Why banking feels the same everywhere
Disruption in banking is a hot topic these days. Banks are increasingly concerned about the competitive pressures exerted by a small, but very visible cohort of financial technology companies that have explicitly identified their goal as disrupting the banking sector, and even banks themselves. Not surprisingly, given the way that disruptive technology innovators transformed the music industry, the airline industry, and the taxi industry, to name just a few of the casualties, a lot of bankers are taking note and there’s more than a little trepidation about what’s going to happen to banks.
There’s good news and bad news for banks. The good news is that it’s unlikely that financial technology providers are going to replace banks as the primary provider of banking services in this country. The entrenched advantages are just too great. Already, many of the financial technology providers that burst onto the scene with manifestos of revolution, are looking to banks as partners. A smart VC fund manager I met recently pointed out that most financial technology providers are likely to take one of three paths when it comes to banking: 1) Partner with a bank, 2) Get bought by a bank, or 3) Become a bank.
The bad news is that financial technology providers are disrupting many aspects of the banking industry, and have already done so, in fact. From mobile banking, to peer payments, to online lending interfaces, the banking experience is changing, and in many cases, it’s becoming a homogenized.
The move towards a unified banking experience
Since the 80s, when banking started to grow into the tiered system that we have today, there has been something of a competitive armistice between big banks and community banks. Big banks offer a wide range of services that can fit a broad set of needs, through carefully manicured experience.
Community banks, meanwhile, offer personal relationship and a deep connection to their local economy. This has enabled them to provide flexibility and personalization in the delivery of services, from a friendly birthday greeting by a branch manager to a modified loan approval that takes into account business value overlooked by a formulaic credit scoring models.
However, technology has started to break down these barriers. As illustrated in the chart below, advances in data utilization and the greater access to advanced banking utilities, are making it possible for big banks to know their customers better, and for small banks to expand capabilities faster.
Technology is helping big banks get better at relationships
It wasn’t long ago that the most a big bank could readily tell you about an average customer was how much money they had in their deposit accounts, or perhaps how much they had left to pay on their home equity loan.
A veteran business development officer in community banking once shared with me how he trained his sales teams to keep track of small personal details about their customers on the back of Rolodex cards, using color coding to keep them sorted and prioritized. While it might seem quaint in this day of advanced CRMs that track every detail of each touchpoint, this method was incredibly effective at cementing customer relationships and differentiating his bank from larger banks that were always attempting to poach customers with glitzier services or promotional rate offerings.
The meteoric rise in data aggregation and mining, where banks are consolidating account and behavioral information from systems across their institutions and enriching that data with external sources, means that large banks are getting better at supporting banking experiences that are personally tailored.
These big banks are doing more than using data to remember birthdays. They’re predicting new service needs, channel preferences, and even hobbies and leisure activities. As fewer customers come into the branch for service, preferring instead to engage through some form of mediated channel, this approximate, scalable version of a personal relationship has reduced the service differentiation that many community banks used to rely on to build strong fences around their best customers.
Community banks are getting faster at adding new technological capabilities
On the other side of the equation, the last five years have seen an explosion in new technology providers that are looking to transform the established dynamic of how advanced capabilities are being developed in banks.
For a long time, the biggest banks have had a significant advantage in the pace at which new product and service capabilities could be added. The vast resources that these banks had (and have) at their disposal could be turned to developing new technology, while small banks were largely shut out of any innovation until much further along the adoption curve.
However, as financial technology providers have grown in prominence and resources, more of the innovating is being done outside of big banks. In many cases, early iterations of new services aren’t being piloted at the biggest banks at all, but at smaller institutions where it’s possible to grow adoption faster and where there’s ultimately a larger customer base for any product that provides a better solution to existing problems.
In many cases, the innovation costs and risks are being fronted by entrepreneurs and their investors looking to tap into the national network of community banks, so banks can now access new capabilities at a greater pace and at a lower cost than was possible even as recently as five years ago.
To get a sense of the pace that adoption is happening, consider the speed at which community banks have added mobile banking to their list of services. The capability for people to get on the Internet through their phone only started about 10 years ago with the release of the first iPhone. Banking on your phone was a distant vision.
Yet, community banks have responded with great speed, as mobile banking was made widely available through a range of service providers. When I was managing the Quarterly Bank Executive Business Outlook Survey for Promontory Interfinancial Network, we looked at how widespread the adoption of mobile banking was. In 2016, nearly 70% of respondents with less than $10 Billion in assets had already invested in mobile banking, and 75% were planning on further increasing their investment in mobile.
As new technology providers enter the banking space, disrupting the behemoths who previously set the pace of innovation, community banks have the opportunity of adopting new services quicker than ever, breaking down the technology advantages that once differentiated big banks.
Standing out when banking is a commodity
What happens when one bank starts becoming indistinguishable from the next? After all, if fewer people come into your branches, the most common point of engagement is through the phone or your bank’s online portal. Even a great website is hardly as impactful as a friendly, accommodating branch experience that serves decent coffee.
It’s important to recognize that even as banking becomes more and more commoditized, there are some key ways for banks to put themselves in a position to consistently differentiate themselves.
Here are three ways that banks can continue to distinguish their institutions as banking:
Pick your spots on each innovation curve
Spend a morning reading American Banker and it seems like there’s no end to the services and technology offerings that banks should be adopting. While the degree of change might seem overwhelming, the fact is that most of these technologies will either fade away or become standardized over time, which will then make the adoption much easier and more streamlined, as the bumps are ironed out by earlier adopters.
But that’s not to dissuade banks from considering new technological offerings. It’s just a matter of prioritizing which technology makes sense for your bank to get in on early. Technology is about solving problems, and not all banks have the same problems.
I spoke with a banker a couple months ago that had a customer base that didn’t have much computer access and didn’t have much capacity to manage complex web interfaces. However, there was a lot more comfort with voice activated systems than the general public. She was looking at getting involved in some early pilot projects that were incorporated voice recognition technology in banking.
Put a flexible system at the center of your bank’s data sources
More and more, banking is about managing a suite of services that support a range of different customer solutions. If properly implemented, this diversified technology strategy can help banks get away from being locked into a single technology provider relationship, which can limit the pace at which future technology can be tested and adopted.
However, having multiple systems puts greater pressure on banks to ensure that these systems are communicating effectively with each other, and that the bank is not accidentally generating a whole new set of data siloes and inefficiencies.
The key is to make sure that systems are being effectively integrated with each other, and that the data that is being generated by each system is accessible and shareable, as needed, to the other systems. An effective approach is to establish a flexible, center to your data system, in a “Hub-and-Spoke” structure, which can consume data from each system and make that data accessible in a readable format to other systems, in real-time, or close to real-time.
Focus on what makes your bank special to its customers
As it becomes easier for banks to offer personalized service and advanced banking capabilities, differentiation may start to come down to factors that are less about performance and more about philosophy.
A number of banks are finding success focusing on the things that make them special to their customers, such as a particular focus on an investment philosophy, a commitment to giving back to their local community, or specialized expertise in business categories that reflect the surrounding area. When this unique quality is supported with great stories, good data, and a consistent experience throughout the bank, the results can be transformative.
Nothing can replace the basic blocking and tackling of banking, but once the basics are accounted for, it’s the little things that can make a big difference.