- PROJECT HELP
By Richard Steggall, CEO, Urban FT
More than 20 years ago, Bill Gates famously called banks "dinosaurs." And today, we're bombarded daily with reports that fintech firms are eating the banks' lunch. The drumbeat is so loud and steady, it's hard not to fall into the trap of thinking that banks' best days are behind them.
But, I believe the proliferation of fintech solutions presents a remarkable opportunity for small and midsized financial institutions not only to compete on a level playing field with the big banks but to leverage their exceedingly hard-to-compete-with strengths to win new customers, win back lost customers, and build loyal customers for life.
What are the strengths of small and midsized financial institutions that big banks can't match? It starts with trust. Consumers recognize the value of banking locally and, I believe, place significant trust in financial institutions they believe have a personal stake in them—provided, of course, those financial institutions can meet their banking needs throughout their lifetime. The centerpiece of small and midsize financial institutions' strength is, however, the customer experience. For big banks (and they used to be called 'commercial banks' for a reason), the customer relationship is centered on the transaction. But, today, the transaction is table stakes; the differentiator is moving beyond the transaction to interaction that delivers feelings of being valued, cared for, and appreciated. And, this is what small and midsized financial institutions do best. And, lastly, let's not kid ourselves—it's cost. Small and midsized financial institutions deliver consumer financial services at price points that defy the big banks.
I'm not suggesting the banking environment hasn't changed significantly nor that small and midsized financial institutions don't face serious challenges. What I am saying is, rather than looking at today's environment as the beginning of a march to extinction, small and midsized financial institutions should embrace fintech fearlessly, because it's the great equalizer.
Historically, banks have differentiated their consumer services from each other based on locational advantage (e.g., a large branch network or access to a large ATM network). In addition, the largest banks have differentiated themselves based on their ability to invest in technology, and support proprietary R&D and innovation efforts. Today, fintech has neutralized both: Every bank can be—almost literally—everywhere at any time for its retail customers, and every bank can lead in technology.
Neutralizing the large-bank advantage started in the 1980s with the advent of shared ATM networks, offering cash access across the U.S. and even worldwide. Years later, digital banking was a huge next step, boosted immeasurably by the expansion of the mobile channel and the near ubiquity of smartphones. Most recently, mobile check deposit enables customers to deposit checks into their bank account anytime from anywhere—just by snapping a photo with their phone. The combination means consumers, quite literally, can handle all their day-to-day banking without setting foot in a branch. Goodbye advantage of huge and costly branch banking networks. But everyone knows this already, right?
Where things get really interesting is how fintech is similarly leveling the playing field in technology. There's no doubt fintech is hot. In 2015 alone, fintech funding totaled more than $19 billion worldwide, with $7.6 billion invested in North America—a significant portion dedicated to the payments and lending sectors, according to KPMG. Even large financial institutions are investing broadly in fintech firms, recognizing their role as partners, not adversaries, in idea/product development and acknowledging their strengths (e.g., nimbleness, awesome tech skills, and the absence of constraints based on culture and legacy systems).
And, many products resulting from these massive investments are available to all financial institutions, without the capital and other costs of developing them in-house. Fintech, for example, has made it possible for financial institutions of any size to offer digital banking that rivals—and, dare I say, exceeds—that offered by big banks. And, if I might focus on the mobile channel for a moment, why would a bank want to develop proprietary mobile banking technology when the mobile payments market is so fragmented in terms of handset and POS technology? Fintech firms specializing in this area are far better positioned to stay on top of developments and offer plug-and-play solutions as the mobile environment shakes out. So, goodbye to the big bank advantage of huge and costly R&D efforts and the ability to afford a small army of developers. Leave it to the fintechs that can do it better, faster, and cheaper. Focus on your competitive strengths, leveraging the strengths of others to achieve your goals.
With fintech obliterating big banks' location and technology advantages, it's time for small and midsized financial institutions to double down on their customer experience advantage—as this is the new battlefield.
What was once, perhaps, instinctive or cultural, now requires knowing—really knowing—who your customers are, who you want your customers to be, and, importantly, what both groups need and want relating to managing their money. This is a long conversation, too long for here, so I'll just offer the opinion that knowing your customer isn't a one-and-done deal; it's a continual journey. And, if you're not treating it as such—and making appropriate time, resource, and financial investments—you can't truly know your customers in the way you need to know them to optimize their lifetime value to your bank. And, that's lost opportunity.
Speaking of one and done, evaluating your fintech partners' products is a continual process, too. If you've chosen well, your partners are as committed as you are to evolving their products to address new technologies and consumer trends, and evolutionary adaptation is baked into their support. But, don't take this for granted. Whereas, banking product lifecycles used to be measured in years, they're now measured in months, and there are more moving parts (and partners) to consider. Just as you need to continually monitor the changing requirements of your customers, you need to be on top of your fintech partners to ensure what they're delivering is what your customers need and want—today.
Lifelong customers are, in fact, a very real possibility for small and midsized financial institutions. No longer are there compelling reasons for consumers to take their business elsewhere as their needs evolve and they get on with their lives. And, I suggest, there are many reasons for consumers to keep their banking relationships where they are.
In addition to avoiding the time, hassle, and cost of changing banks, there's the emotional pull of staying with their financial institution. Yes, I said it—"emotional pull" and "financial institution" in one sentence. Crazy idea? Then, just try convincing a millennial to change the area code on his first mobile phone number—that is, his "hometown" area code. It's a fight you're likely to use. That area code is his touchpoint, an emotional connection to where he was and what he was doing at a point in time. With all financial institutions now at par in terms of their geographical reach and ability to deliver fintech innovation, why is it crazy to think that staying with the bank you started with is any less of an emotional connection with a place and a point in time? Why, does American Express continue to print on its cards "Member Since" if not to suggest a bond of loyalty with its cardholders?
Small and midsized financial institutions now have a remarkable opportunity to capture their customers' hearts and minds for a lifetime. Take it and be fearless!