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The [Not So] New Hierarchy Of Needs In Banking

When you hear “hierarchy of needs,” I’d guess that you think of Maslow’s hierarchy of needs. The theory posits that humans have needs that range from physiological needs (e.g., food, water, shelter) at the bottom level of the hierarchy, to self-actualization at the top. The theory has recently been updated to reflect the new reality that wi-fi and battery life are perhaps more important than food and shelter.

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The “hierarchy of needs” concept is a useful way to look at the banking industry. There is–and always has been–a hierarchy of needs. At the bottom of the hierarchy is security, in the middle is (money) movement, and at the top level, performance. 20141002HierarchyNeeds In the old world of retail banking, consumers had a need for security–they wanted to know that when they put their money in a bank of Monday, that money would be there on Tuesday. With deposit insurance, and a highly regulated industry, that level of need was satisfied, and has been for a while now.

In the old world of retail banking, consumers had a need for money movement–they wanted to know that when they wrote a check on their banking account, the money would be moved to whomever they wrote the check to. And they wanted to know that when they deposited a check into their account, that the money would be moved there (although we’ve long wished that movement happened faster than it does). These needs have been long met, as well.

And in the old world of retail banking, consumers had a need for account performance–they wanted to know that they were getting the best rates, and paying the lowest fees. This is a relatively newer level of need, as consumers (especially, and predominantly, in the US) have become more affluent over the past 50 years. The Internet has contributed strongly to helping meet this need.

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Disruptophiles love to talk about how banking is being disrupted. Two speakers at this week’s SIBOS conference told the Innotribe group over and over that “you (bankers) will disrupted…it’s not a matter of if, but when.” Personally, I find these proclamations to be at a level of distraction that renders them useless. What’s happening in banking is that the hierarchy of needs–which to a large extent were satisfied in the old world of retail banking–need to be re-established.

With the advent of electronic, mobile, and alternative payments, the security of transactions and the efficient/effective movement of money is being challenged. At the top of the pyramid, the increasing complexity of managing one’s financial life makes managing performance far more complicated than just tracking rates and fees.

While the Disruptophiles would like to scare us into thinking that banks are becoming obsolete or will go out of business (i.e, become extinct) if they don’t adapt to the changes, the reality is that the financial services environment is too global, and way too complex for so-called disruptors to effect large-scale change without the assistance of, or reliance on, existing financial institutions (case in point: Apple Pay).

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The Innotribe Startup competition that concluded this week at SIBOS underscores this redefinition of the hierarchy of needs. Finalists Sixscape Communications and Ensygnia address the changing security needs. Sixscape replaces insecure username/password authentication with certificate-based authentication, while Ensygnia’s technology improves identity verification. Competition finalists also addressed the changing needs at the money movement level of need.

As Bank Innovation put it, competition winner Epiphyte “avoids traditional money movement avenues and instead converts currency to bitcoins, moves the coins, then cashes them out on the other end in the local tender. The bitcoins are moved for a fraction of the cost of traditional money transfers using exchanges like Coinbase and Bitpay, which take on the currency risk.” Another finalist, TransferGo, is a digital, international money transfer service that enables international money transfer without actually transferring the sender’s money internationally.

Addressing the performance level, competition finalists Stockspot provides robo-advice to investors, while Lending Robot helps investors looking for lending opportunities on P2P lending platforms like Lending Club.

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Bottom line: As banks and credit unions move into the latter stages of their 2015 strategic planning efforts, the challenge is not “what to do about potential disruption.” FIs needs to better understand the changing needs at the various levels of the hierarchy, and determine when and where to make investments in the technologies driving–and dealing with–those changing needs.


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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Comments

  1. decisionscience says:

    Hi Ron – Disruptophile here (but you knew that),

    For those that care (or for those still capable of caring, which won’t be most that read these words yet, but it only takes a few to make the effort worthwhile), it should be noted that those that were meaningfully engaged/involved in the myriad of industries which have already been Disrupted (and for the most part, thus by definition already displaced and/or entirely dissolved) read their tea leaves the same way you read yours.

