The Bank of the Future ... Isn't What You Think It Is

As companies across sectors hurtle towards greater technology-driven efficiencies, customers see only 8% of the firms they deal with as different.


The result is that customers expect companies to differentiate their otherwise, similar products with lower prices. WSJ reported earlier this year that firms are feeling customer pressure to hold down their prices. Consistently lower prices can only be sustained when companies experience vibrant revenue growth. But in the same article Thomson Reuters comments on lackluster revenue growth of S&P500 companies this year and last. Such a degree of competitive convergence, where competing companies are less and less different from one another, limits both profit margin and revenue.

The banking industry, in which digital will change the paradigm of efficiency ratios, could be the next to spiral into efficiency-driven competitor convergence. McKinsey director Somesh Khanna says: "The ability to automate processes--to take a lot of work that is currently done in a very manual, and therefore error-prone, way and to transform those processes into ones that deliver the same outcome every time and that eliminate a lot of manual work--can shave off large parts of the cost structure that bank CEOs have considered unapproachable until now. I can imagine us about five, ten years from now talking about efficiency ratios in the low 40s, high 30s."

Banks, are in fact, busy migrating their customers to digital at a rapid pace, using technology to simulate individuality into the customer experience. However, automated individuality is replicable, and customers will not detect significant differences in the experiences or products offered by one bank from those of another. Flawless automation and streamlined convenience will be the common denominator of tomorrow's banks. But these same new efficiency standards will erode the advantages that one bank can offer its customers over its competitors. Price and convenience will become the only levers of customer choice and will pressure banking margins just as the margins in other industries have been pinched by digital.

There is, however, a cost efficient way for a company to allure its customers into a loyal, less price-sensitive relationship. Mastering this approach, especially in a digital environment, requires that one appreciates the differences between three overused terms: Customer convenience, customer experience and customer service.

Customer convenience is a function of the effortlessness, time efficiency and cost-efficiency with which customers can satisfy their needs for a company's products or services. This is the first level of engagement with customers and mitigates customer disloyalty[1]. You do not need human interaction to provide high levels of Customer convenience; it can be provided by technology as Amazon does superbly.

Customer experience is a broad term that doesn't really mean anything at all. Customers can have good experiences or bad ones. They can be thrilled, entertained or delighted. They can simply be satisfied. All of these are examples of customer experiences. In the entertainment industry where customer experience is the core product, Netflix provides it by means of technology. Disney, on the other hand, provides a more differentiated customer experience by relying on human beings to deliver it.

Customer service, however, is a different idea entirely. Customer service is a relationship between two individuals that results in a deep, human emotion in the person being served. Technology can satisfy customers and provide them with an experience, but technology cannot truly serve a customer; only a human being can. Service means that one individual temporarily subordinates his or her own interests to the interests of the other (think Mr. Carson, the British butler of Downton Abbey). The resultant feeling in the customer is one of dignity. It is a feeling that comes from being valued, respected; almost revered. You serve a customer only, when for a moment, you are willing to be his or her "servant". If a salesperson's ego or sense of self-importance precludes them from playing servant to another, then they may be delivering product, but they are not serving people in the true sense of the term service. You serve another when you can make that individual feel like an English lord -- if only for a moment!

Service is not a substitute for convenience and effortlessness. It is something different. A company needing to differentiate itself beyond the commodity it supplies should have both. Service need not cost a company much, but it does demand a very specific culture and highly developed character among its employees. It requires that a service ethic be infused from the very top. It requires a specific brand of leadership.

Technology can provide convenience and effortlessness; but you need great people to offer service. Technology can keep efficiency ratios down; but you need authentic service (in the true sense of the word) to keep margins high. Understanding the possibilities that true human service can offer when successfully fused with digital efficiencies could be the key differentiator for winning banks of the future.

Consider what I term the two-pronged strategy that I believe has been key to Zappos's growth and its atrractiveness to Amazon in 2009. The two prongs are 1) superb technology and 2) superb people delivering what technology cannot deliver, but that many people crave: the experience of feeling served by individuals who, during the moments of the transaction, subordinte their own interests to yours. When Amazon bought Zappos in 2009, it wasn't just to neutralize a rising competitor. Jeff Bezos realized that Tony Hsieh had a competency that Amazon did not. Hsieh is one of the few entrepreneurs who has successfully executed on the two-pronged strategy. Hsieh doesn't rely on one strategy or the other. His competitive advantage is the way he fuses both strategies, digitally driven convenience and human inspired service into a single, unique experience. And that is why Amazon bought Zappos. "I get all weak-kneed," Bezos said at the time, "when I see a customer-obsessed company, and Zappos certainly is that."

Amazon doesn't need the second prong. This is not because it relies solely on technology. It doesn't need the people prong because its investment in R & D and brick and mortar logistics is so large that it has erected almost impenetrable barriers of entry to potential competitors. Provided its offering remains effortless, it will dominate its markets. Banks don't have the luxury that Amazon has because unlike Amazon, with electronic cash becoming the norm they need less brick and mortar capabilities and find it, therefore, harder to differentiate themselves only in their digital interfaces. As banks downsize their branch networks -- making them into ATM malls and help centers -- their capacity to truly serve mass depositors and medium sized borrowers on whom they depend, will disappear. With it, their competitive advantage will disappear as well. Banks would be well served to study and implement a two-pronged strategy like the one Zappos used to grow its 2007 revenue of $840m to $1.5bn in 2010.

The biggest impediment to banks developing their own two-pronged strategy capable of differentiating them from competition, is that most do not appreciate how crucial a carefully crafted culture is to the delivery of true service -- the Mr. Carson type of service! Zappos offers the kind of service that can only be delivered by a culture of employees who find it fun to serve others. Bezos confirmed this after buying them when he said, "Zappos has a totally unique culture. I've seen a lot of companies, and I have never seen a company with a culture like 'Zappos' and I think that kind of unique culture is a very significant asset."

The cultural change needed in the financial services industry today, specifically in banks, is so enormous that in many cases it is hard to think of it happening without a corporate lobotomy. Banks still think of service as giving customers what they want and need in the most cost and time-efficient way possible. This is not service, it is convenience! Banks are not in the business of money but, like almost every other business, they are in the business of people. Banks serve individual human beings who have intangible needs, cravings and insecurities; people who yearn for dignity and respect; ordinary people who dream of feeling like a British lord for just a moment. Imagine if these folk had a bank who's malls were their own Downton Abbeys!

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[1] N.Toman and R. Delisi, The Effortless Experience (New York, NY: Penguin Group 2013)

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