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Retail financial channels are not as simple as some think

A lengthy discussion yesterday about retail distribution channels for banks.

The debate began with whether a traditional bank could succeed in launching new channels against clean sheet start-ups.

The answer, imho, is no.

First, a different audience is attracted to the new channel.

Second, a traditional bank brand is not needed for the new channel.

And third, and most importantly, a traditional bank always struggles to add the new channel, whilst the start-up gears specifically for this capability.

That is why you have great branch-based banks that are average-to-poor at call centre and digital channels; great call centre banks that are average-to-poor at digital too; and great digital banks that are average-to-poor at the human side of the business.

One thing that pervades all of these channels however is that they are human.

The human design of the digital channel is what makes a digitised bank rock or roll.

I know this through the creation of the UK’s first wave of digital finance in the form of Egg, Intelligent Finance, Cahoot and Smile.

Of these, the one that sank out of sight the fastest was Intelligent Finance: a digital bank designed by technologists for technologists.

It stank.

Jam jars and layers of security turned the customer off.

Meantime, Smile was intuitively human and rocks.

That is why it has stayed the course and, along with First Direct, regularly stars at the top of the customer satisfaction tables.

In both cases, you have banks that are remote.

So who needs the human interaction in the physical space?

This led to another discussion about demographics, and the fact that the young, educated and higher earners are more likely to approach the remote channels whilst the elderly, less educated and lower earners need the branch.

Obviously this is not cut and dried, but if you look at the Nationwide or Lloyds in the UK, they attract the latter categories of customer as a general rule, whilst the First Direct specifically target, gain and retain the former.

So this led me to a final thought.

The mix of channels, demographics, products and profitability is a complex one.

Channel mix

Some ABC types want pure remote channels, whilst some want branch for trust.

Some C2DE types want branches only, whilst some will use mobile apps.

Some SMEs need branches, and some don’t.

All customers however will move to the bank segment that best fits their need, which is why all banks offer as much of a multichannel mix as possible.

It makes sense, but is less understood by commentators when they talk generically about branchless banking or less branch banking.

Eventually, we will all see how this mix works best.

Meantime, I did pose one question I haven’t answered yet: would the purely digital banks succeed if they weren’t backed by a major bank?

Still thinking about that one. 

 

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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  • It is a little rich to say that Intelligent Finance has sunk out of sight. It is still live and kicking (far more than Cahoot), though I do accept that the idea of the jam jars was less than successful. Intelligent Finance is part of the Verde disposal, which given that the Co-Op, who owns Smile, is the front runner to win, will, almost certainly, mean the end of IF.

  • Great post Chris – you are a star.
    A thought about the Q you posed but haven’t answered yet…
    I think a totally digital bank could succeed without being backed by a traditional bank – in fact it might even be essential.
    A traditional bank will always be overly entrenched in its old ways, distracted by the myriad challenges of the bigger existing operation, and – crucially – won’t be able to convincingly position itself as the clean, fresh start that banking so desperately needs in the eyes of the most valuable customers.
    Even Virgin Money’s recent launch of their bank tried hard to convince the audience that this wasn’t their second go (remember the Virgin One Account? I do. I helped design and launch it back when Radiohead were still good). The most spun/Marketing/PR’d of the banks knows that ANY past in the banking world should be hidden away and kept as quiet as possible.
    But of course the public does need to trust the new venture to be solid, strong and dependable. And if the size and weight of a trad bank as backer kills the marketing, then an alternative source of trust needs to be tapped.
    Zopa’s history is useful in this context. Lending money to total strangers was a wacky enough thing to ask people to trust, let alone doing so through a small brand they had never heard of before. But for the last 2 years Zopa has been voted the Most Trusted Personal Loan provider in the UK in the v big annual consumer survey done for Moneywise. And Zopa – whilst still relatively small (approaching £200 million of p2p loans) – is growing fast and now accounts for 2% of all UK personal loans issued each month.
    So they’ve cracked trust. And they did it by offering total and complete transparency and full member engagement (members even run the discussion boards). This level of openness would give Bob Diamond a coronary, but it is attracting bigger and bigger numbers of the most valuable consumers out there.
    As association with a big bank is a trust killer, this total transparency and openness is one possible route and is probably essential anyway. After that, the big positional gold dust would be a hugely trusted non-bank brand as the backer. Here, the brand that most springs to mind is John Lewis – even more than M&S, and certainly more than the increasingly tainted Virgin. With its take on ‘mutuality’ as well, the positioning could be deliciously appropriate for the current zeitgeist. But similar distractions, non-core focus logistical challenges would still be there as per the trad bank backer. Hmmmm.
    An alternative thought though is that rather than looking for some single venture to eat the elephant in one go with its possibly impossible capital and cost challenges, maybe the ‘all digital’ future of banking isn’t going to be offered by one, but many. So better savings and loans from p2p lenders like Zopa, money transmission through Paypal or a better take on that model, money management through a UK Mint that is backed properly and works, etc.
    This would be much more like how huge industries like the music business have been eaten alive, not by a new bigger record company, but many new, and innovative business models. It reminds me of that quote from Zopa re the debatable need for more, new banks to help improve competition. They said “when horses no longer met our needs satisfactorily, we didn’t breed more horses, we invented the motor car.”
    Martin Campbell

