Will 2008 will be the year for Web 2.0 in financial services?

What did you get for Christmas? An iPhone perhaps, or a new laptop, a Blackberry or a 3G mobile phone? Happy City folk will doubtless be amazed with what their new gadgets can do. But it is worth thinking about what modern technology cannot do when it comes to financial services, the life and blood of the City.

Any discussion about how financial services can adapt to Web 2.0 – or vice versa – is hampered by the fact that the UK industry has failed fully to exploit Web 1.0. Financial services have been on the cusp of exploiting new technology for years, and the example most cite is still First Direct, a telephone bank that has been an exemplary success since the mid-1990s.
That is not to say the Internet has had no effect – quite the opposite. The ability to compare prices has helped consumers find the best deal, especially on simple products such as savings accounts and loans, where the interest rate is the key factor. Households can compare household insurance prices and switch insurer at the click of a button.

But there should be more to online financial services than just price transparency. This presents a huge opportunity for quick-thinking companies. For the generation entering the workforce now the mobile phone is the gateway to social interaction, thanks to audio and video messages, Internet access on their handset - and sometimes even making a phone call. Their computer is for social networking and instant exchange of news, views, the latest music tracks and top moments on YouTube or MySpace, not word processing.

Readers of The Long Tail, Chris Anderson’s brilliant explanation of the creative destruction the Internet has wrought on swaths of business, will be aware that banking has been left undisturbed compared with popular music, books and clothing. Financial services were as invisible and transferable as music, yet no one had come up with the right product. Established names in finance have certainly embraced new technology, particularly in back office operations such as call centres and data processing.

But it is hard to find fund managers that offer clients the opportunity see in real time how their investments are performing and enable them to shift investments on their mobile phone or laptop. There are creditable reasons why they have not felt able to exploit the potential of the Internet. Regulators oblige firms to list services as products with key features rather than explaining the benefits. It is a cultural divide that is hard to bridge.

At a meeting of the Centre for the Study of Financial Innovation, a City think tank, management Patrick Towell described Web 2.0 as not just technological phenomenon but as a social and marketing one as well. While Web 1.0 is about accessing data, Web 2.0 is about making that relevant and personalised to the user. While Web 1.0 was about e-mail, Web 2.0 is about social spaces; Web 1.0 was about search engines While Web 2.0 was smart contact and so on.

It is likely to be a new entrant that makes the leap to a Web 2.0 format. One example is zopa.com, an online marketplace that allows people to meet and lend and borrow money. Launched in 2005 it has some 175,000 members who have lent and/or borrowed £16m, claims to give lenders 30% better returns than banks, and has a default rate of below 0.2%. It is named after the “zone of possible agreement”, a business term for an area where two or more negotiating parties can strike a deal on price. The aim was to combine the enjoyment factor that has made eBay the world’s largest retailer with consumers’ resentment towards traditional banks.

Social networks allow consumers to swap details – positive or negative – about firms and ask for advice on the most suitable products. Established businesses tend to fear this aspect while start-ups embrace it. Large companies might try to test the water by launching sub-brands or overseas operations that would not immediately encounter hostility from Internet-savvy consumers who tend to distrust major brands.

There are three essential elements of Web 2.0 that have the potential to change financial services, according to research consultants FreshMinds. The first is transparency and openness. Websites enable people to get better deals. The second is personalisation. Pru Health, which creates financial incentives for policyholders who pursue a healthy life style, is an interesting example. Third is the idea of “collective intelligence” – the idea that individuals can come together online to collaborate and share knowledge about savings and investment.

These examples of a technology and marketing “push” are welcome. However the real impetus for change will be a “pull” by consumers.One striking example comes from some of the most underdeveloped parts of Africa. Where there is little in the way of banking services or landline phones, mobile phones fill the gap by enabling people to send money to each other using prepaid scratchcards.

In more developed economies such as South Africa, consumers can pay utility bills and check their balance via their phone. Where developing countries lead, rich ones will surely follow. The same technology must allow more complex investing and trading. The issue is whether regulators and politicians will feel happy managing a world where that can take place.

The pressure for change may soon become overwhelming. According to a story from the United States – where else? – mobile phones, laptops, digital cameras and MP3 players were among the most popular Christmas gift items for pre-school children.
That generation will grow up treating a mobile or handheld device as an extension of their body and will expect it to carry out “simple” tasks such as share dealing. The online financial revolution may be about to begin.