Banks - Utilities or Innovators?
Whenever I run short of ideas or just need a different perspective, I check in on several blogs that I think are real leaders in their spaces. One I find that has great ideas and content is BankerVision, by James Gardner. He writes recently about a topic that I've been thinking about for some time, the choices firms make about innovation and their role in their markets.
I think too many firms assume their markets are zero sum games - that is, there are a fixed number of customers available in a market, and any I add must come from another firm in the industry. There isn't a lot of allowance for potential customers that are currently in the margins, or customers in adjacent spaces, or in many cases people who want to be customers but can't be. The banking industry is a great example - we know for certain that at least 20% of the US population is underbanked or unbanked - those are customers that most banks know exist but either overlook or have decided that those customers are too risky or unprofitable to exploit. So billions of dollars flow in a gray economy or in remittances or check cashing sites, while the banks continue to ignore or overlook these potential customers. Yet they will fight tooth and nail for their existing customers and the customers of their competitors, taking share and losing share from each other.
All the while other firms - Prosper, Mint, alternative payment networks - are angling in and slicing away customers by appealing to one or two significant needs, rather than a general banking product. So, the banks overlook some potential customers and allow themselves to be cut off from other single need customers. Does this sound familiar? If we were to go back to the 70s and substitute the names GM and Ford for the existing banks, and Toyota and Honda for the smaller disrupters, would that seem logical? Toyota and Honda sold to people who couldn't afford or were turned off by the "Big Three", and for the most part the Big Three had turned their backs on these customers. The Big Three ignored emerging customer segments in the US and fought over the same pool of customers.
So, to return to the title and concept of this post - is your market truly a "zero" sum game? And if so, should you become a "utility" that locks in its market and provides a good or service in the background - but does it so well there's little need or opportunity to change, or should you become an innovator?
Utilities succeed for the most part because they face little direct competition. Most individuals don't have many choices for their water or electricity service. Many banks are similar to monopolies, since once a banking relationship is established, it is difficult to break that relationship and switch, especially as the number of services or products acquired by an individual from a specific bank grows. However, utilities, at least the good ones, provide exceptional service. They keep the lights on 99.99% of the time, or constantly provide clean water, so they meet or beat expectations, and consumers don't have much choice anyway.
In the banking sector, there used to be much less choice, and much less switching. However, there are many banking options and choices available, and more will come on line. As new services are developed that allow people to painlessly switch their banking services from one provider to another, the winner in the space will be the firms that either aggregate services from many banks (Mint for example) or those that create interesting, innovative products that retain existing customers and attract new ones (sorry, no examples yet).
Banks could be utilities - they could provide so many of the services and features we need as consumers that there'd be no reason to switch or seek banking services elsewhere, but they've failed in their basic mission to establish trust and transparency. Imagine if their rates and fees were regulated like utilities - then again, that might happen.
If a bank can't successfully compete over time as a utility, then it must become an innovator, or watch its best customers get sliced away by firms that offer compelling services tailored to their needs, which are then aggregated into one view by firms like Mint.
I think too many firms assume their markets are zero sum games - that is, there are a fixed number of customers available in a market, and any I add must come from another firm in the industry. There isn't a lot of allowance for potential customers that are currently in the margins, or customers in adjacent spaces, or in many cases people who want to be customers but can't be. The banking industry is a great example - we know for certain that at least 20% of the US population is underbanked or unbanked - those are customers that most banks know exist but either overlook or have decided that those customers are too risky or unprofitable to exploit. So billions of dollars flow in a gray economy or in remittances or check cashing sites, while the banks continue to ignore or overlook these potential customers. Yet they will fight tooth and nail for their existing customers and the customers of their competitors, taking share and losing share from each other.
All the while other firms - Prosper, Mint, alternative payment networks - are angling in and slicing away customers by appealing to one or two significant needs, rather than a general banking product. So, the banks overlook some potential customers and allow themselves to be cut off from other single need customers. Does this sound familiar? If we were to go back to the 70s and substitute the names GM and Ford for the existing banks, and Toyota and Honda for the smaller disrupters, would that seem logical? Toyota and Honda sold to people who couldn't afford or were turned off by the "Big Three", and for the most part the Big Three had turned their backs on these customers. The Big Three ignored emerging customer segments in the US and fought over the same pool of customers.
So, to return to the title and concept of this post - is your market truly a "zero" sum game? And if so, should you become a "utility" that locks in its market and provides a good or service in the background - but does it so well there's little need or opportunity to change, or should you become an innovator?
Utilities succeed for the most part because they face little direct competition. Most individuals don't have many choices for their water or electricity service. Many banks are similar to monopolies, since once a banking relationship is established, it is difficult to break that relationship and switch, especially as the number of services or products acquired by an individual from a specific bank grows. However, utilities, at least the good ones, provide exceptional service. They keep the lights on 99.99% of the time, or constantly provide clean water, so they meet or beat expectations, and consumers don't have much choice anyway.
In the banking sector, there used to be much less choice, and much less switching. However, there are many banking options and choices available, and more will come on line. As new services are developed that allow people to painlessly switch their banking services from one provider to another, the winner in the space will be the firms that either aggregate services from many banks (Mint for example) or those that create interesting, innovative products that retain existing customers and attract new ones (sorry, no examples yet).
Banks could be utilities - they could provide so many of the services and features we need as consumers that there'd be no reason to switch or seek banking services elsewhere, but they've failed in their basic mission to establish trust and transparency. Imagine if their rates and fees were regulated like utilities - then again, that might happen.
If a bank can't successfully compete over time as a utility, then it must become an innovator, or watch its best customers get sliced away by firms that offer compelling services tailored to their needs, which are then aggregated into one view by firms like Mint.
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2 Comments:
Great post.
Through an unpreparedness to work with one another properly in the first place, banks have arrived at the Classic Innovator's Dilemna. Now, through individual banks chasing high margin customers' easy-to-interpret requirements, we are continuing to follow exactly the Ford/Toyota story (or 'Minimills' versus 'integrated mills' in the steel industry etc, etc) you mention.
The one asset we as bankers must strive for above everything else is trust. This is the tool to differentiate us. Without it, we have to compete with others in a fast, internet enabled, global consumer market that banking infrastructure is not equipped for.
Rebuilding that trust (if we indeed can) will take time. This means that in the meantime, we need to learn how to play the innovation game properly - and take note of the hard lessons learnt in other industries.
Exactly like you say, we have to look at opportunities that lie outside of, or below 'the race to display financial information in user-centric ways' - that's just tablestakes... business-as-usual.
Opportunities for banks to realise returns in new ways absolutely exist, but the banking industry doesn't see them as being valuable enough - they don't provide the short-term return on investment the industry is so addicted to.
Hopefully the recent arrival of Innovation experts within banking can help things change for the better, as the role becomes established within the industry - not find new ways to continue on the same race to obsolescence.
It's so great to find a blog with original thoughts like this.
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