Insufficient Balance

Buy vs. build, part II

Neil Davidson — Fri, 17 May 2013 10:20:47 +0000

Last year I wrote about the fact that very few mobile operators have built their own payment platforms, choosing instead to buy (or, more strictly speaking, license) them from specialized vendors. It turns out that this is how operators get most of the content and services that they offer to customers: rather than building, they buy.

This is largely true for banks, too. There is a healthy industry of software companies that sell everything from core-banking systems to white-label personal-financial-management tools to banks. Of course, banks do develop some systems in-house—at minimum, big banks have to employ large numbers of developers to make sure that all the other software that they have bought can talk with each other—but generally speaking there is a preference to buy rather than build.

On the other hand, all of the fast-growing startups of the past decade (I am thinking of Facebook, Google, and the like) have built their core products from scratch. As I pointed out in my previous post, such companies had to build because they couldn’t buy: if Sergey Brin and Larry Page could buy a good search engine, they probably wouldn’t have bothered to start Google.

That MNOs and banks buy rather than build is entirely defensible. For the most part, their competitive differentiation vis-à-vis their rivals does not dwell in software. Airtel in India is famous for outsourcing just about everything that did not give them a competitive advantage, and of course IT was one of the first functional areas to be spun off. Likewise, banks have historically competed on the basis of their branch networks, their interest rates, or their customer service—not their software.

But the competitive landscape is evolving, and in both financial services and telecommunications we are more and more frequently seeing the buyers start to compete with the builders. PayPal was the original example of this in financial services, and today there are scores more technology companies, led by Square, with the disruption of traditional financial institutions on their agenda. And of course the increasing rivalry between MNOs and OTT players is by now old news.

It seems to me that these new challengers have, by virtue of their ability and preference to build software, a huge competitive advantage over the buyers. I see several interrelated reasons for this.

One of the reasons that buying software makes sense for the incumbents—if your requirements are standard, it’s more cost effective to buy software from vendors that can sell it over and over again to similar players—means than it is almost impossible to buy your way to a position of competitive differentiation. When Square came out with a dongle that transformed any iPhone into POS device, banks didn’t have the luxury of buying something similar from a vendor. Nothing similar existed.
Firms that develop their own software are far more agile than those that can’t, for obvious reasons. If Mark Zuckerburg thinks of a new feature for Facebook, he can get a prototype thrown together in a hackathon in a matter of, literally, hours. Compare this to the grinding procurement process that banks and MNOs are obliged to follow when buying new software.
When engineering and product development are in-house, a fairly intimate relationship between those who are creating software and those who are using it can arise, allowing companies to build and iterate their products based on feedback that they gather from their customers. When software is bought or its development is outsourced, this feedback loop is at best extended and at worst broken: vendors have no direct channels through which to gather end user feedback, and so naturally find it more difficult to build products that meet their needs.

As a case study, we can look at text messaging, where mobile operators are seeing their cash-cow SMS franchise being eaten alive by the likes of WhatsApp, WeChat, and so on. Such services caught on initially not only because they tend to be more cost effective for users, but also because they offered (and continue to add) new bells and whistles (emoticons, photo-sharing, stickers) that customers like.

Now of course, MNOs are trying to build competitive messaging platforms. The most prominent is an initiative from the GSMA called Joyn, which is a rich-messaging service that is supposed to compete with OTT offerings. But the process of getting Joyn to market has been painfully slow: the GSMA started working on Joyn in 2007, and it is only now starting to become available to customers in a handful of markets. Part (not all) of the delay stems from the fact that the GSMA, like its members, has no in-house product development and software engineering capability. Other operators are going it alone: Indosat in Indonesia just announced that it will offer an exclusing messaging platform, but again, because they are not a software company they are in the process of evaluating vendors that might build it for them. This of course suggests that any such platform is at least a year away from being ready for launch.

MNOs are in the process of losing the messaging wars, and I believe a major reason for it is that they, by and large, lack the capacity to build competitive products themselves. If this skirmish between the old guard of buyers and the new guard of builders is any indication, then, the moral is clear: be a builder.

