As a member of the banking industry, there are two pivotal questions you should be asking yourself regularly: 1) Who do you compete with? and 2) How often do you rethink your strategy? Community banks are quick to stall on these answers and instead fall back on the usual themes:
Challenges with core
Challenge of innovation
Unfair regulatory environment for fintech or tech companies.
These are nothing more than the usual rants by the usual suspects. In fact, it reminds me of my favorite movie from the 90s: “The Usual Suspects.” There’s a scene where “Verbal” Kint leans in to tell his interrogator about the devil’s greatest trick. He says, "The greatest trick the Devil ever pulled was convincing the world he didn't exist."
Spoiler alert: The subtext to that quote is that Verbal is actually referring to Keyser Söze, the mafioso who is really a phantom, a red herring to throw off the investigators.
There’s a parallel between Verbal and big banks. Namely, the greatest trick that big banks ever pulled was convincing community banks that their greatest competition is other community banks or — the greatest devil of all — credit unions and their fat tax advantages. Big banks have also dangled the idea that Amazon may become a bank in front of their community-based counterparts.
Spoiler alert (again): Amazon is not going to become a bank and not because it can’t; because it doesn’t need to. Why? Because Amazon is already partnering with...big banks.
With these facts in mind, it becomes easier to see the flawed logic underpinning the notion that community banks are solely competing against themselves. Michael Porter, the Godfather of Strategy, created a framework for understanding competitive factors at play within an industry. Known as the Five Forces, this framework also outlines which forces impact how economic value is divided among industry players. The Five Forces are:
Industry rivalry
Threat of new entrants
Threat of substitutes
Bargaining power of suppliers
Bargaining power of buyers
It’s a helpful model for guiding organizations on how to position themselves for success. This article serves as the first of a five-part series analyzing the banking industry through Porter’s framework. The first part we’ll explore is industry rivalry.
Technology Changed the Playing Field of Industry Rivalry
Community banks almost always define competition based on geographic proximity. Ron Shevlin wrote an article discussing this concept and the title says it all: “The Problem For Small-Town Banks: Technology Has Redefined Community.” This is true and that truth packs a punch.
Ron spends some time driving home the new reality that big banks are leveraging big tech budgets and how that reality is deepening the divide between big banks and small ones. Beyond the ability to offer better, more advanced capabilities lies another new reality: technology has changed the playing field by making it easier to move money. As a result, geographic proximity has become a moot point.
This reminds me of a conversation I had with a community bank in Hawaii. The greatest defense to this bank’s existence was the giant moat surrounding the bank, otherwise known as the Pacific Ocean. Between the moat and extremely expensive real estate, big banks were hesitant to build a branch network on the island.
In 2020, however, technology has made it easier than ever to cross that moat. Big banks are no longer thrown off by middle-of-nowhere, teeny tiny, cornfield-laden towns. Today’s technology has made it seamless for big banks to grab customers in the most remote locales, throwing a pin down in the ever-growing digital map of the banking network.
The Strategy Metamorphosis
This new reality calls for a shift in strategic ideation. Specifically, there are five places where strategy is beginning to change for community banks:
Partnerships with Big Tech
Partnerships with little tech
Reimagining the branch
Influences to strategy
Idea incubation
Let’s start by looking at partnerships with Big Tech. Take the Apple Card — a product of a Goldman Sachs and Apple partnership — for example. Why does this partnership excel? It’s not because Goldman lacked some measure of technical aptitude. We know this because it has successfully veered into technical territory with Marcus, the digital bank launched three years ago that is now powered through the Marcus app. As of January, Marcus hit $60 billion in deposits.
Nor is the partnership a result of a deficit in Apple’s ability to become a financial institution. Just a glimpse at Apple’s customer base and financial power is enough to make incumbents get a little weak in the knees. Those same qualities also make Apple an enticing partner for a slew of financial institutions. The reality is that Goldman and Apple both came to the table with the understanding that this particular combination had the potential to be especially potent.
