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Why banks must embrace customer-led innovation

Back in Dec 2011 an article authored by Rita McGrath from Columbia Business School and published by Forbes outlines five big trends in innovation that would alter the business landscape in 2012. The fifth of these, that ‘oblique competition will become ubiquitous’, is a rather elegant way of saying that industries will face competition from non-industry competitors. In the context of retail banking this threat is as real as in any other industry. A whole array of non-banking entities are circling and hoping to exploit the much talked about disparity between the offerings of banks and the needs of customers. Suddenly banks face competition from a number of quarters including the telcos, supermarkets, tech firms and innovative start-ups.  Customers who have grown used to limited choice in banking could soon have a whole plethora of options to choose from.

As Professor McGrath astutely points out in her article:

“Customers judge across their entire set of experiences rather than just comparing your organization to others like it. We want our technology to be as intuitive and user-friendly as Apple products, the service we receive to be as thoughtful as we might get from Nordstrom, and personalization and ease of payment as good as Amazon’s”

So from a bank’s point of view the competitive frame of reference has expanded considerably and at a frightening pace. The supermarkets, for example, excel at customer analytics so they are probably better positioned to deliver more personalised and relevant services to customers. The telcos have significant influence over what will become the main banking channel, the mobile phone. But what about the smaller, less established but innovative companies like Nutmeg, Movenbank, Dwolla and SmartyPig? Some banks may be forgiven for dismissing these assuming that, because they operate at the fringes, they will ultimately have little impact. But this assumption lies at the heart of the Innovator’s Dilemma: incumbents tend to ignore the aspects of the industry most susceptible to disruptive innovation. More recently Chris Skinner evocatively outlined why traditional banks need to fear these ‘upstarts’ arguing that they should be less focused on looking for profits and more concerned with seeking to “avoid the losses”. The cautionary point is that, while they’ll start at the periphery and create new revenue streams, eventually they will wreak havoc on banks’ margins.

What’s to be done? The most important first step is to acknowledge the threats and analyse why they may be successful in wresting control of the customer relationship. The second is reimagining banking from the customer’s perspective by crafting a customer experience that meets the needs of the constantly connected and canny customer. Third is confronting the organisational rigidities that have become banks’ Achilles heel by transforming the customer processes and touchpoints. It’s not going to be easy but there’s a very real danger that only the banks that embrace this type of innovation will remain relevant in the future. 



Comments: (4)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 06 April, 2012, 09:40Be the first to give this comment the thumbs up 0 likes

You forgot the fourth step: Make banking an unregulated industry. On second thought, this should be the first step for, without this, there's little chance of the other three things happening.

Michael Joyce
Michael Joyce - Shorebank International - Dhaka 10 April, 2012, 09:38Be the first to give this comment the thumbs up 0 likes

I agree that consumers aren't comparing banks to other banks anymore. They see how much technology has advanced and wonder why using their bank isn't as easy as using Amazon, or Gmail, or an iPhone.

But it's not regulation that's holding the banks back! Banks will always use regulation as their first excuse for not taking action, followed closely by blaming their legacy systems. I don't believe there is one single bit of regulation anywhere in the developed world that really gives the banks a reason to stop innovating. Sure, they have privacy regulations that Facebook and Google don't have to contend with, but a smart bank can treat its customers fairly and bring the benefit of their data to the customer in terms of personalisation and ease of use.


Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 12 April, 2012, 13:54Be the first to give this comment the thumbs up 0 likes

The impact of regulation on banks is two-fold: (1) Put roadblocks to innovation of the nature that could potentially enhance consumer experience (2) Make banks answerable to a regulator.

KYC is one example that is applicable to both USA (developed nation) and India (developing nation). Because of KYC, it usually takes a few days and a branch visit before a bank account can be activated. 

2FA is another example. The banking regulator in India uses its direct jurisdiction to ensure that banks comply with this regulation for money transfer transactions. It also uses its indirect jurisdiction via acquirer banks to make merchants - over which it has no direct control - comply with this regulation for credit card purchases. In the USA, 2FA has been mandated around seven years ago. While not all banks and merchants are compliant with it even today, the existence of regulation can't be denied.

Both KYC and 2FA cause a lot of friction and worsen consumer experience.  

In both nations, customers can complain to the banking regulator if something goes wrong with their banks. To avoid bad publicity, banks might be compelled to make their customers jump a few more hoops (e.g. insist upon applicants to visit the branch before activating a bank account), even if this results in inferior consumer experience. On the other hand, nonbanks can provide great consumer experience (e.g. PayPal activating a merchant account instantly) because they know that they're not answerable to any regulator in case something goes wrong (e.g. PayPal puts an arbitrary freeze on the merchant account).

After facing regulatory scrutiny in the developing world (e.g. India), nonbanks (e.g. PayPal) are coming under the regulator's radar even in developed nations (e.g. USA, post Dodd-Frank-Durbin). While consumer experience might nosedive, money might be safer, as a result of this development.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 17 April, 2012, 10:41Be the first to give this comment the thumbs up 0 likes

This Finextra article suggests that nonbank payment solutions providers have come of age. Not only does Beamit, the nonbank mobile remittance startup featured in the article, recognize statutory hurdles but it has also budgeted a part of its VC funding to "knocking down regulatory barriers".

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