After the recent WashPo article which bashed banks for potentially deriving more value from customers than customers derived from the banks (see my blog post on this here), the Huffington Post must have felt compelled to take back the steering wheel on the bank-bashing bandwagon with a misguided, poorly analyzed article of its own.
In a vituperative article titled Are Banks Innovative?, the author mentions “innovations” like CDOs and swaps that are “thought to have contributed to the failure of the global equity markets in 2008″ and goes on to ask:
So are banks innovating in the right areas? Has the innovation in product produced greater customer satisfaction, higher margins and better banking?” Let’s just put it this way, banks are not know for their innovation. But they better start learning, and fast…”
[Note: the above is a straight cut and paste. Yes, it should be "banks are not known". Poor job of editing/proofreading at HuffPo]
My take: It really is amazing how short-sighted people can be when they want to make some politically-slanted point.
The question regarding the impact of innovation on margins is an impossible to question to ask, because it requires an understanding of what would have happened to margins if none of the “innovations” that have been introduced had not been introduced.
But we can look at whether banks’ innovation have produced greater satisfaction and better banking.
Many of you might be too young remember this, but when I was in college in the late 1970s, ATMs were first coming on the scene. The ability to get cash (which some of you might be too young to remember, as well) at any hour of the day was an advancement in the world of banking that really marks the separation of the dark ages of banking and the modern world. I can’t even begin to tell you (and wouldn’t want my parents or children to know) what the ability to get cash at 10pm on a Friday enabled me to do.
HuffPo also conveniently ignores innovations like:
- Online banking (which I bet even the author of the article does),
- Online bill pay which not only makes bill pay more convenient but saves customers on postage costs,
- Remote deposit capture which lets you take a picture of a check with your iPhone and have it deposited in your account without having to go to a branch or ATM,
- Account aggregation which lets you see all your accounts in one place, or
- Debit cards, which pretty much give you the ability to not have to carry cash in the first place (and which, granted, may be a double-edged sword).
Even before the Internet helped bring on a wave of innovations, there was phone banking which let you get your balance or transfer funds without having to wait in line at the branch during your lunch hour.
The bottom line here is this: To even question whether or not banks have introduced innovations that have improved customer satisfaction and the customer experience is so short-sighted that I shouldn’t have dignified the HuffPo article with even the slightest expenditure on my part.
Ron, I have to agree with you. I did not want to agree with you since I like the King. Banking industry, which includes many 3rd party companies, innovate all the time. Just look at what Bancvue has done with checking accounts or Intuit/Mint/Geezeo have done to online banking. Stop bashing the banking industry. Most of us are good people.
Here are some more comments. Mr. King points out that Apple is an innovative company and that banks are not. What did Apple innovate besides design? The inside of their computers are innovated by Intel, Nvidia and by the hard drive manufacturer du jour. They also innovated by how they configured these components, like taking a laptop hard drive and turning it into a MP3 player. How is that different then what http://www.umpquabank.com is doing or https://www.vancity.com/ credit union? Maybe I am biased, but the banking industry has a lot of innovation and it does not have to come from the banks directly, it comes from our infrastructure.
@dmgerbino
Apple should only be credited with innovation in the area of style, interface and experience. They take other people’s innovations and make them better.
Ron,
Allow me to defend my post – if I can. I’m not a left-wing political activist, but I do think Bank’s need to be more responsive and innovating around customer. They lag almost every other industry in that endeavour, largely because it isn’t sexy – in fact, it is hard work. Fundamentally my point of view, expounded upon in my book BANK 2.0, is that banks are not listening to customers enough, and hence are trying to fit customer behavior like a round peg into a square hole.
The key issue is that banks primary internal measure of success is improvements in revenue through product sales – measured channel by channel. There is virtually no understanding of where the money really comes from. Countrywide in the US proved that mortgages, for example, could be sold online. BofA and Citibank in the US still measure mortgage revenue largely as a function of branch because they insist customers largely come into a branch to process the paperwork – this shows a lack of understanding of core value of respective channels in the value chain.
The second issue is organization structure. Most banks still have the head of ‘distribution’ as a more senior resource than say Internet and Mobile Banking, who generally sit 2-3 layers below the branch guy. While this is starting to change, for now organizational strategy is driven by senior executives who wish to retain the status quo in respect to reporting, budgets and channel hierarchy.
Banks are not engines of innovation. They adopt innovations when forced to because of competitive forces, but they don’t drive innovation.
