By Brian Nixon
If you’re considering the forces shaping the future of your bank and the banking industry—and you should be—keep an eye on the “digital disrupters.” Such initiatives and enterprises swept through the music and publishing industries—think of Pandora and Spotify in streaming music, or the Amazon Kindle in e-publishing—leaving in their wake revamped and revised business models, low-cost digitally-driven products and services, and faster and easier delivery systems.
In financial services, digital disrupters include PayPal, Moven, Quicken, Lending Club, Prosper, Google, Apple and others, says Joseph Cady, who spoke on the topic at ABA’s 2015 Directors’ Forum in Los Angeles.
“The trend is banking is becoming digitized,” says Cady, managing partner of CS Consulting Group. “This happened with music and books and it’s happening to the banking industry.”
Digital disrupters are very good at developing faster and easier—and frequently cheaper—solutions. These are features that appeal to unbanked or underbanked millennials. The disrupters can operate more nimbly because they are less regulated, Cady says. Disrupters also excel at picking off profitable niches. Quicken Loans, for example, has become one of the largest originators of mortgage loans and receives top marks from J.D. Power for customer service.
“Banking is simple, but the environment is complicated,” Cady says. “The regulators put [banks] through a tremendous amount of effort to provide deposit insurance.”
Millennials—now roughly on par with baby boomers in terms of numbers participating in the American workforce—are a growth opportunity in banking and financial services. By contrast, older boomers, for example, have less need for credit than younger millennials. Millennials, who are projected to represent a large majority of the workforce by 2025, are also open to different alternatives when it comes to managing their money and they tend to see less of a need for traditional banks, Cady remarks. He points to the well-known Viacom survey as an example, which found that a larger majority of millennials would rather go to the dentist than visit a bank.
So, what can banks and their directors do? Cady says banks should focus on customer needs and priorities, and leverage technology to enhance efficiency and lower delivery costs of products and services. Better decision-making algorithms, for example, lower costs, smooth customer service and speed response times. Using “big data” enables better tailoring of products and services to specific customer needs, or better ways to suggest them to potential customers.
Still, key questions remain when it comes to efficiency. Among them: “What do we do about branches?” And: “Do you need to transform your bank? Do you want to be in this business in five and 10 years?”
For most institutions, the answer to the latter question is clearly yes. But it won’t necessarily be an easy road. Cady advises bank directors to think like competitors and not like bankers. What are your bank’s distinctive competencies? What compelling reasons do you offer customers to do business with your institution? Does your bank offer the right lines of business at the right time and through the right channels?
“The future is promising,” Cady says, “but [directors] will have to work hard.”
