Is The Banking Industry Obsolete?

Peter Drucker said, "When talented people work very hard and produce consistently inadequate results, it is evidence of the obsolescence of your business model". I am confident every reader of this column will concur that we are working harder than ever in the business, yet we continue to lose market share and market capitalization. Does this mean that banks have finally reached cultural irrelevance?

Consider this hypothesis: our industry has worked for years to maximize the efficiency of its customer interaction. We strive to optimize the transaction time, equating speed and accuracy with the customers' value proposition. As a result, we have managed to train our customers to expect only that from us speed and accuracy. This crisis of diminished expectations has rendered our strengths, which we worked for decades to perfect, very difficult to market effectively and parlay into customer loyalty and share of wallet.

When an industry behaves consistently enough for long enough, it produces consequences that we have all experienced. For example:

• Margins collapse. We have been experiencing margin compression for years, anticipating further pressures on the margin, and working hard to create other sources of non interest income to compensate for the shrinkage
• Crises in attracting and keeping talent. Our best and brightest move on to bigger and better industries, looking for more challenging and rewarding work. While our compensation is competitive, our industry has not been able to successfully attract the choicest candidates out of top schools and fast growing industries
• Inability to introduce new products successfully. Since the CMA account introduction in 1979 there has been no major innovation in our business. Further, it took most banks 20 years to be able to produce a similar account. We have not been able to launch new, breakthrough products that sweep market share and provide custoemrs with compelling value.
• A rise in new entrants that collapse industry boundaries the monolines have been eating our lunch in certain product categories, most notably credit cards. Some are parlaying their knowledge garnered through marketing a single product extremely successfully to other segments of our business. We attempt to compete with these players through relationship building, but only few execute on that promise effectively.
• The loss of most valuable customers (MVCs): We continue to bemoan the fact that Merrill Lynch and others are capturing our MVCs. While many of us plan and execute specific defense tactics to maintain the relationships, we often times now witness keeping the customer but not their wealth. Instead, true to our transaction efficiency positioning, we keep the customer's transaction business, but lose the most lucrative asset accumulation and management part and the credit component to others
• The inability to attract younger future customers: many of us are concerned about aging customer bases that are relegated to the CD world. Our product line offers new, younger clients basic transaction services, but we do not grow our business with them effectively, losing many of them along the way to more adaptable providers who offer a customer experience better suited to the younger buyer.

Is this an inevitable doom and gloom scenario for our business? Heck no! But it means that we need, as an industry, to change the customer experience and value proposition, and move away from pure transaction efficiency as our main competitive advantage. That anchor almost assures that we'll become transaction mortuaries, keeping the least profitable part of the customer business, and leaving the relationship building to other providers.

Breakthrough performance by selected players can turn the tide for our industry by changing their positioning in the customer's mind from a transaction factory to a trusted, broad based financial advisor/supermarket. It is a challenging transformation, and a promising one. Some of us are well on our way, and the winners will capture major benefits from being first in this race.