Caught Between Custom And Commodity

At a time when bank branches are disappearing with regularity and there seems to be more consolidation at the corporate level (though that isn’t necessarily the case), the head of the Office of Fair Trading (OFT) in the U.K. has a major problem with the industry. He thinks the market needs more banks.

Speaking to the Parliamentary Commission on Banking Standards late in January, Chief Executive Clive Maxwell didn’t stop there. He stressed that the market needs more banks to make the industry more competitive and focus more closely on the customer. Established institutions, he reported don’t engage customers enough because they don’t need to.

The 40-year-old OFT had its powers expanded in 2002 through an act of Parliament, but even earlier its word carried some weight. That’s why a pronouncement like this sparks an unlikely thought: If the government doesn’t think an industry is being well served by its players, should other players step up? Or is that a sign that they should stay away?

Here’s a different way to look at the same problem. As the plethora of online and mobile services hitting the market every week makes clear, retail banking just ain’t what is used to be.

As we’ve occasionally examined in this space, there are certainly alternative models emerging, but the reality is that the Internet is the great equalizer. The array of tools and apps available from every bank in every geographic market essentially makes it easier for every customer but harder for the bank to create differentiators.

The charge that banks aren’t “engaging” their customers enough is particularly strange in this regard. Isn’t that exactly what the blizzard of technology-enabled services offers? The truth is that mobile apps and other online services, many of which feature more customization and convenience than was ever possible before, represents an unprecedented level of  engagement.

Here’s what might be considered the flip side of the equation. A blogger recently wrote about finding an old piggy bank he used to store the dimes he collected in his younger days. The dimes he found amounted to about $30; the piggy bank itself, by his estimate, cost $10. That got him pondering a ‘piggy bank’ test that evaluates the charges each bank’s customers incur, and whether they’re worth the price.

The OFT chief had a lot to say about this aspect too. He speculated that banks sell customers various products they don’t understand or even need, and drive up charges in the process.

There’s no clear bottom line here. Online or otherwise, banks will offer ever-greater customization and convenience, because in a free market, that is exactly what they should do. Services that are ultra-customized are by definition not for everyone, but that doesn’t mean the bank is giving customers services they don’t need. And of course, more banks will mean more services, not less.

We’re in the midst of a groundbreaking transformation for the banking industry. In a sense, we’re caught between two extremes—greater customization for the customer, possible commoditization (perish the thought) for the company. With new APIs and mobile devices coming down the pike, we’re actually going to see a spike in new apps. Some customers will appreciate that, and maybe some regulators possibly won’t.

So how will banks distinguish their offerings? How will customers react to new services giving them capabilities they never thought but like (and will have to pay for)? What will regulators have to say about it?

It should be fun to watch. Stay tuned.

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