Disruptors and Retail Banking

By Don Peppers

Information technology has already rendered obsolete so many business practices and entire business models that adopting a jaded point of view with respect to any well-established, highly regarded business activity—retail banking, for instance—seems like a slam-dunk for a futurist.

Any business or task that involves a digitizable product or service has become vulnerable to serious disruption—not just movie rentals but anything at all involving photography, music, telecommunications or media.

And money, of course.

At a conceptual level, money is almost purely an information product, and the entire financial industry—based on facilitating how money is invested, borrowed and transferred—is certainly as vulnerable to massive disruption as other information-based businesses are. What’s truly amazing is that the industry hasn’t already been completely re-invented. 

The rise of the “trust platform” business model

One big disruption that will almost certainly rock the financial services category is what we could call “Uber-ization.” Uber, the well-known taxi-service disruptor, is under constant attack from regulatory authorities, who mostly appear to be trying to protect the established taxi industry while professing that they are protecting consumer safety.

Uber’s business model is the “trust platform.” It is a technology-facilitated method for connecting willing buyers with willing sellers, while using crowd-sourced feedback to ensure mutual trust.

In the 20th-century economy, the primary way consumers would decide whether they could trust a business was by relying on the business’s brand reputation, or perhaps its permanence within the community. If a business had some sort of physical facility, such as a building or a storefront, then this symbol of permanence could also serve as an indicator of trustworthiness, because, if a business were untrustworthy, it could be physically identified, and its untrustworthiness would be publicized by the customers it cheated.

But Uber is a kind of cross between a virtual, e-commerce business and a physical service. It relies on a different mechanism to establish trust: the constant, real-time reviews of customers, made easily available to everyone, on the Net. No Uber driver could ever get away with cheating, or even bad service, with respect to more than one or two customers. A cheated or poorly served customer will immediately alert everyone else to watch out in their dealings with this driver, and Uber itself might take action to withdraw the driver’s ability to participate.

By the same token, however, Uber drivers don’t need to fear being abused or cheated by their customers either, because drivers rate their customers after each ride in the same way that customers rate their drivers. An abusive customer will be outed immediately, and a repeat offender will soon find it difficult to secure any service at all from Uber.

A business based on people’s good intentions

The trust-platform business model depends for its success on the fact that, generally speaking, people have good intentions—not everyone, perhaps, but the vast majority of us. Uber, like Amazon and other businesses that depend heavily on customer reviews, is able to operate more efficiently by appealing to people’s natural desire to contribute, or to give back and to share their opinions. In the end, a trust platform can only exist by relying on the good intentions of most of its participants, which ensures a healthy supply of real-time reviews and ratings. Like a co-op, Uber is based on people’s generally good intentions.

And Uber isn’t the only disruptor with a trust-platform business model, either. Airbnb is a similar trust platform that has already surpassed Hyatt in the number of rooms it makes available worldwide. Like Uber, Airbnb is frequently under attack by regulatory agencies and political actors purporting to represent consumer interests, but whose agendas are suspiciously well aligned with the interests of the businesses they are regulating—in this case, hotels. And every day some new venture applies the “Uber” model to some additional task, from cooking or cleaning to shopping or shipping.

The first wave of Uber-ization in financial services is probably what’s known as peer-to-peer lending (Prosper, Lending Club and Zopa are examples). Peer-to-peer investing, on the other hand, is illegal in many countries. Investing is a highly regulated activity, and very few peer-to-peer investment vehicles have been able to clear that hurdle.

Aspiration.com’s business model

Earlier this year, I received an email from Andrei Cherny, who seems to have launched the next best thing. His new and rapidly growing financial advisory firm, Aspiration, may not rely on peers investing in peers, but it’s definitely based on investors showing their good intentions. Cherny’s email read in part:

“Aspiration is an online ‘investment firm with a conscience’ with a few very unique features:

  • “Focus on the middle class, not millionaires. As opposed to Wall Street firms, all the mutual funds we create, curate and offer direct to the consumer have a low $500 investment—and a $100,000 maximum investment to keep us focused on middle-class investors.
  • “Let the customer choose our fee. We trust the customer to decide how much to pay us—even if that is zero. This is the most pro-investor approach ever offered in retail investment products. We don’t make a cent other than what our customers think we deserve. And our customers have been responding as honorably as one would hope they would. There is more info on this trust-based approach: https://www.aspiration.com/pay-what-is-fair/
  • “Turn ‘Greed is good’ on its head. We bring the Toms/Warby Parker model of buying/giving to investing by donating 10 percent of all our revenue to charities issuing microloans to help struggling Americans—and make it easy for our customers to give to the cause of their choice.”

