The Problem with the Status Quo
In his book Smarter Bank, Ron Shevlin makes a bold but necessary assertion. “The prevailing business model in retail banking,” he says, “is no longer viable.” As Shevlin illustrates, banks have seen an ongoing decline in net interest margin, overdraft income, and return on equity — all resulting in slumped profitability. In addition, demands for new technology have added their own pressure.
“With the advent of mobile technologies, the shift in demographics, and the economic issues facing the industry,” Shevlin says, “we are finally on the cusp of change.”
What are financial institutions supposed to do?
Shevlin has specific suggestions in mind, but first he gives historical context. He outlines three major phases of competitive dynamics in banking since 1950:
- 1950 - 1980s: Banks primarily competed for the best locations
- 1980s - 2011: Banks primarily competed to offer the best rates
- 2012 - Now: Banks must primarily compete on performance
That is, while location and rates used to primarily give banks a competitive edge, now banks must primarily perform as true advocates for account holders. The solution, Shevlin says, is to “transition from selling financial products to financial services.”
At its heart, this service-oriented solution is all about creating a culture that legitimately engages with account holders. It’s not a matter of merely having a social media presence or offering a product that meets some sort of baseline requirement. It takes more than that. According to Shevlin, true engagement is defined as “repeated—and satisfying—interactions that strengthen the emotional connection a consumer has with a brand, product, or company.” That’s what financial institutions need to focus on if they want to differentiate themselves in the future.
Creating this level of engagement can yield big returns. For example, in his research with Aite Group, Shevlin found that when compared to disengaged consumers, highly engaged consumers are:
- 2x as likely to refer their primary financial institutions to friends and family
- 3.5x as likely to have had either increased their balance or the number of accounts with the financial institution
- 5x as likely to use online personal financial management (PFM) tools
As you can see, if a financial institution can increase the number of highly engaged users, they’ll be in a much better position to outsmart the competition.
Ways to Engage
According to Shevlin, one solution that has merit is to iterate on current PFM products. While he’s been underwhelmed by what PFM has achieved so far, Shevlin is hopeful for what it might become. He mentions bill analysis, mortgage analysis, and spending incentives apps as possible ways that PFM could be more useful in the lives of users and drive up engagement. The key is to offer products that can legitimately help account holders make better financial decisions — products that will lead consumers to change real habits. “What banks need,” he says in summary, “is an advice/guidance culture.” The next iteration of PFM will likely play a major role in creating such a culture.
Of course, PFM isn’t the end-all of engagement. Throughout the book Shevlin offers detailed suggestions about how to create a culture of advocacy as he looks at a variety of topics including branches, social media, Millennials, mobile wallets, payments, and more.
Our Take: Altogether, what makes Smarter Bank worthwhile is the same thing that makes all of Shevlin’s writing worthwhile. He writes with clarity, humor, and the right amount of skepticism. You’re never lost in a Shevlin piece, and more importantly you’re never bored. His years of experience and research with Aite Group are also a plus — you know you’re not just wading through a bunch of fluffy platitudes. Shevlin follows the evidence where it leads and cites it when it’s relevant. If you’re a banker who’s looking to help your institution thrive in the contemporary competitive landscape, you’d do well to hear Shevlin’s take on how to create a smarter bank.