The Real Reason Why There Are Too Many Banks

When I read Matt Yglesias’ article in Slate on America’s Microbank Problem, it took me a minute, but I realized what it really was: A hack piece of journalism, written simply to call attention to the author and publication.

Yglesia’s case to support his contentions was poorly argued. American Banker easily tore through the arguments in a well written piece.

Another AB editorial, What Matthew Yglesias Should Have Said About Small Banks, posited that the disparity of operating performance across smaller banks is the reason there are too many banks. Well, at least, I think that’s what the gist of the article is. I’ve read the article a few times, and I’m still not sure exactly what the author thinks Yglesias should have said.

According to the article:

“There are currently over 900 publicly traded banks and thrifts with a market capitalization over $10 million. Twenty percent of those 900 or so institutions have returns on average tangible common equity over 12.3%. Five percent are over 17.2%. The bottom 30% post returns below 5.7%. Is 5.7% acceptable? Perhaps it doesn’t look horrible in absolute terms in today’s ultra-low interest rate environment, but it is horrible any way you cut it.”

I’m not quite sure how the variability of average tangible common equity in 900 banks proves that 7,000 banks is too large a number.

There could be any number of reasons why a particular bank’s ATCE is below 5.7%. And probably any number of ways that a bank could increase the ATCE to 17.2%. Should we just eliminate all banks with an ATCE below a certain level? I’m left confused as to what argument the author is making that somehow Yglesias should have used to justify the euthanasia of community banks.

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There is one argument I can see making to justify the claim that there are too many banks in the US:

Supply outstrips demand.

It’s become somewhat popular in the past few years for social media morons and clueless Gen Yers to claim that everything about the past is dead, and that the rules of economics has “fundamentally changed.”

Nonsense. Nothing is as timeless, and relevant, as the interaction between the supply of products/services in a market, and the demand for those products/services.

If the long-term demand for a particular market’s products and services is less than the current capacity the existing set of providers can provide, then something has to give. Existing providers can:

  1. Reduce production capacity;
  2. Go out of business; and/or
  3. Find a way to increase demand.

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Over the past five years, the combination of a weak economy and the regulatory changes made by the current administration have depressed demand for financial services.

By demand, I’m referring indiscriminately to both unit volume and total revenue. The number of mortgages and credit cards needed by the market declined as a result of the recession. But the overall level of revenue generated by FIs has also been suppressed by the pricing limitations (on credit card interest, on overdraft fees, etc.) imposed by regulations.\

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If the reduced level of demand for financial services is systemic and persistent, then an argument can be made that there are too many banks (and credit unions). 

Yglesias’ arguments about difficulty to regulate and poor management are ridiculous, and not valid reasons to support the notion there are too many banks.

Lots of restaurants are poorly managed (and there are plenty of health regulations regarding the delivery of food). Many go out of business. But others are created, because the demand for food services is there.  

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If the reduced level of demand for financial services is systemic and persistent, the number of banks and credit unions doesn’t necessarily have to decrease. 

FIs could shrink down through layoffs. But if the aggregate demand — across financial products/services — is significantly lower than it was in the past, this is unlikely to be a successful strategy, and the number of FIs will have to decrease. 

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So that leaves us with 3. Find a way to increase demand.

You might be inclined to argue that the demand for financial services/products is actually there, but not being adequately captured by FIs. 

The rise (albeit, still small) of the Debanked, who are abandoning traditional banks (and banking accounts) for alternatives like Simple and Moven are a good example. But I’d be hard pressed to say that Simple and Moven have put a lot of banks out of business. 

You might be inclined to argue that banks could increase “demand” by capturing the P2P lending volume that’s occurring. But you’d be wrong, and you’d be misinterpreting the definition of supply and demand. 

If I say I want a Maserati, does that constitute “demand” for a Maserati? There’s no way I can afford a Maserati (well, maybe I could, but good luck getting my wife to spend all of our retirement savings). For Maserati to capture that “demand,” it would have to lower the price of the car to point at which it wouldn’t be profitable to them.