One more spoiler alert: size isn’t all that matters.
Partnerships with little tech can be just as formidable. Lincoln Savings Bank, one of our members at Alloy Labs Alliance, is the bank powering Square. Banking as a Service is a powerful strategy for banks looking for novel ways to differentiate. Partnerships with little tech are feeding into a new wave of B2B (Business-to-Banking) fintech geared towards creating new tools for banks to better serve their customers.
At Alloy Labs Alliance, we’ve partnered with ClickSWITCH for account switching, Numerated Growth Technologies for small business lending, and Neocova as a challenger core. These are just three companies that our consortium can look to for examples as they continue to build out their own tech strategies.
Reimagining the branch is another sweeping area of change when it comes to strategy. Wainwright Bank in New England was a pioneer on this front in the 80s and 90s. Outreach and partnership with nonprofits were core to their strategy and they were progressive about reimagining the branch around this core constituency. As a result, they created spaces within branches for nonprofits to host board meetings, adding value to their large customer base in a fresh way.
Others continue to follow in those footsteps today. Capital One and their cafes aside (can I please access the ATM in a convenient location and outside of branch hours?), other banks are beginning to envision the branch from their customer’s perspective and pivot accordingly.
Citizens Bank of Edmond and CEO Jill Castilla (both members) did exactly that for their small business customers in Edmond, Oklahoma. Let me set the stage: the 91,950-person city has no WeWork or any other coworking space to speak of, save the local Starbucks. Citizens Bank of Edmond, on the other hand, was flush with real estate. They reimagined a branch, not via updated furniture or by removing the glass from the teller station, but by adding real value and solving a real problem. They consolidated their existing branches into one coworking space, Vault 405, to accommodate their small business customers. In other words, the bank identified a key problem a bulk of its customers faced and reimagined the branch to solve it.
Banks are seeking out new sources of influence as well. Finovate has served as a showcase for fintech startups for more than a decade, but it is only now starting to bridge the chasm between fintechs and banks. Branded as a series of conferences that highlight “cutting-edge banking and financial technology,” this organization is just beginning to scratch the surface of true bank and fintech partnerships.
The Financial Brand is another great example of a new source of influence for banks. The Financial Brand has done very well at bringing in speakers that are able to address non-banking problems. These experts speak to relevant, strategic topics like engagement and customer-driven development, but come from outside of the banking industry. These unique perspectives breathe fresh insights into an industry that teeters dangerously on the ledge of stagnation, largely due to its own inability to see outside the banking bubble.
We’re also seeing banks pop up in even more unexpected places like SXSW and the Consumer Electronics Show (CES). This is another important development and banks begin to step outside of the bubble and recognize that banking is no longer exclusively happening within a branch.
The final change to the strategy metamorphosis is the way idea incubation occurs. Some big banks have created their own accelerators, like the Barclays Accelerator, powered by Techstars in each of the cities where Techstars has a presence. Others are partnering with local accelerators or finding other ways to bridge the gap into the incubator ecosystem. The most exciting development is the way banks are endeavoring to incubate ideas internally. Strategic ideation is no longer bound to the top-down flow of ideas but one that starts by giving the front lines — those closest to customers — a greater voice in how strategy evolves.
Industry rivalry is definitely changing, but the change goes much deeper than digital transformation alone. Sure, digital enables a step function in capabilities, but those capabilities are the means to change how strategy evolves at leading banks. They are not an end, but just the beginning of how banks are changing the nature of rivalry. The next frontier of banking strategy is not about the internet or digital transformation; it’s about rethinking who your customers are and how to best serve them.
If Main Street banks want to survive, they need to think beyond their little corner, perk up, and pay attention to the realities of banking in 2020. This means moving beyond digital transformation to a strategic transformation that views competition and industry rivalry through a more realistic lens. The devil is real and the sooner banks lift the veil on what the real devil looks like, the better equipped they will be to thrive.