The Industry Is On A Rebound (Maybe)

It’s official: Our industry is back with a vengeance.

For the first time since credit debacles entered the headlines toward the end of the last decade, financial services companies are seeing the fastest earnings growth in the S&P 500, and potentially preparing to become the market’s biggest vertical industry. (For the record, according to Bloomberg, the technology sector still leads with 17.6% over 16.8%.) But guess who’s got the momentum.

That’s what’s happening at the top of the ladder. Further down, it’s a slightly different story. Every company and every professional working in it is acutely aware that huge changes are taking place, the whispers of unease are getting louder. Some of the concerns got publicly expressed at the American Banker and Bank Technology News’ seventh annual Mobile Banking & Commerce Summit earlier this summer.

To be clear, the industry as a whole has reason to take pride in its accomplishments thus far: exceptions notwithstanding, financial services institutions have been in the forefront of adopting innovations ranging from documents imaging to social media integration. Yet there remain some uncomfortable questions: Do even the sweeping changes go far enough? And are some institutions being left behind not through any lack of desire but because they don’t have the resources to overhaul their infrastructure?

A new report from Javelin Strategy & Research provides a startling view of the scope of the changes taking place, and the breadth of the adjustments needed to keep up. We all know that digital interaction has radically transformed banking practices, but the numbers still come as a surprise: Javelin says “88.5 million Americans attempted to open an account online or with a mobile device in the past 12 months,” but emphasizes that the full market potential remains mostly untapped.

It’s not just about the technology, of course. The truth is that the ubiquity of digital apps, both mobile and otherwise, is fundamental redefining what we know as ‘personal banking,’ and this revolution-as-evolution still has the market ahead of the industry. In other words, the changes may run deep, but not deep enough.

Take mobile, by most accounts the single greatest area of change. Despite the staggering numbers cited by Javelin, it’s also estimated that there’s a glass ceiling of 15% to 20% for mobile adoption among online banking customers. This isn’t because not enough customers have smartphones, or don’t wasn’t to use them—as with many other uses, there’s an initial resistance (particularly when there’s money involved) followed by an inevitable shift. Instead, it’s at least partly because at least some institutions, even those that may have devoted considerable resources to the effort, haven’t done their part.

In this context, “Consumers and Mobile Financial Services 2013,” the study released this spring by the Federal Reserve, is worth another look for gauging where we are in the move to mobile. There, too, we see a similarly substantial gap between adoption and practice.

Again, the industry seems to be doing fine—in particular, banks, brokers and insurance companies are posting much better numbers than they have in a while. But putting the broad brush aside for a minute, it’s also clear that the market is moving faster than some of us are, and in the long run that could be a huge problem for everyone.


Peering Into The Future

Online banking carries with it the same question that accompanies every aspect of human activity moving online: Is it simply a more convenient way to do what we’ve always done, or is something new, particularly in the sense that we can do more, and therefore will do more?

There’s obviously no simple answer to this—the very act implies a level of customization that rules out any all-purpose conclusion. But if we still don’t know everything, what we do know now that we didn’t know even a couple of years ago?

A recent report from Javelin Strategy & Research has some answers, and they’re not particularly pleasant. Here’s the gist: Too many financial institutions still view online banking as the completion of a circle—consumers and (and maybe businesses as well conducting transactions, only doing it faster and more easily than by going to the bank. Javelin emphasizes that this “approach to online banking and bill pay has reached saturation because it is outmoded and unappealing in an era of customer-controlled interactive finance.” And that’s not all. Instead of new, technology-driven offerings drawing more business, Javelin theorizes, it might be even be a handicap: “The banking industry’s stale approach to online banking and bill pay leaves FIs particularly vulnerable to losing the 11% of consumers who are likely to switch primary FIs this year.”

The fundamental problem is the role of the bank in the equation—is it now simply a facilitator, the same way a basic piece of technology might be, or does it have more to offer?

Looking back, it’s easy to see that this is a transformation that’s been a long time coming. The availability of personal finance software two decades ago signaled a major shift in consumer behavior; the ability to collate huge amounts of information with ease and speed enabled a level of unprecedented control over money matters. The rise of online trading was another milestone—the boom years of the dot-com era surely had a lot to do with the voluminous buying and selling of the late ’90s, but instant access to business data was also responsible for much of it. Even the simple act of online bill paying was, in its own way, revolutionary.

In this context, it’s easy to understand that in the grand scheme of things, online banking in general and mobile banking in particular are still in their infancy. But in a few years (there’s a reason this blog is called Banking2020), everything we do now will seem antiquated. That still leaves the question of the banking industry’s role in this evolution.

For example, think of how consumers prefer to pay their bills. While FIs in general have a share of this market, they could surely get more. However, research shows that many consumers still indicate a preference for bill-paying services rather than their primary financial institution. What can the FIs do to bring the back the business that many think is rightfully theirs?

This may be a small issue, but it offers a perspective on a larger one. Throughout its history, the banking industry has thrived on certain core advantages—trust and credibility built over years of operation, the convenience afforded by a real-world presence and easy access, the stability that comes from size and government-backed insurance. But as with so many industries, the past couple of decades have brought about more changes than the dozen decades that came before. In the era of mobile banking, these advantages are still there, but they don’t mean as much as they used to.

The Javelin report urges FIs to “raise their aspirations beyond being an efficient pipeline for paying bills to instead become a place where customers gain control, oversight and insight into their bills, spending, cash flow and overall finances.” That said, there’s no magic bullet here—every institution will have to figure for itself what this change entails.

To be sure, this will require a fundamental transformation in everything from business philosophy to operating practices. Those that resist the change have a problem. However, those that take on the challenge early, and manage the change well, will not only survive but thrive.