This is not a good time for middlemen. Their historical success came from the value they added in helping people with something get connected to people who want that something.
Middlemen are dying. The internet is making middlemen unnecessary since people just go direct. Book publishers are no longer essential to connect authors to readers. Music producers are no longer needed to connect musicians to listeners. The internet is more than an alternative to middlemen, it introduced an almost infinitely frictionless environment that lowered cost and processing time to virtually nothing. Middlemen cannot recover by lowering cost or speeding operations because they are competing against a perfect system. Middlemen get paid for exploiting inefficiencies, but there are fewer every day.
Banks are middlemen too. They are by definition “financial intermediaries.” The word, “disintermediation” has been used incorrectly by bankers to describe when customers move their deposits from low rate options to a high rate options, while often staying within the banking system. In today’s middlemen killing environment, disintermediation is reverting to its intended meaning, when customers stop using banks all together.
Banks have done two types of connecting, and both are under attack. One is to take in depositor money and give it out to borrowers, while getting paid through the margin. Peer to peer lending does the same thing, without banks involved, and these options are becoming smoother, less risky, and more mainstream. The second is the intermediation of financial transactions, but again direct peer to peer financial transactions are now possible completely outside of the banking sector, and growing more rapidly than most people can even believe.
Banks are even losing their grip on value added mobile apps, which they “owned” only a few years ago. Innovative technology firms keep coming up with mobile apps for free that will work for most bank and credit cards. With the rapidly expanding availability of standardized API’s, technology firms will be adding more features, eventually even deposit and loan origination. The gold ring of mobile banking will be when multiple bank, credit union, and investment relationships can be managed seamlessly through one app, which is very unlikely to come from a bank Banks do not want to enable their competitors, but the internet marketplace wants to enable everyone.
The most convenient retail bank of the future could be the one that doesn’t exist.
How does a middleman survive? There’s only one way – add more value. Abandon the thought that people have to do business with them, and instead offer value that is so compelling, people will gladly use the service and willingly pay.
What value can a bank add to stay relevant? Regulation does not allow banks to venture out of banking activities very far except for the few “permissible nonbanking activities” (see 12 CFR 225.28). So that leaves “how” banks interact as more important than “what.”
The answer is customer engagement.
This will be unwelcome news to banks that would rather buy a new system with better data analytics and pay for it with staff reductions. Customer engagement feels awkward to many bankers, not the least of which because it is hard to quantify and calculate a firm value. The new generation of bankers needs to think more like the new generation of journalists who now know that their income is based on how well they engage people every day, not on how many are locked into a paid subscription, or how well they have served people in the past.
Banks need to look at every touch point. Before launching into the next strategic plan, or technology purchase, first find out how engaged the bank really is. A valuable foundation building exercise is to go through every point of customer contact and evaluate its engagement. Is the call center just answering calls as quickly as possible, with a few cross sell offers thrown in? Is the bank using the web and social media just to brag about the bank? Is the bank’s retail overdraft approach truly engaging, or does it treat over-drawers as part criminal and part cash cow? Are the bank’s sponsorships chosen to build bank reputation, or are they sponsoring events that their potential customers are truly excited about attending? And that’s just the beginning.
Once a bank knows the holes in customer engagement, they can create strategies to fill them. Big banks are going to do everything within their broad reach to do the same thing. Community Banks should be able to create meaningful relationships better than big banks.
If they cannot, then their offer to their communities will be no different from big banks, except big banks will have better technology. This would make community banking unsustainable in the long run.
Photo Credit © Can Stock Photo Inc. / isky