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BirdsEye View

banking paradigm shift

  

Your newsletter titled 'The Hall of Fallen Giants' says we need to change our way of thinking about banking.  New payment technologies are appearing, and at the same time consumers are getting used to new communication devices, which have been long awaited, since a drawing of a future computer was made at a Silicon Valley cafe some decades ago.

 

We are witnessing a paradigm change of communication. Long ago, horses and stagecoaches carried information.  Those were replaced by trains, automobiles and aircrafts, and then by telephone and fax using telecommunication networks, and now through WWW. These shifts inevitably change consumers' behavior with respect to all communication, including finance, because financial activities are now information activities. 

The implications to banking are profound.  A branch used to be the place to bank, i.e. conduct financial transactions, and banking was almost the only way of finance to most of consumers and business entities.

But at the same time, it is important to remember that financing is not a purpose of life to a person or a business, but only the means, albeit important means, to making a life.  Due to the shift in communication modes, coupled with a major shift in financial services offerings, which have multiplied manifold in recent years, customers now have numerous alternatives from which they can obtain financial services. The exclusivity of banking has passed due to both innovation in the financial system and the communication revolution.

My conclusion: The future of the bank is probably not in being a bank, especially in terms of what it sells. It will actually sell financial literacy and wisdom, even if prices are still placed on products and services.

This is very much like the situation of an old "marketing myopia" story, where railway companies defined themselves as rail business, rather than the transportation business, which ultimately lead them to marginal players in the whole industry.

Banks must identify what their clients want and need in order to make their life better through their financial activities, and then must transition from transaction executioners (Or as Anat says, "transaction mortuaries") to a financial steward, guardian, counselor, and agent, by utilizing their assets, which are physical presence and ties with clients. The phrase, "trusted advisor" comes to mind.

My personal view: Banks must be facilitators for customers who want to deal with their financial issues in order to make their lives better and easier. In doing so, communication capabilities will play an important role.

Technology has been replacing cash and checks with electronic means, and banking customers increasingly see less need to visit bank branches. Less need for physical transactions equals less need for physical distribution.  Therefore, banks can reduce their distribution cost of running branches, but at the same time, they are losing opportunities to sell products to the customers who currently visit branches for cash and check transactions.

This requires banks to find and reinforce means to get connected with customers when necessary ('When necessary' means not to banks, but to customers, of course).

Let us think of modes of communication we use, such as face-to-face, mail, phone, voicemail, e-mail, chat and social media. What we have seen is that when a new mode of communication arrives, it enriches our communication,; however, all traditional means of communication still persist. What we as bankers need to do is  to determine which we think is the most appropriate from all available means.

Therefore, branches will remain, but the frequency of customers' visits will be meaningfully reduced. But at the same time, frequency of contact between banks and consumers will increase in total, because of the mobile devices that are always in the pockets of consumers, and communications using them are far easier and less cumbersome than going to a branch.

Because customers will not walk into bank branches, one clear conclusion is that banks need to provide multiple modes of contact and spend more resources to better understand consumers buying behavior, and especially information related behavior, so that they can show up in front of a customer whenever and wherever it is appropriate, as a contributor of valuable information. The difficulty will lie in finding the optimum of channel combination and attracting customer interaction through remote channels. 

Of course, the power of face-to-face contact will not disappear. And this is one of banks' strongest points. But given reduced branch visit frequency, banks need to develop and maintain their mind-share of customers, to be the first choice as they think of financial needs. We do not go to auto-dealers regularly, but do so when to buy a new car, and the ones we visit are usually pre-determined by a short list in mind. Banks must get to the same place, and social media can play a big role in this field. 

Every person has her/his money issues. Banks have great opportunities to provide remedial information. We need to monetize it. 

One last comment. If you would like to draw a larger and longer-term picture, you have to go back to the nature of the Internet, which is to connect directly supply and demand, cutting out intermediaries. 

The implications are profound for banks, which too often function as intermediaries themselves. 

As long as banks see themselves as the middlemen of money demand and supply,they will lose grounds perhaps faster than expected, because once the trend of change becomes clear, it will accelerate.

It is time for us to walk away from this marketing myopia and make another marketing legend.