Banks and other financial service providers want to differentiate themselves from the increasing number of competitors and position themselves as offering their customers something unique. The benefits of doing so are multiple — among them, greater marketing effectiveness, increased retention, and more cross-sell.
At the same time, it is harder than ever for banks to rise above the “noise” of bank advertising and marketing. However, the similarity and banality of many of the messages being communicated (“We’re a people’s bank;” “We care about you;” “We’re friendly”) fail to stick with customers and leave many viewing banks as utility-like players. In short, it has become increasingly difficult for banks to differentiate themselves with customers, and we expect challenges related to decommoditization to increase.
What practical steps can banks take to decommoditize themselves from the banks and credit unions and brokers, etc., that are all focusing on the same customer base?
Define the customer. We think the first place to start is with the customer. To this day, too many banks try to be all things to all people. We have written frequently about segmentation. Part of the value of segmentation is that it helps management determine which customers are high priority and which should be downplayed. Once that decision is made, banks can gear products, delivery channels, and the overall market positioning toward that customer set.
Example: Much of American Express’s business focuses on professionals who run microbusinesses (less than $1 million in revenues). Products (line of credit, T&E card, etc.), delivery channels (selling by mass media, service by phone and online) and marketing (“We are small business focused”) are all aimed at supporting and communicating this message.
Example: Industry specializations in a bank’s small business and middle market areas. Chase Bank, going back to its Chemical and Manufacturers Hanover days, created specialized industry groups. With few exceptions, all major middle market bank areas now operate with an emphasis on anywhere from five to 20 industries. That is not to suggest that they do not serve other industries as well, but these are the areas that they emphasize and in which they want to become known players. Similarly, small business groups operate with an industry and/or demographic focus (for example, professionals, women-owned businesses, Hispanics, etc.).
Some of the benefits of this approach that bankers mention to us include: reduced marketing costs because of increased networking and referrals, improved credit quality because of an enhanced knowledge base about an industry, and increased productivity due to better understanding of both what the customer wants and what is acceptable to the bank.
Example: American National Bank of Chicago. To this day, more than ten years after its acquisition by the since-acquired First Chicago, midwest bankers cite this institution as the pre-eminent middle market bank. Basically, ANB positioned itself as a business bank. Period.
Other decommoditization approaches. Other than “selecting” your customer, approaches to decommoditization may involve products, banker quality, culture, or service. By the way, these approaches are never mutually exclusive.
Products. The now-acquired Bankers Trust was a leader in developing very sophisticated structured finance and investment products aimed at large corporate clients and the upper end of the middle market. Deliberately, they were transaction rather than relationship players. However, the cost of constantly reinventing and extending the product mix and difficulties in doing so was high and, ultimately, unsustainable.
The quote in the sidebar typifies what we hear from many of our bank clients. The fundamental products are similar from bank to bank. The way in which a bank packages an offer, how it communicates to the target, and how it services the customer distinguishes that bank from others. For most players, differentiation based on products is unsustainable. Some exceptions: AIG in its focus on international risk management and GE Capital’s ability to finance certain types of equipment. However, these and a relative handful of other players are exceptions to the rule.
Culture. Going back ten years, a number of banks had very differentiated cultures. For example, the pre-First Union Wachovia and the pre-Chase J.P. Morgan were distinctive. As good as these banks may be today, they no longer have a culture that is as easily definable or uniform, having been to some degree homogenized by multiple acquisitions. A strong culture seems to reign at a few investment banks, such as Goldman Sachs, and at credit unions with their non-profit focus.
Banker quality. One upper-end middle market manager commented, “We need bankers who are experienced. We are not teaching our customers anything. We need to have good listeners who can spot opportunities. Our people have to have a broader skill set than others in the market.” Attracting and retaining high quality bankers is critically important to distinguishing yourself in the marketplace. Some banks believe that their bankers have to develop proprietary-like relationships with customers that emulate that of the Merrill Lynch broker versus a typical bank.
Service. This is the area in which many banks are focusing. Smaller banks believe that they can outserve the BofA’s, Wachovia’s, and others (we are somewhat skeptical on this point). Some good examples of decommoditization by service exist. We frequently mention Commerce Bank of New York/New Jersey. They really are great at serving the customer and demonstrating to them that they are pleased the person walked through the door. At many other banks when you walk into a branch it seems that a cloak of invisibility has descended upon you…not at Commerce.
However, smaller banks are making a mistake if they think the big banks do not “get it.” Service levels at Citi, Wachovia, BofA and many other large players are receiving focus at the highest levels of the company and these issues are being addressed.
Banks need to fight against the customer’s general perception that banks offer mediocre service. In this case credit unions appear to have a natural advantage versus the banks. Look at USAA as a model here. Love is an unusual word to use in the context of banking, but their customers appear to love USAA. Why? An unremitting focus on service and doing the best for the member…no matter what.
Commit and invest. All the examples of successful differentiation (American Express, Chase Middle Market, Commerce, and USAA, among others) all required a commitment by senior management and all required time. Too often, banks begin to go down a path that could lead to distinguishing them and then lose momentum and focus by replacing one initiative with another.
The players that have distinguished themselves with their customers, first decided what they wanted to be and then committed the time and energy necessary to make it work. AMEX has been communicating its message for years; AIG has had its focus for decades; Commerce Bank began its existence with the customer’s service and convenience needs in mind.
Unfortunately, no magic wand can be waved resulting in decommoditization. As with just about everything else in financial services, once management completes some tough and rigorous analysis of its best path to decommoditization, it needs to pursue tough and rigorous execution of the implications of that analysis.