I stand by my blog, you’ve not given me anything to recant…
Regards,
Brett King
Author – BANK 2.0
Brett: Thanks for commenting. And for distancing yourself from left-wing political activists, which will make it a whole lot easier for us to have a logic-, reason-, and data-based discussion about this (versus an emotional-driven, ideological-based argument).
There are a couple of places where we agree. I couldn’t agree with you more that organizational structure is an issue, and not just an “issue”, but maybe the core of many banks’ problems. I also agree with you that banks, (at least for the most part), measure revenue as “function of branch”. I think you’re right on that this lacks an understanding of the contribution of channels in the value chain.
But there are a couple of places where I think you’re making assertions that aren’t supported by data or example, or that aren’t unique to banking. For example: I listed a number of things in my blog post that I considered to be innovations within banking. You said banks “lag almost every other industry” in that endeavour. Which industries have done more? I’ll name at least two that I would consider to have done less: Travel and grocery. With the exception of online booking and boarding pass printing, what innovations have we seen in the airline industry? Are you really going to try and tell me that the airline travel experience is better than the banking experience? If you do, congratulations for having your own private jet and pilot.
Grocery shopping is another big ticket item for most consumers, so another area I think is worth looking at. Remember Webvan? Most people don’t, because online ordering of groceries was a bust. So we all still trek off to the supermarket, and walk up and down the aisles. Then we go to the checkout counter where we put our stuff on the conveyor and bag our own groceries. What innovations have we seen from that industry?
Last point: You assert that “banks are not engines of innovation. They adopt innovations when forced to…” A few responses to this:
First, why is this (i.e, adopting innovations when forced to) wrong? Should firms or industries innovate for innovation’s sake? The likely result of that is higher costs to pay for the innovation development efforts that get passed on to customers.
Second, I would dispute that banks have been “forced” to adopt innovation. Nobody “forced” them to invest in ATM networks and technology, nobody “forced” them to develop an online banking channel, nobody “forced” them to offer online bill pay. In contrast, for the most part, banks invested in these capabilities ahead of the demand, and had to incent and cajole consumers to use these innovations.
Third, I’m interpreting your comment as criticizing banks for “adopting” instead of “driving” innovation. Take a look at David Gerbino’s comment to this blog post, and his comments about Apple — his claim is that Apple isn’t a “driver” of innovation either.
Thanks again for taking the time to comment, I truly appreciate it.
Ron,
Fair enough on the Apple issue. I know David is a fan and follower to so I won’t argue with his comments except to say the following:
Look at my infographic – I specifically note ATM, SWIFT, Internet Banking and Mobile Banking as POSITIVE innovations. Although, in reality neither Internet nor Mobile are banking innovations, they simply adopted those innovations. In most cases, such as with Merril Lynch, et al – it was actively opposed initially. Read my book for a more detailed review on this.
Customer experience is where I have my real issue. Banks could hardly be seen as embracing mobile banking (my primary bank still doesn’t even have an iPhone App) or social media. If banks were serious about innovation they’d do two things:
1. Have more mechanisms to incorporate customer feedback into decisions about how they interface, and
2. Would dedicate more thinking time to improving customer interactions. Right now for the big banks I’m working with there is outright resistance to things like social media generally because they see it as a threat, rather than trying to figure out a way to make it work.
I’m an insider. I’ve worked hard to try to help banks to innovate around customer, I’ve just got tired of hearing the same old arguments about why it is so hard for banks to change. I don’t believe it should be difficult.
Simply put – my view is that it is too late for most banks. I see banking as a ‘utility’ these days. The banks will keep the ownership of the ‘wires’, but I see lots of third-parties taking ownership of customers because it’s all too easy.
Incidentally, how long will ATMs last once mobile phone debit cards are entrenched?
Thanks for the opportunity to chat.
BK
Brett,
(and thanks to Ron for pointing out this debate)
“listening to customers” is only *one* way to drive innovation. There are plenty of others.
I don’t want to dive into the debate about whether or not customers are listened to by their bankers, but by defining innovation in these terms you fall neatly into the trap that suggests that if an innovation isn’t *visible* to customers, no innovation is occurring.
That is patently false, and your infographic misses very significant back office business and process innovations that bankers led on.
Such as, for example, the introduction of the first business computers in any industry anywhere by Bank of America.
The introduction of automated credit scoring.
The creation of payment clearing systems.
There are plenty of others.
Visible customer experience innovations and product innovations are all very nice, and I suppose you can make the argument that bankers haven’t been so visible as other industries in these areas.
But there’s been lots of innovation elsewhere in banks. You just won’t necessarily see it if you only look through the customer lens.
