The New Rules of Banking

By: Richard Berger

February 15, 2018

You’ve heard the old saying “if it looks like a bank, swims like a bank, and quacks like a bank, then it probably is a bank.”

Or something like that. Whatever the saying was, it isn’t true anymore.

We used to know what a traditional retail bank did and where it fit in the broader financial landscape. Pre-2007, major players like Bank of America, Wells Fargo, PNC and their ilk were busy perfecting one-stop banking convenience. Savings, checking, loans, credit, billpaying and everything else, all concentrated in one brand and brick-and-mortar family.

What a difference a decade makes. Companies like Zenefits, Nerdwallet, OnDeck, Wealthfront and more have disrupted the banking space, offering faster, cheaper and more efficient versions of everything the traditional players do that actually makes money. None of them are “banks,” per se, and in reaction to their offerings, what we used to recognize as banks are scrambling to reinvent themselves as something else as well.

This phenomenon is pretty well documented. Tom Loverro of IVP offers an interesting summary here and half-baked advice for the traditional banks can be found almost anywhere. The FinTech media intelligentsia suggests:

• Buy one of these startups;
• Invent better services;
• Give up on offerings that have fallen behind the competition.

God help the bank that listens to those bright ideas.

But what are we in the broader business community to make of all this? What can we learn from the unbundling of the traditional bank?

A few takeaways:

1. In a completely virtualized marketplace, better beats more. Lest we’ve forgotten, “one-stop shop” is a geographic reference that has no application to the web. A larger suite of services makes no difference when a competitor offers a better service a click away.

2. Follow the customer, not the money. If you look closely, many traditional bank offerings aren’t really getting beaten on performance. They are getting trounced on customer experience. Privacy, personalization and preference management matter more than ever.

3. Play to win, not to avoid losing. For years, banks saw innovation as a customer retention priority. That led to safe bets, marginal changes and incremental improvements. Startups took big risks and won customers as a result. No matter how large or entrenched the institution, everyone has to compete.

To conclude: it often makes sense to zig when others are zagging. Just a few years ago, every bank was building hundreds of new branch locations. Fast forward a few years and just as quickly, they reversed course and have closed just as many. I am sure many of these banks wished they had focused their time building out their online products; developed in-house online small business lending products or perhaps developed their version of the Chase Sapphire Card.

But that’s all behind us now. A better use of brain cells would be asking ourselves the big question: who will be unbundled next?