The inevitable disruption of banking by Fintech
I was recently part of a conversation involving several senior bankers. The topic was the tradition of passing on a better mortgage offer to a customer via a mortgage broker than to a customer who approaches the bank directly.
The question being debated was: how much should a bank offer a customer who they discover is seeking a refinancing quote for their home loan through a broker? Should the bank discount beyond the market to hold onto, or ‘save’, this customer? Even if the customer has reached out to the bank for a quote before engaging a broker?
The bankers agreed they should offer a discount to win the customer — but only through the mortgage broker. They didn’t see any value in offering the discount to the customer directly.
I see two fundamental flaws with this kind of thinking, both of which help us understand why the banking industry is facing a very real threat of being disrupted.
Churn acceptance
The first fundamental flaw? The bank is simply accepting churn will happen, and, as a result, is unwilling to offer discounts to existing customers without lumping them with additional effort and/or pain. The fear driving this thinking is: if all it took for a customer to get a better deal on their mortgage rate was to call a bank and negotiate, banks would be inundated and their lucrative mortgage business eroded.
Not only are banks training their customers to shop around but, even worse, they are penalizing customers for engaging directly with the bank.
To protect their profits, banks are relying on an assumption that only a small number of customers will engage a mortgage broker to get a better deal, and are willing to simply accept the churn.
This feeds into the widely held belief in banking circles that the average customer switches banks every 7 years. This is madness. Why aren’t banks thinking more about nurturing a multi-generational partnership?
And what’s more, a BCGer I spoke with recently claimed that this 7 years is quickly becoming 4 years.
Surely banks should be focusing primarily on developing long term financial partnerships with their customers? If this were the case, and customers valued their partnership with their bank, the thought of changing banks (for a lower mortgage or otherwise) would be far from their minds.
The Pavlovian customer
The second flaw? If you want to train a dog, you need to reward it repeatedly for the correct actions. Humans aren’t much different.
Let’s look again at the mortgage broker scenario, and what kind of behaviour the bank is rewarding and encouraging. In this instance, banks are teaching customers to head straight to a mortgage broker to refinance their mortgage. And what’s more, when a customer does actually reach out to their bank directly for a more competitive rate, they don’t get much joy.
Not only are banks training their customers to shop around but, even worse, they are penalizing customers for engaging directly with the bank.
Avoiding the Kodak Moment — shifting the focus from margin to engagement
I wish I was the first to coin the phrase ‘Kodak Moment’, as it perfectly encapsulates the challenges currently facing banks. Yes, the banking industry could be facing its Kodak Moment. (aside. Kodak was the first to develop a digital camera, but its then lucrative film sales division refused to let the team commercialise the technology).
In order to change the paradigm, banks should be reaching out to customers before they even start thinking about their mortgage. This actually happened to one of my colleagues recently. The bank contacted her with a proposal to consolidate her mortgage and reduce debt payments as a result. Not only was she stunned, but more importantly, she didn’t even bother to shop around. She immediately accepted the offer.
It’s almost as if the banking industry has developed an oligopolistic defence mechanism: making everything too difficult.
So how can banks reinvent themselves — so they don’t end up like Kodak? By shifting their focus from short-term transaction revenue and margin to long-term engagement and churn reduction.
What does engagement look like?
A bank we admire is currently developing the clearest example of a well-executed strategy.
The bank is proposing to introduce a system that grades customers on their overall financial health. While this may all sound a bit draconian, the main aim is to actually help customers manage and improve their financial situation. For example, the system will advise customers if making a particular transaction is a good or a bad move when it comes to their financial health. The bank also plans to pass on reduced costs/special offers to customers who make concerted efforts to improve their financial situation. This is a great example of long term thinking that prioritizes customer engagement and retention over immediate transaction revenue.
Banks must change the dynamic by fostering meaningful engagement, even if it means wearing a short-term loss in margin, to avoid facing their Kodak moment.
So what do customers want, anyway?
Personally, I prefer a single bank to provide all my financial services. The promise of a single point of contact to resolve any issue is extremely alluring (though often far from reality). Most people I have spoken with about this agree; trying to remember multiple logins and different processes is not worth the effort.
I use the word ‘effort’ here because to date banks have traded on this effort being too high for customers to do anything about it. It’s almost as if the banking industry has developed an oligopolistic defence mechanism: making everything too difficult.
This is where Fintech is stepping in and challenging these previously unchallenged assumptions. Not only are emerging Fintech companies making onboarding so much easier, they are also reducing friction throughout the customer experience. And often at a significantly reduced price point, because they don’t have to support legacy cost bases.
Customers are ultimately rational beings, especially when weighing up costs and benefits. When the amount of effort they are willing to make erodes, or even switches from the benefit to the cost side of the equation, change is not only likely, it is inevitable.
And what about engagement?
We are currently witnessing a growing trend of customers asking: “why isn’t my bank doing more with my personal financial information?” And fair enough. With greater access to their personal financial data, customers understand they’d be in a much better position when it comes to making those daily decisions that revolve around spending and finances.
Gamification — the opportunities
When I think about gamification, the lengths I go to to travel on my preferred airline alliance comes to mind. I know it’s irrational, but I am hooked. It’s a game, and I’m addicted.
Similarly for banks, there are huge opportunities to gamify customer engagement. This could be small rewards for taking the desired actions (e.g. moving chequing to saving by direct debit) that will ultimately benefit both the customer and the bank.
When the Qantas Frequent Flyer program is valued as a standalone asset worth billions of dollars, before taking into consideration any of the loyalty benefits it brings to Qantas, I can’t help but think that banks are well behind in this area.
On the ground experience
A discussion we had with a banking insider provided insights into why banks are so ripe for disruption. When we put forward our solution, recognising that while it might erode transaction revenue, it created an opportunity for long-term customer engagement and new revenue streams, his response was stark.
“You’re likely to come across an executive who just cannot afford to lose, say $5m, in transaction revenue. It would mean he’d miss his KPIs, and blow any chance of career progression. They will do everything in their power to stall or stop your product from being deployed. Of course, the CEO would be happy to trade $5m in revenue for a significant, dynamic change in banking. Yet, the CEO (and Board) cannot see all these machinations happening.” This is the greatest challenge to overcome as banks face their Kodak moment.
Onefill
At Onefill, we believe banks have enormous potential to develop truly holistic financial partnerships with their customers. Onefill provides a launch platform to develop partnerships via e-commerce. Not only is e-commerce growing rapidly, but there’s also a role for banks to play in bringing greater security to online shopping. Customers want security. They also want banks to make better use of their personal financial data. Onefill makes this happen.