  • Great post Chris – you are a star.
    A thought about the Q you posed but haven’t answered yet…
    I think a totally digital bank could succeed without being backed by a traditional bank – in fact it might even be essential.
    A traditional bank will always be overly entrenched in its old ways, distracted by the myriad challenges of the bigger existing operation, and – crucially – won’t be able to convincingly position itself as the clean, fresh start that banking so desperately needs in the eyes of the most valuable customers.
    Even Virgin Money’s recent launch of their bank tried hard to convince the audience that this wasn’t their second go (remember the Virgin One Account? I do. I helped design and launch it back when Radiohead were still good). The most spun/Marketing/PR’d of the banks knows that ANY past in the banking world should be hidden away and kept as quiet as possible.
    But of course the public does need to trust the new venture to be solid, strong and dependable. And if the size and weight of a trad bank as backer kills the marketing, then an alternative source of trust needs to be tapped.
    Zopa’s history is useful in this context. Lending money to total strangers was a wacky enough thing to ask people to trust, let alone doing so through a small brand they had never heard of before. But for the last 2 years Zopa has been voted the Most Trusted Personal Loan provider in the UK in the v big annual consumer survey done for Moneywise. And Zopa – whilst still relatively small (approaching £200 million of p2p loans) – is growing fast and now accounts for 2% of all UK personal loans issued each month.
    So they’ve cracked trust. And they did it by offering total and complete transparency and full member engagement (members even run the discussion boards). This level of openness would give Bob Diamond a coronary, but it is attracting bigger and bigger numbers of the most valuable consumers out there.
    As association with a big bank is a trust killer, this total transparency and openness is one possible route and is probably essential anyway. After that, the big positional gold dust would be a hugely trusted non-bank brand as the backer. Here, the brand that most springs to mind is John Lewis – even more than M&S, and certainly more than the increasingly tainted Virgin. With its take on ‘mutuality’ as well, the positioning could be deliciously appropriate for the current zeitgeist. But similar distractions, non-core focus logistical challenges would still be there as per the trad bank backer. Hmmmm.
    An alternative thought though is that rather than looking for some single venture to eat the elephant in one go with its possibly impossible capital and cost challenges, maybe the ‘all digital’ future of banking isn’t going to be offered by one, but many. So better savings and loans from p2p lenders like Zopa, money transmission through Paypal or a better take on that model, money management through a UK Mint that is backed properly and works, etc.
    This would be much more like how huge industries like the music business have been eaten alive, not by a new bigger record company, but many new, and innovative business models. It reminds me of that quote from Zopa re the debatable need for more, new banks to help improve competition. They said “when horses no longer met our needs satisfactorily, we didn’t breed more horses, we invented the motor car.”
    Martin Campbell

  • Chris, you brought up an interesting question and Martin, you presented a very clear answer. My take on the question is two-fold: the state of traditional banks and the likelihood of success for digital banks. The current number of traditional branches is not sustainable as many consumers are choosing to use alternative channels for interaction. It has been shown in recent studies that, year after year, consumers’ preferences are shifting towards online and mobile channels throughout various age groups. If banks do not cater to this changing behavior, they risk being irrelevant to their customer base which will result in customers switching banks. I don’t think branch banking will ever go away, but instead, the role the branch takes will change as consumer continue to use online and mobile channels more often. I wrote a blog post about the effects of new banking channels that offers more insight into this argument:
    http://www.zootweb.com/blog/index.php/mobile-channel-fad-disruptive-force-banking/632/
    As for purely digital banks, I think they can succeed if they offer the right marketing and product mix. There are strong examples of banks that thrive without a branch network (like USAA), so there clearly is no core requirement to have branches in order to succeed.

  • Chris, you brought up an interesting question and Martin, you presented a very clear answer. My take on the question is two-fold: the state of traditional banks and the likelihood of success for digital banks. The current number of traditional branches is not sustainable as many consumers are choosing to use alternative channels for interaction. It has been shown in recent studies that, year after year, consumers’ preferences are shifting towards online and mobile channels throughout various age groups. If banks do not cater to this changing behavior, they risk being irrelevant to their customer base which will result in customers switching banks. I don’t think branch banking will ever go away, but instead, the role the branch takes will change as consumer continue to use online and mobile channels more often. I wrote a blog post about the effects of new banking channels that offers more insight into this argument:
    http://www.zootweb.com/blog/index.php/mobile-channel-fad-disruptive-force-banking/632/
    As for purely digital banks, I think they can succeed if they offer the right marketing and product mix. There are strong examples of banks that thrive without a branch network (like USAA), so there clearly is no core requirement to have branches in order to succeed.

  • I think you know what we think… @anthemis FTW. 😉

  • I think you know what we think… @anthemis FTW. 😉