A few months back I was leading a strategic planning session for a client and had the pleasure of co-facilitating a portion of the session with Brett King, author of Bank 2.0. Prior to the planning session, I had read a healthy hunk of Brett’s book both as preparation and out of general interest. After all, how many books worthy of note come out in any given year having to do with meat and potatoes banking? Brett gave an engaging presentation talking about what financial institutions (banks and credit unions) needed to be doing to better prepare for the next wave of retail financial service offerings. Brett’s message, supported by extensive industry data, was clear: paper checks are dying quickly; branch visits and transactions are down sharply in the last five-plus years; the payments landscape is changing rapidly; and online channels, especially with the advent of mobile, will see explosive transaction growth in the next 10 years – all at the expense of branches. In light of these changes in how customers interact with their FI, Brett told the group that institutions that don’t change their business model soon should probably be prepared to either close up shop or be gobbled up by a more aggressive and innovative competitor who has the scale and deep pockets to invest in technology and delivery.
I came away from Brett’s presentation and the drama he created around the death of the branch with a jumble of thoughts coursing through my limited gray matter. Some of his assertions about the future of banking I definitely agreed with; of others I was a bit skeptical. The thought, however, that repeatedly kept coming to my mind was best summed up by Bill Gates in his book Business @ the Speed of Thought where he made the basic point that people, especially industry pundits, “always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.” For the past hundred years banking has been a lot like a poor plastic surgery patient – other than a few nips and tucks around the edges, banking hasn’t fundamentally changed. Bankers are still stuck to their “branch and differentiation through service” models while the world swirls quickly around them, making their business evermore obsolete. They have clearly been “lulled into inaction.”
Like Brett, I have little doubt that checks are dying, that branch transactions are in definite decline vis-à-vis electronic transactions, and that payments revenue is under attack both from Washington and non-traditional players. At the same time, I see the banking model under a serious and necessary state of evolution rather than revolution in the next decade, contrary to some of Brett’s prognostications.
Bank 2.0 notes that Gen X and Y and millennials rarely set foot in a branch to transact business, don’t write checks, and live on their smart phones. These behaviors will impact the way FIs provide services and interact with their customers. The reason I don’t think the sky is falling quite yet is probably overly simplistic – the younger generations, for the most part, don’t have much money as retail customers and don’t drive banking decisions as commercial customers (i.e. they aren’t CFOs and controllers yet). HOWEVER, they will have money and they will drive business decisions. The older generations who have all the cash and run companies do still like coming to branches, talking to call center agents, golfing with their commercial bankers, and having salespeople from cash management pay them visits every quarter or two. To me, the greatest challenge for banks and credit unions in the next 10 years will be how to create the Real Bank 2.0 – a business model that straddles the divide between the hundred-year-old way of doing business that millions of consumers and businesses cling to while preparing for the next generation of financial service delivery that millions more will be gravitating toward.
Four key capabilities/changes FIs should consider to transition to the Real Bank 2.0 are listed below. I would credit some of my fellow consultants at Gonzo’s mother ship Cornerstone Advisors for some of these concepts that have been discussed in other GonzoBanker articles. How a bank puts it all together is the trick.
- Build an Innovation Capability. With rare exception, banks, to use a highly technical term, “suck” at innovation. In working with our mid-size bank and credit union clients on strategy and planning, I think the typical approach to innovation that I see can be summed up as follows: Let’s look at what the big banks are doing and then decide if we should be “early adopters,” “fast followers” or “late bloomers.” The inevitable management vote is for the gutless “fast follower” approach.
By way of “strategy,” many banks watch their largest competitors to see what products, services and channel capabilities they offer and then do what they do a year or two later. Guess what? That ain’t no strategy. As the saying goes, “innovate or die.” Banks need to have, at a minimum, an executive (if not multiple people) that focuses on fostering an innovation capability, staying ahead of industry trends, and collaborating with peers to develop unique products and services for niche markets. The days of copying the big guys are numbered.
- Delivery Channels and the Customer Experience. It would be trite but true to state that the way customers, both retail and commercial, interact with their banks is changing rapidly and unalterably. But because of the industry innovation weakness, the typical bank’s approach to channels is to create separate laundry lists of projects in each line of business and then fight at the I.T. Steering Committee meeting about whose projects get top priority. Mobile? Image lockbox? New PFM? Online account opening?
This is hardly the optimal way to approach creating the ideal customer experience. Banks need to develop a strong channel competency to stay competitive and retain customers. Customers want to move effortlessly between channels – a near impossibility when responsibility for channels and the customer experience is divided up by a bank’s dysfunctional org chart. As my colleague Terence Roche advocated in Meet Your New Senior Executive – The Head of Channels, there should be one senior executive at every FI responsible for channels and the customer experience no matter which channel a customer uses or which line of business “owns” that customer.
- Payments and Data. Cornerstone has been beating the payments drum now for well over a year in articles, speeches and Webinars. Payments are where the money is, and banks are currently ill prepared to both defend and enhance this revenue source. Fees can be derived from checking accounts, debit cards, credit cards, prepaids, ACH/wires, P2P, bill pay and other sources. Yet ask an executive team what their Payments P&L looks like and you get a blank stare. Rare is the client I have come across that has a nice simple Payments P&L statement showing the revenue drivers, the associated expenses, and where the bank is making money. Instead, payments revenue knowledge is buried with an AVP in deposit ops, an SVP in treasury, and a retail executive while the expense side of the equation is typically negotiated by the I.T. group with processors and other vendors.
The Real Bank 2.0 business model will be highly dependent on payments and the associated data identifying where consumer and commercial customers are spending their money – information that is invaluable to retailers. The bank of the future will understand how to mine this data and partner with retailers to create compelling loyalty programs and offer discounts to their customers.
- The Real Bank 2.0 Org Chart. As banks make the transition to banking in the 21st century, the dreaded org chart will have to be dealt with and turf wars will necessarily ensue. I believe banks straddling the “old” and catering to the generations that have money for the next 10 years while preparing for the “new” will have to maintain remnants of their current org charts with the traditional heads of retail, commercial, wealth management and other areas.
The traditional bank org structure will definitely NOT foster developing the capabilities listed above. I challenge bankers to rate their institutions on a scale of A-F for innovation, channel management, and payments and analytics. I’d love to hear from anyone out there who thinks they have an “A” in all three areas.
Look around your senior management table today. If in two years’ time the same folks are there with no representation from Innovation, Channels and the Customer Experience, and Payments/Analytics, you won’t be prepared for the Real Bank 2.0. It’s a gamble I wouldn’t want to take.
All for now.
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