Is the future of payments not having to think about them?

Neil Davidson — Tue, 16 Apr 2013 11:03:58 +0000

In the developed world the emergence and growing penetration of smartphones augers a major change in the way people make payments at retail. I think one very likely shift is from a world in which payments require the active initiation by and authorization of customers to one in which customers' role is more often passive, with explicit review of payments occurring asynchronously (either in advance or retrospectively). Such genuinely frictionless payments promise greater convenience for customers and more revenues for merchants; they also open up new opportunities in the value chain for firms willing to assume the risks that such payments entail.

To understand what I mean, it is helpful first to think about what is happening with online services and the way people pay for them. Subscription-based cloud services have become the darling of venture capitalists in part because customers are far more likely to continue paying for so-called opt-out services to ones that require periodic opt-in. I pay for services this way personally (Spotify, Dropbox), and we use many more in our company (Google Apps, Amazon Web Services, Xero, Jira). I appreciate the convenience—in the most general sense, subscription billing reduces the number of conscious decisions that I have to make, which frees up brain bandwidth for more important things—and these providers and their investors like the recurring revenues. Research presented in a recent TechCrunch article suggests that, at least among a certain user segment, there is still lots of headroom in customers' willingness to pay for services that are billed on a subscription basis.

Something similar is afoot in bill payments. In the old days, paying bills meant reviewing (paper) bills and deliberately initiating payments (by check). Today, however, customers are increasingly likely to issue instructions, either to their bank or their biller, to automatically debit their bank account on a recurring basis. Sometimes these payments are for the same amount every month, as with, for example, student loans or gym memberships, and sometimes the amount varies, as with utility or credit card bills.

This move from active to passive payments online appears to be a boon for both sellers and consumers. What does this suggest about payments in the real world? Consider the following examples as intimations of where we may be headed. Today, Square Wallet customers can walk into a Square merchant's shop, order and collect a coffee, identify themselves by name, and walk out—no card, cash, or recordable authorization of the purchase required. Cover extends this concept to dining and will allow customers who make a reservation using their app (presumably offering up their payment credentials in the process) to simply get up and leave the restaurant when they are finished with their meals. And it is easy to think of other possibilities. Today, checking out of a hotel is a time-consuming and largely pointless exercise. Why not e-mail guests an itemized list of charges after they have left, which they can review at their convenience (or, if they are especially harried and trust the hotel, not at all)? This would save time for both the guest and the hotel's staff.

Now for customers to accept these arrangements, they must feel that they have the ability either to preview payments or (more commonly) to retroactively adjust those that have already been made. The simplicity of passive payments will have to be accompanied by mechanisms that give customers control of them for them to be truly attractive. If Cover automatically adds a 15% tip to restaurant bills, users will want the ability to increase or decrease that default depending on the quality of service. Similarly, if a hotel guest finds a minibar or telephone charge that they did not make on their statement, they will need a way of challenging those charges. And so on. This means there is a risk that there will be a discrepancy between what the customer thinks (or fraudulently claims) that he owes and what the merchant thinks (or fraudulently claims) it is owed.

No player in today's four- or three-party model is very well positioned to assess and therefore to assume such risk: the final word in any dispute with a credit card company about a charge is evidence (in the form of a signature or PIN entry) by the customer, which is a hallmark of an active payment. In some cases, merchants themselves will be willing to assume this risk: after dozens of stays in their properties around the world, Starwood can be reasonably certain that I'm not going to pull a fast one on them by disputing a room-service charge that I did in fact incur. In cases when a single player acts as both acquirer and issuer (Square), that entity will be situated nicely to bear and manage such risk. And in still other instances, firms like Affirm or Klarna, currently focused on m-commerce, that can assess creditworthiness and extend credit in realtime will underwrite it. But regardless of who assumes this risk, I suspect the business case for doing so will exist for the simple reason that customers tend to spend more when they don't have to think about paying—and merchants will pay for that.

