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The Next Wave Of Banking Competition

A Snarketing post by Ron Shevlin, Director of Research at Cornerstone Advisors

Damn that Brett King. Had to title his book Bank 3.0, didn’t he? The book (which as I said in my Amazon review is a must-read by anyone working in financial services), talks about the progression of banking from branches (1.0) to the Web (2.0) to mobile (3.0).

I have no argument with this interpretation. But I think of the evolution in terms of how the predominant basis of competition has changed, not in terms of the change in channel focus (see the chart below).


Phase I: This phase of  competition (post-WWII) focused on who had the most/best locations, and who provided the best (friendliest, most helpful) branch-based service.

Phase II: As the nation’s overall level of education and affluence rose, we developed more sophisticated borrowing needs (mortgage, education, other personal loans) and more opportunities to save. As a more educated society, we believed we should be more “economic” in our decision making, and not just put (or take) our money from whomever had the closest branch. As a result, Rates became the new focus of competition — who had the best rates (lowest for borrowing, highest for saving) or lowest fees became the primary basis of competition.

Phase II started to take hold long before the Web emerged. It was the rising levels of education and affluence that brought about Phase II. What the Web did do, however, was kick this phase into high gear starting around the mid-90s. Even though few people applied or opened financial products, many researched financial products looking for the best rates and fees.

Phase III: The next wave of banking competition will be about personal financial performance.

It’s not about personal financial management. PFM has become too narrowly linked to budgeting and expense categorization. Nice features, but not what a lot of people want. Performance isn’t just about getting the best savings rate or lowest mortgage rate. It’s about helping customers save more, getting the best deals on what they buy, about choosing the right way to pay for the things they purchase, and about avoiding fees. And charging them for those capabilities.

You might think that this is what financial advisors have been doing for years.

Nope. They’ve typically focused on helping a small percentage of people maximize the performance of their financial assets. But the mass market doesn’t need help allocating assets (investments), they need help in managing liabilities (expenses).

There’s no money for RIAs in doing that. And banks haven’t been able to do it.  As long as people paid in cash or checks, (or with credit cards that weren’t issued by the bank), banks and have been hampered by a business model that offers no reward for providing advice and guidance in managing day-to-day expenditures.


Why is this new phase of competition emerging now?

1.Industry economics. Industry ROE fell off a cliff after 2008. While profitability has rebounded, ROE hasn’t. This is true for both banks and credit unions. Ten years ago, when the Web was emerging, lots of people predicted industry transformation. Didn’t happen because there was no profitability crisis. Another reason it didn’t happen was…

2. Demographics. Ten years, even the oldest Gen Yers were barely out of college. They simply weren’t a force in the industry, and therefore not a factor in driving change. Now it’s different. Gen Yers are the first generation to not automatically open a checking account upon becoming an adult (they’re also kind of the first generation to not actually become an adult upon reaching adult age, but that’s a different blog post). The other important thing about Gen Yers is that they’re a whole lot more educated about financial-related things than previous generations were at that age. Gen Yers want more help in managing their everyday financial lives than previous generations did (and do).

3. Technology. Yes, mobile matters. What matters most about mobile isn’t just location-based stuff, it’s the elimination of latency. In Phase II, while the Web helped consumers get better access to their financial lives, it still happened after the fact. You went out into the world, spent money, then came home, accessed your PC, and figured out how badly you screwed things up. The gap between action (purchase) and analysis has closed thanks to the mobile channel. That’s more important than knowing that you’re at Starbucks.


The problem a lot of bank marketers have is that they don’t understand the composition of the competitive dynamic. It’s probably inaccurate of me to describe these waves as “phases.” They’re not discrete. They overlap.

So, many marketers cling to the Location dynamic because some consumers still place an emphasis on branch location and service, and because they (the marketers) have been around so long, this is the competitive dynamic they’ve grown accustomed to competing in.

Younger marketers, who grew up in the Rational Customer era, learned how to compete in the Rates dynamic. But, at any given point in time, there isn’t just one dynamic at play. The forces change slowly over time. What confuses the industry right now, is that all three dynamics play a role.

But the Location dynamic is dying out. Rates will persist for a while, but will be replaced by Performance.


My Aite Group research this year is going to focus on building out these concepts and what it means to FIs and fin tech vendors. These are just some early — and I fear, poorly formed — ideas.

