Are all banks really mean?
You're all familiar with the bell curve right? I'm sure you remember studying it at school. More formally known as the theory of normal distribution, it is used in statistical analysis to reflect the distribution of a set of data. In can be used to determine the mean and standard deviation of a sample. If you could take a sample of banks worldwide and plot their services and products, I would bet that the distribution would look nothing like a bell curve. If you were to close your eyes and visualise it, you could see that it would be highly skewed. There would be a major cluster around the mean, with very few outliers. All banks look the same and consequently none of them stand out. They have all ended up being mean.
What has caused this cluster to occur?
Clusters occur in irregular conditions. The banking industry has operated in an environment of uncompetitive regional oligopolies for years. Geography, government and regulation has come together perfectly to protect the established hierarchy. Even during the recent global financial crises, most of the big banks were considered 'too big to fail'. Due to this, banks have rarely had the need or the desire to venture outside of their comfort zone. They have broadly stuck to the same services and products because they generate profits without even trying to meet customer needs. Unfortunately as long as these conditions continue, it is unlikely that the cluster will disperse.
Why is this so bad?
In effect a Premier League has been created where the same banks are at the top every year. Throughout the financial world it is rare to find cases of small banks, or new players, breaking into the upper echelons of banking. Sure, some are able to achieve growth and good returns, but none of them attract significant market share. In the UK, the big four banks actually hold a larger share of the market than they did ten years ago. Due to this lack of competition banks have had little motivation to improve. This has led to minimal differentiation and in turn limited choice for consumers. Even with record high complaints, and record low customer satisfaction, banks have little reason to change.
What can be done to improve the situation?
There is some evidence that the tide is turning. New entrants in the payments and lending space are starting to challenge banks for a share of consumer wallets. With the continued growth of digital and mobile banking, new entrants are unlikely to suffer from the same barriers to entry as they would have in the past. Governments and regulators are also beginning to realise that the current situation is not viable. They need to continue to encourage new competition by providing financial support and relaxing legislation where required to encourage more supply. Both parties should also look to work with the industry to implement changes to assist in the ease of bank switching.
Where does this leave consumers?
If the right steps are taken, consumers should end up being the big winners. More competition will encourage both the established players and new entrants to differentiate and offer better products and services. Customers will have greater choice as the cluster scatters. In turn they will be able to select financial service providers that are better suited to their specific needs. Power will return back to the consumer, factory banking will disappear and services tailored to the individual will prosper.
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As other non-bank companies expand further into the financial services space, the smart banks will begin to make moves to get ahead of the pack (or perhaps more accurately, the herd).
To extend the analogy used in the article out to the world of physics, the problem they face is building momentum. This is necessary for them to compete with the speed and agility of the new players.
However the size of the banks (i.e. mass), and perhaps more significantly, their traditionally conservative cultures (i.e. friction), makes this very difficult. The amount of energy required to overcome this is large, and banks are always loathe to invest more than they believe is absolutely necessary. Under investment or failure to consider the 'cultural friction' can lead to nothing but failure (where failure means being stuck with the herd to graze on shrinking pastures).
The winners will be those who take this all into consideration. They will reduce their friction by changing the way they operate. They will adequately invest in the right places rather than looking for quick fixes that are doomed to failure. And they will build up build up momentum through partnerships with smaller players who are already have the ideas and are travelling at speed.
That's a difficult recipe to follow, but those who are able to execute on it will be the leaders going into a new generation of financial services.
Even with digital and mobile banking it still needs to be linked to a traditional bank to access your cash. In effect digital banking is just another type of payment method, a la cheque or debit card.
There are no big ideas out there at the moment that is going to fundamentally change the status quo.