wealth management, prepaid cards, etc — is over, Skinner said.

Banks still want control, instead of breaking [their services] into pieces. If banks componentized, at least customers would be using pieces [as opposed to turning to alternatives]…it’s hard for banks to say ‘We’re not going to control distribution and be the owner of the relationships.’ It’s a big cultural barrier, especially for financial institutions, which are traditionally slow movers.

There are a number of advantages in componentizing banking. Skinner cites PayPal as an example: the company released two APIs, one in 2011, and a mobile-focused on in 2013. Both releases saw a spike in profits and a fall in costs for PayPal. “Once you build the network, the more it’s used, the more you make… you can make money by making services open-sourced.” PayPal’s network is the gift that keeps on giving — PayPal’s finances are strong and continue to support parent company eBay.

If banks don’t wise up and start figuring out their strengths and focusing on them, Skinner warns, tech companies may overtake them. With rumors about Facebook, Amazon, and Apple all attempting to enter the payments industry, a fragmented approach could attract users from banks.  “At the moment, with Amazon’s OneClick, Facebook’s [still unannounced] payments, and Google Wallet — if you’re the bank in those processes, in some form, that’s far more valuable than not in any form at all.”