jamtronix

As I said on Cameron's blog, there's three components to a financial service:

• the brand - including advertising & marketing.
• customer service - whether it's at a shopfront (e.g. bank branch) or via a call centre or website, you need to have ways to allow your customers to do business with you, and help them when they have problems.
• backend infrastructure - the databases and comms links etc that store and carry transactions.

These are really 3 seperate businesses, but at the moment most major banks are in all 3 of them. But there are also lots of businesses that do only 1 of them. For example, there's lots of brokers that do the sales & marketing of home loans where the customer service and infrastructure is provided by a major bank.

PayPal (like the banks) also cover all 3 areas, although I doubt they could repurpose their current infrastucture very easily to handle e.g. home loans or credit cards. Also as soon as you get into products more complex than straight money transfers, your customer service requirements will go way up. You'll need branches where people can get help filling out application forms, and ATM's where people can take cash out. Basically you need to stop being a purely 'online' company and start owning real estate. And it is much much harder to build a network of physical outlets out from a website than it is to add a website to an existing distribution system.

So while PayPal might try to offer more services, I think they will just be rebranding products offered by other companies. So rather than competing with the branches and infrastructure of ANZ / NAB /CBA / Westpac, they'll be competing with other resellers like Virgin Money to onsell the banks' products.

But that doesn't mean the banks aren't about to get shaken up. They will, just not by PayPal. The real threat for the banks is from organisations that already have strong brands, and lots of physical distribution points and customer service staff. Once again, Coles Myer and Woolworths will be the ones to force an industry realignment. And it's happening already - today Woolworths announced they are rolling out their own ATM network. Coles Myer offer Credit Cards and Insurance.

The major retailers have a big advantage over the banks when it comes to running a payment processing system - because they own so many retail outlets, lots of the payments will be closed loop, meaning no interchange or merchant service fees. I.e. it will be cheaper for Coles Supermarkets to take payment on a Coler Myer issued MasterCard than a CBA issued MasterCard.

Also, these retailers are able to develop new stored value products that work across their distribution network. e.g. the Coles Myer Insurance Claim Card. I expect to see a lot more 'single purpose' stored value products as well, like Woolworths 'Essentials' Card. Since Woolworths control the retail outlets as well as the payment instrument, they can ensure that the cards are not used to buy booze or smokes. Compare that with the Visa Debit cards issued to hurricane Katrina survivors for emergency supplies - they were used for gambling, porn and tattoos

So here's my tips for the Australian financial services market 10 years from now:

• Both Coles & Woolworths will offer a single integrated Credit/Debit & Loyalty Card (i.e. instead of having separate credit cards and a FlyBuys card, you will just hand over your Coles Myer issued credit card)
• There will be a loose federation of independent 'tier 2' retailers combining to offer financial products (stored value cards & loyalty cards) usable across that network. That federation will probably include IGA & Harvey Norman.
• 50% of EFTPOS transactions will be on Credit/Debit/Stored Value cards issued by retailers
• 20% of car & home insurance will be sold by retailers
• 10% of home and car loans will be sold by retailers
• At least one of the retailer programs will allow customers to download their receipts electronically. e.g. Woolworths will offer a credit & loyalty card that's integrated with MYOB. (American Express are pretty close to this already)
• The infrastructure underpinning the above will be a mix of in-house and rebadged 3rd party products. Where 3rd parties are involved, it will be agile infrastructure companies like MoneySwitch that win the business.

In  short, I'm predicting that the banks will lose their retail banking business to the retail giants, and their wholesale ('backend') banking business to the infrastructure specialists. Maybe even one of them will be gone (through a merger, there's no way the RBA would let a major bank collapse).