Back to basics banking

"Back to basics" is a phrase that seems to be coming up in banking quite a bit. It refers to the strategy of eliminating activity that isn’t "core", of concentrating investments on those customer segments which are most profitable, and looking to grow the business organically.

I’m always so surprised at the reliance people place on "back to basics" whenever the going gets a bit difficult. They do so based on the inherently flawed assumption that what worked in the past will continue to work in the future. The historical time scales of banks – decades with only gradual changes – make it seem as if this a workable strategy. When turn your head backwards and see the same thing as when you look forward, it is easy to imagine that nothing is very different.

The basis of competition is changing, though.

When you ask bank vendors – whom are interesting as barometers of what is actually happening, because they only pick up the most coarse-grained signals about what is really going on -  what they believe our top challenges are, they invariably answer with at least the following:

"margin shrinkage"

"acquiring customers"

"reducing costs"

Look at all three. The first and second are signs that customers are less willing to pay for the capabilities we are giving them since what they have is good enough. And as we give them more capabilities in an attempt to increase margins, they are fleeing instead from the higher price.

The third – cost reduction – is a reaction to the other two. Failing to get the rewards from developing new things, there is little to do but get rid of as much cost as possible. Reducing costs equals, essentially, "back to basics". Reducing costs is an acceptance that what you are doing has become a commodity and the basis of competition is price.

The emergence of "back to basics" is a sign that an institution has conceded (even if it doesn’t realise it) its core businesses to emergent competitors who will likely have superior cost advantages. These are competitors who do good enough excellently.

What is needed is the ability for an institution to do something pretty rare: take on good enough with good enough  of its own, and to do so on a level cost-based playing field.

Back to basics, if you want to execute it right, means starting again. It implies investing in something that exists outside the value and cost systems of the parent institution and letting it get on with dealing with the highly optimised good enough competitor.

Now here’s the rub. How many executives do you know that would choose to invest in a business over which they will have limited direct control and which will – eventually – be going after their most important customers?

I know of practically none. Executives are not in the business of getting rid of their jobs.

That’s why, in my view at least, back to basics (when run by the main business) is a bankrupt strategy, doomed over the long term to reducing value rather than creating it.

But don’t just believe me. Look at the many examples across the industry: back to basics in online payments, because no one has come up with a compelling way to go after the customers using PayPal. Back to basics on savings accounts because "good enough" worked excellently for ING Direct. Back to basics on mobile banking because, actually, most people are very happy with their call centre.

So instead of Back to basics, I’d be trying back to the beginning and a bit of patience instead. Though I accept, of course, that for some institutions there may not be sufficient runway left in the main businesses to allow much of the latter.

2 Responses to“Back to basics banking”

  1. June 13, 2008 at 4:10 pm #

    This is such a timely post for Banks. Whether its bakc to basics, or return to fundamentals, nothing addresses the core problems that you highlight in your penultimate paragraph, that banking is being disrupted, and yet Banks fail to recognise that. Nero fiddling etc.
    The credit crisis is a warning shot, yet I fear that Banks the evidence does not suggest any lessons have been learned. People cannot invest quickly enough in the recent rights issues and capital rejuvenation in Banks, suggesting most believe that Banking ‘normal service’ will return, after this short break.

  2. June 14, 2008 at 10:42 pm #

    As a Consumer I have no interest in the “products” my bank has to sell. Over the past year I have experienced that the “insurance” product they sold me at the time of taking my mortgage was useless and over priced. This combines with aggressive cross selling means that all I am interested in is payments.
    Thanks to the rising markets I have managed to clear my mortgage and so am no longer tied to any Bank.
    I am closing my account with a high street bank and transferring my funds to a Private Bank. The reason is that they have an incentive to offer customer service which the previous Bank did not. They do not seek to have scale they aim to give a personal service and develop a relationship that lasts generations.
    I do not expect that they will be offering Mobile Banking any time soon. But then the Bank I am leaving does not offer it so its no loss.
    Technology will not replace a named manager. I am now in a situation that sees me well placed and looking to optimise my income and assets.
    Rather than acquire customers I would recommend that Banks seek to reduce the number of account holders and return to providing high levels of personal service. If that service is values then it will be paid for. If not then the market will see the Business fail.
    The Web 2.0 arena shows that the future is in Personalisation. The Banks could do well to understand this and start delivering a service that is more than lending. The Us Banks seem to have adopted far more complex analytic tools that have enabled them to quickly deliver products to customers. They also spend more money on customer acquisition because they now that the Value of a relationship.
    Might the future be a return to the days when having a Bank Account was something that few had? Would the economy be better if the man in the street had only a savings account in a mutual society?

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