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Chapter 1
Why Banks Fail at Customer Innovation
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In 2003, Citigroup was the most profitable company in the world and Apple was emerging from virtual corporate oblivion.
In 2011, Apple became the most profitable company in the world and Citigroup is languishing in virtual corporate oblivion. 8 years from cash cow to pig.
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Apple Share Price – 10 Years Source:
Money Central July, 2011 |
Citigroup Share Price – 10 Years
Source: Money Central July, 2011 |
Why?
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“Motivation gets you started. Habit is what keeps you going.”
– Jim Ryun
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Achievement is an aphrodisiac. The buzz of success can be infectious. As companies grow, they seek to institutionalize success factors. To make them habits. The logic is a simple one. These factors created success, are central to success and are a formula for continued success.
There is a simple flaw in the logic. Change. Times change. Markets change. Technologies change. Habits become anchors. Yesterday’s market icon is tomorrow’s market embarrassment. Yet time and time again, market leaders sail ever so elegantly off the precipice. Why?
We often do the things we do because they have always been done that way. We anchor ourselves to a formula when what we should be doing is anchoring ourselves to our customers. But banks, perhaps more than other corporations, have three key anchors that make customer innovation … challenging. Overcoming these anchors is no longer a ‘good to have’, but a necessity for survival.
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History
Banks are anchored by history.
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Banking has been an integral part of trade recorded though the annals of history. The earliest recorded extension of credit was by Babylonian Traders in 5,500BC where interest was charged for future payment in the next lunar cycle. Religious authorities intervened and banned interest. Traders responded by bundling credit in price, resulting in todays ‘standard’ 30 day credit terms.
The more formalized institution of banking is believed to have evolved in the temples of Babylon in 18th Century BC during the time of Hammurabi where deposits, loans and currency exchange began to take shape. Greek financiers furthered the concepts of deposits and loans and by the 5th Century BC, amore formalized system of banking had evolved supporting multiregional trade, effecting the concept of transfers or remittances. It was during this period that currencies started to evolve from grains into other forms of exchange including the rudimentary form of the LC, the Letter of Credit.
During the middle ages the roles of currencies and Europe wide trade flourished. Formal banking houses came into existence. The Chinese are credited during this period with the first paper money. Europeans adapted the invention of the Gutenberg Press to mint coins made from precious metals.
Modern banking is credited to the Italians in the 1400’s which popularized the branch network to facilitate international trade. Branches were usually located in major trading hubs supporting trade through bills of exchange which continued to conceal interest payments within essentially what was a future FX transaction. Europe finally embraced paper money in the 1700s.
The 1900’s saw the migration of regional banking to the global banking, largely facilitated by innovations in transport and communications. Global transport expanded with shipping and more significantly with the commercialization of the airplane. The speed of communication initially jumped forward with the advent of the telex and later the fax machine. Banks essentially followed their customers as the ventured abroad into foreign markets.
The next revolution in branch banking occurred in the 1980’s with the widespread adoption of the ATM. Technology facilitated another giant leap. With the commercial adoption of the internet in the 1990’s, technology again made a great leap forward. The 2000’s saw widespread consumer adoption of mobile data services, providing a platform yet another great leap in banking to be realized in the 2010’s.
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“In the late 1930’s, Luther George Simjian started building an earlier and not-so-successful version of an ATM, but he did register related patents. He initially came up with the idea of creating a hole-in-the-wall machine that would allow customers to make financial transactions, the idea was met with a great deal of doubt. Starting in 1939, Simjian registered 20 patents related to the device and persuaded what is now Citicorp to give it a trial. After six months, the bank reported that there was little demand.” – http://www.atmmachine.com/atm-inventor.html
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Throughout the modern history of banking, banks have invested significantly in technologies with a very limited appetitive for investing in consumer adoption. Banks tend to focus on the challenge of driving consumer behavior rather than harnessing it. Throughout history, innovation has largely focused inward. Making the bank more efficient. For instance, the modern ATM was primarily designed to minimize expensive branch services. Phone and Internet banking followed that same core design objective. Silos of service rather than a holistic view of customer experience.
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Few banks could claim that services are designed around the customer which is why each banking channel usually requires a different customer process. As with branch design, the momentum of history acts as a anchor on the present. However the force for change is evolving from a tide into a torrent. Banks are now struggling for their very survival. From a customer experience perspective, much of bank innovation has been cosmetic. Lipstick.
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Risk
Banks are anchored by risk management
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“The cautious seldom err”
– Confucius
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Change. In any organization, change evokes a range of emotions and reactions. Fear, excitement, challenge. Change polarizes. It emphasizes organizational inadequacy. It galvanizes those restless with the status quo. The rumor of change in a bank is always the fastest moving communication. Everyone wants the inside information. It propagates with unparalleled speed. It evolves, it morphs. Battle lines are drawn. Change is personal.
