Thinking more about componentised versus integrator banks leads to an interesting dialogue that started way back for me.
Fifteen years ago, we were grappling with bank models and structures and talked a lot about whether banks could be integrated retailers, processors and manufacturers of financial services or should they be specialised.
Then the book The Discipline of Market Leaders by Michael Treacy appeared, and he reinforced the idea that this was not possible.
In the book, Treacy says that businesses are three dimensional around customer, operations and products, but can only excel in one dimension. Therefore you have to decide whether you are going to lead by being customer intimate (a retailer), operationally excellent (a processor) or product specific (a manufacturer), as you cannot be brilliant at all three.
This is not necessarily true as there are exceptions to the rule – just look at Apple or Tesco who achieve more than one facet on the scale of three dimensions – but you get the idea.
I’ve been intrigued with such discussions for years because an old friend, Professor David Llewellyn of Loughborough University, was espousing similar ideas back in the late 1990s.
David’s theory was that banks would be componentised, just like airlines, telecoms and other industries had been.
Banks therefore had to decide whether they wanted to be the best interface to money – an integrator – or the best provider or processor of money – a component.
Again, it’s another way of saying are you a retailer (interface), processor or manufacturer of financial services.
David illustrated the theory well by talking about airlines and making it clear that airlines manufacture nothing but purely provide an interface to a seat.
The key in airline selection is who provides the interface most appropriate to your needs for that seat.
If it’s cheapness you want, fly Southwest; if it’s luxury, fly Emirates; if it’s functional, fly American; if it’s service, fly Singapore.
Each airline excels in a dimension of product, process or service, and each airline emphasises a slightly different aspect of interface to seats based upon how they put their offer together. It is how they integrate the components of air traffic routes, engineering, catering and service that allows them to be a market leader, even though they build and manufacture none of these components.
Others do this and banking, he claimed, is the same.
Now there are components of banking at the back end – money markets, securitisation, SWIFT, CLS, etc – that provide the core elements of delivering financial service at the front end.
You could claim that these are the core components that banks integrate for delivery.
But David’s point was more targeted at the front-end customer experience, and hence it was more to do with components of mortgage, credit cards, deposit accounts and such like, and how banks integrated these into their branch and call centre operations and, today, internet and mobile channels.
Which brings me around to today.
Today, we talk about customer experience and engagement rather than interfaces and service, but the point being made is the same.
If you’re a bank that believes you want to provide customer intimate experiences through the best integration of the components for engagement, then that is a specific strategy to follow that has to be clearly thought through and delivered.
And this is where it gets wobbly as most banks are not focused upon customer intimate engagement.
Sure, the customer is important but, over and over again, we see the banking is defined by product and process.
“This is subject to compliance and therefore cannot be changed.”
“The regulation will not allow us to offer this.”
“We behave in the shareholder’s interest first and foremost.”
“Cost of processing is paramount.”
“We live in a zero margin world and compete on rates.”
“Customers think all banks are the same, so we ensure our fees and charges are aligned.”
Sure, there are exceptions to the customer intimate rule – USAA and First Direct – but generally banks are focused far more on products and processing.
This was illustrated by a comment from one seasoned financier at the payments conference I attended this week: “it’s notable that at all the banking conferences I attend, we never talk about the customer”.
Certainly we had talked about T2S, SEPA, the PSD, SWIFT MX and ISO20022; we had talked about mobile, NFC, facebook credits, M-PESA; we had discussed Basel III, the Eurozone, Frank-Dodd and Durbin; but, for all of these discussions, we had not really talked about customers and customer engagement.
We had danced around it, but no-one really focused upon what the customer needs, wants and desires from their bank experience.
Maybe this is where the future lies: in truly being customer intimate.
Or maybe, due to the barriers to entry of regulation, capital, structure and compliance, banking can continue to be a wholly process and product centric service, with the customer engagement coming last.
That’s certainly how it would seem to have played out for the past two decades and, even with others moving into the financial markets space, it may well be how it remains.
After all, the other comment that’s been used at most conferences I’ve attended is that customers change their spouses more often than their banks.
And if that’s the position – once you’ve got ‘em, they’re locked in – then who needs to focus on the customer?