Traditional financial institutions accomplished some admirable tasks in the coronavirus national emergency. They distributed billions in Paycheck Protection Program funds, provided financial services through remote channels during lockdowns, and gave Americans a trusted place to continue their financial affairs. But as the nation fitfully attempts to reopen to some new normality, banks and credit unions find themselves returning to the long-running competitive war with fintechs and other newcomers to financial services.
And traditional institutions will face the same competitive deficiencies they did before COVID-19 gave everyone something new to worry about, according to Peter Wannemacher, Principal Analyst at Forrester. One of these is lack of differentiation. While the pandemic challenge will continue for some time, Wannemacher says, now is the time for traditional institutions to get more serious about differentiating themselves from the pack. It is essential for their future growth.
“Differentiation matters less in times of economic turmoil,” says Wannemacher. “In times like these, a bank brand being unique doesn’t matter as much as being trustworthy.” But differentiation can’t be snooze-buttoned any longer because it will matter big time within five years, he predicts — if not sooner.
Universal Appeal Doesn’t Work Anymore
“In most industries, not growing can actually be an indicator of loss and decline in the future,” Wannemacher says. “That’s less true of financial services. You can bump along in the middle and be OK okay for a while. Shareholders won’t murder you.”
Survival isn’t necessarily imperiled, but the goal is to thrive, he says. The time has come to make some tough decisions.
“Sustained profitable growth is unachievable without differentiation.”
— Peter Wannemacher, Forrester
“The big question is, who are your customers?” says Wannemacher. “Most banks have always tried to kind of be there for anyone out there. They have to make some really clear choices soon about who they serve and what role they will play in those people’s lives. That is going to require something not discussed in financial services — specialization — and a term that is used, but really never adhered to — brand positioning.”
Quality digital services do rank highly, but what Wannemacher’s talking about is more strategic.
“Sustained profitable growth is unachievable without differentiation,” declares the analyst.
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A New Concept: Break Up the Bank into More-Focused Parts
That doesn’t necessarily mean that huge groups of people and businesses would be shown the door, not in the usual sense. Instead, Wannemacher suggests that institutions reverse the pattern of adding more functions, more divisions under the same umbrella.
“We’re going to see specialization where banks and other incumbents are going to start spinning out pieces of their existing business so that they can be more focused,” Wannemacher theorizes. “I don’t mean stripping back to the level of a startup with just one product, but to the point where you concentrate on one area and how to serve it well.”
This might not always be in the form of actual divestment, but a change in structure and orientation. Banking, he says, has never done what the auto industry did: create divisions based on needs, preferences and other factors that acknowledge that there are different automotive markets with unique attributes. Consumer goods companies like Procter & Gamble have done this for decades. Not banks.
To Wannemacher, this is the advantage that digital brings to the industry, beyond commoditized functions like remote deposit capture, mobile banking and more.
“The banking industry is now able to design, measure and iterate because of digital in a way that it never has before,” he explains.
Thinking this way, specializing and positioning products and brand in very specialized ways, will look like a gamble to a very conservative industry, Wannemacher admits. He believes the economic fallout of COVID-19 on the country will heighten the need to think this way.
In his conversation with The Financial Brand Wannemacher cited two examples institutions can learn from, Petal and Apple Card.
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Looking at the Niche Served by Petal
Petal is a specialized credit card company, offering a program using a Visa card issued by WebBank. Petal offers credit cards to people who traditional card issuers wouldn’t want to target or wouldn’t choose to, says Wannemacher. “These are people with murky or nonexistent credit histories and credit scores, not necessarily bad ones.” (The company specifically states that any record of delinquency or bankruptcy could rule out an applicant.)
“Petal offers a different proposition, that a credit card is a tool for building credit.”
Others target sub-prime consumers, but what interests Wannemacher most about Petal is how they position their card product. The traditional premise of credit cards is that they make it easier to buy things that you could pay for later. Various bells and whistles like rewards programs came along, but essentially that’s what credit cards are. In their early days, they were, as fintech gurus like to say, removers of friction.
Petal offers a different proposition: that a credit card is a tool for responsibly managing credit. How many card offers state that you can obtain higher limits, but that keeping utilization low can help you build credit? Petal’s website does. The company urges responsible use of credit to improve ratings with the credit bureaus. Among the incentives is graduation to a higher cashback percentage when 12 on-time payments have been made.
Wannemacher says Petal isn’t going for universal appeal but for the younger consumer, the underbanked person and the gig worker who lacks a steady traditional stream of income. Unlike other options for this market, there are no card fees nor the need to keep a deposit with the company, as is required for secured card programs that are designed to build credit.
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Looking at What Makes Apple Card Stand Out
When Forrester issued its 2020 U.S. Customer Experience Index, Apple Card, not yet a year old, ranked fourth out of 15 issuers evaluated in that category. Wannemacher says there are three factors that have helped Apple Card ramp up its appeal to consumers.
The first is “brand halo.” While Goldman Sachs issues the card, the most visible brand element of the card is Apple. The card is actually intended to function most often as an extension of the iPhone. “The brand had a lot of goodwill — not all goodwill, but a lot of goodwill going in.”
“Apple demonstrates that the “warmth” a brand offers does not have to come from actual human contact.”
The second is multiple features that make the card valuable to consumers. One that stands out for Wannemacher is expense management functions that help consumers organize and understand their spending.
The third function is multiple design considerations that play positively to consumer emotions. Forrester research on branding has found that emotion accounts for 43% of a brand’s “brand energy score.”
Apple demonstrates that the “warmth” a brand offers, which produces positive emotion for it, does not have to come from actual human contact. Banks and credit unions, by contrast,often equate warmth with staff in branches and human voices in contact centers.
He notes that Apple does have physical Apple Stores around the world, “but I don’t think anyone pretends that Apple’s resurgence and success over the past two decades is primarily driven by their stores.”
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Emotion is Critical to Ensuring Banking Brands’ Future
In a report that Forrester published, “Retention Is Not Enough: Banks Must Build Emotion-Rich Relationships To Grow,” this point is made:
“Although everyday banking transactions are about completing a particular goal — often one that is seemingly utilitarian — emotion is the largest contributor to a bank brand’s energy. CMOs must get this right when building moats around financial relationships increasingly at risk from high-equity brands like Apple.”
Wannemacher adds that emotion can be produced without contact — a lesson that should have been learned during COVID-19.
“The word ’emotion’ always feels like it means ‘joyful’ and ‘glee’,” the analyst states. “But often it’s ‘reassurance.’ Reassurance is emotion. Feeling safe is an emotion.”
Tone of communications is an important element in this, and the best thing financial brands can do is “rip the jargon out of banking communications,” the analyst says.
Take bank advisories about an account problem. Typically these are very officious, topped with things like, “Incident Report Number” — about as friendly as a jury duty summons.
Wannemacher gives Capital One high marks for handling such notices well. They are conversational, in plain language.
Also good is Emma, the fintech financial management app. It uses a lot of emojis in its communications and people like it a lot, says Wannemacher. Forrester research has found that banking communications featuring emojis obtain higher response rates.
One easy emotional outreach that Forrester analysis found that nine out of ten banking companies missed during COVID was using video messages to communicate with consumers to tell them what their institution was doing during the crisis.
While video doesn’t have the same emotional resonance as being in a branch with a person, says Wannemacher, it is scalable. Being in a branch, on the other hand, is unscalable right now. And for some consumers it’s undesirable.