It’s All About the Customer

By Rob Morgan

The battle for the future of banking is already taking place, and it is happening one click at a time. Three years ago, I predicted that banking would have its “Amazon moment.” While banks have successfully partnered with technology startups to offer their customers the latest innovations, the entry of large technology firms raises serious questions for banks as they consider where to partner and where to compete.

I believe the key question that will determine who wins and who loses in this digital age of banking is “Who controls the customer relationship?”

The question of customer relationships has determined the winner in many other markets that have been impacted by digitization. Uber is a prime example of this. Uber doesn’t own any cars, but when its customers need a ride, they open Uber’s app. Because of this, Uber controls the customer relationship and ultimately the demand, in a way an individual taxi never has. Control over the demand allows Uber to dictate the terms to the network of drivers on their platform.

This question is just as important, if not more so, in banking. Banking has always been a relationship business, but as those relationships move online, they must evolve. Just recently, Citigroup Chairman and CEO Michael Corbat warned that banks that forfeit this relationship risk becoming a “dumb utility.” A McKinsey study highlights the impact of this relationship on banks’ bottom line. The study found that the return on equity associated with originating assets was 22% while the ROE of holding those assets on a balance sheet is just 6%. Banks that forfeit the customer relationship risk becoming a “dumb utility” that does little more than hold the asset.

Why are tech companies interested in banking?

In recent years, technology has fundamentally reshaped our economy and the way companies interact with their customers. A key enabler of this digital transformation is the amount, availability and use of data. The value of data has led to new business models called “platforms,” which are digital marketplaces that exist to connect a buyer with a seller. These big-technology companies create value by establishing, cultivating and cementing relationships with customers and collecting data on these customers across a broad set of services. They then analyze and apply that data to predict a customer’s needs and preferences and offer them targeted products and services.

The good news is technology companies don’t want to become banks. They simply can’t generate the growth that their shareholders demand in a highly regulated industry. The bad news is that these companies want the data and relationships that come along with being a bank.

Banking data is one of the most valuable sources of customer information available today. Platforms like Google were built on search data and its ability to predict what customers are willing to buy. Banking data gives insight into consumers’ financial preferences, tracking where they spend their money and even how much they are able to pay.

Because of the value financial data can provide, big technology platforms are quickly looking for ways to obtain consumer financial data. Uber, for example, recently launched a credit card offering a very attractive 5 percent rewards rate on purchases at restaurants in order to collect consumer data that can give its food delivery service a competitive edge.

How should banks respond?

As banks consider their strategy, they should prioritize partnerships that help them deliver innovative services to their customers and strengthen relationships. It is helpful to remember that there was a time when Barnes and Noble made the strategic decision to sell books via Amazon instead of building its own online book sales franchise. At the time, after all, online was a small market and B&N thought it was too expensive to build its own marketplace. In doing this, it gave up valuable relationships with their customers.

Banks that are successful in maintaining their customer relationships will be their customers’ first stop when they need banking services. Banks that lose that relationship risk becoming back-end facilitators that compete on price alone.

Banks have a strong foundation to build on. They have trusted relationships that have been built over years of doing right by their customers. They will be well positioned to win if they are able to bring their customers the latest technologies from a partner that they trust.


About Author

Rob Morgan is vice president for emerging technologies at the American Bankers Association.