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“Show me the money!” Sure, I’ll show you your losses

You can sense an audience’s reaction as you present ideas on innovation.

Sometimes its warm and engaging, sometimes distant and thoughtful, and occasionally remote and cynical.

I experienced all three reactions last week when presenting at a bank’s annual leadership conference, with the third being the reaction I like the least but enjoy debating the most.

This was a third of the way through my dialogue about how transactional branches need to be shut down as mobile delivery through contextual, intuitive servicing is the new focus.

A hand was raised in the audience, and this manager loudly opinioned: “this is all well and good, but where is the money?”

Ah … the old “show me the money” statement.

I’ve heard it regularly and, in fact, most regularly from this particular bank.

Purely due to time and structure, I couldn’t answer the question raised properly until the end of the presentation – this wasn’t meant to be an interactive workshop, maybe it should have been – and, as a result, the rest of the presentation had a mood change amongst everyone to: “show me the money”.

All the innovations I talk about regularly – new forms of currency, value exchange, hybrid real life and virtual economies, alternative commerce systems, the use of Big Data and the threat of those who get it, the mobile world of revolution from Africa to America, etc, etc – was now tainted with the undertone: “show me the money”.

An innovation presentation on the future of banking is not meant to be a presentation about the business case for new banking models, although maybe it should be.

I’ll work on it next year.

But here’s a story about why the “show me the money” crowd have the wrong focus.

There’s an old bar in my town called: “The Branch”.

It’s been there for hundred of years and has a regular and loyal crowd who drink there.

It’s always made money by selling nuts, crisps and sandwiches, along with high priced spirits and beers.

It doesn’t serve a decent wine, as no-one came to the Branch and asked for wine, but the beer is the focal point for the largely male crowd who attend there.

A few years ago, a little bistro place opened nearby called: “The Upstart”.

The Branch manager wasn’t particularly concerned about it.

After all, it was positioned totally differently to the Branch, in a different market with a different focus.

It served wine, when the Branch didn’t.

It served hot meals, when the Branch didn’t.

It was more like a restaurant than a bar, and it didn’t serve beer and didn’t have a loyal customer base.

So the Branch manager wasn’t worried about it.

He thought that the Upstart wouldn’t succeed and, even if it did, that it wouldn't affect the Branch's business.

The Upstart thought differently.

The Upstart didn’t know if it was going to make money, but had seen the idea of hot meals and wine working overseas and believed it could work here.

After a while, the Upstart had a few loyal customers.

They were mainly families, and these families often included people who previously went to the Branch.

These folks could not afford to have a night at the Upstart and at the Branch regularly, and slowly the loyal customer base of the Branch were all too often to be found in the Upstart’s premises.

Eventually, the Branch could see it was losing business and so the manager changed his ideas a little.

He began to serve wine and hot food.

But the crowd didn’t buy it.

They didn’t like the dark and old view they had from the Branch and soon it was abandoned, apart from a few loyal souls who were dedicated to their beer and sandwich.

Meanwhile, the Upstart was enjoying a buoyant business, with high margin food and wine purchases in volume, and so the new business was not only making a profit, but a substantial one.

The moral of the story is that, with innovation in banking, you shouldn’t necessarily look for the profits but should seek to avoid the losses.

The reason I say this is that banks are protected by bank licences which means they enjoy a monopoly.

This is why no new banks have opened for hundreds of years and why it is difficult for new entrants to get into banking. 

However, if new entrants erode the fringes of the banking model where they can enter, then it is often around the parts that make money, like credit and loans, insurances and mortgages.

This has been shown to be the case regularly through the past few decades and the danger is that all the bank will be left with is the loss-making deposit account of the corporate and consumer.

If that’s all you want, fine; but it’ll give you losses as you lose cross-sell opportunities.

From American Banker this month:

Moebs Services Inc estimate that the average checking account costs American banks $349 to manage, whilst the average revenue per account is just $268, implying a loss of $81.  Javelin Strategy & Research found that customers using online banking cost banks $192 a year, $167 less than customers not using online banking who cost $359 a year.

This is why banks need to fear the Upstart chipping away at their higher margin business as, in most cases, banks only have something to lose rather than gain.


About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  1. As a participant of this particular conference I feel that your portrail of the atmospehere is somewhat skewed. Far from being cynical or short sited I think discussing the way money can be made by implementing new services is quite necessary, especially considering the investments that need to be made. I think both with banking as with the story above the answer is quite simple. The money is in providing services that appeal to customers. Finding out what these are is of course the tricky part and I feel that this should be the focal point in answering the “show me the money” question.

  2. I did say that some audience members were warm and engaging, but the comment: “where’s the money” is always going to create a discussion as innovation, by its nature, cannot show you the money.
    Innovation is new – there’s nothing out there to show how innovation will perform – so you can only point to opportunities to make money by being more customer engaging, more market specific, more capable of financing, and more nimble at finding alpha.
    All of these things are then just a punt.
    However, most bank decision makers are unwilling to take bets on a punt, which is why it’s easier to focus upon losses.
    It’s easier to prove the business you might lose rather than the riches you might gain through innovation.
    This is because, as per Clayton Christensen’s Innovator’s Dilemma, the incumbent is always being targeted by the new entrant, and the new entrant will always innovate whilst the incumbent can only evolve.
    That’s the point of the above and why I enjoy the debate with the cynic.
    Bottom-line: the cynics die as they are eventually destroyed by the visionary.

