As small fintech firms and technology giants use consumer data, artificial intelligence and modern technology to build competitive alternatives to traditional financial offerings, the question remains whether existing banks and credit unions should build digital-only spin-offs. For JPMorgan Chase and HSBC, the answer seems to be ‘no’.
Both organizations have closed down digital-only options, transferring customers to their traditional offerings that offer many of the same features and functionality, with the added convenience (and costs) of extensive branch networks. Still unresolved is whether consumers want to bear the cost of extensive branch networks, or if they prefer the potential for higher deposit and lower loan rates — even if these come from multiple digital-only offerings.
According to emails sent to customers, JPMorgan Chase is shutting down it’s mobile-first banking app Finn, which was introduced in 2018 targeting younger customers who favored digital engagement. Existing Finn customers will be transferred to existing Chase accounts, retaining much of the functionality of Finn, yet expanding the branch network availability.
Similarly, HSBC is integrating popular parts of its money management app, Connected Money, into its broader mobile banking app. “User insights and feedback have been a key driver of Connected Money’s successful evolution, and the time is right to start integrating these intuitive learnings and experiences into our core mobile banking app,” said Raman Bhatia, head of digital bank at HSBC UK.
This is not the first time HSBC has tested a standalone app in the marketplace, only for the app to be closed and integrated with an existing offering. There are even examples of open banking initiatives at HSBC being rolled into broader apps. “The goal was to explore how open API technology could help customers in new ways by connecting their different financial products and service providers in one place,” said HSBC.
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The Competition Is Getting Tougher
The impact of both small fintech firms and large technology leaders can’t be ignored. In fact, the impact of non-traditional competitors on legacy mobile payment players has increased the need for discussion around regulation and security of digital-only non-traditional banking alternatives.
“A significant disruption to the financial landscape is likely to come from the big tech firms, who will use their enormous customer bases and deep pockets to offer financial products based on big data and artificial intelligence,” stated International Monetary Fund Managing Director Christine Lagarde at a G20 financial technology symposium.
While innovation from alternative providers may modernize financial markets and provide more jobs, they could make the financial system more vulnerable due to consolidation of power among only a few players, Lagarde added. “This presents a unique systemic challenge to financial stability and efficiency.”
As non-traditional firms expand offerings well beyond payments, legacy organizations need to determine how they will compete in the increasingly digital world and how they will make the most of existing infrastructure, while offering the cost and functionality benefits that are presented by mostly digital-only alternatives.
Are Digital-Only Offerings from Traditional Banks Given a Chance?
Even though legacy banking organizations are introducing new digital-only offerings, are these organizations willing to provide the financial and leadership support to allow these new entities to succeed? Or, are the new digital-only offerings placed at a disadvantage — not only to alternatives from fintech and big tech firms, but also to the branch-centric offerings of the existing organization?
For example, JPMorgan Chase’s commitment to bricks and mortar is well documented. In 2018, the bank announced plans to open nearly 100 new branches in new markets by the end of 2019. This is part of a broader plan to open 400 new branches and hire as many as 3,000 employees in new markets over the next five years. With such a massive commitment financially and strategically to physical branch delivery, was it viable to also make a commitment to a lower-cost digital organization?
According to bestselling author and noted financial industry speaker Chris Skinner, “What is the commitment to the new bank’s success? Does it have the full support of the old bank’s executive team, in terms of budget, capital, resources and talent pool? What happens if the new bank eats into the products and services of the old banks’ lines of business? Will the SVPs be happy to see their bonus (or their existing career) destroyed by the newbie upstart?”
As Chris wrote in an article on his blog in 2016, “Too often, a new shiny digital bank will be killed by the old boring bank because of internal politics. Unless you align the objectives of the old bank people with the new bank targets, the new bank will always fail.”
Retailing Industry Correlation
We all remember how digital music has all but made the music store obsolete. In the traditional retailing industry virtually every part of the customer journey has being digitized, except for the acquisition of the physical product itself. While it is tough to see, feel and test/try a product digitally, much of the engagement has been moved to new channels.
My wife started as a merchant for a major store-based retailer. Over time, she moved to the digital side of the business because she saw the disruption occurring. Despite what she saw as an obvious shift in the industry, some of the store-based organizations she worked for fought consumer trends.