Ron ShevlinRon Shevlin is Director of Research at Cornerstone Advisors. Get a copy of his best-selling book, Smarter Bank: Why Money Management is More Important Than Money Movement. And don't forget to follow him on Twitter at @rshevlin.

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  1. Next time I publish I’ll ask your advice on the title Ron…


  2. I think the most interesting change recently has been the release of more backing bank functionalities to the general public. Tools like Bancbox and Intuit’s Aggregation service which are open to the the public with little or no contract negotiations. While I haven’t been too impressed with Simple’s release, I think banks are becoming more and more of a commodity. If financial services are provided more and more online and those banks are all using the same or similar fintech products, there is little differentiation. Sure, rates help but nowadays the rates vary very little from institution to institution. More startups like Movenbank and a bevvy of other “we’re a bank but not a bank” startups are going to be able to focus almost exclusively on performance and leave the rates as a commodity of their backing platform.

    In a lot of ways, the “we need mobile” attitude that financial services have now seems to be a bit too late. I don’t think you’re going to solve the problem by merely adding mobile, PFM, e-Deposit, etc. It’s the overall performance of the platforms together that make things unique, interesting, and hopefully profitable. As long as technology is viewed as a puzzle still by institutions and not a piece of custom architecture, I think there is a great deal of room for a startup to come in and capitalize on the consumer market in a real way. I imagine there will be one big “non-bank bank” in the next 5 years assuming legislation/regulation doesn’t get in the way.

  3. @mattcharris explains this same concept differently in a blog post titled “In defense of banks and bankers” where he sees banks becoming more of a utility and the innovative ecosystem that could then take greater risks without affecting depositors on top of that stability. He eludes to your performance areas which take hyper specialization from new companies or focused players that serve specific needs in the market place. What is your outlook on the culture of bank’s and even fintech vendors meeting the need of the emerging performance sliver for creating an ROE acceptable to the investors?


  4. “I don’t think you’re going to solve the problem by merely adding mobile, PFM, e-Deposit, etc.” I couldn’t agree more. Those in the industry who whine about the lack of innovation are missing the point.

    As for a “non-bank bank” that will be big in the next 5 years, I agree that someone will emerge, and your point about the regulatory hurdles is spot on. As for who that big non-bank bank will be, I don’t know. But I imagine that Movenbank CEO Brett King has some opinions. 🙂

  5. Wade —

    Thanks for the link to that blog post. Hadn’t seen that before (or that blog, altogether).

    There seems to be a lot of people labeling banks as utilities. I think this is misdirected. It’s not the bank that is a utility or a commodity — it’s the checking account that has become a utility or commodity.

    The providers (banks) need not fall into the trap of commoditization. The key isn’t technology innovation, it’s business model innovation. The biggest albatross hanging on the necks of banks is the $30 billion in overdraft charges that get levied every year. Replacing that revenue stream is a huge hurdle and burden.

    As for my outlook on “fintech vendors meeting the need of the emerging performance sliver,” let’s leave that for my presentation at the AFT conference in March.

  6. A very good and interesting framework.

    In my view, one of the biggest challenges facing banks as they move into Phase III is mindset: they have not historically acted as customer advocates. A banker’s reflexive position is to minimize the interest rate on deposits, to maximize the rate charged on loans, to add as many fees as the market will tolerate, and to recognize deposits and purchases in such a way as to maximize fee revenue.

    Working with clients to help them get the best deals on what they buy, and choose the right way to pay for the things they purchase requires a different way of thinking.

  7. Ron,

    Another thought provoking for post. One of the challenges banks and credit unions are facing is not just this change in the phases, but the SPEED at which the change is happening. It seems like consumers are moving at one speed (warp) and financial institutions are moving at another speed (first gear).


  8. Matt Davis says:

    Or “neutral”…waiting to be pushed.

  9. Mark: As I think about this more, I think this is an interesting analogy. Exactly what speed are consumers and FIs moving at? Consumers may be rapidly adopting new technologies, but are FIs really that far behind? And not all consumers are moving at warp speed. I would bet that some younger consumers see themselves moving slowly, while an older consumer who gets a smartphone think s/he has entered a time warp.

    On the other hand, I’d bet some FIs think they are moving quickly, which some fast movers think they’re not moving fast enough.

    It’s a matter of perspective, I guess.

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