Commoditized Banking Yielding Artificial Loyalty

Customer loyalty in financial services takes on a very different meaning than in other sectors. Low attrition rates are not always a reflection of brand satisfaction but rather a decision to avoid the switching costs of moving to a different financial institution (FI). These days, loyalty often stems from benefits related to ATM network, nearby branch presence or rewards on transaction cards. If consumers were forced to go with their next best option, would there be a significant drop-off in these types of benefits?

My guess is that a large chunk of consumers would be more bothered by the switching costs related to transfer of assets and update of account information sitting with employers and other third parties. As competitive advantages in lending began to erode several years back, consumers were drawn to the very benefits listed above, followed by a second wave of modern day differentiation in digital self-service banking. But it was only a matter of time before these differentiators were replicated by peers and commoditized.

The lack of differentiation in retail banking became evident during my post-college assessment of financial providers. I struggled to identify a substantially unique depository institution and opted to stick with Chase for the foreseeable future. Despite being a loyal customer for years, I kept my eyes out for banks that better utilized technology and brought something different to the table. Obviously, if Chase had provided the type of experience desired then I probably wouldn’t have written this post.

untitledObjectively speaking, Chase does a good job of addressing their customers’ basic technological needs, delivering standard self-service features like web / mobile bill pay and remote deposit capture (RDC). However, online banks like Ally are able to provide similar services while offering interest on checking accounts and full reimbursement of ATM fees. Squeezed by branch-related costs, Chase can ill afford to offer these kinds of perks. And since I’ve visited a bank branch just once over the past twelve months, Ally’s lack of a physical presence poses no issue.

These minor advantages make Ally my PFI for now, though I covet an even more progressive approach to financial services – even if it comes from an FI other than a bank. What started out as a move to earn hotel points on credit card purchases evolved into an appreciation for American Express’s mobile app, which includes a form of digital receipting. Amex has regularly been cited as a leader in new age technology and can build on that reputation with its Bluebird neobanking platform.

My best decision thus far has been opening a Moven account, which owns a framework that can truly redefine consumer banking. Moven’s platform is built around personal financial management (PFM) and peer-to-peer (P2P) payments, two of the industry’s newest differentiators. With its special emphasis on personal financial wellness, I have found Moven to be best-in-class versus neobank rivals Bluebird, Simple and GoBank.

Chase is hardly in the equation for me anymore; its traditional operating model will prevent the bank from adopting newer technologies in stride with neobanks. Of course, I wouldn’t expect the still-mildly innovative Chase to morph into a neobank overnight. The company has done a great job of catering to traditional banking needs of the past while acting on the digital demands of the present. But, what route will Chase take when banks are forced to compromise their hybrid approach?

I go back to the hypothetical situation of losing one of the core businesses in your life. How distraught would you be if your favorite sandwich shop was sued and subsequently went out of business? I know that I would go through some major Potbelly withdrawal…but wouldn’t blink twice if the equivalent somehow happened to Chase.

It just so happens that a dozen-plus other banks can provide me with similar experiences. I can also remotely deposit checks with PNC’s mobile app and hear about savings products from U.S. Bank’s call center staff. The ATM fees incurred by banking with an out-of-region bank like SunTrust are immaterial when you consider that I only nab a Chase ATM once in every four or five cash withdrawals anyway.

It’s likely that you share the same commoditized banking experience I do. Banks lack creativity and innovation, which is a shame when you consider the host of products and services that they are capable of delivering. They are the gatekeepers of precious consumer data that serves as the backbone to PFM, a market currently owned by third-party providers. PFM is the form that modern day financial advisory is taking and one that should naturally involve banks.

A primary component of PFM is analysis of consumer spending, which, through mobile technology, can be layered into the pre- and post-payment process at retailers (i.e. the impact of a purchase on budgets). Another avenue in payments is P2P pay, which banks have unsuccessfully tried to push on consumers over the years. Ironically, P2P pay is a market that requires joint collaboration amongst banks to make successful, indicating the lack of differentiation opportunity. However, much can be done by banks to make their in-app experience more seamless than that of peers.

More important to consumers than simply using a smartphone to pay is using it to uncover deals. While the in-store payments ecosystem is likely to run on the rails of companies like PayPal and Mastercard, banks can position themselves to be a facilitator of merchant-funded offers (MFOs) – both at and away from the physical point-of-sale. Bank of America has already tapped this market with its AmeriDeals service, which transforms transactional insights into contextual offers for its customers.

Banking executives wary of the implied technology investment above should consider opportunities that leverage existing infrastructure. The closing of big branches can be part of a strategy to increase the footprint of ATMs and smaller outlets. The ATM in particular is a terrific tool for increasing brand penetration and integrating with mobile devices. ATM manufacturers like NCR and Diebold have shown willingness to upgrade ATM fleets, presenting banks with an opportunity to offer services like cardless cash withdrawal.

Advisory services like live chat with a banker can also be delivered at the ATM, though this type of guidance may be better conveyed in smaller outlets like the ‘pop up branch’ rolled out by PNC this summer. The 160 square-foot office features a single financial consultant stationed beside one of the bank’s more advanced ATMs that is available 24/7. This type of branch is suddenly vital to the overnight worker that is only able to perform banking at odd hours.

The inevitable transformation in banks’ physical presence can be seen as not only a layer of differentiation, but also a push for sustainability as retail costs are contained and banks become more agile in aligning physical infrastructure to a region’s geography and demographics. These physical enhancements and the digital opportunities described above are all sources for differentiation in a banking industry that is facing pressure to change.

Differentiation, of course, must be profitable – a concept forgotten in the last wave of differentiation that has merely produced cost savings. This may be achieved through processing, referral and flat monthly fees – a potentially large sum of revenue currently being left on the table. Packaging these new offerings with existing products gives the appearance of added value to the consumer. Banks can also offer a premium option for services that customers are accustomed to getting for free.

Though some will disagree, I believe this next round of differentiation is unlike those of the past in that services like PFM and MFOs will be unique to the distributor. Superior BI systems will give certain banks a leg up on others, in contrast to the few ways that RDC and bill pay features can be distinguished from one another. Today, banking consumers decide loyalty based on convenience and self-service factors. In the not-so-distant future, consumers will deposit their money with FIs that offer technology-driven banking experiences that can’t be replicated by peers.

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