Banking services have been commoditised since moving from one-to-one to one-to-all relationships infused by the digital revolution, but it can’t stay that way anymore. Banks face extreme regulatory pressures, and thinning margins are making it difficult to stand out from the crowd. But what’s more worrying is that banks don’t seem to be in any hurry to offer additional services to everyday customers.
You can open a bank account, get a debit card, possibly an overdraft and a credit card too, if you are a “good” financial citizen. The difference will be very small (if any) whether you go to HSBC, Barclays or Lloyds. Everyday banking is starting to feel like using a gas station: you need to use it, but you really don’t care which one you’re going to use. It’s a commodity.
What is a commodity?
A commodity is a product or service that no one cared enough about to market. Marketing creates value by combining stories, design and care. The product or service is produced in a way that makes engaging with the item better. Commodities are in the eye of the producer. If you don’t want to sell something that’s judged merely on price (or interest rate), then don’t.
There’s no such thing as a commodity in banking or finance anymore. There is no such thing as a commodity in an online world. Banking is becoming increasingly online-based and can’t afford to be a commodity.
Banking is an experience and should be treated as such
How do companies create an experience that appeals to the customer, like buying an Apple device or using Airbnb? Banks need to take bold steps to create an experience for their customers. Banks need to move from transactional to experiential relationships. The first step is to prioritise innovation and research. JP Morgan’s R&D budget is 0% of its revenue – yes, 0% – while Apple’s R&D budget is 4.6% of its revenue. Banks have adopted a latecomer approach, which works when the rest of the market is equally slow or reluctant to change. It’s game theory: “I don’t need to do this because my competitors won’t”. It’s a dangerous game to play.
Once companies take a conscious steps to innovate, they will allocate a budget towards that. However, spending money on technology is easy, and the temptation is to implement quick fixes, but we need to prioritise strategic, not tactical, solutions. I know it feels safer to do a short-term fix (of another short-term fix of another short-term fix, and so on) than a large, strategic overhaul, but a large strategic overhaul is what’s going to make the difference. It’s a difference that will become a competitive advantage.
To create truly better experiences, banks need to prioritise innovation
This doesn’t mean having robots instead of bank tellers – innovation doesn’t need to be futuristic. It can simply mean reusing concepts from other industries that work. For everyday banking, retail is a good place to look for inspiration, with many stores looking to shift towards an experiential centre. To do this, you need to hire people who understand technology, innovation and its priorities (hint: this doesn’t mean poaching the head of digital from Deutsche Bank or BAML, but rather the head of innovation from Amazon or Nike).
The innovation that will make the difference needs to come from an outsider who doesn’t think like a banker. You can’t project-manage your innovation pipeline by sorting your deliverables in a spreadsheet by decreasing the Internal Rate of Return (IRR) column. Some of the projects that will deliver the biggest IRR won’t be obvious until implemented, even at a visionary company. Sergey Brin said he nearly discarded the Google X project, a bedrock for most of the AI and other critical projects in Google, as unnecessary. You need to take a bet.
Bold decisions will have to be made
I know, I know, there’s a lot of money involved. It takes courage to make bold decisions. Let’s take a look at an example with a lot of money involved: Apple removed the headphone jack from a product that’s generating 69% of its revenue. That’s bold. It has taken a commodity (headphones) and morphed it into an experience. It may be transformative for the company in the light of a rapidly growing internet of things (IoT) ecosystem.
Or this may prove to be unnecessary friction right now – one way or another, most headphones will become wireless in the next five years, so who really wants to have a cable? It may be just too soon. One thing’s for certain, Apple will not be the company who just waited, and waited, and waited until it was too late.
You can be the future or you can be the past – the choice is yours
There are many once-mighty companies that believed their history of success would inevitably protect them from technological change, only to be undone by their complacency. Blackberry was that firm. Kodak was that firm. Twitter, arguably, is that firm (it’s started changing now, but it may be too late).
How many financial services firms are just waiting now? Soon, it may be too late. The best time to innovate is today, just like yesterday was. Just like tomorrow will be. The sooner you start, the more room and scope you have for iterations, and the more successful product you can develop.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Photo: Aleksandar Malivuk, Shutterstock.com