Banking in the 1990’s … even then, the writing was on the wall

Back in 1997, I was tasked with writing a strategy for NCR. The strategy had to review the likelihood that other industries would enter banking and what threat or opportunity this offered. I spent a long time on this and concluded that the most likely outcome would be that telecommunications firms would acquire banks and banks would acquire telecoms companies to become hybrid technology-financial firms.

Twenty years later, this is coming true. Maybe. Certainly, banks are technology firms, but the hybrid institution is yet to be revealed. FinTech or FinTel? A future where banks are fully integrated with telecoms and vice versa ... or a mere reconstruction of the financial industry with technology?

That’s a theme I will come back to tomorrow but, for the sake of clarity, I went back to my strategy document of 1997 and thought I’d replicate an edited version here of just the summary (the full report runs to 300 pages and is a thesis in time). The edits are purely to maintain confidentiality and there is no substantive change to any of the content – note little mention of ecommerce or internet giants – so, here it is, a blast from the past.

Cross-Industry Banking Strategy: Management Summary

Within the banking marketplace, a revolution is occurring.

For over 200 years, banking was a simple branch-based operation.  Since 1980, this branch has been completely re-invented through new technology.  These changes, alongside the drivers for cross-industry banking, combine such that there is more change taking place in banking today than seen in the last two hundred years.

The advantages new entrants have over existing banks include:

• Low entry and exit barriers to the market
• New entrants focus and do not compete in everything
• New entrants manage the consumer value chain, relating their financial offer to their core business as a complement to the consumer purchasing process
• New entrants cherry-pick by recognising that traditional bank charging structures incorporate significant product cross-subsidies
• Lower costs as new entrants have no fixed overhead infrastructure, costs or legacy
• Low fixed costs relative to variable costs as new entrants can leverage banking from existing operations

As a result, banking opportunities for new entrants are greater than ever.

25% of all credit cards issued are now branded by companies that are not banks according to Lafferty Research, 1995.  Two of the top three credit cards issued in the USA originate from non-banks (Sears Discover and AT&T Universal).

“Non-banks now account for nearly half of ATM terminal shipments and we expect this trend to continue,” said James B. Moore, president of Mentis Corp. “Many of these non-banks are retail firms that use ATMs to generate foot traffic and sales at their locations.”

According to Docunet founder and CEO Vajid Jafri: “What we see as the future of the payments business is a convergence of on-line banking, ATMs and retail shopping.” Most banking experts agree that cash transactions will become less important to ATMs.

Communities are forming, where banks are working with many other industries in consortia.  Examples include Barclays Bank’s Barclaysquare, British Interactive Broadcasting, Web TV and Integrion. “When you think of potential new entrants into the banking sector, most people get excited about retailers, but it is the telecommunications and satellite TV companies which have the powerful distribution channels,” states Mike Trippitt, bank analyst at Schroders.

In-store branch banking entails physical alliances between banks and non-banks. The focus is the deployment of full-service bank branch capabilities into a non-bank environment and generally into a supermarket. The USA has over 4,000 Supermarket Branches, and an estimated 1 in 10 bank branches will be resident within Supermarkets by the end of the decade. With 50% of ATM’s being delivered to non-banks, and 1 in 10 USA Bank Branches being in a Supermarket, the non-banks and especially retailers, FSG cannot afford to ignore these non-bank markets.

In a few, highly deregulated and well-advanced markets, supermarket grocery chains are opening their own banks. Examples include:

• Finland - Anttila/Kesko
• Germany - HERTIE Waren-und Kaufhaus and Service Bank [Metro/GE Capital]
• Norway - MKL, NorgesGruppen and Hakon Gruppen
• Portugal - Grupo Sonae
• South Africa - Pick ‘n’ Pay
• Sweden - IKEA, ICA
• UK - Tesco, Sainsbury, Marks & Spencer and Great Universal Stores (GUS)
• USA - Ukrop’s

“At the moment, retailers are dabbling, and we’ll see that for a while,” said Andrew Barstow, banking specialist at accountants Ernst and Young. He suggests there will be a movement towards “value networks” - a co-operative arrangement between retailers, technology companies and banks, with each supplying what they can do best.

However, some Retailers believe banking is a highly lucrative area for success.  “Tesco has watched the banks and thinks that most are a bunch of clowns. Tesco can do a much better job. It has a much stronger customer base and could offer better services”, states an unofficial Tesco source.

In 8 weeks over 100,000 customers joined Sainsbury Bank depositing over £100,000,000 with growth at 10,000 new customers each week.  After three months, the Retailer Bank has 250,000 accounts, 200,000 customers and £300m in deposits.

We have identified a number of major drivers that motivate Retailer Banking:

• low entry barriers to banking
• zero growth in core markets driving expansion into new areas
• high margins allow leverage of own brand policy
• increasing focus upon consumer as well as supply management
• maximising corporate cashflow
• maximise profitability per square foot
• increased consumer franchise and desire to gain long-term loyalty
• optimise physical distribution
• see opportunities due to bank in-store branches and off-premise ATM deployment

Other ‘Banks’ entering the market include:

• Mail Order Companies, e.g. Great Universal Stores
• Car Manufacturers, e.g. Ford and VW
• Other Manufacturers, e.g. Lego and General Electric
• Utilities, e.g. British Gas and Electrical companies
• Telecoms, e.g. MCI, AT&T and BT
• Technology, e.g. possibly Microsoft and IBM?
• Petroleum Companies, e.g. BP
• Airlines, e.g. British Airways, American Airlines and KLM
• Brand Stretch Companies, e.g. Virgin and Disney

One thing all of these have in common is:

• regular and frequent consumer contact
• a growing consumer focus and
• an ability to manage and process large volume transaction bases
• strong brands

Any company with a strong brand, consumer focus, and frequent consumer contact, could become a bank.

The result of the non-bank entry into banking is that banks will choose new strategies to survive.  In choosing a strategy, each bank will be reviewing their core set of competencies across the complete consumer delivery and supply value chain for financial services, and identifying where their strengths reside - in the form of core competencies.

We have collected many models of banking - McKinsey, Gartner, Andersen, Coopers, Deloitte, Unisys, Loughborough University and others - and they are all consistent in theme.  The key messages they convey are:

• a bank is three firms - a distributor, a processor and a manufacturer
• the bank value chain is being disaggregated
• new technologies will be required throughout this new value chain
• new entrants may find it easier to deploy new technology than existing players
• banks may continue to operate in all areas, but cannot be best-in-class in all
• banks should focus upon core competence and leverage that competence
• other areas should be closed down or sold, and replaced with appropriate contracts with business partners to fill the gaps
• as a result, key areas of banking will be integrated with other industries