It’s an analogous situation with banks and P2p lending. Banks have lending guidelines. The “demand” for loans constitutes the demand that fits those guidelines. One way of increasing “demand” for loans is to loosen the guidelines. Basically, credit card issuers have done that to increase “demand” for cards.

But as long as FIs maintain lending guidelines — i.e., maintain profitable pricing levels — that exclude certain consumers, P2P borrowers won’t constitute demand.

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If FIs’ attempts to increase market demand is limited to finding new ways to sell existing products and services, they’re screwed unless: 1) the economy heats up, and/or 2) new generations produce significantly new numbers of customers. 

If either of these things happen, it just proves that the current reduced level of demand is not systemic and persistent. 

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The other way the existing number of FIs can remain stable is if FIs develop new products and services to sell that grow the overall level of demand.

The current track record among FIs isn’t bright. 

Banks give away PFM and online bill pay for free. P2P payments has failed to generate much additional revenue. 

The innovations that the market seems to get excited about — things like Coin, Loop, or other mobile payment-related stuff — don’t generate revenue (demand) for FIs. 

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Please note that “mobile” isn’t the cause for banks going out of business. It’s about the reduced level of demand for financial products and services. 

Mobile has helped to create alternative suppliers to the existing level of demand, but that’s just one factor chipping away at the number of banks.

And mobile offers as much opportunity to banks to find ways to create new demand by leveraging the technology to create new products and services.  

Bottom line: The real reason why there are too many banks — or, more accurately, why there may be too many banks — is about supply and demand. And not any of that stuff that Yglesias and Slate mumbled about.

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Big Idea: Activity- Based Marketing

Most traditional forms of marketing — TV, radio, print, direct mail — are outbound forms of marketing. I call it push-and-pray marketing: Marketers push out a bunch messages, and pray for a good response rate.

More recently, a different form of marketing has become popular: Inbound marketing. This type of marketing waits for a customer or prospect to make contact with the company, and then applies marketing efforts to that interaction.

But there’s another type of marketing that’s beginning to gain traction. As far as I can tell, there’s no commonly accepted name for it, so for our purposes, i’ll call it Activity-Based Marketing:

Marketing within the context of an activity being performed by a customer or prospect.

Yesterday’s announcement by restaurant chain Chili’s regarding tabletop computer screens is a great example of activity-based marketing: The activity is the process of ordering food.

At its most basic level, asking “would you like fries with that?” is a form of activity-based marketing. You might think of it simply as up-sell or cross-sell — and I would agree — but it doesn’t quite seem like marketing because no principles of marketing (targeting, segmentation, promotion) are applied.

But they could be applied.

That’s the potential of these tabletop computer screens. Not that they just simplify the ordering process. But that they push (i.e., merchandise) certain entrees, track your visits and tell you what you ordered last time, connect you with other diners to see what they like, etc. This technology shouldn’t just streamline the ordering activity — it should transform it.

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A narrow-minded banker might think “we already have things like this — ATMs and video tellers.”

Wrong. Those deal with service transactions and interactions. These aren’t the “activities” I’m talking about. I’m talking about activities like car-buying, house-shopping, and ticket-purchasing, or even shopping for more mundane items like shoes (that was a joke, guys — the ladies <at least the ones in my family>, hardly consider shoes to be “mundane”).

There are a number of great examples of financial institutions doing activity-based marketing:

1. USAA. USAA’s Auto Circle app changes the car buying process by providing car shoppers with an app that lets them search for the type of car they want, track those cars for future reference and comparison, get a loan for the car when they’re ready to buy it, and insure it as well. Transformation of the car-buying activity or process.

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2. Commonwealth Bank. This Australian bank’s app uses augmented reality technology to let a user “take a picture” of a home or building, determine the location, access the realtor database, and display the price and details of the home if it’s for sale. This app enables Commonwealth to identify potential mortgage customers long before they were able to do so in the past.

I don’t know if Commonwealth is doing this or not, but the app could give other marketers — those interested in reaching new movers (who typically spend thousands of dollars in the six months after moving) — an opportunity to reach prospects even before they move, enabling Commonwealth to generate advertising revenue.