James,
In less turbulent times I may agree with you. After all as a bank shareholder such “innovations” in the past have served to maximize profit. I just thing the pendulum has swung too far to the introspective approach. Customer champions are needed.
Look at KYC/Compliance and Risk to name two areas. Banks are far better at assessing risk these days, but they are so focused on such that often this just gets in the way of the customer relationship because the customer ends up doing the bulk of the work to satisfy the bank. When in realtiy banks have forgotten that they should serve at the pleasure of the customer.
BK
Innovating before the customer-base is ready for it does not make good business sense, as Mr. King seems to want from banks. Banks are for-profit entities and there’s nothing wrong with that. Until you have a critical mass of customers asking, for example, for mobile payment capabilities to ensure operational savings in order to recoup the initial expense of the innovation, they are unlikely to pursue. Banks (and credit unions) need to show a probability of profit/savings to justify the expense. At the same time, once the financial institution recognizes that balance, it probably should move forward with it.
Sarah,
The point is if Banks were honestly assessing customer behavior and where the money was coming from – they would have a compelling business case to do so. It’s the fact that the bigger, established institutions have such reliance on ‘branch’ as the centre of the bank-cusotmer relationship that they don’t entertain such innovations.
For example, you simply can’t argue that any bank in an established market should wait for mobile banking to make better business sense…could you? Yet, inventory how many banks properly support mobile internet banking today.
I want banks to understand how I need to work with them in this day and age and adapt appropriately. That means rethinking long held structures and traditions I’m afraid.
BK
Sarah: I think I understand what you’re implying here, but as stated, I would disagree with you. An analogy I would offer is Apple: No one told Apple “we want an iPod”. Apple had a vision for what was possible, and made it happen. It’s the same with banks and credit unions. Firms in any industry HAVE TO innovate before the customer base is ready. Waiting until they’re ready is too late. And because people are pretty bad at envisioning how technology might change things, relying on “voice of the customer” for innovation ideas is likely to produce little. I think Mr. King and I might actually agree on this point.
Just a couple of things…
If the HuffPost post was on about credit default swaps then as I read it they’re a fine innovation if regulated with reserves, limits on volume and ownership-in-asset kinda’ stuff. They’re only dangerous, violently so, when used in a totally wild-west unregulated market manner as they were with mortgage bonds and CDO’s, as they were with Enron and as current regulation still allows.
SO, I get a bit confused about your mutual disaffection for “left wing” activism since you’re discussing a financial innovation that backfired because of RIGHT-wing activism, to wit, “don’t regulate.”
Regardless of all that, here on Planet Earth, a discussion of capital markets innovations like swaps should be an entirely different discussion from retail banking innovations like ATMs, on-line banking and even, apparently now available, Twitter Banking (saints be praised).
I haven’t gone back to the HuffPost post but the comments above would indicate you’re involved in two different conversations.
DB: According to a review of the book The End of Wall Street published in last Friday’s Wall Street Journal, “in the summer of 2007, to rein in Fannie and Freddie, whose account books were showing disturbing levels of risk. Treasury officials visited Mr. Schumer’s office to express their worries. “Schumer made a show of clasping his hands and accused the officials of being ideologically ‘handcuffed’ to the far right—which the officials found highly insulting.” To Mr. Schumer, Fannie and Freddie were engines for democratizing home ownership and not to be tampered with.”
My point: To place the blame on “right-wing activism” is not just short-sighted, but completely wrong. And THAT’S my “disaffection” with “left wing” activism: The tendency to not accept any portion of the blame, or see another side of the coin.
Since “lessons from the Grateful Dead” seem to be such a popular tactic these days, let me share with you something I learned from the Grateful Dead: There are THREE sides to every coin. Heads, tails, and the edge. I prefer the edge. My “disaffection” is with activism from heads or tails if they can’t see to the other side.
You DO, however, have a point about the “different conversations”. I switched the focus from the capital market to the retail market when I wrote my blog post. And ignored any analysis of “innovation” on the capital side of the coin.
Follow the money.
The activism starts with the money which was made in capital markets which were assiduously de-regulated, un-regulated and passively supervised.
Sure Schumer’s a schmuck. He’s trying to tap into money and votes. And sure, we all tried to drink, in our own way, from the flow (I tried to provide them software to help, not realizing what they were actually doing). But we’re only taking sips from the billionaire’s unregulated fire hose… Schumer, you, me, the house-flipping borrowers… and we’re all paying for it, but not the bonus boys… no, not them….
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