Roger Dennis of IdeaPort mentions two trends in consumer banking that in his opinion leads represent a real problem for banks.
He recognizes an inescapable death of cash because of the emergence of electronic payments and a decrease in customer loyalty, where customers tending to go to mortgage broker for advice instead of bank customer rep. This combined with internet as information source - enabling customers to gain information - will lead to a real problem.

His observations are backed by research from Forrester [1], claiming that only 36% of customers believe what the bank is telling them, and that over 60 % of US customers do their own research before buying financial products [2].

Another source (IBM’s study on banking ) describes five industry trends, and a possible response of banks to them. Among them they recognize a shift in demographics, attitudes and behavior of clients, combined with the ubiquity of information that gives customers more power to demand greater responsiveness and transparency from their banks. Continuous innovation and operational excellence should be the answer.

Are banking and innovation incompatible?
I agree that the financial services industry is not known for its innovations. The image of the reliable banker in a three-piece suit is not characterized by radical innovations and industry shake-ups. Banking has been a pretty lucrative business, so there was not a burning platform for change. The industry landscape however has changed in the past century. In an IBM podcast Mark Greene and Rusty Wiley distinguish three types of banking industry innovations:

• Product innovation: e.g. ING Direct, a low-cost online business model to serve the retail market
• Technology Innovation: e.g. proximity credit cards, (cell-phone) payment technologies
• Customer Service Innovation: e.g. opening up of branch hours, branch innovations

Because financial services industry does not know the concept of patents, new products are copied very quickly. That makes companies innovate “less in products and more in the way that products are delivered� [3], i.e.: where product and services can be copied, business model innovation is the way to go.

Outside the established industries we find examples of web-based business models. Examples of this are Zopa.com and Prosper.com, alternatives for consumer loan services. These models are matching individual lenders to individual borrowers [4]. These initiatives however have not yet generated a substantial change potential and threat for the traditional banks.
In order to remain competitive new forms of innovation are required. In stead of current focus on incremental steps on product and service innovations banks start to focus on business models innovation. Recent examples of outsourcing strategies (of which the multi-sourcing deal of ABN Amro in September ’05 is one of them) support that banks increasingly look for technology partners to facilitate innovation. It might very well be the case that the use of external knowledge and external parties is a critical for business model innovation in the financial services industry.

suggested reading

1. Nial, Jim “The consumer advertising backlash� Forrester research. May 28, 2004
2. Shevlin, Ron. “Why banks can’t afford to ignore gen yers� Understanding the financial needs and behaviors of the young consumer� forrester research. August 6, 2004
3. Nick Studer, Mercer Oliver Wyman, in The innovation combat zone, “Financial Times�, Capital Markets & Commodities, July 19th 2006, p 31
4. Zone of potential for financial exchange, Mortimer R., Brand Strategy, May2005, Issue 192

This entry was posted on Tuesday, August 22nd, 2006 at 10:08 am and is filed under Trends, Innovation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.