PwC released an excellent report recently, titled Retail Banking 2020: Evolution or Revolution? Reading through the report triggered some thoughts:
PwC: Fewer than 20% of (banking) executives feel well-prepared for the future.
My take: The other 80% told the truth.
PwC: 70% of global bank executives believe it is very important to consider how macro trends will impact the banking industry in 2020.
My take: The other 30% expect to retire within the next five years, so they don’t give a…uh, they don’t care. Seriously, though, there is a rational explanation for this. PwC even mentions that “fewer US executives think it important to form a view of the industry in 2020 (61%) than executives in the emerging markets (79%).” Are US execs missing something here?
Not necessarily. Their view might just come from a belief that the rate of change in the industry is so great, that forming a view of 2020 in 2014 is nearly impossible, and that the more appropriate planning horizon is shorter. I’m not arguing that they’re right–just looking to explain why they believe what they believe.
PwC: 55% of banking execs believe that non-traditional new players pose a threat to traditional banks, while 31% believe they present innovative partnership opportunities.
My take: This is a false choice. It can be both. As we’ve seen with BBVA/Simple, there’s nothing stopping a traditional bank from acquiring a non-traditional new player. It’s too simplistic to say a non-traditional player is a threat or not. A threat to what? Survival? Acquiring a segment of the market? In industry after industry, the typical path of startups goes in one of two directions: failure or acquisition. The number of Amazons, Microsofts, Yahoos, and Googles, who disrupt (or create) a market or industry are few and far between, and are usually limited to one per industry.
PwC: Identified six priorities for success in 2020. They are: 1) Developing a customer-centric business model; 2) Optimizing distribution; 3) Simplifying business and operating models; 4) Obtaining an information advantage; 5) Enabling innovation, and the capabilities required to foster it; and 6) Proactively managing risk, regulations, and capital.
My take: No offense, PwC, but while this is an awesome list, these were the six priorities for success in 2010, 2000, and 1990, as well.
PwC: Banks need to have a clear sense of the posture they wish to adopt – whether to shape the industry, rapidly follow the leaders, or manage defensively, putting off change.
My take: Way too simplistic a view. The vast majority of banks simply can’t shape the industry. What’s really difficult for many banks (large of small) is actually figuring out who the true leaders are. The banks who “led” with mobile banking 12 to 13 years ago are not necessarily the same banks reaping the benefits from those early investments. What banks do need to have a clear sense of is which segments of the markets they want to serve. This will dictate product and service offerings, and drive strategic decisions regarding physical and digital delivery and distribution. Following the leader (rapidly or slowly) or attempting to shape the industry is foolish.
PwC: Governments will influence through regulation rather than ownership.
My take: Yep. And they’ll continue to do more damage than harm by being politically motivated instead of consumer-focused, and by missing the unanticipated negative consequences of their decisions.
PwC: Competitive reach [will] no longer [be] determined by branch networks, but rather by banking licenses, technology and advertising budgets.
My take: Mostly correct, but missing at least one important dimension. Competitive reach will be influenced by the press and social media. This is what I was trying to get at in a post I wrote about Coin in which I described the “TechCrunch effect.” By becoming the darling of the technology press, a company like Coin, with practically no advertising budget, not banking license, and only promises of technology, can create a competitive “reach” that no amount of money could buy them.
PwC: Surviving banks will be low-cost producers, with nearly every product profitable on a stand-alone basis.
My take: No. Never has been the case, and despite whatever might come, will never be the case. There will be always be opportunities–as there are in every industry–for a competitor to take a higher-than-low-cost, higher-than-average value-provided position. Don’t take my word for it. Talk to Michael Porter. He’ll tell you.
What’s even worse about this prediction, is that it misses a critical shift banks need to make: From a focus on product profitability to customer profitability. If you have a customer whose profit level is 50% above the average of all other customers, then you can afford to provide a product at a slightly lower profit margin than you get from other customers, in order to keep or protect the relationship.
In other words, in the future, profit profitability will take a back seat to customer profitability. Or at least, I hope it does. In fact, PwC even predicts that “banks will organize themselves around customers instead of products or channels.” If they’re going to do that, than customer profitability has to supplant product profitability.
PwC: Customer trust will be returning. For customers to trust their banks they need to feel that banks are acting in their best interests.
My take: Yep. Been saying this for 10 years now. In fact, I think I said it just the other day in the post title Banking Myopia.
PwC: Cyber security is paramount to rebuilding trust – winners will have invested significantly in this area.
My take: Not only do I agree 100%, I think this could be one of the biggest competitive differentiators and advantages the traditional, large banks could leverage. A recent survey showed that consumers, by and large, blame merchants for the recent data breaches. As well they should. Demonstrating their security advantages could not only position banks as consumer advocates when it comes to the use of data, the large banks will likely be able to show they’re better at this than the non-traditional startups.
Of course, there’s plenty of room for the traditional banks to screw it up in this area, with poorly executed marketing approaches. So we’ll see what happens here.
BOTTOM LINE: Overall, lots of great stuff in this white paper from PwC, despite the nits I have with some points. Definitely a must-read for bank and credit union execs.