In the previous post, I have made a statement that people not only dislike their retail banks, but they even distrust them. Despite that customers tend to stick around with their banks instead of switching to another bank, which I diagnosed as fear that a new relationship might strongly resemble the current one. At the competitive landscape, we witness ‘great unbundling’ of a retail bank when banking business is being sliced into individual services that are then provided by FinTech companies, the disruptors.

What people dislike about their banks?

For what people dislike their banks? What bothers customers most is a combination of low returns and high fees. According to PwC research, top-3 reasons of dissatisfaction were (% of respondents):

• Getting a poor return on savings - 37%
• Overcharging and unfair fees - 31%  
• The institution making risky investments with client’s money - 30%

Research The Times did in 2013, add to the list a complaint that “ the bank does not understand her day-to-day financial needs”, a statement shared by 22% of respondents, is the most painful one. Banks have all information and hence ability to understand and develop their customers’ financial needs. However, banks mostly do not leverage it while financial services disruptors do. So what disruptors do differently than banks?

Focusing on one thing and doing it well

Firstly, FinTech disruptors practice a Silicon Valley mantra to focus on one thing and do it well. For example, Transferwise does exclusively on-line international money transfers with a relentless emphasis on customer experience on every click she does. SpotCap does only MSE lending, Lending Club only peer-to-peer lending, etc. However, this sounds counterintuitive to bankers that are told to provide broad range of services and to focus on cross-selling on every interaction with the customer. The number of products per customer is one of the main strategic KPIs that banks regularly monitor. Instead of trying to cross-sell, FinTech companies stimulate desired behaviour of their existing customers. Continuously, they run improvement experiments on different customer journeys through their on-line platforms. Last but not least, they ruthlessly acquire new customers through ads, referral programs, and viral campaigns.

Looking at product from a different angle

You might have noticed that FinTech companies rarely challenge banks head-to-head with the same product. Rather than doing that they create their offering around customer needs in a given context or situation that is currently underserved. For example, Square and its clones did not try to compete with large POS acquirers (at least at the very beginning). Instead, Square defined new context to use payment card in situations that were for a reason overlooked by acquirers. Before Square, payment card holders would expect to use a card in retail stores, cafes, and restaurants. Shortly, with merchants whose turnovers justified buying expensive POS terminals and paying a monthly fee. However, a customer need to pay with the card in context of small transaction amount and in places like outdoor markets, cabs, or to self-employed craftsmen existed irrespectively of the prohibitive cost to serve this segment with traditional POS terminals. Therefore, Square created a solution for particular context that did not directly compete with the acquirers. Creating a product category on its own, generated a pleasant side effect as it allowed Visa to step in as an investor.

Having a cheaper cost base than traditional banks

Despite low-interest rate environment we experience today, banks need to receive a certain level of revenue to redeem significant fixed costs and satisfy their shareholders with adequate income per share. Should interest income fall as it does now, banks need to compensate for it by increasing commission income. Unfortunately, this is the root-cause of customers’ complaints about low income from saving coupled with high fees. FinTech companies do not have this kind of problem as they are usually lean on staff, and technology platform represents their primary fixed cost. Therefore, their two main business model parameters are to maximise active customer base growth to pay off the technology platform and to make sure that customer acquisition costs exceed customer lifetime value. Given the on-line service platforms, cost to serve customers decreases marginally as the customer base grows. Hence, it is a less acute problem to worry about once the base is growing.

Can retail banks imitate the success of FinTech companies?

How can banks be more similar to the internet services we use and love? I believe that to a certain extent they can, and they definitely should try. Let's revisit the three FinTech companies’ characteristics and hint what banks could do.

• Focusing on one thing  - Simplify product portfolio to a few easily understandable, manageable, and simply great products that match fundamental financial needs
• Looking at a product from a different angle - Shift thinking from product profitability to achieving smooth customer use cases that generate positive experience at every touch-point for every product. Also, explore context in which customer needs a financial service and see if the use cases currently cover the need
• Decrease cost base - Drive the costs down (think fixed, and unit costs) by optimising distribution channels and digitising the whole process from customer touch-point to the back-office

There is a lot to be done in the financial industry. There are people like Brett King, who think that banks are already doomed, and there are examples of successful bank transformation like Michal Panowicz’s turnaround of the Polish mBank. I clearly see the danger for banks, but even more I believe in banks’ innovative potential.