In The House of Morgan, historian Ron Chernow outlines three ages of banking. During the first, the Baronial Age (1838-1913), bankers held to a gentleman’s code of competitive conduct and nurtured relationships with aristocrats. In the second, the Diplomatic Age (1913-48), bankers patterned their work after U.S. diplomatic policy, resulting in global expansion and the rise of the middle class. In the third, the Casino Age (1948-89), bankers tossed out their gentlemen’s code of conduct and doubled down on winning big at the expense of competitors (and occasionally at the expense of customers).
From Barons to Digits
Since that time, digital banking has taken the industry by storm, amplifying competitive pressure and social change. We might say that recent history represents a fourth era of banking — the Digital Age (1989-2016). During this time, financial institutions began to offer online and mobile versions of the standard banking experience. Account holders could check their balances from their home, deposit a check via a smartphone, and even make payments on the go. This shift to digital has been so widespread that any financial institution without an online or mobile offering today likely doesn’t stand a competitive chance in the future.
Although the shift to digital has made banking more convenient, not everything has improved. In many ways, banking is more impersonal than ever, with 71% of consumers saying that banking is transactional rather than relationship driven. This is problematic for bankers who want to maintain their edge against competitors, especially because account holders frequently have their 401(k), their HSA, their checking account, their credit card, and their mortgage all in separate places. If account holders view their relationship as merely transactional, what’s to stop them from eventually moving their business to another bank, a neobank, or a fintech company that can offer them better rates or a better user experience?
The digital age puts banks and credit unions in a precarious position.
The 5th Age of Banking: The Analytics Age
Fortunately, there is a way for financial institutions to bring personalization back to the industry. Enter the Analytics Age (2016-????). In the age of analytics, financial institutions and their competitors will increasingly find themselves in a race to succeed on three fronts:
- Gather more raw data, including internal and external data
- Find a simple way to clean, view, and analyze the raw data
- Use the cleaned data to create a 360-degree view of each user and personalize their experience in real time
Several leaders in other industries have already made major inroads on each of these three fronts. For instance, Netflix is famous for gathering internal data about their users’ viewing habits as well as external data about which films are most popular on torrenting sites. Once they’ve gathered this raw data, they crunch it in such a way that they can act on it. They provide or create films they know their users will best appreciate. They even offer personalized recommendations based on specific user preferences.
Farhad Manjoo, a writer for the New York Times, detailed exactly why this process is so powerful when he wrote that, “Netflix, like Amazon, is a flywheel that keeps spinning faster: As it gets more subscribers, it gets more data and more money to fund more content, which in turn helps it bring in more customers, and on and on, ever faster.”
In short, more data leads to greater personalization, which leads to more data (and more personalization). This is one reason why the market capitalization of five leading digital companies — Netflix, Amazon, Google, Apple and Facebook — is double that of the five leading banks. Analysts have a hunch that the companies that master data will rule the future marketplace.
Financial Institutions Are Positioned to Win Big
From transactions to total balances to interest rates, banks and credit unions already have access to vast amounts of data. In fact, if data is the new gold, financial institutions are collectively sitting on a mine the size of Mount Everest. Every card swipe and new account is available for analysis.
As we’ve seen from Netflix, the key to success in the analytics age will hinge completely on whether businesses can use data to provide better service — not whether they can use the data to take advantage of their users.
Analysts from across the globe have noted as much. Accenture says banks are at a tipping point, that “their historically stable customer base could erode steadily if banks cannot deliver the service proposition that customers demand.” Infosys adds in their Banking on Satisfaction in a Digital World report, “With the increasing commoditization of banking services, banks today need to look beyond their traditional goals – like driving customer satisfaction, customer revenue, and customer retention. Instead, they must focus their energy on winning customer advocacy.” In short, analytics can be pivotal to success in banking, but only if the solution leads to better end user advocacy.
Of course, focusing on advocacy doesn’t mean that you will miss out on profitable growth. Quite the contrary.
Think of it this way: Last year there were approximately 40 billion debit card transactions at an average swipe fee of 31 cents each, equaling $12.4 billion in total. If financial institutions can grow their share of this pie by winning more account holders through advocacy, they stand to reap tremendous profits.
Most importantly, the 360-degree view available in the age of analytics empowers financial institutions to see exactly which of your account holders are most profitable — even if these account holders have their largest accounts with your competitors. As Strategy Corps has shown, the top 10% of account holders are worth an average of $6,200 each annually (or 57% of total relationship dollars), which means that winning and retaining these account holders will make all the difference in achieving profitable growth.
Indeed, given that there’s a cap on possible growth via mergers and acquisitions, and given that traditional marketing efforts (billboards, radio) continue to fall by the wayside, using data to better advocate for your most profitable account holders is simply the best path forward.