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3. Caixa Bank. Caixa Bank in Spain has developed an app that let consumers buy tickets (movies, sports, etc.) using their mobile device. Transforms the ticket-buying activity.

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There are other activity-based marketing apps that I can envision, but won’t belabor the point here.

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One of the common threads in the examples above is the creation of a new point of interaction for banks.

Historically, banks’ point of interaction with customers or prospects is the point of purchase — when the consumer is ready to buy the house and now needs to find a loan, or when the consumer is sitting down with the car dealer negotiating price.

For a host of other types of purchases, banks’ point of interaction is when the consumers swipes their debit or credit card, or — even worse — after the transaction itself, when the check clears.

Activity-based marketing changes the point of interaction for banks, moving that point much closer to the identification of the need or want for the product or service.

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Moving that point of interaction gives banks more opportunity to influence the choice of providers. But it does so in a way that provides huge value to the consumer by transforming the overall activity.

Wanna know why Google is worth gazillions? Because its point of interaction is so close to the consumer’s identification of the need or want for a product.

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Brett King was spot-on when he wrote, in a post title When Payments Disappear, and Value Emerges:

“Arguing over whether a payment is truly mobile or something else is a lost argument. When a payment ultimately works, no one is going to care how it happened. As long as it happened seamlessly with minimum fuss, and maximum context or value. When the payment disappears, it doesn’t matter how you paid, it matters what the payment did for you.”

The challenge for banks is: How do you get value to emerge? The answer is activity-based marketing.

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What this also demonstrates, however, is the narrow-mindedness of too many bankers. Namely, those worried about what channel the order is taken in. 

So what if the mortgage application is taken online or in the branch? It doesn’t matter — as long as your FI gets the application.

And how are you going to ensure that your FI gets the application? By getting involved in the shopping process as early as possible. 

Activity-based marketing is going to be big. 

Strategic Planning in Banking: What A Joke

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I don’t how USAA would describe its business strategy, but the following would work for me:

Serving the financial services needs of the military.

A strategy purist might take issue with this, asserting that it’s a positioning statement, defining a target market, but not necessarily a strategy for serving that market.

I’d argue that point. There’s a lot implied in the statement above:

1) Members of the military have unique financial services needs that need to be identified and served.

2) Serving the military requires an FI to develop and sustain a set of capabilities that are superior to what other FIs have in order to profitably serve this segment of the market.

3) The military is a sufficiently large segment of the market to sustain USAA.

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Peter Drucker once said “strategy is as much about figuring out what not to do as it is what to do.” I once said:

“Firms that don’t decide what not to do find themselves in a lot of doo-doo.”

For the life of me, I can’t figure out why my quote isn’t as widely cited as Drucker’s.

The USAA strategy definition above meets Drucker’s test. Any possible investment of scarce USAA resources can be put to the test: Does this help us attract and serve the unique financial services needs of the military?

Implicit here is that, in order to answer that question, USAA needs to actually know what the unique financial services needs of the military are. And that they truly need to be unique.

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Q. What does USAA do every year at strategic planning time?

A. I have no idea. But I bet it does not start from scratch and come up with a new definition of strategy every year (if you know for a fact that it does do this, for g*d’s sake, be quiet, and don’t say anything to ruin my blog post).

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Q. What do a lot of banks and (especially) credit unions do every year at strategic planning time?

A. They go through the charade of defining a “strategy” for the next 12-24 months, often based on some overly simplistic and misguided SWOT analysis.

The end result of this “strategic planning” effort is a list of initiatives that are supposed to produce strategic value, direction, and competitive advantage.

WHAT A WASTE OF TIME AND EFFORT. The only good things to come out of this process is a good round of golf and some good food at a nice resort (and for those reasons alone, I’d be happy to come to your next strategic planning offsite).

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Having spent (the part of) 2 consecutive weeks in October at credit union conferences, I’ve witnessed the challenge and pain of poor strategic planning efforts that is prevalent among many CU executives.