    As an example, in terms of what’s important, call clarity and legibility were always high on the priority list of the attributes that Ma Bell believed were important to it’s customers. Who’d have thought that people would actually tolerate and get used to asking someone to repeat themselves (sometimes several times within a given conversation) – or perhaps even have to redial again because the call signal dropped? Certainly not anyone from the (now Disrupted) phone company. Also not anyone from the (now Disrupted) microwave and cable-based long-distance telecom companies whose business has been all but taken over by VOIP, messaging, and other OTT services.

    Disruption ALWAYS involves unserved and underserved consumers sacrificing what incumbents believe those customers simply MUST want. In your case, what would you say if I told you that people no longer care as much about getting the transaction right the first time as long as it can be corrected later – provided they were to get something else valuable (as portability turned out to be for telephony) in exchange? And what if I were to suggest to you that for many transferability (you call it “movement”) is already far less an issue that you propose – anyone that maintains any kind of balance, in bank accounts, CDs, or any other not-entirely-liquid-without-some-cost vehicle already doesn’t care as much about the transferability of that portion of their funds as they do about whatever they’re getting for not transferring those funds.

    I won’t belabor the point as it should be evident at this point that the banking industry (or at least anyone that believes what you’ve proposed here) has all the same symptoms as those that proceeded to (but not through) these straits before. Too bad, particularly for those that hope for and depend on them to be making better (read wiser) decisions.

    Take care (- and good luck).

  2. Great stuff, as usual.

    I think “performance” is the crux of the changing business model of banking. It’s helping customers achieve their financial objectives as “optimally” as possible. Enter analytics.

    But, I do think you’re “poo-pooing” too much the cry for change. There may be some “Al-Gore’ing” of bank disruption, but the underlying point is still valid. Without a change to address the changing needs and expectations of customers, someone will eventually step in to do the job.

    I don’t think banks are choosing to ignore these changes. But I do think they use a lot of excuses (e.g. legacy systems, regulation) to avoid doing the tough work that needs to be done.

  3. DS: You make a lot of great points, and as Frank Bria (probably rightfully) points out, I’m probably over-poo-pooing you disruptophiles. But I struggle to agree with your reasoning when you state “disruption ALWAYS involves unserved and underserved consumers.” Always? Wasn’t the photography market disrupted by digital technology? I don’t think it was un- or under-served consumers who were the most involved in that disruption.

    I do fully agree with you that the banking industry has many (“all” may be too strong a word) of the symptoms as “those that proceeded.” But the role that money and financial services play in society and in a government context are radically different than music and photography.

    We do have to go back, here, and make sure we’re talking about the same thing when we use the term “disrupt” however (see an earlier post titled Defining Disruption, or something like that).

    I should also be (a helluva lot) more targeted in my use of the word “disruptophile”. I’m not just referring to people who say banking will be disrupted–I’m referring to the Chicken Littles running around screaming “the sky is falling! the sky is falling!” without providing any more specifics, or more importantly, any advice or guidance to those being disrupted (that is, those who the sky is falling on) on what to do about it.

  4. Totally agree about “performance” which is why I wrote a whole post about performance-based competition. And I think you make a fair accusation about me poo-pooing too much. See my comment back to Decision Science for more explanation. Thanks, Frank.

  5. decisionscience says:

    Hi Ron and thanks,

    Not meaning to unnecessarily belabor the point so feel free to tune out if this is overly long in the tooth.

    > Wasn’t the photography market disrupted by digital technology?

    It was, and now a bazillion pictures are taken that never would have been (previously underserved market) by a half-a-bazillion (or so) people (previously unserved market) who wouldn’t be taking pictures at all were it not for the camera in their phone.

    In another for-instance, people that used to use phones only for making voice calls were clearly underserved as there are increasingly fewer among us who count voice calling as our major means of remote communication – and many of those that use ONLY OTT services today would simply not have made the call at all under the prior paradigm (e.g. previously unserved).

