Banking services have been commoditised since moving from one-to-one to one-to-all relationship infused by 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 also don’t seem to be in any hurry to offer additional service to the everyday customers. You can open a bank account, get a debit card, possibly an overdraft and a credit card too, if you were 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 is a commodity.
What is a commodity?
It is a product or a 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 is 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 it 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 relationship. First step is to prioritise innovation and research. JP Morgan R&D budget is 0% of their revenue, yes, 0% while Apples R&D budget is 4.6% of their revenue. Banks have adopted a latecomer approach, it 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 very easy and temptation is to get quick fixes in 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.. you get the point) than a large strategic overhaul but a large strategic overhaul is what’s going to make the difference. A difference that will become a competitive advantage.
To create truly better experience banks need to prioritise innovation
This doesn’t mean to have 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, many stores are looking to shift from towards experiential centre. To do that you need to hire people who understand technology, innovation and its priorities (hint: this doesn’t mean poaching 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 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 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 taken
I know, I know there is 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 headphone jack from a product that is generating 69% of its revenue. That’s bold. They have taken a commodity (headphones) and morphed it into an experience. It may be transformative for the company in the light of 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, who really wants to have a cable? It may be just too soon. One thing 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 done in by their complacency. Blackberry was that firm. Kodak was that firm. Twitter, arguably, is that firm. It started changing now but it may be too late.
How many of financial service 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, the more successful product you can develop.