Part of the pain is caused by absolutely horrendous definitions of strategy. Ask 10 CU CEOs what their firm’s strategy is and 7 are likely to say “Superior service.”

Sorry, but that doesn’t come close to passing the Drucker test (or any other test of strategic definition). Service means different things to different people, provides no guidance on what should and shouldn’t be invested in, and because it isn’t measurable, doesn’t help an organization determine if it is outperforming the competition or not.

The other 3 out of 10 might say something like “Serving our community.”

That sounds somewhat similar to my take on the USAA strategy, so I should be careful about criticizing it, right?

Wrong.

My stab at USAA’s strategy includes mention of the military — which I am claiming and/or assuming has unique needs regarding financial services.

But what is the definition of “community” for a lot of credit unions? Often, it’s a geographically-defined area. Made up of all sorts of people, who are unlikely to have uniquely defined needs.

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What’s a bank or credit union to do?

Start by reinventing the strategic “planning” process. The process needs to start with a strategic “discovery” effort — that is, figuring out what the current strategy actually is. This isn’t as easy as it sounds.

Some years ago, I was working for an IT strategy consulting firm, and us junior know-it-all consultants went off  to client’s site to interview execs and collect data to fuel our IT strategy project.

After a week or so, we came back to the home office to check in with the omniscient partner, who asked “so, what’s this firm’s IT strategy?”

We said “they don’t have one.”

“NO!,” he yelled, pounding his fist on the table for dramatic emphasis. “Every company has an IT strategy. It might suck, it might be inconsistent, it might be ineffective, but they have one. Your job is to figure out how to describe that strategy. If you can’t do that, we can’t get help them understand and define a strategy that IS consistent and effective.”

If you can’t describe the strategy your bank or credit union is deploying today, then you won’t be able to figure out what competencies you have or don’t have that would be relevant to some other strategy.

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Having “discovered” your current strategy, you need to “evaluate” that strategy.

If you’re not growing as fast as you’d like to be, or not producing profits that you’d like, you might be inclined to conclude that your strategy isn’t working.

But it’s not that easy. You need to determine which of the following four boxes your organization falls into. Your strategy might be the right strategy, but your execution is falling down. Or maybe you’re executing well, but the strategy is wrong.

strategic planning

A SWOT analysis isn’t going to help you with this evaluation, people.

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The “discovery” effort has to be done before you go into a strategic planning offsite. It’s a total waste of time to use BOD time to do this. You need to come prepared with the results of that effort.

The bulk of the time in the strategic planning offsite should be spent on evaluation. And you probably don’t even have enough time to do that.

Over the course of a weekend, you would do well do to meaningfully address the following — and only the following — questions:

1) Given what our current strategy is, do we need to change it?

2) If we need to change it, what do we need to change it to?

Any discussion of specific initiatives, or the timing of those initiatives, is a waste of time.

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I know of some CU CEOs who might read this, nod their head in agreement, and then consciously ignore every recommendation made here.

Why?

Because, for them, the strategic planning effort isn’t really a strategic planning effort. Instead, it might be better thought of as the “beat the board into submission” effort.

If that’s your CEO, sorry, I can’t help you.

Bottom line: Strategic planning is a joke at many FIs because “planning” is the last they need. Lots of the verbs used to describe strategy fall short, as well. I’ve yet to find a firm that has successfully “formulated” strategy.

Disruption Delusions

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If I had a nickel for every time the word “disruption” was mentioned in a blog post, article, or conference in the past 12 months, I’d be richer than Warren Buffett.

If I had a nickel for every time the word “disruption” was appropriately used, I wouldn’t even be able to afford the ukulele that Buffett’s playing.

The most recent flagrant misuse of the term comes from the Harvard Business Review blog, which is ironic, since HBS professor Clayton Christensen is credited with popularizing the term in the first place. If a Fellow at the Forum for Growth and Innovation at Harvard Business School can’t use the term correctly, then I guess that I shouldn’t expect the rest of us intellectual lowlifes to figure how to apply it appropriately.