    > The role that money and financial services play in society and in a government
    > context are radically different than music and photography.

    Indeed it is, but irrelevant to authentic Disruption. When the priority of that which was most important to incumbents is not the priority for the majority of newly-pertinent constituents (a constituency which usually begins with the unserved and underserved element and migrates into the incumbent market through tiers currently considered inconsequential), the role that the incumbent product/service played – if still pertinent – becomes integrated into the entrant product/service as part of the entrant’s improvement process. Will the broader scope of digital transactional processes (the name I’ve given to that which will replace what we today call banking) necessarily be less secure than the subset currently facilitated by banking – and even if it were at first, wouldn’t this something that could be quickly brought up to snuff if required?

    As to the dearth of authentic solution providers, you are (and remain, at least for now) woefully accurate. There are indeed a plethora of would-be providers, big names just like IBM, HP, Palm, and Microsoft that were all making smartphones without really having a clue as to what people really wanted before Steve Jobs made his point. Those of us on this side of it are well aware of that and all I can tell you immediately is that while technology (e.g. mobile, big data/analytics, etc) may provide a means to the solution, it assuredly won’t BE the solution.

    Thoughts? and thanks again.

  6. Mauriceo Castanheiro says:

    The interesting question to ask is who is going to be disrupted – in my opinion it will be the community banks as they will be unable to invest in solutions resulting in a host of failures and consolidations. New competitors may emerge (Apple, Google, PayPal, Green Dot, take your pick) but the probability of pushing out the global bankers is remote as they have the ability to invest or acquire the technology necessary especially when the innovation is incremental in nature (ApplePay, SmartyPig, etc).

    Solutions that provide the greatest threat to banks such as cryptocurrencies and the supplemental services that will evolve around (remittance) them will be an interesting dilemma for the global banks. The question is will these virtual currencies be able to go mainstream without some form of regulatory framework supporting them. My belief is they will need that regulatory framework (KYC, etc) as without them national governments will limit their adoption for a host of reasons including AML/ATF and financial stability (I acknowledge this is an assumption that may prove incorrect). Once that framework is in place though the problem becomes much easier for the global banks to capitalize on as regulatory uncertainty is one of the major hurdles in place for the cryptocurrencies.

  7. Mauriceo–Thanks for your comment. Your thoughts are spot on. I agree with your concern regarding community banks, but I think their funding challenges means they have to rely on third-party technology providers to get the job done.

  8. Mauriceo Castanheiro says:

    Ron – I agree with you that vendors will play an important role in providing community banks with point solutions such as a mobile app or a feature within. Where the community banks may have challenges is in leveraging the data to make better decisions. The current industry changes are not simply the implementation of a new channel or product but harnessing the underlying data that is produced – it will require access to that data in real time, data scientists to glean insight and business strategists to determine what problems to to tackle and when. The investment in both infrastructure and talent is significant in this new model and I am not sure how well that translates into a turnkey vendor solution (though there is an opportunity there if someone can get it right).

  9. MC: We are in violent agreement. I was trying to be tactful, and not write off community banks’ survival chances, altogether. I’m heading out to a conference today to speak to community banks and credit unions about the future of financial services. It would be an awfully short presentation to say “you’re hosed.” 🙂

  10. Mauriceo Castanheiro says:

    Fair enough… good luck with the conference 🙂

  11. Michael Carter says:

    Not to mock the serious flow of ideas here but the “Disruptophiles” would make a great comic book character. Might be a series in there somewhere because I have been hearing about the coming death of banks and banking for the 25+ years I have been working with banks and fintech.

  12. I like this idea. The primary character will be Disruptoboy. I know a few people who will end up being the role models. 🙂

  13. as per Michael, loving the serious points above, but my contribution to his disruption of the topic….

    Main leading couple, á la Bonnie & Clyde, should surely be ‘Disrupto Phil’ and ‘Disrupto Fillie’ ??? 🙂

  14. What about Disrupto Phyllis ?

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