The Future Of Banking: Death By a Thousands Cuts

If banking is like any other industry, fragmentation and disintermediation will change everything — from how financial marketers see consumers to how they create new products and deliver their services. If traditional banking providers sit on their thumbs and do nothing, they will see their existing customer base splinter and head off for big banks and innovative fintechs.

It’s not hard to spot the clues. To see the havoc that will be wreaked on the banking industry, all you have to do is look at what’s happened in other sectors of the economy. For instance, no example offers a starker picture of what could happen in the future than what we’ve seen in the entertainment business, where product fragmentation and digital channels have crippled broadcast TV, killed Blockbuster and rewarded personalities like Howard Stern with a staggering $500 million contract from Sirius Satellite Radio. Consumers know what they want, and they don’t care when and where they get it. When there’s a demand for something, the market responds… one way or another. Either existing providers rise to the challenge, or new players swoop in and eat their lunch.

Technological innovations in media and delivery channels spurred this massive fragmentation and disintermediation in other industries. But because regulators have always afforded banking providers a certain level of protection against new competition, traditional financial institutions have been somewhat insulated from feeling the full fallout of the Digital Revolution.

That is now changing.

Fintechs startups are upsetting the once relatively stable banking marketplace by stepping in to accommodate consumers’ needs. In the process, they are redefining what it means to be “a bank” — both from the providers’ point of view and the consumer perspective. Fintechs are using social media and other similarly nontraditional techniques to assess consumer credit worthiness — bucking a century of conventional wisdom anchored in the credit scores from Experian, FICO and TransUnion.

Reality Check: The ability to adequately address consumer needs will determine the fate of every banking provider in the market today. Smaller community banks and credit unions face the most risk.

The scary thing is that the pace of change is actually accelerating, and there’s no sign that it’s ever going to slow down. What’s current, cool and trendy today might be passé or old news tomorrow. Take the case of Whole Foods, for instance. Not long ago, they were the darlings of the supermarket sector — the nation’s preeminent organic/healthy grocer. Now Whole Foods is struggling, closing stores and facing the worst slump in more than a decade. That’s because mainline grocers like Kroger, Wal-Mart and Aldi moved into the organic food space, undercutting prices and providing a bigger distribution network.

Reality Check: It’s a constant battle to stay relevant. If your organization isn’t constantly pushing itself, you could lose the fight and become a dinosaur… extinct in the blink of an eye.

All this disruption and fragmentation means financial marketers can no longer view audiences as one large monolithic group who responds to the same generic marketing message. One consumer’s preferences can vary by the hour and depend on context. For instance, drinkers may chose a premium brand in a bar, a less expensive product for home, and yet another to take to a party. Each situation demands marketing messages and media channels that are suited to the audience.

But banks, it seems, only grudgingly cater to consumer preferences. Almost everyone (even you, dear reader) considers banking “a chore.” People are people, and will do just about anything to avoid a chore; if that means finding a more convenient alternative and switching banks… so be it. You can see how this phenomenon has played out in mortgage lending, where — for the first time in more than 30 years — banks accounted for less than half of all mortgage loan dollars extended to U.S. borrowers. Nonbank lenders like Quicken Loans and PennyMac Financial Services gave out 51.4% of the loan dollars in the third quarter of 2016, up sharply from the mere 9% for all four quarters these lenders represented in 2009.

Since virtually the entire adult population owns a mobile phone, you might think that online account opening would be a no-brainer for banks and credit unions. Apparently not. Only one in five traditional institutions are currently offering online account opening, and even then, the experience sucks — a stunning 40% of consumers abandon their online application somewhere along the way.

Reality Check: The banking industry’s half-hearted attempts to fulfill consumer needs leave customers ripe pickings for über-convenient fintechs.

Consumers expect more. A recent survey shows consumers buy low-margin products from their primary bank, but shop around for other high-margin services. The majority (61%) of consumers choose other sources for brokerage accounts, 70% choose other sources for auto loans, and 52% choose other sources for home mortgages. People are increasingly peeling away from their PFI and instead choosing the lowest cost, most convenient provider.

These negative headwinds working against traditional institutions are compounded by the utter lack of differentiation in the financial industry; consumers think one bank is as good as another — “Seriously!? What’s the difference?” Instead of remaining with their primary institution, they are inclined to seek better-priced or more convenient products elsewhere (e.g., fintechs, startups and digital-only banks with sexy brands). Because the majority of consumers view their banking relationship as strictly transactional and not advice-based, they find it particularly easy to cut ties.

This all adds up to death by a thousand cuts. Fintechs eye banks as fat, financial turkeys, and they are carving off juicy morsels one slice at a time. What’s left? The picked-over carcass for anyone who’s left to fight over.

The solution — especially for community-based institutions — is to embrace the trend and build their own strategy around “fragmentation.” Learn how to accommodate the customer. Become a narrow, specialized institution offering a select number of products aimed at a specific audience. Develop a strategy that will allow your institution to prosper and become a market leader in a niche.

These days, if you try to appeal to everyone, you will wind up appealing to no one. The “all-purpose, one-stop shop” is no longer a viable model. Just ask Sears.

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