Desperately seeking disruption

Neil Davidson — Fri, 08 Mar 2013 02:32:47 +0000

Like other, more famous graduates of Harvard Business School, I have been influenced by the writings of Professor Clayton Christensen and his theory of disruptive innovation, which he laid out in 2003 in his landmark book The Innovator’s Dilemma. (For those who haven't read it, TechCrunch recently published a summary of the book's key ideas.)

Christensen categorizes innovations as either sustaining or disruptive. Sustaining innovations target “demanding, high-end customers with better performance than what was previously available.” When a new generation of TVs comes out that are brighter, thinner, and larger than those that went before, they exemplify sustaining innovation. In contrast, disruptive innovations are “products and services that are not as good as currently available products, but… are simpler, more convenient, and less expensive,” making them available to new or less-demanding customers. Classic examples of disruptive innovations include low-cost airlines, online travel-booking sites, and mobile phones (which originally disrupted landline telephony and are now, in their smart incarnation, in the process of disrupting the traditional PC business). Needless to say, these are all innovations that benefitted consumers enormously, by making a certain kind of product accessible to a wider range of users than ever before.

It is important to stress that disruptive innovations, as Chistensen defines them, are actually worse than the products and services that are otherwise available to customers along at least one important dimension. Mobile money counts as disruptive because it compares unfavorably to traditional banking in a number of ways: the customer experience in a mom-and-pop shop serving as an agent will unquestionably be worse than what you get in a formal bank branch, accounts don't pay interest, and so on. But of course, these shortcomings are in part what makes the mobile money business model successful even when serving low-income consumers.

Now one of Christensen’s crucial insights is how difficult it is for established players to compete with disruptive innovations or to develop them themselves (i.e., to "disrupt themselves"). The reason is that the resources, processes, and values that firms develop over time, while optimized to support their existing businesses, often become hindrances when trying to bring disruptive innovations to market. For example, a manager in a company that specializes in high-gross-margin products will find it almost impossible to get approval to develop a low-margin offering, particularly if it threatens to siphon off customers from the higher-margin business, even if the volume potential and scale economies of that new business make it economically attractive.

Normally this is not a problem for consumers, because we don’t rely exclusively on incumbents for innovation. You can be sure that traditional travel agents would never have disrupted themselves with online booking engines; happily, however, firms like Expedia, Travelocity, and so on sprung up to seize the opportunity instead.

But high barriers to entry, including those erected by regulation, can stymie such competition. It seems obvious to me that what has short-circuited the emergence of disruptive products and services in financial services are the very high barriers to entry to firms that might have the capacity for such innovation. This includes not just startups but also established players from other industries. One of Christensen’s key insights is that an idea can be sustaining for firms in one industry and disruptive for firms in another, and you can made a good argument that while mobile money and prepaid cards are disruptive to banks, they are sustaining to the likes of Vodafone and Walmart.

This is why it is so vitally important that we open financial services to nonbanks: without them, there is no disruption. And where there is no disruption, consumers lose out.

How Magic Johnson can help you to save

Neil Davidson — Mon, 04 Mar 2013 09:00:46 +0000

In my last post I wrote about Amex Bluebird, a product that walks and talks like a bank account but isn’t. Today I want to talk about another prepaid offering from the US, this one with a neat savings angle. Taken together, these services give a sense for the rich innovation that prepaid card regulation is supporting.

The MAGIC Prepaid Mastercard is issued by OneWest Bank in California and branded and endorsed by the former basketball star Magic Johnson. In many ways it is a standard prepaid card. Customers can add value to their account by making a bank transfer, asking their employer to set up direct deposit, or buy buying a GreenDot MoneyPak available at most large retail chains in the US. They get a debit card that they can use to make purchases at retail and online and withdrawals at any ATM.

