With technological developments and upstarts threatening to disrupt and displace established financial institutions, what should banks and credit unions do to defend their positions, and to grow and thrive in the new world of banking? Smarter Bank helps banks and credit unions: 1) Understand and react to emerging technological disruptions; 2) Regain consumer trust; and 3) Be more profitable.
In short, it’s about how to become a “smarter” bank. Smarter about developing customer trust and relationships, smarter about understanding consumers’ needs and wants, smarter about using technology, smarter about marketing products and services – and smarter about making money.
In his newest book, ‘Smarter Bank,’ Aite Group Senior Analyst, Ron Shevlin provides a no-nonsense framework to address broad issues impacting banking’s rapidly changing business model. The book addresses topics like innovation, big data, customer engagement, mobile payments, personal financial management, and the changing financial behaviors of consumers, in particular, the Gen Yers.
I interviewed Ron about his newest book and what he hopes to share with his clients and readers.
What prompted you to write another book and why the title is ‘Smarter Bank?’
With books like Brett King’s Bank 2.0 and Bank 3.0, and Chris Skinner’s Digital Bank, already on the market, the world really doesn’t need another book focusing on “what will the future of banking look like.” But I thought – based on my consulting experience working with many banks and credit unions – that the industry could use a book that discussed “how to get there from here.”
I also believed that there is a lot of unwarranted and unrealistic hype surrounding the potential impact of new technologies on the banking industry. In no way do I dispute the fact that technology is changing the industry. The book, however, presents arguments for why the speed of change, and the impact of these changes on existing players, is different from what some pundits claim.
As for the origins of the title, I have to give the credit to (or, if you don’t like the title, place the blame on) Brett King. Brett wrote the foreword to the book, and while discussing the book, I mentioned that I was thinking of titling it “Smart Bank.” Brett convinced me to change it to “Smarter Bank.”
Can you elaborate on why you believe the current business model in banking is broken?
The retail banking business model – in the United States, at least – is based on a number of premises, three of the most important being: 1) A significant percentage of revenue is driven by overdraft charges; 2) A growing percentage of revenue is driven by card-based interchange fees; and 3) Growth opportunities come from up-selling and cross-selling checking account customers into more profitable (i.e., lending) products.
How’s that working out for our banks? Regulatory changes have limited overdraft revenue opportunities and reduced interchange fees. Demographic changes have produced consumers more aware of and concerned with overdraft fees, which has impacted revenue generation. And the idea that the checking account was the ‘core’ product, which provided a basis for relationship expansion and helped create the popularity of free checking, is no longer viable.
Technology can (and will) change how consumers access their accounts, and interact with their banks. But if the underlying business model – that is, how banks make money – doesn’t change, who cares if people access with a mobile device or through mind reading.
First and foremost, retail banking needs a new business model and a new way to make money.
Despite lots of ‘death of the branch’ hyperbole, branch networks remain strong. Can you explain?
There are two predominant factors fueling the “banks continue to get larger” trend. The first is merger activity. The cost of compliance (not to mention the costs of technology development and distribution) is so high today, that these costs need to amortized across a large number of customers, assets, and deposits. So the big keep getting bigger.
But there’s a consumer aspect to this, as well. While money is very important to us, we hate spending time managing our money. I’d bet most consumers spend more time choosing what restaurant to eat at, or which movie to go see, on a Saturday night than they do choosing which bank to do business with. As a result, they default to the easy choice: The bank with a branch at the nearest corner. And the big get bigger…
“Ron Shevlin is famous for his snarky sense of humor, as well as his well-researched, well-considered takes on banking and customer behavior. Smarter Bank is a smart book. If you are in banking, you should read it, and you will definitely come away smarter and better informed.”
– Brett King, Best-selling author of Breaking Banks and Founder of Moven
What is the key to being a Smarter Bank marketer in the future?
There is no “the key.” You can’t boil down marketing to some simple set of 3 or 5 or 7 rules to follow so that everything falls neatly into place. Marketing is a complicated business function with a host of sub-functions—advertising, pricing, research, etc.,–that must applied to a growing number of distribution channels.
Striving for clarity of strategy and alignment of marketing execution across channels and sub-functions is a good place to start. But there’s no easy answer to this question.
Which segment(s) should banks and credit unions focus energies going forward?
Banks and credit unions should focus their energies on the segments of customers and prospects that they can make money from. There’s a reason the unbanked are unbanked – there’s no money in serving them. If there was, they wouldn’t be unbanked. That’s not to say that banks and credit unions couldn’t be doing things to help the unbanked – but let’s be clear, these actions come under the banner of “charity.”
As for the “underbanked,” there is no such thing. Just because someone chooses to use payday lending or check cashing services doesn’t make them “under-served.”
Are banks responding quick enough to the market realities of a digital universe?
Yes and no. On the yes side, banks have responded quickly enough in terms of providing online and mobile access to accounts. On the no side, banks have not responded particularly quickly in terms of developing technology-based products and services.
But you can argue it doesn’t matter. New firms have stepped in fill that innovation gap. Now, while some pundits think that portends industry disruption and displacement of existing banks, I’d argue it’s just as likely that it means the existing banks will acquire and integrate these new players.
How does a ’Smarter Bank’ respond to the innovation, agility and tenacity of these new players?
Existing banks need to start by answering one question: Is a new player a threat to my business? If the answer is yes, then it prompts a second question: Do we compete against the new player or take them out of the market through acquisition?
It’s not rocket science. They’re just not particularly easy questions to answer. Without a sense of strategic clarity and solid understanding of what business model will be a successful, it’s tough to answer the first question. And if you can’t answer the first one, you can’t answer the second.
Finally, do you see any ’Smarter Bank’ in the industry today?
USAA. I’d be hard pressed to identify a financial institution with the clarity of mission, the clarity of strategy, and the commitment to technology innovation that USAA demonstrates.
There are plenty of banks and credit unions doing ‘smart’ things, but few do so at the level, with the consistency, or the scope that USAA does.
Ron Shevlin has been a management consultant and industry analyst for more than 25 years. He specializes in retail banking issues including sales and marketing technologies, customer and marketing analytics, loyalty management, P2P lending, personal financial management, social computing, online banking, customer experience, and consumer behavior. Mr. Shevlin is a recognized thought leader for his pioneering research on right-channeling consumer interactions, the impact of customer advocacy on future purchase intention, and developing sense-and-respond marketing capabilities to improve sales and marketing efforts. Ron was ranked #2 on Bank Innovation’s list of 30 Innovators to Watch: Key Executives Shaping the Industry in 2014. His blog, Snarketing 2.0, is published as part of The Financial Brand and was named to Radius’ 25 Best Marketing Blogs of 2014.