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.