The twist here is a feature called Magic Mojo that helps customers to save. The prepaid account is notionally divided into two, the “spending side” and the “saving side”, and customers are encouraged to establish a saving goal (“$1,000 for a rainy day,” for example). Then, anytime a customer saves money in the course of their daily life, they can send a text message to the bank in a standard format indicating how, and how much they saved: for example, “MAGIC 5 by skipping my afternoon Starbucks.” The bank will parse the message and then move $5 from the “spending side” of the customer’s account to the “saving side.” At any time, the customer can log into their online account to see how much they’ve saved and how they’ve done it. They can also at any time move money back to the “spending side” if needed, although they have to login on a computer to do so. In that way, it’s easier to save than to backslide. There are no fees for moving money into or out of the "saving side".

The other clever thing about Magic Mojo is its social component. Customers can choose a “savings partner” who will get a text message every time they contribute to their savings goal. And it works reciprocally, too. You can imagine a couple using this feature to save for a new appliance, or two friends to save for a holiday.

These features exploit much of what behavioral economists are learning about how we can best encourage people to save given our own cognitive limitations and biases. Making saving as easy (if not easier than) spending, being able to easily track progress to a tangible goal, and exposing one’s savings performance to peer pressure all help a customer who chooses to save to follow through.

Traditionalists will grouse that the “saving side” of this account is not technically a savings account and does not pay interest. To them I would say only that you are probably not the target market for this product.

The MAGIC Prepaid MasterCard is available only in the US, of course. But the technology that makes the on-the-fly and social savings features of Magic Mojo possible is SMS. So perhaps someday customers in the developing world will get access to similar tools. In the meantime it will be interesting to see how they resonate in the US.

Will the next bank be a bank at all?

Neil Davidson — Thu, 07 Feb 2013 09:00:51 +0000

Before the holidays I wrote a post in which I briefly mentioned Bluebird, a new service from American Express that was launched last year in the United States. I believe the introduction of Bluebird will eventually be seen as watershed in the history of consumer finance, because it is the first credible alternative to a traditional bank account offered by a nonbank in the United States. This should unleash some salutary competition in a depressingly sclerotic space.

Bluebird was launched by an unlikely revolutionary: American Express, a venerable player in financial services. But it makes most of its money issuing credit cards to companies and high earners, and its management sought to diversify these revenues by offering a product for customers that might never qualify for an American Express credit or charge card, including the currently unbanked or underbanked.

Bluebird accounts are issued under prepaid card regulations, which have been around in the US since 1978. (Although American Express does own a bank—more on that in a minute—Bluebird is not offered by that subsidiary.) But Bluebird offers basically the same functionality that customers currently expect from their transactional bank account:

You can make deposits by taking a photo of a check with your smartphone, by transferring money from another bank account, or, thanks to a distribution deal with Walmart, by cashing in any of their 4,000 stores. Crucially, customers can also arrange to have their paycheck paid into their Bluebird account using direct deposit.
You get a debit card to use to make purchases at retail and ATM withdrawals, and you can use Bluebird's online and mobile interfaces to pay bills. American Express is even working to allow Bluebird customers to write checks.

So how is Bluebird different from a bank? Principally, the lack of branches. Amex can’t intermediate Bluebird deposits, so their accounts don't pay interest—but this is normal for basic transactional accounts offered by banks, too (I have current accounts with Citibank in both the US and the UK, and neither pays interest). Anyone with a more than a little savings in cash will want to move it out of a basic checking account and into a high-interest savings account offered by a specialist like Capital One 360 (known, before its acquisition, as ING DIRECT) online. As it happens, American Express runs just such a business itself, and surely Amex will eventually make it easy for customers to move money into and out of such interest-bearing accounts from Bluebird, just as it will probably start to mine its Bluebird account data to identify customers who could be cross-sold an American Express credit card.

I don’t know if Bluebird will succeed or fail. (I’ve been unable to sign up for an account because of an obscure problem verifying my identity, so I can’t speak to the user experience personally.) But I do feel confident predicting that services like it are going to give banks a run for their money. Because at the end of the day, customers don’t care if their “banking” needs are met by a bank or a nonbank—rather, they care about how well, and at what cost, those needs are met. Now that American Express has blazed the trail, I reckon there are many other nonbanks that will relish the opportunity to try beating the banks at their own game.

