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 / Autumn 2013 / Issue 72(originally published by Booz & Company)


To an Analog Banker in a Digital World

Personal Banking’s Future

The shift occurring now in financial services has been seen before in other industries—for example, in recorded music. In the early 2000s, the convenience and lower cost of an MP3 download, the greater choice, and the delivery when and where it was convenient for the consumer all combined to create a tipping point that drove consumers to the iPod. The entire music industry had been organized around the economics of physical distribution: Record labels bundled songs into albums, because the cost of physical distribution (stores and the production of media such as records, tapes, and CDs) could not be supported by the revenue generated by single songs. Suddenly, Internet distribution of songs, videos, movies, and TV shows enabled much broader audience reach at a fraction of the cost, and disintermediation ensued. This soon led to the collapse of the music store industry. Financial-services firms are only now beginning to recognize similar signals in their industry.

One clear signal is the shift to electronic cash in the form of debit and credit cards. According to the federal government, checks and cash represented more than 70 percent of all U.S. financial transactions in 2000; by 2010, that percentage had dropped to 43. Another signal is the generation of people now in their teens and 20s who are used to communicating over mobile devices, with far less need for face-to-face interactions. Especially with intangible products and services (such as any FS offering), they expect merchants to deliver what they want whenever, wherever, and however they choose.

There is often a gap between knowing what needs to be done and knowing how to get there. It is helpful here to remember the Templars and the basic needs that banks fulfill—the security and safety of capital, access to that capital when and where it is needed, and the deployment of excess capital in search of greater returns—but to interpret those needs through the lens of current enabling technologies.

Because of the nature, volume, and velocity of the transactions it enables, and the demographic spectra it crosses, personal banking is at the core of every financial-services relationship. Between bill payments, debit and credit card usage, withdrawals, and deposits, the average individual interacts with his or her bank between 100 and 200 times per year—compared to the same person’s six to 12 transactions with investments and one or two transactions with retirement products. At the center of this relationship is the security of capital; therefore, most banks—from the simple ceramic pig to the elite private bank—start with savings or other deposit products. If you recognize that consumers are as interested in security, money movement, cash access, and capital access as they always have been, moving these services into the digital sphere becomes much easier.

Precepts for Digital Banking

The following guidelines can help financial-services institutions make the transition to a world in which their customers meet them online most of the time.

•  Choose the right metrics and methods of measurement. Today, most financial-services firms focus on tracking and benchmarking standard accounting metrics. Every quarterly report provides a comparison to the previous quarter, and gives year-over-year results.

In the past, these measures could easily demonstrate the impact of competition, because most banking competition took place in the same neighborhood. But your most important rivals are no longer across the street. A good example can be found in German banking. Between 1995 and 2005, one leading German bank was able to increase its number of accounts from 127 million to 132 million. Since the trends were upward, the executives felt they were in good health. However, had they measured market share, they would have observed that new online entrants had expanded the market, and they had in fact lost 10 percent of their market share during that time.

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