  3. Show me the money is EXACTLY the sentiment that ought to be expressed. All endeavors should result in improved profitability one way or another, otherwise, why do it!? Profitability may not be immediate, in fact, organizations may expect to incur costs during ramp up period, but there must be a set of expectations and specific quantifiable milestones against which the management team can assess the performance of any given initiative.
    But your story is very appropriate. All Banks – especially smaller Banks (Community Banks and Credit Unions in the US) should be asking ‘Where is the Money?’ question when it comes to all capex and opex investments – including branch network support / expansion, marketing initiatives, etc.

  4. Good article. Let’s probe a bit deeper as to not why the question “show me the money” is asked but why there is dissatisfaction at ‘any’ answer that is provided in response to it.
    1. there are no weather beaten models to arrive at a business case. So the good old banker of the brick and mortar banking world tries in the best case scenario, to find the lost gold ring under a lamppost that is lit, rather than where it was perhaps lost. I mean rather than lighting a new lamp.
    2. Consultants talking vs practitioner talking – sorry Chris! So it is like ‘we will listen to the bright new ideas from you but we know the organisational bureaucracy and what it takes to execute’. If there was a bane for consultants, it has been the word ‘execute’. We shall see how the movenbank experiment of Brett lee will go.
    3. Finally credit be given to the new models. Innovation is undeniably fruitful. Truth be told, we are going to use the new models anyway, so why not devote some experimentation dollars for the new bank? Obvious as it appears, as long as CEO’s are not set goals by their boards on ARPA or wallet share from online customers or percent spend on R&d in a bank, things will remain static.
    A nice way to silence critics for consultants would be to tie their fee to the outcomes from innovation streams?

  5. Innovation and incumbents are like oil and water. Instead, present your ideas to venture capitalists. They’re willing to take a punt, that’s the business they are in. Banks are in the business of protecting transaction margins, not massacring them.

  6. The full question is surely ‘show me enough money to persuade me to change’.
    In a networked economy, there are massive inhibitors to change. A recent report from the Boston Fed references market failure which ‘occurs if the sum of consumer benefits and bank profit (social welfare) exceeds the cost of bringing a standardized service to a market, but, in reality, there are insufficient private incentives to introduce or to subscribe to this service. Market failures of this type are more likely to occur in network industries where consumption benefits depend on the number of other consumers and firms that provide the service.’ Sound familiar?
    I agree with Serge that ‘all Banks – especially smaller Banks (Community Banks and Credit Unions in the US) should be asking ‘Where is the Money?’ The Fed report quotes an earlier paper: ‘One issue of great interest is the relatively high prices charged by commercial banks to their customers for completing a transfer. While the Federal Reserve charges banks less than $0:25 per transfer, banks charge their customers prices that vary from a few dollars to as much as $50.’
    And ‘most banks do not even offer their customers the interface for making A2A (account to account) transfers, despite the fact that ACH transfers are the least costly transfer method for commercial banks. In fact, frustration with the inefficient payment systems in general and with the nonavailability of A2A electronic transfer services in the United States in particular, goes back almost 40 years.’
    So it’s clear where the money is; and also the lack of incentive to change. As usual, change will be driven by consumers; who may move to the upstarts if they offer better value.
    But it would be a shame if all innovation delivers is the same thing, better. It should also deliver a better thing. Roll on 2012, Movenbank and the rest; and over the break, tip a glass to Chris and others who are prepared to ask the right questions.

  7. I love the Branch/Upstart story. I think we are half-way through the story, where some clients of the Branch start experimenting the Upstart’s wares and finding them good. This is also substantiated by Neil Burton’s comment, to which I wholeheartedly agree- in fact I have been finding ways to avoid these high charges and bad forex rates (see the PayPal and UKForex related entries on my blog copernicc.wordpress.com). So, yes, the Branch should be worried about the Upstart, which is something we keep on saying in Innotribe events.

  8. The Branch and the Upstart is very topical at this time with Northern Rock going to Virgin Money (The potential Upstart) and Lloyds Banking Group Verde appearing to head towards Coop (The Branch). This is explored further in http://www.itsafinancialworld.net/2011/12/is-northern-rock-decision-good-for.html

  9. I love it when incumbents frame innovation entirely the wrong way. Like giving a physics test for entry to Juilliard, their spreadsheets are entirely ill-suited to supporting a robust and vibrant innovation investment program. Which is great for folks like us, as it means that we suffer no competition from them and our portfolio companies find it that much easier to create significant differentiation. It’s not that there aren’t frameworks, metrics and tools on which to base a robust investment policy, it’s just that they weren’t taught in business school and are very different than the toolkits incumbent managers are familiar with. Innovators dilemma indeed. Anyhow, thought you might like the way I think about the “audience” for innovation, see http://www.parkparadigm.com/2009/07/13/the-bond-salesman-and-the-estate-agent-a-modern-day-parable/

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