Central Banks aren’t accountable—by design

Neil Davidson — Sun, 03 Feb 2013 12:58:02 +0000

One of the risks that banks and non-bank financial institutions alike must manage is the untrammeled power that financial regulators have to make or break their businesses. Of course, plenty of other sectors are heavily regulated; but central banks are unusually muscular, independent regulators.

It turns out there’s a good reason for this. The original function of central banks, and their most important role even today, is managing the stability of the national currency. By creating money or taking it out of circulation (achieved these days by manipulating interest rates), central banks defend against inflation. It turns out that this is highly susceptible to meddling from politicians, whose calculus is short term and who often seek to interfere with decision-making at central banks in an effort to goose the economy and, at the same time, their own popularity. In the long run this kind of interference is disastrous, because it can lead to dangerous levels of inflation. For this reason, it has become customary to charter central banks with a very high degree of autonomy, and central bankers jealously protect this independence to preserve their credibility in the eyes of the markets.

Over time, the mandate of many central banks around the world has been expanded to include regulatory responsibilities created by legislation (for example, supervising banks) and in many cases to financial policymaking. This evolution was natural: central banks were and are well positioned to understand the inner workings of the financial system given their interest in the role that financial intermediaries play in money creation.

But a problem has emerged. In democratic societies, we expect that policymakers will be accountable to the will and interests of voters. Normally, when governments delegate policymaking (rather than embedding it directly into law) they do so by bestowing such authority on government agencies. While this insulates the policymaking process from seedy business of legislative horse-trading, it still leaves technocratic policymakers exposed to the pressures of democratic politics, since they are situated within bodies that are ultimately headed by politicians or political appointees.

When financial regulation emanates from an independent central bank, no such pressure is brought to bear. And this is something to worry about. There are too many countries where important innovations are being kept from consumers by financial regulators. To take just one obvious example, the governor of the central bank in Nigeria has decided that he doesn't think that mobile operators should be allowed to offer payment services. Given the power vested in his office, he has been able to bar them from doing so without giving much thought to whether ordinary Nigerians want or approve of this policy.

In cases like this, I can’t help but wonder if outcomes would be better if consumers’ voices were heard a bit more loudly in the policymaking process.

Joint ventures and misadventures, regulatory edition

Neil Davidson — Wed, 19 Dec 2012 23:45:31 +0000

Today in my Twitter feed I saw a number of links to a story indicating that the “Uganda Communications Commission (UCC) is partnering with Bank of Uganda to set new rules that will govern the Mobile Money trade.” The article doesn’t give specifics about how this is going to work, but it is emblematic of an emerging trend in which telco and financial regulators set out to regulate mobile money together.

Unfortunately, this is bad news, for a few reasons.

In general, the only thing harder than getting a regulator to move quickly is getting two regulators to move quickly, together. This will be especially true given that, in every country I’ve worked in, these two regulators have radically different styles and approaches.
Mobile money services are payment services, which financial regulators are competent to regulate. There is virtually no useful role for the telco regulator in such tie-ups, expect perhaps to help their colleagues understand a bit better how mobile networks operate (which of course they could do informally).
The likely outcome of a collaboration between these two regulators is regulation that pertains specifically to mobile money. This is a mistake, because it means the financial regulator will have missed out on an opportunity to put in place more comprehensive payment system regulation that would support not just mobile money, but also other payment services, such as those that are card-based or offered by non-banks other than mobile operators.

Imagine for a moment (you will have to use your imagination, because I don’t think this has ever happened) that a bank decides it wants to get into mobile telecommunications, either by becoming an MNO or an MVNO. Would a special collaboration between regulators needed in order to oversee this novel arrangement? Of course not. The bank would need to apply for a license from, abide by the rules set out by, and submit itself to oversight from the telco regulator, in addition to its pre-existing obligations to the banking supervisor.

