19 Oct, 2011 17:46
Recently I've been discussing with bankers, economists, strategists and futurists the future of the banking industry. At a time when we've got the likes of the
The New Normal is inherently unstable
As bankers most of us would have preferred if things had just stayed the same as they were, or at least returned to the 'good ole days' once the dust from the global financial crisis had settled. Instead we're faced with talk of a
The perfect storm for a financial system in crisis is not just the failure of the banking system to self-regulate, or the default of sovereign nations in respect to servicing their national debt. The perfect storm is driven by three primary mechanisms that aren't normally discussed as macro-economic factors, but are critical as part of a discussion around reforming the banking industry. They are:
1. Increased Transparency and Visibility
2. The Reassessment of the role of Risk and Regulation, and
3. The Loss of Physicality
Adjusting to a Transparent World
The response to bailouts, banker bonuses, new rates and fees structures, and to the financial crisis itself is indicative of the fact that bankers can no longer just assume that the public at large will trust that banks know what they are doing. How has the industry at large responded to this increased transparency? At first with incredulity, then with a defense of the indefensible, and finally with begrudging acceptance.
Understanding that you now answer to the public and you need to defend your positions with openness, logic and fair value,
“I have an inherent duty as a CEO of a publicly owned company to get a return for my shareholders,” Moynihan said in an interview with CNBC’s Larry Kudlow at the Washington Ideas Forum... Customers and shareholders will “understand what we’re doing,”... “Understand we have a right to make a profit.”
Brian Moynihan, CEO - Bank of America
As a bank you do have the right to make a profit, but customers now understand more acutely than at anytime in history that they have rights too. It's not that customers don't want to pay for banking, it's not that they are unreasonable; it's that they now demand value and they are assessing that value, and exposing your shortcomings when you don't meet up to their expectations.
In this way, what we need to do as an industry is better understand our value in the system. Right now we have trouble articulating that because we've become too historically focused on 'banking' as the system, rather than banking as a financial service to those that have the right to pay and choose. The balance has tipped in favor of the voice of the consumer.
There are bigger Risks than Risk
I was in a conference in Oslo earlier in the year and talking about the need for retail banks to adjust to serving their customers better, no matter when or where they needed banking, and a banker in the audience defended the need for a strict, traditional approach to physical KYC (Know-Your-Customer) because banking is first and foremost about 'managing risk' - at least that's what he said. With our almost myopic focus as an industry on risk management and risk mitigation, we've perhaps missed the biggest risk of all - the fact that we are putting so much of the risk workload back onto the customer and the front-end of the business, that we're starting to become a problem.
I've talked at length previously about the huge amount of time the front-end staff and customers spend in an attempt to reduce the potential legal or regulatory enforcement risk. When I, as a customer, am spending 50%, 60% or perhaps 90% longer doing a simple task like opening an account or applying for a loan than I did 20 years ago - do I see that as progress, or do I feel it a burden? Do I see such moves as a reduction of risk, or do I merely see it as an increase in complexity? In such a risk adverse environment, the bank is no longer serving the customer, the customer is serving the bank - and the customer is increasingly getting intimidated by the thought of having to navigate this complexity before he can get to the actual product or service he wants.
If you look at the biggest consumer shifts in the last 15-20 years, the biggest shifts have been driven around change in process or distribution that makes life simpler and easier. Here's a few examples:
- Mobile phone versus Landline
- Google Search versus Catalog
- Online Trading/Travel versus Broker/Agent
- Multi-touch screen versus stylus/keyboard
- iPad/Tablet versus PC
- Kindle/eBook versus Paperbook
- Online News/Streams versus Newspaper
- Email/SMS/Facebook versus Mail/Telephone
The threat here is complexity, and invariably as we try to manage risk, we're actually making customer facing processes more complex. This is bucking the trend of almost every other core customer interaction we're seeing today.
The Loss of Physicality
"The bank is no longer a place you go. Banking has becoming something you do. It is now contextual, and measured in terms of utility – how easily someone can use bank products or services to accomplish a task like shopping, traveling or buying a car or a home. The more a bank insists on physicality, the more it risks becoming irrelevant to customers who no longer cherish the traditional processes and artifacts. In just four years, that will be the vast majority of your customer base – not a marginal demographic, as some would prefer to believe."