In an article title Revenge of the HourlyNerds, the HBS fellow(ette) writes:

“Last week’s news that Mark Cuban put $450K into consulting startup HourlyNerd should make traditional consultants nervous. Founded only last year by a team of current MBA students, HourlyNerd is a prime example of disruption in consulting. HourlyNerd represents one of the newest business models in consulting, the facilitated network business, which is structured to enable the exchange of services between clients and freelance consultants. These businesses have powerful disruptive potential because they can provide consulting at a fraction of the cost of traditional models, largely because they do not need to carry expensive fixed costs like recruiting, training, consultant beach time, and expensive real estate. HourlyNerd, by encouraging students to bid against each other, likely drives down the hourly cost of projects even more.”

My take: Last week’s news has me laughing, not nervous. Coming into a market simply with lower prices doesn’t make you disruptive.

Wikipedia’s definition (which I think it Christensen’s) of “disruptive innovation” is:

“An innovation that helps create a new market and value network, and eventually goes on to disrupt an existing market and value network (over a few years or decades), displacing an earlier technology. The term is used in business and technology literature to describe innovations that improve a product or service in ways that the market does not expect, typically first by designing for a different set of consumers in a new market and later by lowering prices in the existing market.”

In this context, HourlyNerds is hardly disruptive. No new market is being created here. Nowhere is there any proof that HourlyNerds will improve the quality of consulting. There’s no evidence that HourlyNerds is even changing how the consulting service is delivered. The only new technology involved here is the one used to connect small biz owners and the Junior Scout consultants.

There’s an axiom in the consulting industry:”You get what you pay for.” Can’t wait to see what $10 gets a bunch of small business owners.

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Which brings us to the world of financial services (how, exactly, it does that I’m not sure).

There’s apparently no shortage of startups in the financial services space claiming to be disruptive (I know some of them personally, so apologies in advance to any friends — or soon-to-be former friends — that I offend here).

Most of them aren’t disruptive in the least. Instead, they’re niche fillers. They’re filling gaps, or niches, in the current market by serving unmet needs.

As Wikipedia describes it:

“The automobile was a revolutionary technological innovation, but it was not a disruptive innovation, because early automobiles were expensive luxury items that did not disrupt the market for horse-drawn vehicles. The market for transportation essentially remained intact until the debut of the lower priced Ford Model T in 1908. The mass-produced automobile was a disruptive innovation, because it changed the transportation market. The automobile, by itself, was not.”

This is analogous to the situation in banking today.

Startups are finding cracks in the market serving people who don’t want to pay checking account fees, or who simply don’t like banks and want to find an alternative.

But these startups aren’t disruptive. They’re not creating a “new market” — they’re simply meeting the unmet needs of the existing market.

And they won’t be anywhere close to being disruptive until they develop some kind of technology that is adopted by other providers of financial services. In other words, just gaining market share in an existing market doesn’t qualify a technology development as disruptive. Ford may have been the first to mass-produce cars, but mass-produced cars only became a disruptive technology because other manufacturers learned adopted it as well.

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Are there any disruptive innovations out there when it comes to financial services? The only thing I see that comes even close as a candidate to being disruptive is Bitcoin.

Your thoughts?

Blazing New Trails In Financial Services (Or Why PerkStreet Failed)

Once again, I’m late to the blogging party, following on the heels of (yet another) great post from NetBanker, this one about the news that PerkStreet will be closing its doors:

“My guess is they were done in by the problem that every financial startup faces: It’s really, really, really hard to get customers to send money to a web-based startup, especially when there is no immediate short-term gain. Also, while Perkstreet had a great consumer-advocacy positioning, “use debit, avoid credit,” that was a bit of a mis-match for the customers they were targeting, big-spending rewards junkies which could afford to park $5,000 at the startup. Most existing big spenders are fond of using credit card programs with similar rewards, so changing their behavior was a continual challenge.”

My take: The reality for financial start-ups is that while blazing a new trail through an uncharted forest, sometimes you run into a brick wall. You can cut down a tree, but you can’t cut down a brick wall. PerkStreet hit a brick wall. And the sign on the wall read “Caution: Consumer Apathy About Financial Services Ahead.”