A less hypothetical example is Starbucks in the UK. When Starbucks wanted to get into payments, did the FSA need to draft special regulations in collaboration with the coffee-shop regulator? Of course not. Starbucks simply applied for an e-money license from the FSA.

I could go on, because this is kind of fun (what if a pharmaceutical company wanted to offer insurance? What if a cigarette company wanted to start drilling for oil?), but I think the point is clear. Mobile money is just another payment service. That it is offered by a company that is in another regulated business is not a good enough reason for create a cumbersome regulatory superstructure to oversee it.

The myth of safe banking

Neil Davidson — Tue, 04 Dec 2012 06:54:33 +0000

There is a pervasive assumption, implicit in many of the debates around the emergence of new financial services, that banks are paragons of stability and that deposit accounts are the gold standard for safe storage of value. After all, banks are heavily regulated, they have giant compliance and risk-management functions, and they are conservative by nature. What better place to store your money?

But this intuition gets the causation exactly backward. Banks have injected caution into their DNA and are subject to extensive prudential regulation because their business model is so risky. Banks accept short-term deposits and make long-term loans, rendering them constitutionally incapable of honoring a large number of withdrawals simultaneously. This is the worm in the bud of the fractional-reserve banking, and it haunts banks (and occasionally entire banking systems) during times of crisis.

You might think bank runs are largely a historical phenomenon. Actually, in America alone, a bank fails every week or so. You don’t hear about it the regulator has gotten very good at winding up banks (they can do it over a weekend), and because depositors are protected by insurance.

Now there have been howls of objection from those in the traditional banking industry that customers of Bluebird—a prepaid debit account offered by American Express in the United States—do not benefit from federal deposit insurance. Deposit insurance, they imply, is what distinguishes safe checking accounts from unsafe stores of value.

But again, this gets the logic backward. Deposit insurance emerged as a way to protect consumers from bank failures and to make such failures less common by reducing the incentive of individuals to participate in a bank run. As with any other form of insurance, deposit insurance protects against risk—in this case, the riskiness inherent in storing your money with an institution that is going to lend the vast majority of it to someone else. Were deposits risk-free ways of storing money, deposit insurance would be unnecessary.

For centuries, we have tolerated the fundamental instability of the fractional-reserve system and done our best to contain the risks associated with it. This is because our economies would grind to a halt without financial intermediation, of which banks are traditionally the engines. But just because you rely on something doesn’t make it safe.

The appification of consumer finance

Neil Davidson — Thu, 29 Nov 2012 08:51:54 +0000

[Quick note: if you subscribe to Insufficient Balance by e-mail or in an RSS client, we encourage you to click through to the site where you can read comments to each post and add your own. Our number of readers is small, but they are smart and knowledgable, and recently the back-and-forth in the comment section has been very interesting.]

In the bad old days, when you bought a smartphone (aka a Blackberry) or a PDA (aka a Palm), you were basically stuck with the software provided by the manufacturer of the device. Of course, there were ways of installing new programs, but it was a hassle and there weren’t many developers. All this started to change in July 2008, when Apple launched the App Store, which made it easy for users to download and in many cases buy—and, equally important, for developers to list and in many cases sell—applications. Today, apps are the dominant paradigm not just on smartphones, but also on tablets and increasingly on the desktop, too.

It occurs to me that the explosion of importance of apps is a useful metaphor for where I think we are headed in retail financial services, which I wrote about in my last post. In the bad old days, customers were reliant on their bank to provide a basket of most of the financial services that they wanted to consume. Of course, some banks offered services provided by other parties to their own customers (mutual funds and insurance products spring to mind as examples), akin to Palm licensing bits of software from other companies for its Pilot. But customers could either take the options their bank had curated or leave them.