In this environment, retail banking is ripe for disruption. Why? Because instead of understanding the shifts around us, we're digging in - levying fees, increasing complexity, and arguing that customers are just going to have to suck it up. After all, where else are they going to go?
Increasingly customers have a choice. Whether it is pre-paid debit cards, mobile wallets, PayPal, or other challenges to day to day financial interactions, the concept that as a regulated industry we're protected from having to make the hard decisions and actually reform the way we work, is foolhardy.
We need to start working very differently...
Wow, what a great blog. Covers a lot of ground in an honest and reflective way. Your summary is so good its worth repeating:
...we're digging in - levying fees, increasing complexity, and arguing that customers are just going to have to suck it up. After all, where else are they going to go?
It might seem like banker-bashing is the new national, no global, sport, but if you look we are frequently bashing the spongers and thieves in society and want rid. We basically want both to suffer a little like we feel we are suffering - this is like a lower-middle-class revolution.
But banking is so institutionalised - can it ever really change that much? Did Egg really change the underlying process and experience by 'going internet'. Are we all home-trading and moving our investments about? Not really, but a bit. It takes time to turn the oil tanker, and you can only do it bit by bit. Embracing social channels with customers is another bit.
I was with you all along until you brought up the subject of alternatives to banks in the end. I wish there was a choice, but, unfortunately, customers can't escape from banks. What's worse, many of them can't even escape from their present bank - as reports have pointed out, many BofA accountholders feel that they'll stick with BofA because switching banks is such a pain. I was shocked at BofA's CEO's statement that BofA's newly introduced debit card fees will actually bolster customer retention because they'll buy more products from BofA so that they can eventually be spared this fee!
Eventually, all monies on prepaid cards have to be deposited in a bank. In their present form, barring Boku, Zong and a few other niche players, mobile wallets merely store bank-card information, so they'll lose their existence without banks. PayPal freezes merchant accounts so frequently that it appears safer to move money through hawala. I'd have to undergo 100X more pain with banks before I'd even dream of PayPal as a bank-alternative. If the whipping that PayPal has been receiving from the Indian regulator is any indication, I'm not even sure if it will be around when - note, I didn't say if - banks cross the 100X pain threshold.
And, when it comes to fees, I forgot to add that banks have a lesson or two to learn from the NetSpends and GreenDots of the world. Why would someone exit a bank over a debit card usage fee when most prepaid card operators charge a fee for even balance inquiry? And, if I remember right, it was a bank - AmEx - that introduced the first fee-free prepaid card.
I think your comments reflect your experience with the market in India versus the US market. Certainly the fact is that PayPal and pre-paid debit cards are already a strong alternative here in the US, and the fee structures are cheaper than traditional checking accounts and wire transfer mechanisms. Regardless of who started pre-paid, right now the banks are nowhere near it because they see the users of pre-paid as unattractive financially.
However, the typical profile of a pre-paid debit card user is a 50% likelihood of a college education, and 25% likely to have a prime credit rating and professional career. The reason for them opting out of the banking system is irrelevance of the day-to-day banking system.
Try to defend it as you will. A lot of traditional banking just doesn't make sense to these kids anymore. You can't educate them around to your way of thinking - they just don't get it.
My comments on prepaid cards are entirely USA-specific: (1) Prepaid cards are much more expensive than checking accounts offered free-of-cost by several credit unions and community banks (2) According to latest news, the moment prepaid cards are linked to ACH, which is a pre-requisite for using them to make bill payments, their interchange fees will be subject to the same ceilings imposed on debit cards by Frank-Dodd-Durbin. As a result, prepaid cards become less attractive for NetSpend, GreenDot and other prepaid card issuers, not just banks. When they raise their fees even further and / or eliminate eliminate ACH linkage and other features to compensate for reduced interchange revenue, prepaid cards will stop appearing as an alternative to traditional bank accounts. Sadly, whether they belong to Baby Boomers, Gen X or Gen Y generations, people won't have a choice but to stick around with traditional checking accounts, whether they understand them or not.