By definition, innovation embraces failure. A willingness to embrace reasonable risk. There are few industries more conservative than banking. Considering the usual corporate forces of opposition to change, in banks, you have whole departments focused on minimizing risk. People adept in statistics and schooled in conservatism to challenge every element of change. (Though apparently able to overlook simple logic that housing prices go up and down. Go figure). Like the legal profession, this group is constrained by precedent, subservient to statistics and accountable to a higher being. In the case of banks, that higher being is known as the regulator. Feared trustees of the financial system who themselves live in fear of political attention.
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“In God we trust, all others bring data”
– W Edwards Deming
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Data is essentially the ongoing measurement of precedent. The metrics of habit. As in the case of the mortgage market, precedent data can create limiting beliefs which ignore the reality of dynamic market behaviors. Innovation thrives on dynamics, intuition and action. These concepts are abhorrent to most risk managers who prefer to refer to ‘proven data’. Understandably, they require this so they can present the same data to the regulator. It’s the ‘circle of …. ‘ actually, it’s just a circle. A vicious one.
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An Actual Conversation with a Risk Manager
RM: You need a business model.
Me: We have one
RM: You need to (empirically) prove the value proposition
Me: What would change if I can’t?
RM: Everything
Me: Be specific
RM: Something
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The net is that banks are actively constrained and held to a higher standard. Regulation trails innovation. And the absence of legislation inhibits innovation. Risk. This manifests in the market in numerous ways. It inhibits internal innovation and reduces the role of bank innovation to one of procurement. Lipstick.
With deals such as Google Wallet and ISIS, banks are essentially endorsing competitors as trusted payment entities. The implications are significant. Most disturbingly, a parallel financial system is evolving to fill the bank innovation gap. Corporations can now freely take deposits (pre-paid) and facilitate payments without any role for the bank. And with none of the consumer protections of the regulated banking system. When the company goes, so does your money. And while corporations can lose hundreds of millions of peoples personal financial data with impunity, banks are regulated and monitored continuously.
Having endorsed their competitors as ‘trustworthy’, it is questionable as to what role the banks will play in the future as unregulated competitors become more adept at managing risk. Bank competitors are far more imaginative.
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“Logic will get you from A to B. Imagination will take you everywhere.”
– Albert Einstein
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Complexity
Banks are anchored in complexity
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“I know that most men, including those at ease with problems of the greatest complexity, can seldom accept even the simplest and most obvious truth if it be such as would oblige them to admit the falsity of conclusions which they have delighted in explaining to colleagues, which they have proudly taught to others, and which they have woven,thread by thread, into the fabric of their lives.”
– Tolstoy
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A Federal Reserve Chairman is purported to have said that ‘money is made in the dark’. Banking hires the smartest and brightest to contribute and sell the story. There is an unwritten equation in banking that increased complexity = increased revenue = increased bonus. Derivatives and Treasury teams thrive on this equation though few of the people selling the products tend to actually understand them. Which is probably a good thing because few customers understand them either and don’t ask difficult questions. (But they do provide excellent data to the risk guys!) I digress.
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“Any intelligent fool can make things bigger and more complex… It takes a touch of genius – and a lot of courage to move in the opposite direction.”
– Albert Einstein
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While the market and bank blow ups in recent times have proven the first half of Einstein’s theory correct, there remains the opportunity to embrace the second half of his theorem. It may well be a defining moment for banking. And certainly a defining moment for customers of banks. Customers buy products to make life easier, faster, safer, smarter or more enjoyable. While focusing almost exclusively on the ‘smarter’ with complexity (clearly missing the point of consumer understanding), most banks have missed the 80% opportunity. Companies like Apple and the Social Media companies however have not! Their share prices reflect this. And the scoreboard is the only measure that counts!
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“Simplicity is the ultimate sophistication”
– Leonardo Da Vinci
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While banks do face a higher hurdle to innovation, none of the above should serve as an excuse. There are ways to use momentum for advantage, engage with regulators and to simplify customer experience to drive greater, more sustainable revenues. It requires recognition. It requires innovation. And it requires action. Simple.
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Case in point: Japan’s oldest bank grew revenues 16.3% and profitability by USD$100M in just one year in a declining market by embracing change and simplifying customer experience.
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About banking
Banking is a simple business formed to make money safe, flow and grow. It is an innovative business founded on trust, bound by honor and forged in security. Or at least it was ….
About the book
Socializing banking is a book about how to make customer engagement the focal point of bank innovation. And a ‘how to’ book to innovate and drive new levels of profitability, liquidity and customer satisfaction back into banking.
About the author
Steve Monaghan is passionate about banking and finance. A serial intrepreneur and entrepreneur for companies including Dell, OCBC and Citigroup, Steve has struggled with the unnecessary complexity and bureaucracy of banking in the never-ending search for simplicity, certainty and exceptional customer experience.
Socializing Banking 