Feb 092011
 

Bank Innovation recently started a discussion on Innovation within the Banking Sector.  This is a topic ‘near and dear’ to me as I believe that Banks – and particularly Community / Regional Banks must take a leadership role on Innovation, if for no other reason than just pure survival.

The following are my comments on Innovation in the Community / Regional Bank sector:

Innovation is hard work and not everyone is capable.  In large banks, there are typically a handful (literally) of people who are capable of thinking outside the box.  These individuals contribute ideas and push hard to see them through the labyrinthine go-to-market process.  Smaller institutions typically do not access to these types of individuals and/or their skill sets.

My view is that what will emerge is a bifurcation in the industry – value added and commodity based services.  Most retail banking services, are by definition commoditized, and thus can only compete on price (higher deposit rates and lower loan rates).  As a result, Institutions pursing this strategy will need to focus on scale and/or specialize (eg. razor thin margins but very high volume; morph into a lean-and-mean loan production factory rather than a true retail bank) or position these services as “loss-leaders” to cross-sell value-added services. 

The challenge for the industry is to develop value added services wherein the consumer would be happy to pay for the service.  Banking, and particularly, retail banking has until recently been insulated from competitive threat due to the need to be local; to have a local presence (eg. branch).  This of course, is changing.  Branches are no longer the hub of banking activity – in fact, more than 50% of bank customers visit a bank branch just once per year.  As a result, we have seen the rise and success of Ally, ING, Discover Bank, Capital One Bank, etc..  These institutions provide quality customer service and reward the consumer with better rates.  In addition to business model innovations, we’ve seen other innovation including retail RDC (eg. scanning checks with iphone or other application), product packaging (eg. BankVue -not commenting on success, just the idea; the highly anticipated go-live of BankSimple), and marketing breakthroughs including the use of social media (many are experimenting, most are failing). 

Most recently, many financial institutions seem to be jumping on board the PFM ship; many appear to believe that PFM will drive loyalty and cause customers to aggregate accounts in their institution.  (I disagree, and believe that PFM adoption will be low and banks will be able to neither charge for the service nor generate positive ROI.) 

Product / Service Innovation should have the result of attracting new customers, and / or lead to substantially improved retention rates, and / or result in greater wallet share leading to higher revenues.  If we are to look across the horizon, it is very difficult to identify too many institutions that could be classified as Innovators.  Given the state of the industry (regulatory pressures and competitive threats), the differentiation should be of greatest concern and should be the top priority for Community and Regional Banks.  Banks and Credit Unions must re-write the rules of the past if they wish to remain relevant to anyone other than their shareholders and employees.  Banks and Credit Unions must innovate in terms of service delivery, product selection, product pricing, break from the past model of self-imposed restrictions on geographic markets and extend accessibility (excluding branch network).  Messaging must be refreshed and must be appealing to the target demographic.

Serge Milman

Serge Milman is the Principal Partner of San Francisco, CA based SFO Consultants which provides Strategy, Finance and Operations Management Consulting services. He is also the Principal of Optirate – a blog dedicated to growth and profitability strategies for Banks and Credit Unions. Serge can be reached at info@SFOconsultants.com.
  • http://twitter.com/jcapachin Jeanne Capachin

    Innovation will for sure be a key to success, and you are spot on that consumers need to value their relationships with their banks and credit unions – and only then will they be willing to pay for services that they value. I do think that PFM is part of the solution, and will in fact, be the next evolutionary stage for online banking. It provides a great service to consumers, and great data to financial institutions.

    • http://www.Optirate.com/ Serge Milman | Optirate

      Jeanne – thanks for your comment. We agree that innovation is and will be essential for success. I will challenge the notion that consumers are somehow ‘missing the boat’ by not valuing the relationship(s) they have with Banks and Credit Unions. The blame here square rests with the providers… a dispassionate assessment makes it very difficult to conclude anything other than most Banks and Credit Unions offer a commoditized product, and most consumers believe that the service delivery is just ‘so-so’.

      Banks and Credit Unions must rethink their value proposition, and find ways to deliver value to consumers… Loyalty and the resulting growth and profitability will not occur until consumers recognize that their Bank or Credit Union has something unique and valuable to offer.

      In terms of PFM, I must say that I am a skeptic. Most PFM solutions today offer nice bar graphs and bubble charts, but not much more than that. In fact, the functionality of most solutions is little changed from the early 2000 when Yodlee first introduced its consumer facing PFM solution. The value proposition to drive consumer adoption of PFM is missing, and until this is fixed, the industry will continue to see abysmal adoption rates … and Bankers will continue to wonder why consumers just don’t get it while lamenting the large sunk costs…

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