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PerkStreet wasn’t targeting big-spending rewards junkies.

Big-spending rewards junkies are typically over the age of 45, earn more than $100k a year, and have been with their preferred credit card issuer for a long enough period of time that switching their spending to not just another card, but from a credit card to a debit card, just wasn’t going to happen.

Instead, PerkStreet was targeting consumers who are fed up with traditional banks and bank accounts, and looking for an alternative. In other words, they were targeting the Debanked.

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The Debanked are (relatively) young, and while they don’t earn as much as rewards junkies, that’s more a factor of age than anything else. The Debanked are a highly educated group of consumers. They might not be earning much today — but they’re likely to in the future (if the economy ever gets back on track, that is).

The problem for banking pioneers is that the Debanked is a very small segment of consumers. NetBanker may be correct that “It’s really, really, really hard to get customers to send money to a web-based startup,” it’s also really, really hard to succeed when the number of consumer who are willing to send money to a startup is small.

The questions banking pioneers must address are: Why is the Debanked segment so small? What can we do to grow the Debanked segment?

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My theory for why the Debanked is small is that it boils down to Customer Apathy. We just don’t care that much about financial services to seek out and use new alternatives. We probably spend more time figuring out which restaurant to eat at on a Saturday night than what bank to do business with.

Take a look at this data from Distimo. Nearly 2,300 different game apps have cracked the Top 25 best selling paid apps. Only 30 financial apps have made that list.

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What this data tells me is that If you’ve got a new game app you want to launch, you’ve got a better shot at getting consumers’ money than if you’ve got a new banking idea.

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I’ve got another data point that highlights the problem start-ups have in the financial services space.

While the press (not to mention credit unions) love to point out how disillusioned people are with big banks — and how Gen Yers are going to change and disrupt everything, reality tells another story.

According to a recent Aite Group survey, nearly half of Gen Yers consider a large national bank to be their primary FI. That’s a higher percentage than any other generation.

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Just one in five Gen Yers — or Gen Xers, for that matter — consider some “other” type of FI (i.e. not a bank or credit union) their primary FI. For most of them, it’s a brokerage, advisor, credit card firm, or insurance firm that they name as their primary FI — not a start-up alternative.

The self-proclaimed disruptors in financial services would like us to believe that there are hordes of consumers chomping at the bit to leave the big, evil, mega-banks. It’s just not so. Why? Because people just don’t care that much about financial services.  

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So what’s the answer to the second question: What can we do to grow the Debanked segment?

I’ve got some ideas about that, but I think my boss would prefer that i not spill all my candy in the lobby. 

Related research: Credit Union’s Biggest Enemy
Related research: The Debanked: The $1.7 Billion Threat to Banks

The New Phase In Bank Competition: Competing On Performance

One of the distinguishing financial services-related characteristics of Gen Yers is their awareness and understanding of the concept of the “credit score.” My generation didn’t know what a credit score was, let alone what our individual credit score was, when we were in our 20s (OK, that wasn’t really fair, since the FICO score wasn’t introduced until 1989 when most Boomers were already in their 30s),

It wasn’t until recently that Americans truly became aware of what a credit score was, and how it impacted the interest rate they got on their credit cards and loans. Excellent services — Credit Karma comes to mind — have emerged to help consumers track their credit score, and understand how their financial-related actions impact their credit score.

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But the credit score is a tool that financial institutions use to rate consumers’ creditworthiness. From a consumer perspective, it’s not a useful financial management or measurement tool.

Based on their financial behaviors, my in-laws probably have a lousy credit score. And I doubt they could care less. Getting credit from a financial institution isn’t something they’re too worried about getting. Yet, you and I should be so lucky to be in as good a financial situation as they are.

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Exactly how well are they doing? And how much “better” are they doing, financially, than you or I?

I don’t know the answer to those questions because there is no universally-accepted score (think of it as a FinScore) that measures this.

What I do know is that we need one. “We” being both consumers and financial institutions.

