The UX of Banking

Why Retail Banking Services are Necessarily Badly Designed and Why Changing that May be a Key Component of the Next Wave of the Internet.

The movie rental chain, Blockbuster’s business model was based on deliberately bad design. It charged competitive rates for renting movies that were low to attract customers, but so low that it couldn’t make a profit by renting movies. All of Blockbuster’s profits could be accounted by the fees that were charged if you returned a movie late.

…and bankrupted us

This business model worked as long as you had poor service design. The type of customer who would be most likely to spend the time and effort to voice a real complaint about these fees would be the type of customer that would spend the time and effort making sure they returned their rentals on time. Customers that didn’t make this effort but did complain could damage the brand but would have no actual legal recourse. A simple cancellation of the charges for those who made a lot of noise would mitigate the risk from these people.

This meant that Blockbuster had a natural filter in place to maximize profits. Its service design could be based on actually maximizing late fee revenue. In other words a bad user experience design would maximize profits while still theoretically offering a good deal.

Retail banking operates on the same model. Retail banks make money in two principal ways, rather like Blockbuster did. They make money on the spread between borrowing & lending and from charges.

The borrowing & lending business is interesting in itself, from a design perspective. A bank attracts money by looking like a safe place to put it. This is why the business looks conservative in terms of design, why bankers wear suits and why bank buildings are often classical or high-tech. A bank creates the brand experience of a place where your money is stored safely in a vault and magically accrues interest.

Bankers look conservative for ‘Service Design’ reasons.

This, of course, is false. If your money stayed in a perfectly secured vault it would eventually all disappear, taking the bank with it. It would never gain interest and since, in the long term, inflation is as certain as the 2nd law of thermodynamics it would slowly be diluted away to homeopathic levels of nothingness.

A bank is a place that looks like somewhere to store money when in fact a good bank is a place that gives your money away as soon as you deposit it. If banking architecture were based on truth rather than psychological distortion, banks would look like the ephemeral architecture of tent cities.

The architecture of banking isn’t really bad design in terms of user experience, but it is incredibly wasteful. Stone buildings that look like the Parthenon or a Florentine palace are very expensive, and as banking becomes electronic, from ATMs to web sites, this expense is no longer necessary. Online banking will become the norm because it is cheaper, and offline incumbents will have to divest of much of their fancy, but obsolete, monolithic real estate to offer a range of offline and online channels to compete.

Banks need to look like somewhere to store your money safely, despite that fact that an effective bank is a place where your money flies out of the door almost instantaneously, as it is handed to someone else to do something useful with it.

This brings us to the second way banks make money — charges. Unlike Blockbuster, banks have lots of ways to charge people fees as they move people’s money around, even although they don’t actually have to physically move anything around anymore, bringing a large profit. Banks make money as you move it around, forget to move it around, move it into a different denomination or remove it via an ATM etc.

Nearly all of these fees can be avoided if you make an effort, just like the effort to return a video rental. In addition, if you really kick up a fuss, most banks will appear magnanimous by reversing charges they made, so that vocal people don’t damage their brand (always complain to your bank about fees).

What this means, however, is that banking UX design is necessarily bad because their business is based on customer ‘laziness’ and so the design has to require user effort.

Necessarily bad does not mean deliberately bad. Like most awful things, you don’t need a conspiracy to explain how the world sucks. Bad design in banking services is as much a result of apathy. Because there is no evolutionary survival advantage for good design the environment self selects for poor quality.

This equilibrium of badly designed banking services is not a stable one, however. If enough money is invested over enough time, in disruptive approaches which are based on genuinely good service, then once they have enough customers they will be profitable.

Such services are emerging in the hugely important area of fintech. From Square to Stripe to Simple, ergonomic design is a unifying factor. The reason this process is taking time, however, is simply because people don’t like switching banks or using a credit card nobody accepts, no matter how much they talk about it.

Square has an almost Apple like attention to design, and this is no accident.

Fintech is very important, it will play a pivotal role in the next phase of the Internet regardless of (and I will argue, because of) an impending dotcom style technology correction. This correction will possibly be an inevitable consequence of the success of the system itself morphing into a ponzi scheme, as Hyman Minsky argued when looking at financial markets. Certainly, the cost of customer acquisition for Internet startups has spiraled as services compete (with venture capital dollars rather than revenue) for people’s attention which has become saturated. This has created a situation which is inherently unstable.

The tech. bubble will need a pin to prick it and that will come from a realization that some fundamental component of the ecosystem is broken. My guess is that this will be the realization that mobile advertising does not work, that combining successful tablet advertising with the numbers for smartphones has obscured the fact that ads are less valuable on a tiny screen where people are clicking by accident.

Since mobile Internet devices outnumber not just desktop ones but humans themselves, they are what matters in terms of where the Internet goes from here. If the advertising model is fundamentally flawed then mobile payment systems will offer the only big enough change from a free to paid environment.

In a paid environment where you buy things like news articles that are currently supported by ads, you need micro-payments. But the web is a quarter of a century old, and there is no way to buy things for a few cents. In the US, there are no ubiquitous micropayment systems and payment systems in general are less developed than elsewhere. Somaliland, a failed state within a failed state has more adoption of electronic payments than the US and even Apple, with its near monopoly on media content sales, has to delay and batch up payments to avoid losing money on transaction fees. In China, however, social networks already have payment wallets and this will surely be part of the model for the dominant Internet firms: Facebook; Google; Amazon and Apple, in the future.

Mobile electronic payment in the US lags behind much of the developing world

Blockbuster is now bust. Netflix, which created a well designed, valuable user experience without relying on late fees, killed it and well designed fintech products, particularly payment systems, may do the same to badly designed banking. While payment systems are not retail banks, the retail bank of the future may come from Internet payment systems and it will be designed so that it actually helps people rather than tricks them into losing money.