Not only did the store divisions argue that the digital component was destroying their business, they continued to build more units in malls that were going out of favor themselves. Similar to banking, the physical unit was designed to ‘trap’ consumers so that they will buy more, instead of the time and money saving convenience of a digital offering. At the end of the day, a retailer (or bank) can’t deliver the best product and convenience at the beneficial price point of a digital-first alternative.
Underneath the surface, there is a bigger issue for retailing and banking. Innovation and an improved real-time experience is created by how fast data can be turned into insights … and how quickly these insights are turned into personalized engagement. There is no way this speed of engagement can be replicated in a physical structure.
In the end, retailing is almost exactly like the banking industry (even though banking doesn’t sell tangible products).
- The existing organization wants to protect the existing infrastructure and underlying processes
- There is a lack of understanding of the requirements of a complete digital transformation
- There is a lack of understanding of the financial and experiential impact of digital engagement
- There is an undervaluing of the power of real-time personalized insight on the customer experience
This is Not the Death of Banking as We Know It … Yet
Financial institutions need to transform themselves from product-centric to customer-centric, from efficiency to flexibility, and from digital support to digital-only. The winners in the banking industry will find ways to collect and act on insights faster than the competition. This is what Amazon does and what consumers will expect from their financial institution.
This can’t be achieved by protecting existing branch-based organizations, processes, or by hoping that increased investments in technology will save the day. This is because the financial support of legacy branches and processes (at least to the degree that is occurring in most organizations) is not sustainable. Alternative providers can provide greater value, better rates and a better experience at a lower cost.
According to noted author and futurist Brett King, “We’re likely to see more digital-only offerings from traditional banks fail in the future where banks aren’t truly committed to digital transformation. The problem is that many traditional banks are doing this for PR reasons — not because they believe in digital as a destination. Ultimately they will fail because the traditional organization kills it off or starves it of adequate support”
In a Forbes article by Ron Shevlin, director of research at Cornerstone Advisors, Finn was not shut down due to lack of support. In fact, quite the opposite. In his article, Shevlin says there were 3 reasons:
- Lack of demand. Many consumers say they don’t want a digital-only bank
- Wrong audience. The appeal of a digital-only bank comes from consumers well beyond Millennials
- Better choices in the market. In the case of Chase, their current mobile offering had all of the benefits of Finn … with greater branch access
The jury is still out on the right strategy, but it appears that trying to be all things to all people is not the right strategy (no surprise there). It is also clear that non-traditional organizations will continue to be a threat to banking as we know it.
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Deja Vu All Over Again: Wingspan.com
In 1999, WingspanBank.com was one of the first and most successful online banks. A subsidiary of Bank One (now JPMorgan Chase), the online-only bank had a significant advertising budget and talent pool that helped it attract 50,000 customers in just three months. It also was one of the boldest moves by a traditional bank entering the internet-only banking marketplace. However, within two years, Wingspan had challenges. Its CEO resigned and advertising was significantly reduced.
WingspanBank.com was a direct competitor to the business model of the legacy financial institution. According to William Wallace, then CIO of Wingspan, “You are attacking the moral fiber of the company. We had to face that issue in launching Wingspan. It was a chance to redefine the economic model, the fundamental unit price and unit cost of running a bank.”
The importance of a separate unit was key. “Because the new business was a threat to the existing one, it required strong support from senior management to succeed, Wallace said. “We believed someone out there was going to do this. Rather than let five guys in a garage cannibalize our business, we wanted to do this ourselves.”
Wingspan was established as a unit of First USA, a then high-flying credit card unit of Bank One. Unfortunately, when First USA ran into its own financial problems, resources were significantly reduced for the startup because support for the unit quickly waned from the parent bank. Initially, Wingspan was a poster child for the practice of ‘proactive destruction,’ where an existing organization is willing to undercut existing channels and organizations in anticipation of shifting customer demand. In the end, it’s demise was caused by lack of organizational support.
A separate subsidiary, separate employees and separate money were needed. When support waned, the organization was doomed. In September 2001, Bank One discontinued the Wingspan brand and rolled the online bank’s customers into Bank One’s existing online service as regular account holders. The leader who made the decision was recently installed 44-year old CEO, Jamie Dimon.