You can sense an audience’s reaction as you present ideas on innovation. Sometimes it’s warm and engaging, sometimes distant and thoughtful and occasionally remote and cynical.
I experienced all three reactions recently when presenting at a bank’s annual leadership conference, with the last being the reaction I like the least but enjoy debating the most. This was a third of the way through my dialogue about how transactional branches need to be shut down as mobile delivery through contextual, intuitive servicing is the new focus.
A hand was raised in the audience and a manager loudly opined: “This is all well and good, but where is the money?” Ah … the old “show me the money” statement. I’ve heard it regularly and, in fact, most regularly from this particular bank.
Purely due to time and structure, I couldn’t answer this question properly until the end of the presentation – this wasn’t meant to be an interactive workshop, although maybe it should have been. But the mood change lingered through the presentation. All the innovations I talk about regularly – new forms of currency, value exchange, hybrid real life and virtual economies, alternative commerce systems, the use of Big Data and the threat of those who get it, the mobile world of revolution from Africa to America, etc, etc – was now tainted with the undertone of “show me the money.”
Rise of the Upstart
Here’s a story (and a true one) to illustrate why that’s the wrong focus. There’s an old bar in my town, let’s call it “The Branch.” It’s been there for hundreds of years and has a regular and loyal crowd. It’s always made money by selling nuts, crisps and sandwiches, along with high-priced spirits and beers. It doesn’t serve a decent wine, as nobody comes to the Branch and asks for wine, but beer is the focal point for the largely male clientele.
A few years ago, a little bistro place opened nearby that we’ll refer to as “The Upstart.” The Branch manager wasn’t particularly concerned about it since it was positioned totally differently to the Branch, in a different market with a different focus. The Upstart served wine, when the Branch didn’t. It served hot meals, when the Branch didn’t. It was more like a restaurant than a bar and it didn’t serve beer.
So the Branch manager thought that the Upstart wouldn’t succeed and, even if it did, that it wouldn’t affect the Branch’s business. The Upstart thought differently. The Upstart didn’t know if it was going to make money but had seen the idea of hot meals and wine working overseas and believed it could work here.
After a while, the Upstart collected a few loyal customers. They were mainly families, who often included people who previously went to the Branch. These folks could not afford to enjoy a night at both the Upstart and at the Branch regularly so, slowly, the loyal customer base of the Branch were all too often to be found on the Upstart’s premises. Eventually, the Branch could see it was losing business and the manager changed his ideas a little. He began to serve wine and hot food.
But the crowd didn’t buy it. They didn’t like the dark and old view they had from the Branch and soon it was abandoned, apart from a few loyal souls who were dedicated to their beer and sandwich. Meanwhile, the Upstart was enjoying a buoyant business, with high-margin food and wine purchases in volume, and so the new business was not only making a profit but a substantial one.
The moral of the story is that, with innovation in banking, you shouldn’t necessarily look for the profits but should seek to avoid the losses. The reason I say this is that banks are protected by bank licences which means they enjoy a monopoly. This is why few new banks have opened for hundreds of years and why it is difficult for new entrants to get into banking.
However, if new entrants erode the fringes of the banking model where they can enter, then it is often around the parts that make money, such as credit and loans, insurance and mortgages. This has been shown to be the case through the past few decades and the danger is that all the bank will be left with is the loss-making deposit account of the corporate customer and individual consumer.
If that’s all you want, fine; but it’ll give you losses as you lose cross-sell opportunities. A recent article in American Banker noted an estimate from Moebs Services Inc. that the average checking account costs American banks $349 to manage, while the average revenue per account is just $268, implying a loss of $81. Meanwhile, Javelin Strategy & Research found that customers using online banking cost banks $192 a year, $167 less than customers not using online banking, who cost $359 a year.
This is why banks need to fear the Upstart chipping away at their higher-margin business as, in most cases, banks only have something to lose rather than gain.
Mr. Skinner is chairman of the Financial Services Club, CEO of Balatro Ltd. and comments on the financial markets through his blog the Finanser. He can be reached at [email protected].