Cornerstone Advisors reports having seen evidence of true Gonzo bankers doing really unique things in the industry. According to eye witnesses, these innovators have broken down the old geography barriers and employed industry knowledge and unique products to go to where fewer and fewer banks have gone – i.e., where the customers are. Here are just a few examples of these institutions’ competition-busting tactics:
For the other 6,800 or so banks and 6,400 or so credit unions, I’d like to lay out three BIG reasons everyone now needs to be focused on innovation.
Reason #1: Banking is a Commodity Business.
Let’s face reality. Retail banking and small business banking are commodity businesses today. Eighty-five percent of the retail market is owned by the top four behemoths, and small business banking predominantly consists of a retail-like deposit account, with the big banks offering the small business owner a line of credit through a credit card. Can 6,000+ credit unions really survive when their bread and butter is retail banking mixed with auto and home loans – three of the most commoditized aspects of banking?
While I get a lot of pushback from our mid-size commercial bank clients, I think it won’t be long before significant aspects of the commercial “relationship” get commoditized as well. Banks use similar tools to analyze assets, credit, appraisals and cash flow. How difficult will it be to centralize a lot of this analysis and apply some efficiencies on a large scale? Commercial bankers are slugging it out NOW on razor thin margins with an inefficient delivery mechanism tied to a dying branch network. Imagine the market disruption and what will happen to commercial margins when a few virtual players make delivery of a $2 million CRE loan or a $3.5 million C&I loan fast, friendly and easy – three words I rarely hear from bankers describing their current commercial banking processes and paperwork.
While banking has always been, for the most part, a commodity business, the U.S. market at one time allowed for 20,000+ FIs simply because of geography. In the days of yore it was necessary to go to a physical branch to open an account, cash a check, or get a loan. Those days are long gone. Technology has been a game changer for banking, and geography is no longer a sustainable defense – on either the retail or commercial side. So what happens in a commodity business when the #1 barrier to competition is removed? Yup – consolidation. That is why Innovation and Differentiation are vital. The bank or credit union that is not doing something different from its 13,000 brethren has only itself to blame as the industry consolidates around it.
Reason #2: The Big Vendors Suck at Innovation.
If I hear one more bank or credit union say it is going to be a “fast follower” in technology and innovation, I think I’ll lose my lunch. HELLO PEOPLE – fast follower in a commodity business is a powerful combination for disintermediation and eventual death by acquisition.
With the recent acquisition of Open Solutions by Fiserv (covered so well recently by my colleague Scott Hodgins) we are in a world where literally a handful of vendors serve all 13,000+ banks and CUs in one way or another. In the old days when geography served as the all-important competitive barrier, banks could happily outsource innovation to their primary vendor partners. Whether a bank partnered with a progressive vendor or a vendor 10 years behind the times didn’t really matter because customers had no good way of determining whether the products and services their bank offered were better or worse than others. Now, information is ubiquitous and customers can compare mortgage rates, CD features, Internet banking functionality, etc. Unfortunately the bank vendor market, like banking itself, has become a “me too” business. The business model of the big vendors is based on license and payments revenue, not innovation. You will have to search your memory banks long and hard to find examples of real innovation coming out of Fiserv, Jack Henry, Fidelity or Harland that truly moved the market versus some nips and tucks around the edges. They have decided it is far easier to milk legacy revenue streams and acquire or partner with the innovators in our industry. After all, innovation is hard work.
To put it bluntly, the oligopoly of large FI vendors are the “fast followers” copying what innovative banks or smaller vendors are doing. That means the best an institution can be when it comes to partnering with a major vendor for technology and innovation is a medium or slow follower.
Reason #3: Non-Traditional Players are Preparing to Eat Your Lunch.
I won’t belabor this point as there are enough talking heads at enough industry conferences yelling that the sky is falling. But it is not exactly a well-kept secret that PayPal, Walmart, Apple, Google, the cellular providers, Western Union and a host of others (Congress included, one could argue) are after the traditional relationship a bank has with its customer, especially on the payments side of the house, which is where the money is being made.
With all of these upstarts trying to figure out where and which piece of your lunch they want for themselves, banks and credit unions have two choices: rely on vendor(s) to develop a defensive strategy, or rely on internal resources to develop an offensive strategy. Based on how quickly they move and how creative they are, I wouldn’t put my eggs in the vendor basket. It will be incumbent upon financial institutions to plot their innovation and differentiation strategies and make hard decisions on which non-traditional players they will partner with to execute.
To the bank whose 10 year strategy relies on the same basic products it now has with “medium/slow follower” implementation of channels and technology wrapped with a special focus on “customer service” – I say, good luck. There may well be a consolidation in your future. It’s time for bankers to roll up their sleeves and build new capabilities that will allow them to look at combining existing capabilities in a new way, or building unique products or solutions, or developing deep and specific industry knowledge. It’s time to get busy, folks.
All for now.
With efficiency pressures and shifts in consumer behavior, financial institutions need to optimize their investments in delivery channels while creating a more integrated customer experience.
A disciplined Integrated Delivery Channel Plan from Cornerstone Advisors can help your institution ensure that both its branch and remote channels are generating a positive financial return and supporting the institution’s long-term strategy.
Contact Cornerstone Advisors today to talk more about Integrated Delivery Channel Planning for your organization.