Most financial advisory services, of course, apply management fees that are significantly more onerous on small investment portfolios, but Aspiration’s policy is “pay what you think is fair.” Yep. Pay us whatever you think is right. That’s Aspiration’s model. Seriously.

And so far, this seems to be working. Within its first two months of money management, Aspiration had already accumulated some $2 million in investor funds, and according to TechCrunch the firm had about 700 customers for its premier product, a portfolio of mutual funds managed by Emerald Assets. This makes Aspiration one of the fastest-growing online investment vehicles ever, although it remains to be seen whether Cherny’s venture will eventually become (gulp) profitable.

But if not Aspiration, it will be another iteration on the Uber-like trust- platform business model.

Transaction costs are plummeting

What makes a trust platform such as Uber viable is technology. The only reason a trust-platform business can make sense as a business is that the transaction costs formerly associated with finding and serving customers have plummeted, as a result of information technology. Don’t expect a company such as Aspiration to open physical offices to receive customers any more than Uber or Airbnb will. The transactional expenses required for Aspiration to operate physical offices—a branch network—would far surpass the likely values of the small-investor customers being served.

The plummeting cost of technology-enabled human interaction is not just changing the nature of many companies’ activities, but sooner or later it will call into question the need for the corporation at all. Companies exist because they enable people to interact more efficiently for the purpose of creating value collectively. But as frictionless interactivity has increased, the number of tasks that companies take on directly has declined. The dramatic upsurge in outsourcing and partnering with other firms (including, sometimes, direct competitors) is only the beginning.

Over time, firms will increasingly divest themselves of tasks not directly relevant to their most central corporate missions. As Lawrence Lessig says, in his book “Remix: Making Art and Commerce Thrive in the Hybrid Economy,”: “[A]s transaction costs fall, all things being equal, the amount of stuff done inside a firm will fall as well. The firm will outsource more. It will focus its internal work on the stuff it can do best (meaning more efficiently than the market).”

The self-organizing financial service company

The only kind of banking model that will be able to survive in this environment is one fueled by the trust and empathy that flow among independently acting people—not just borrowers and investors, but employees, contractors and other actors in a bank’s ecosystem. Such a bank will have to rely less on top-down, hierarchical, command-and-control management principles and more on bottom-up, values-based self-organization. It may not mean that investors choose their own fees, but it will likely involve employees and others choosing the right policies.

Uber-ization, first and foremost, is about self-organization, based on computer-mediated trust.

Just two months ago in Australia, I met with the managers at one of the country’s largest retail banks. They told me they were in the process of testing a program for empowering their customer service associates at the call center to deal with tricky, unscripted customer problems on their own, without requiring a lot of top-down direction. In this test, they are empowering their reps to verify the appropriateness of a customer service solution by consulting the opinions of other associates and getting their agreement. If a customer has a problem for which the company has no prescribed policy, or for which the bank’s currently prescribed policy doesn’t seem to be appropriate in this particular instance, then the only authority needed for a rank-and-file associate to offer an improvised solution directly to the customer is the agreement of at least one other associate that the improvised solution is appropriate.

This test represents the bank’s attempt to begin acting according to the principles of self-organization, in which problems can be competently dealt with by rank-and-file employees (or contractors) with little or no top-down direction or guidance. When a customer problem occurs—and a couple of employees zero in on it, take ownership of it, and figure out on their own how to solve it with no top-down direction or management intervention—that is a self-organizing company, and mutual trust among employees is a minimum requirement.

Uber-ization can come to banking in the form of new, disruptive business models, or it can come in the form of creative and original thinking such as this at existing banks.

So why did Aspiration’s founder email me out of the blue? Well, now it’s my turn to brag. Andrei wrote that he had contacted Martha Rogers and me simply because the concept for his company was in many ways inspired by “Extreme Trust,” (the book Martha and I co-authored recently). In our book, we chronicle the increasingly important role that person-to-person trust plays in a more highly interactive society, and we even suggest that as we all get wired together more and more, an increasingly common kind of business model will be one that relies on trusting people to “do the right thing.”

Welcome to the e-social world, where people help each other in mutually beneficial networks based on trust, and good intentions can sometimes be harnessed to create genuine economic value.


Don Peppers is the founding partner of Peppers & Rogers Group, the customer-centric management consulting firm, Stamford, Conn. With co-author Martha Rogers, Ph.D., Peppers has written nine marketing books that collectively have sold over 1 million copies in 18 languages. Their latest book is “Extreme Trust: Honesty as a Competitive Advantage.”