But I believe we are starting to see the contours of the next phase in consumer finance in which customers mix and match products offered by different providers, allowing them to arrange a suite of services that together meet their financial wants and needs. This in turn will allow, or force, providers of financial services to specialize in products that meet sometimes very specific requirements. And switching from the metaphorical to the literal, the user interface for many of these services will in fact be apps: see for example SocietyOne, a slick mobile-first P2P lending platform. What’s interesting is that this evolution is happening at the same time in both developed countries and in developing ones—or at least, those like Kenya where payment services are taking off. The operating system on which all these apps will run is the payment system, allowing customers to move their money between products as they wish.

If you think this metaphor is sound, then you may not be quite as dogmatic as many are about the need for payment services to be fully interoperable. We currently have two major incompatible app platforms in the world, with a few other also-rans, and it is the very fact that these ecosystems are in competition with each other that spurs customer-benefitting innovation. As such, this metaphor implies something different with respect to interoperability than does thinking of payment services as “rails” on which financial products can be delivered. Fragmentation (incompatibility or duplication) in rail networks is so costly that they are typically regarded as natural monopolies. Whether payment systems are, in whole or in part, natural monopolies is a question the answer to which I’m not too clear on.

In any case, appification will transform the way that financial products are delivered and consumed. It will upend the financial services industry and make tough new demands on financial regulators. But it will be an unmitigated boon for consumers.

Prising apart lending and deposit taking

Neil Davidson — Tue, 27 Nov 2012 06:41:07 +0000

An important theme on this blog is the disaggregation of the value chain in financial services. Usually what I mean by this is the separation of payments from the core banking services of deposit taking and lending. But perhaps even more interesting is the separation of deposit taking and lending themselves.

Taking deposits and then on-lending them appear inseparable, but we don’t have to look very far for examples to show that they aren’t. In the developed world, a galaxy of specialized lenders such as credit card issuers and mortgage lenders focus squarely on the asset side of their balance sheets; in developing countries, many microfinance institutions work the same way. Without deposits, these entities fund their operations from equity or by borrowing wholesale in the capital markets. Conversely, there are banks like ING Direct that accept deposits but don’t make retail loans, and of course an increasing number of non-banks like Safaricom accept what walk and talk like deposits from customers. (If it weren’t for poorly thought through rules, some of these would even pay interest.) These entities aren’t allowed to on-lend those funds (for that would make them banks) or invest them in risk assets, so they park them in a regulated bank account instead.

In all these cases, financial intermediation—that is, the transformation of savings into capital that can be used by others for investment or consumption—doesn’t stop; rather, it occurs through new channels, facilitated by multiple institutions rather than one.

The separation of deposit taking and lending is good for consumers in part because it permits specialization. Surely one of the reasons that credit-card issuers like American Express and Capital One are good at what they do (and I mean good both in the sense that they offer products and services that customers like and in the sense that they do so quite profitably) is that they are focused on just on side of their balance sheet, whereas to excel as a bank, you have to win in two very different product lines.

If this is true for giant companies, it is especially so for startups, which can typically only hope to do one thing properly at a time. As such, the growing separation between lending and deposit taking is helping to make financial services more attractive to entrepreneurs. This in turn creates further value for consumers by exposing the retail banking sector to the kind of competition that more nimble upstarts bring to bear.

Technology (including but not limited to mobile technology) is an important catalyst for this divorce of lending and deposit taking. First, technology is making product innovation in both areas easier. In the UK, payday lender Wonga offers an ingenious design-your-own loan facility online; Zidisha is working on something conceptually related, but optimized for poor countries. On the deposit-taking side, M-PESA and its progeny are made possible by widespread mobile connectivity.

Second, technology makes it easier for customers to pick and choose financial services from different providers. A major enabler of the big retail banks’ “financial supermarket” strategy was the degree to which it was annoying for customers to open and maintain accounts at multiple institutions. Electronic channels (e.g., online and mobile banking) means that such “multi-homing” is much easier than it used to be. This in turn allows customers to use a wider range of financial instruments, offered by a larger number of institutions, to manage their financial lives.