Established by two former bankers, the Bank Innovators Council was developed to help financial institutions that may lack internal resources come together to brainstorm and test new ideas that could eventually be shared. Partnerships with Finovate, NextBank, BankersHub and Innovation Agency will hopefully provide additional momentum.
By JP Nicols®, founder and CEO of the research and innovation firm Clientific, a partner at Bank Solutions Group and co-founder of the Bank Innovators Council.
Bankers and credit union executives have long sought a competitive advantage in a vast sea of largely undifferentiated competitors. For most players, and for most of the industry’s long history, the chief weapons in this war have been scale and localization. Either growing large enough to create economies of scale and/or scope, or trying to corner one or more local markets by being more, well, “local”. A few have even tried to accomplish both strategies simultaneously.
But how will those strategies play out in this new era of financial services? Regulators will not let the very biggest banks get a whole lot bigger any time soon. The top 100 banks in the U.S.— less than 1.5% of the 7,000 or so still around— already control 81% of the loans and 75% of the deposits. Well-capitalized and well-run small and midsize banks and credit unions will certainly swallow up weaker competitors as this quickening consolidation phase that we have all been predicting inevitably becomes a reality sooner or later. But will this truly create any new competitive advantages beyond survival of the (relatively) fittest?
How about the localization strategy of being 'the bank or credit union of '
Sure, there are kernels of truth to each of these strategies. Having the scale to spread out increasing infrastructure costs is important, up to a point. And I chose the words 'merely local' for a reason. I think the real word the localists are looking for is 'relevant'. Being headquartered in my hometown is fine, I guess. More jobs for the local economy. But as a customer, what I really want is for you to be relevant to me — and many of the behaviors of the banking behemoths did little to make me feel that way.
Why It’s Different Now
Those basic strategies worked well enough for the last few hundred years, but until recently, the industry was basically undefeated because it won all of its games by default. Sure, we had large banks and small banks, and credit unions, and for a time, S&Ls and Savings Banks; but these were all just slightly different flavors of the same basic model.
Banking as a product and as a service had no real threat of substitution. But during just the last 5 to 10 years, the proliferation of smartphones, tablets, broadband connectivity and connected networks of all kinds have changed the nature of the game. Forever. Just as radio and movie theaters were disrupted by television, which was disrupted by videotapes, which were disrupted by DVDs, which were disrupted by streaming video, the disruption in banking has only just begun.
You can now live your entire financial life off the grid of traditional financial institutions — at least in your direct interactions. They still play a role behind the scenes, but the nameless, faceless utility that merely holds your insured deposits and ensures an efficient transfer of your funds from Point A to Point B is the very definition of a commodity trap.