Last week I released a blog article and an infographic to stimulate discussion on innovation in the banking and financial services sector. It received a lot of comments and discussions on Twitter and blogs, some taking exception at my supposed "left-wing" political leanings based on the fact that I published the article here on The Huffington Post. The blog was in no way a definitive statement on the issue of innovation in financial services, but was more focused on asking the right initial questions about the state of play. However, given the amount of discussion, I'm going to put forward a more detailed opinion based on some simple analysis.
I think we all agree that the innovation of organizations like Goldman Sachs, Lehman Brothers and others around CDOs had a devastating effect on the economy over all. Today, the hot industry innovations are focused on things like dark pools and low latency trading.
Product and trading innovation has had a secondary and tertiary negative effect for institutions, which are the further commoditization of financial products and the lowering of margin on products generally. HSBC has over 50,000 products available to private investors today, and yet in a declining market with an average fund charging 1.2-1.6% in management fees, margin can often be negative. Competitiveness on products like savings plans, personal loans and mortgages mean real margins are often 25 basis points or less. While inevitable that such attempts at product innovation will continue, when the height of innovation is products that only theoretical physicist and mathematicians can understand and margins are shrinking, I believe that banks are missing the point.
Call me an idealist, but I believe innovation should produce profitability and revenue by improving the suitability of product, flow of process, capability of the organization to meet its core customer's needs, and overall efficiency of the business to generate return for shareholders -- rather than focus on internal proprietary trading as the core mechanism for profitability. It is reasonable, then, to expect that financial institutions should use innovation to better understand their customers, and better execute their delivery of products and services to those customers -- because, after all, customers are the primary driver of revenue and costs, which determine product. This is where I have an issue.
According to the FDIC, at the end of 2009 there were 6,839 active commercial banks registered in the United States with some 83,000 branches. (FDIC defines this as national banks, state-chartered commercial banks, loan and trust companies, stock savings banks, private banks, and industrial banks holding a banking license.) My friend Christophe Langlois who runs the most comprehensive social media register and tracking service for financial institutions (see Visible-Banking) indicates that there are 624 Twitter accounts supported by U.S. banks, but companies like Citibank and WellsFargo, for example, have in some cases 19-20 accounts of their own. Wikipedia lists 375 retail banks active in the U.S., but this list is far from complete. Given that the FDIC lists 702 banks as problem banks for 2010 at risk of failure -- then the reality is that the list of banks, credit unions and lenders dealing day-to-day with customers is in the thousands.
The fact is that in reality less than half of the largest retail banks in the U.S. have any presence on social media, and the number of those that are actively utilizing social media is a fraction of that. In fact, if you take into account YouTube, Facebook, blogs and other social media metrics, the average is appallingly small. Of the FDIC registered banks, the actual percentage is 3.3%.
Less than 3% of leading U.S. banks have an iPhone banking app
For mobile internet banking, it is far worse. The iPhone has dominated global smart-phone sales over the last 3 years. In 2009, iPhone made up 72% of smart-phone sales in Japan, but less than 1% of banks in the U.S. have an iPhone app - best case of the largest banks, the percentages is closer to 10%. The excuse for this lag in innovation is undoubtedly that 2009 was a tough year to invest in technology. The problem is that banks should have already committed to this in 2007, when the iPhone was released, not be thinking about potentially launching in 2010/2011, five years after the customer has already adopted the technology. Given the expectations are for close to a billion mobile banking users by 2015, there are just no excuses for such a lag.
Customers are innovating far faster than banks in the use of these platforms. Facebook took just 9 months to reach its first 100 million customers. Most banks still don't have any presence on social media. While banks complain about compliance and security, customers are participating in the mobile and social revolution without them -- putting at risk their total brand, and real customer engagement opportunities.
Banks are simply out of touch. They are moving too slow. The only way to address is this is a complete re-engineering of the way banks engage, support and reach customers -- unhinging traditional distribution models, rethinking third-party relationships and a new era of openness. The chances of this happening are slim to zero. So I see this decade as the decade where third-parties, telecoms operators, device manufacturers, tech start-ups and others start to take ownership of bank customers, and banks are simply left processing the back-end transactions and product manufacturing. Profit will shift from banks to other more innovative organizations like Apple, peer-to-peer innovators and those who excel at the customer experience. It will be a tectonic shift.
So, to be unambiguous -- banks are just too slow at innovating the customer experience.
