Non-bank competitors are pushing aggressively into banking and investment services, threatening to undermine banks in the financial relationship, according to Gartner. The threat is particularly pronounced in two businesses that are at the very heart of banking, namely lending and payment. Gartner predicts that by 2010, social-banking platforms will have captured 10 per -cent of the available worldwide market for retail lending and financial planning.

Social banking should not be mistaken for charitable giving. Rather, it combines the social trends in networking communities of interest with financial products, services, capital and market access for a return on investment and social benefit.

Social banking is the combination of social trends, such as green practices, social entrepreneurship, and peer-to-peer (P2P) lending and financial planning via social networks, with banking products and services. Venture capital investment in financial social networks (FSNs) such as Zopa, Prosper and Lending Club, as well as Virgin USA's acquisition of a majority stake in CircleLending point to the growing prevalence of FSNs and increasing consumer interest in this area.

“This combination of business, non-profit organisations and social justice is being bolstered by general consumer trends and social causes that appeal to consumers to shop ethically,” said Alistair Newton, research vice president at Gartner. “In addition, more consumers are generally spending more time in social networks which increasingly form part of consumer purchase processes for new products and services.”

Gartner expects social banking to initially take off in geographies with a developed banking market and widespread adoption of broadband and potentially wireless communication systems. “Social banking will emerge first where societal cultures have high levels of acceptance for social welfare and potentially where the underserved or unbanked client segments need capital and market access,” said Stessa Cohen, research director at Gartner. “So we are likely to see this trend first in Western Europe and parts of the United States.”

Gartner advises banks:

• Not attempt to replicate social-banking platforms unless they can clearly establish a strategic intent centered on social welfare, as opposed to traditional commercial return. Instead, banks should identify opportunities for partnerships with FSNs, providing banking capabilities such as transaction processing and risk management that are often lacking or insufficient in FSNs.
• To urgently invest in customer behavioral and segmentation analysis and re-engineer business intelligence models so that they can better understand the demographic changes taking place in the market.

About this study

The Gartner study, Virgin USA Buys CircleLending: How Should Banks Respond?, finds financially oriented social networks are offering products and services that compete for bank customers. Are they really all that different from other nonbanks that have tried to invade this market? If not, why has Virgin acquired a majority interest in one and a foothold in the U.S. market?

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