From bank journals and regional conferences, you might conclude there’s a three-prong formula for survival in this hyper-competitive, digitally-fueled banking environment: 1) embrace mobile technology, 2) shrink your branch footprint, and 3) reduce operational costs any way you can.
The strategy may be successful with national institutions but it’s a formula for failure among community banks. Accenture expects up to 25% of US banks to disappear by 2020 and most of those will be community banks following the big-bank bromide.
At one time, national banks and community institutions pursued similar consumer strategies. Each catered to customers around their branches and provided various degrees of personal service. Community banks thrived, nationals grew but conceded personal service and local orientation.
Online and mobile banking changed the game. Big banks saw that a huge investment in digital technology — which was cost-efficient given their large customers base — would attract customers and help overcome the out-of-town drawback that had always dogged them. Furthermore, the stickiness of bill pay and direct deposit increased the customer’s tolerance for service slip-ups.
Where both entities once fought mano-a-mano for local customers, the nationals switched to targeting technology-driven customers across the country. So, where the simplistic, three-prong formula might makes sense for larger banks using technology to entice customers, it doesn’t make sense for local banks who must serve a wider demographic and can’t afford a huge investment in technology.
Ironically, the technology-driven big bank formula will only serve nationals in the short-term. Nuevo bank upstarts such as Moven and Simple are the classic market disruptors. They will take market share from the big nationals because they do everything better. They are customer-centric, technology-focused innovators lacking the high legacy costs that make nationals vulnerable to low cost providers.
There are fundamental problems with the three-prong strategy. Calls for incremental changes in existing practices ignore the bigger, turbulent forces that are rolling across the financial marketplace.
Incremental change is the typical response of established leaders who don’t take the threat of market innovators seriously says Clayton Christensen, Harvard professor and best-selling author of “Innovators Dilemma”, his seminal work on innovative disruptions. Incremental responses from traditional market leaders allowed innovators like iTunes, NetFlix and Apple to take over their respective industries, and it’s why newspapers are on the ropes.
Community banks can survive but it will take more than a simplistic formula, it requires a new business model. Market forces have changed so dramatically that many of our underlying business assumptions are no longer relevant.
Five market forces that need to be addressed in a new business model include:
- Heightened Competition. Once we competed against a few local banks, now competition knows no boundaries and extends far beyond banks and would-be banks to potential entrants such as PayPal and Amazon.
- Savings Decline. In the last few decades, consumer savings rates bounced from high to negative to the current low single digits. Saving for a rainy day may no longer have broad appeal.
- Access to Equity. Today’s customers may not be sophisticated investors, but they certainly have easier access to equity markets, and savings accounts, especially in this low rate environment, are decidedly less attractive.
- Income Divide. The growing divide between the ultra-rich and the rest of us has affected the American Dream. Those ads inviting prospects to live the American Dream may no longer carry the same cache to a large segment of the population.
- Technology Advances. Finally, the mobile banking juggernaut sweeping the industry has left community banks struggling to provide the seamless convenience customers are demanding.
Although the underpinnings of our business model have changed, making incremental adjustments is like changing dining room wallpaper: it may make us feel good but the sinkhole will still swallow the house.
Technology isn’t the answer. Fewer branches aren’t the answer. Legacy costs will always weigh down banks. These are defensive tactics that can play a part but they don’t add up to an offensive strategy which will only arise from a candid assessment of strengths and an exploration of consumer needs.
Incremental change was the hallmark of Blockbuster and Sears’ response to streaming media and Walmart respectively. And we know how those played out.