Follow Brett King on Twitter: www.twitter.com/brettking
At the same time Westpac has ranked as the worst bank for customer service in a survey, released a day after it's profit announcement: http://www.smh.com.au/business/westpac-comes-last-for-service-survey-20100506-ubcl.html
Westpac achieved its profits by pushing up interest rates at the same time as all other sources of funds dried up for business and for home owners as a result of the GFC. You don't need innovation when you can squeeze the market with immunity, due to lack of competition.
In this same period of record profit for the bank the number of Australian companies becoming insolvent has risen again in March, with total collapses increasing 9.3%, according to figures from the Australian Securities and Investment Commission (ASIC).
Walter Adamson @g2m
http://xeesm.com/walter
1. The audience - I authored a very respected mobile phone industry strategy blog for many years until I retired it, and was well quoted and connected in some leading mobile apps circles - so I have a fair idea of understanding the letter in detail.
2. I use an iPhone, I get 2 text messages a day - each informing me of an account balance.
3. The ANZ letter 16 April acknowledged me "as a customer of M-Banking", told me that "ANZ's M-Banking application" would cease to function from Friday 14 May including notifications of my account balances.
4. It told me to use other services including Internet Banking or Phone Banking.
Given my background I don't find any of it confusing or ambiguous. Now I don't know anything about what they call M-Banking versus mobile banking. What I do know is that they are removing something which I have, which is associated with my mobile phone, and that they don't want to pay for text messages any more.
So this particular innovation all comes across as a penny pinching cost cutting exercise, along with a very murky explanation and an even murkier commitment to "future enhancements" to mobile banking.
On the basis of the communication received, I say that the ANZ perfectly fits the topic and description conveyed in your article and especially the closing paragraphs.
Walter Adamson
http://xeesm.com/walter
Regards.
Good article and clarification! Absolutely on target. The lack of innovation and customer relationship management in the financial industry is huge. Other organizations, like those you mention, as well as Target and Wal-Mart, are moving into effective and customer focused financial management. If the banks turn into clearing houses only, we certainly will not need all the infrastructure and people that work in the industry today. The financial industry must get back in touch with the customer, large and small, by developing effective relationships, learning how to exploit innovation and investing in and managing the technology available.
Unfortunately, the industry may be too focused on litigation and the retirement of the current generation in the years to come to invest in innovation. I hope that's not true, that there are CEO's who will commit to creativity and innovation, start round tables and open presentations to review what's available, decide to invest and make a difference! They also have the opportunity to both mentor and learn from new leadership talent in finance and I/T to leave a positive legacy to the next generation.
Thanks for the article! By the way, great website!
Take the ANZ Bank for example, on April 16 it announced breathlessly to customers that "as part of our simple banking promise" "we have decided to remove our M-Banking service"!!! Incredibly they suggest that we use "Phone Banking" instead, where we pick up the phone and call one of their overseas call centres.
In contrast, the Imperial Bank of Canada recently said although "many people are not interested yet in mobile banking" that they saw it as important "to set a leadership position in this space" http://www.thespec.com/News/Business/article/742139
Of course the banks here all see themselves as "innovative". It's kind of Orwellian, but a not unusual outcome of an industry that can't see beyond itself and believes its own myths.
Surprisingly one of their own CEO's has become so concerned about the long term adverse consequences of their stranglehold on the community that he has acknowledged that it needs to change. Now THAT'S the most innovative development in Australian banking ever: "Australian banking oligopoly needs to change NAB chief says" http://au.ibtimes.com/articles/20100408/australian-banking-oligopoly-needs-to-change-nab-chief-says.htm
In a fierce oligopoly, as in Australia, innovation is just a PR stunt or a TV campaign.
Walter Adamson @g2m
http://xeesm.com/walter
Interesting perspective. Actually ANZ is one of the more innovative banks in Australia, the first to appoint a Group Head of Innovation with real teeth. However, I do think they really mishandled the whole announcement over removing WAP m-banking. What they should have done was discuss the transition to mobile portal or app-based m-banking, instead of harking back to Phone banking as you've said.
From speaking to Nick Dean at last week's Asian Banking Summit, I do believe that ANZ has made a big commitment to mobile as part of their future, but I believe they could have handled the discussion better.
I do agree that the Aussie banks need to refocus. I think if they get more involved in the Asia and overseas markets this will push them out of their comfort zones and they'll learn valuable lessons to help customers back home in Oz too.
BK