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I couldn’t tell you if this is the case in other countries, but Americans LOVE to grade and score things. We brag about our SAT score, our college GPA, our Klout score, even our cholesterol score. We love to know how we’re doing, and how we’re doing relative to everyone else.

How much money we make (annual income) has historically been the metric of how well we’re doing financially, but if you have a $500k mortgage and 3 kids between the ages of 10 and 20, you’re not doing as well as someone making the same amount who has no kids and no mortgage on the identical house to the one you own. Or maybe based on other factors and behaviors, you are. Who knows?

So we need — we want — a FinScore. There are some firms working on this. Moven has its CRED score, and FlexScore has its eponymous score.

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Conceptually, this is exactly what we want: A score. A single number that tells us how we’re doing. Having talked to the founders of FlexScore, I know that they’re building a lot of depth into the score to show how various financial actions or behaviors impact the FlexScore. And I know that Moven is validating its methodology for how it calculates the CRED score with real-world results.

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Practically speaking, though, no matter how good (i.e., accurate) the CRED or FlexScore is, the challenge for the two firms — and anybody else who wants to create a score — is getting that score to be universally-adopted.

The quality of the score isn’t really the most important thing here. If you want proof of that, I have one word for you: Klout. A ridiculous metric that doesn’t really measure influence at all, yet has become a widely adopted score.

The success of either firm to have its score become the accepted score will be dependent upon the success of their respective marketing efforts.

An established, more widely known FI may try to develop its own score, but that effort is likely to run into the “what’s the ROI of this initiative?” mentality that kills plenty of potentially good ideas at banks.

Maybe the CFPB could help to develop this score (call me anytime you want to discuss this, Mr. Cordray).

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Although I don’t see any existing bank doing it, it’s in the best interest of banks and credit unions to see a widely-accepted FinScore emerge.

Here’s why: The next wave of banking competition is competing on performance. That is, who best helps the customer manage and improve their financial lives — and not who has the best rates or fees, or who claims to have the best service (whatever that means).

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In order to prove that it’s actually helping customers improve their financial lives, a bank or credit union needs a commonly accepted metric. A FinScore.

With a universally accepted FinScore, consumers will be able to make educated decisions about who to do business based on: 1) How important improving their FinScore is to them, 2) Which FI promises to best improve that FinScore — and ultimately delivers on that promise, and 3) The cost to the consumer for getting an X-point improvement in their FinScore.

Banks and credit unions will brag that their customers/members averaged a 25-point improvement in their FinScore over the past 12 months, and that their competitors’ customers/members didn’t do as well. 

Competing on performance is the future of retail banking — but the industry needs a FinScore to make it happen.

Banks Need To Redefine Personal Financial Management (PFM)

As usual, NetBanker nails it with its post on Will mobile finally make PFM popular? In it, Jim writes:

“Mobile is, and will be, a huge driver for specialty PFM apps. App stores help consumers find the services, and mobile makes them less daunting to use. But it’s not just the mobile platform driving usage at these four challengers (see below), it’s the way they have positioned themselves with tangible consumer benefits (e.g., save money by spotting fraud charges) rather than the nebulous (e.g., “manage your spending for a better life”). Parsing this list a little closer, only Mint is positioned as a pure PFM. The challengers are all backing into PFM from various niches.”

He then goes on to talk about BillGuard, Lemon, Credit Karma, and Manilla.

My take: 1) NetBanker is spot on that mobile is — and will be — a huge driver for specialty PFM apps. Consumers are showing a strong willingness (if not desire) to download and use apps that have a very (or relatively) narrow set of functionality. It’s incredibly easy for someone to download an app, test it out, and see if it add values. And there’s data that shows that finance apps are doing well with consumers, compared to other types of apps. The following chart shows app “loyalty” as defined by Flurry:

20130802 FlurryThe chart shows that relative to a number of other category of apps, Financial apps are used an above average number of times per week (usage), and that consumers keep Financial apps on their mobile device an above average length of time (retention). Since Flurry gets its data from apps developers, I don’t think bank/credit union apps that provide account access is included in this data (I could be wrong about that).

