Most big banks are terrible at innovating. IDEO's Ryan Jacoby outlines how they might help consumers make better financial choices
Despite the very real prospect of prolonged economic malaise, the financial services industry is at an amazing moment. Consumers want new products and services to help them become more confident, educated caretakers of their own money. There's real opportunity here. Only, most big banks are letting startups figure out how to serve their customers better. This wait-and-see strategy may soon prove riskier and more costly than trying new things. Third-party providers are already providing some viable alternatives to traditional banking simply by giving consumers what they need, how and when they need it. Here's how banks can catch up. Be There in the Moment Customers should be able to access their accounts instantly. Financial institutions need to think beyond the retail branch, shed the old notion of bankers' hours, and make services accessible anywhere, anytime. Mobile and online applications are a solid start, but they could be so much more. Banks still can't accommodate basic requests, such as allowing small businesses to accept credit-card payments without complicated service agreements, letting individuals who use different banks transfer money between accounts, or enabling customers to manage budgets on the fly. So entrepreneurs have stepped in. Square provides a credit-card reader and transaction app for the iPhone, no contract required. POPMoney (featured in this recent Bloomberg BusinessWeek story) lets people send and receive funds through an online or mobile banking program via e-mail. Mint, the free online personal budgeting and financial-management tool now owned by Intuit (INTU), offers what amounts to an on-the-go statement. Think Differently About Data Financial advisers frequently know more about customers' investments than customers do. Banks used to rely on demographic or personal data as a marketing tool through which they acquired customers and then sold them additional products and services. If banks instead thought of themselves as custodians of data, they could use the information to help customers paint a picture of their financial selves and whom they hope to become. Banks don't have to give information away, but they could be more generous with what they know and the connections they make. For example, why can't a bank support local businesses by helping consumers get deals on their goods? Consider Groupon, a collective buying service for small merchants. Groupon gives consumers low prices while helping businesses aggregate demand—a financial win all around. Design Good Behavior into Products Traditionally, banks have adopted a laissez-faire approach to their products, a mix of complex lending instruments, payment methods, and investment options. As long as a consumer qualifies for a service, he or she must be qualified to use it. So when someone gets into trouble with, say, a credit card, the bank isn't to blame. Overspent this month? Someone should have set and listened to that balance-limit alert. But banks can provide more ways to help consumers make smart choices, by designing good behavior into the products themselves. Take Bank of America's (BAC) "Keep the Change" (which my employer, IDEO, helped develop); it automatically rounds up check-card purchases to the nearest dollar and transfers the difference to the customer's savings account. Customers check an online box to sign up; they don't need to manage tools or set up payment plans. This is an area in which financial institutions should have a distinct advantage over other providers: Banks can design products with specific behavior built in, while startups are destined to remain third parties. Make Everything Personal Banking was once a relationship business, and it's time to return to that. Customers crave personal and relevant financial experiences. Consumer advocates, such as the volunteers behind Move Your Money, are encouraging people to patronize small banks, because those banks tend to charge lower fees and provide better service. To compete, large banks must develop individual relationships with customers, even as the customers' circumstances, situations, and needs change. The big banks will have to help the budding entrepreneur become a successful business owner and later a tycoon. SmartyPig is a goal-specific online saving service. Users sign up for an account, choose a financial goal (such as paying for a wedding), and off they go. Family members and friends can support the saver with gifts and pledges. If banks knew what customers were saving for—and expanded as savers reached their goals and set new ones—the banks could offer more services, such as securing lower prices on select goods or providing suitable financing. If large banks can get beyond their inertia and adopt a mind-set of authentically designing for customers, they'll find they're in the best position to act. They're pointed in the right direction. Now they just need to get going.