A perfect storm is sitting on
top of the financial service industry today, one that is likely to massively
disrupt this business sector over the next ten years. The converging storm
fronts include the following:
FinTech Competitors:
Many aspects of financial
services are under attack by a host of aggressive Fintech competitors including
consumer banking, wealth management, payments, lending, currency and insurance.
Players include Stripe who wants to redefine the way payments
are made (without banks), Common Bond is radically
changing student loans, Betterment is
robo-advising people about their retirement savings at a much lower cost than
traditional financial advisors, and Bitcoin and other virtual currencies are
creating the digital cash marketplace.
From the Silicon Valley to
NYC these fintech firms are primarily using technology to create new business
models that exploit inherent weaknesses present in banks and other financial
services firms: High costs, poor customer service, thin value propositions and glaring
lack of product / service innovations.
The NY Times devoted an entire
special section to the subject this past spring called “FinTech’s
Power Grab.” The lead-in summarized the situation:
“If you spend more than 15 minutes with any senior
executive of a large bank these days it is almost impossible to not to hear the
phrase ‘fin tech’ uttered. It is usually spoken with a sense of optimism, but
sometimes with a sense of dread.”
It is estimated that $19
billion has been invested in the fintech sector in the past year according to
Citigroup, up from just $1.8 billion just five years earlier. Big banks have
good reason to fear these well financed fintech competitors.
Environmental Issues:
The banks themselves have
been distracted by huge increases in regulatory requirements coming out of the
financial crisis of 2008. For example, JP Morgan has
hired an additional 13,000 people in the area of compliance since 2012.
Banks have also been forced
to make massive investments in IT to fend off new cyber-security threats. The
American Banker identified
a number of them last year including: mobile banking being ripe for attacks,
SMS and malware strikes on Android devices, payment breaches surging ahead of
the shift to EMV chips in debit / credit cards and the Internet of Things (IoT)
creating new vulnerabilities.
Financial services firms also face extraordinarily
stiff competition from start-ups when it comes to attracting and retaining
bright and motivated employees, especially in the IT and senior management
professional tracks.
Cuts backs in training
programs and the glaring lack of long-term wealth building opportunities for
most financial services sector employees have made working in the area far less attractive than it
once was. Many of the best and brightest business school grads are opting for
careers with start-ups and in the tech sector rather than banking.
The Trust Factor:
There is also a glaring lack
of trust on the part of many consumers and businesses in the banking sector. Banks
have undertaken huge cost-cutting initiatives that have adversely impacted the
quality of customer service, continued to increase fees and focused a large
amount of energy on their own trading activities in an attempt bolster sagging
profits.
In the end - bank customers
have gotten the short end of the stick and are more than ever customers are considering
non-banking options for their financial service needs.
According to the most recent
Chicago Booth / Kellogg School Financial Trust Index survey fewer than half of
the people surveyed trust
banks in general and even fewer trust national bank brands.
Branding Challenges:
In 2015 the Harvard Business
Review wrote an article
entitled “Why our trust in banks hasn’t been restored.” They reported “Since the financial crisis of 2008, a major question has been
how banks can restore the trust of their clients.
For example, JP Morgan has hired an additional
13,000 people in the area of compliance since 2012.” I suspect this was a reactive
and defensive measure on the part of Chase.
The banks seem to be missing a blinding glimpse
of the obvious: Financial service brands are built on trust, and that is earned
based on positive customer experiences.
At the top of the list for improving the customer
experience by banks is timely problem
resolution. This seems to be a lost practice these days. Think about how
many times you’ve been put on hold when calling your bank’s toll-free service
number, only to be connected to an overseas-based customer service rep, with a
limited knowledge of the English language.
The HBR goes on to suggest that banks would be
better served rebuilding trust, and thereby their brands, by focusing on three
elements identified by research:
Ability:
Are you competent?
Integrity:
Are you honest?
Benevolence:
Do you care about my interest?
Most people might be hard-pressed to apply any
of these attributes to a major bank – therein lies the opening for many alternative
/ disruptive financial services businesses.
Changing Consumer Expectation and Behaviors
Millennial consumers are
especially unhappy with banks. A recent study published by Scratch – part of Viacom Media found that
banks are at the highest risk of disruption. Why?
·
53% don’t think their bank offers anything different than
other banks.
·
71% would rather go to the dentist than listen to what their
bank has to say.
·
1 in 3 are open to switching banks in the next 90 days.
·
All 4 of the leading banks (JP Morgan Chase, Bank of
America, Wells Fargo and Citigroup) are among Millennials’ ten least loved
brands.
·
73% said that they’d be more excited about new financial
services options from Google, Amazon, Apple, PayPal or Square than from their
own nationwide bank.
These
data points should strike fear into the hearts of senior management and
marketing executives at the larger banks, but alas, they’re probably in a
compliance meeting and won’t notice.
Surviving in a Disrupted World?
The Deloitte Center for
Financial Services recently issued a compelling report called “Banking
Reimagined – How disruptive forces will transform the industry in the decade
ahead.”
Deloitte’s basic premise is
not If the banking sector will be
disrupted, but how, when and to what degree it will change.
The question is not whether
the disruptions that we are witnessing today will transform banking and capital
markets, but rather how will they do so?
Which entrants will have the
most success? What technological disruptions will take root and transform the
way business is done?
What does the future hold?
The likely outcome of all this disruption will be a vastly different competitive landscape for the financial services sector. New entrants will leverage technical expertise with a clear focus on improving the customer experience.
There will be greater industry fragmentation as consumers turn to alternative financial service offerings, many web and mobile based.
The big banks will face pressure to adapt new business models or face massive customer defections and market share losses. They will need to make big investments in talent and technology if they hope to remain relevant, viable, competitive and profitable.