2) NetBanker may be overstating the ability of app stores to “help consumers find the services.” A recent visit to the Apple apps store revealed six pages of apps that begin with the letter A. I couldn’t even begin to count how many pages of apps there were all together. An analyst with Canalys (a firm that tracks the apps market) recently said: “When we speak with app developers, many are concerned about monetization or platform fragmentation, but the number one problem they face is getting their apps noticed.”

3) The last two sentences in the quote above really intrigued me: “[O]nly Mint is positioned as a pure PFM. The challengers are all backing into PFM from various niches.” What’s a “pure” PFM? Why does NetBanker think the firms listed in the post are “challengers” to Mint? And why does NetBanker think those challengers are “backing into” PFM?

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The core of the issue here is simple: There is no clear definition about what PFM is (and isn’t). There is no common understanding — among bankers or consumers — about what PFM is. I don’t have research to back me up, but I’m willing to bet that if you showed a representative sample of consumers a list of companies that included Mint, BillGuard, Lemon, Credit Karma, and Manilla, and asked: “Which of these companies offers a “pure” PFM?” you would get blank stares from 98% of them.

Even among bankers, the term PFM is too loosely used. I (think I) know exactly what Jim means when he refers to Mint as a “pure” PFM — a PFM platform that offers budgeting, expense categorization, and charting/forecasting/analysis tools. Geezeo and Money Desktop, which choose to offer their technologies through FIs, rather than direct to consumers like Mint, are probably considered “pure” PFM tools,  as well. The term PFM has come to mean “budgeting, expense categorization, and charting/forecasting/analysis tools” in the banking community.

But the majority of consumers have shown little interest in these types of capabilities. Instead, they want to know their credit score, how it’s changing, and what to do about it (Credit Karma), or they want to track or prevent grey charges on their debit and credit cards (BillGuard).

These capabilities are “personal financial management” capabilities. They’re not “backing in” to PFM. They ARE PFM. And they’re not challenging Mint (or other “pure” PFM platforms) — they’re providing additional capabilities not found in Mint.

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I’m a big fan of what the “pure” PFM players are doing. But bankers need to redefine their concept of PFM, and expand the definition to include a wider range of “PFM” capabilities.

What they’ll realize is that their “pure” PFM deployments fall well short of providing the range of capabilities that consumers want and need. And they’ll realize that their”pure” PFM deployments need to become more of a platform that integrates the “challengers” into the platform.

It won’t be the Apps Stores that help consumers find the “specialty” financial apps out there. It will be the banks and credit unions. The FIs will vet the apps, recommend to their customers which ones are good, safe, and can be integrated. Consumers will pay for these apps, and FIs will get a cut of the revenue for helping the developers reach a wider base of users.

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To get back to the core question of the NetBanker post — “will mobile finally make PFM popular?” — the answer is: “It depends on how you define PFM.”

If you continue to have a narrow definition of PFM (i.e., budgeting, expense categorization), then the answer is NO.

On the other hand, if you define PFM more broadly, then the answer is YES.

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But a lot of bankers still won’t grasp the strategic importance of this.

It represents a shift in the underlying value of banking.

The old value was “money movement.” Banks were (still are) good at moving money. You parked your paycheck in the bank, then wrote checks (and more recently swiped your debit card) to the places and people you did business with, and the bank took care of all that.

The new value is “money management.” Despite the flagging economy and all the talk of the “1%”, the numbers don’t lie: Compared to even 20 years ago, our (Americans’) earning and spending power is as strong as ever.  But many of us don’t need help allocating and investing assets, and we don’t really need or want help to do budgets or categorize expenses.

There’s a whole bunch of stuff in the middle (where budgeting is at the bottom or left, and investing assets is at the right or top). Things like what BillGuard, Lemon, Credit Karma, and Manilla (and other “specialty” PFM providers) do.

Helping consumers not just make smart choices about how they spend their money, but what tools they use to track, spend, and manage their money could be — I think it WILL be — the way FIs compete in the future.