The banking industry stands at a crossroads. Strategy for the large majority of banks reflects the legacy environment of a regulated industry, whose competitors are basically other banks, where market power is a function of size, and cost efficiency the key to profitability. The deficiency of this strategy is suggested by the continuing wave of consolidation and merger, where low performing banks futilely attempt to increase their performance through a change in size.
Size is not the problem. Indeed, size often contributes to the problem. The problem is a mismatch between banking strategy and the banking environment. As regulatory barriers have fallen, the market for financial services has become more dynamic and fast-paced than before. Non-banking financial institutions and non-financial corporations are entering the market with gusto. Although banks have increased their business in this context, they have lost market share to their new competitors. Bill Gates may have been premature in describing banks as dinosaurs, but the emergence of cutting edge financial service providers such as Yodlee MoneyCenter and Wal-Mart's foray into banking are clearly a "shot across the bow" of traditional banking strategies.
The emergence of the Internet has played a key role in facilitating and accelerating change in the market for financial services. The Internet has provided banks' competitors with a low cost channel of distribution. It has educated and empowered consumers and permits a qualitative jump in convenience for them. Convenience is clearly the driving force in consumer behavior today. It also facilitates the development of relationships much more powerfully and cost-effectively than possible on a face-to-face basis.
Many banking executives have trouble accepting or understanding the profound changes the Internet is bringing to the market for financial services. The younger generation of bank customers certainly do not. They relish and embrace the constantly changing technologies that provide them with increased information, power, and improved access to financial services. Moreover, they have come to expect it. The coming years will see business increasingly flow to providers of financial services who meet these expectations.
Banks in general have become too complacent about their online banking facilities. This complacency reflects a general strategic lassitude on the part of banks that are more interested in preserving their status quo. The failure to recognize online banking as a tool that can be used to aggressively expand business reflects the larger organization's strategy of "business as usual." Online banking facilities are the metaphorical equivalent of a "canary in the mineshaft" for banks. The canary will perish or flourish as a reflection of the strategic health of the whole organization.
There is an increasing disconnect between current online banking practices and the potential for online banking practices. This disconnect has three dimensions: (1) the gap between the expectations of younger Internet users and older Internet users, (2) the gap between a domestic focus and an international focus, and (3) the gap between current static web platforms and the new dynamic web platforms. This disconnect will become less and less over time because competitive forces will drive banks to make online banking a more aggressive and important source for serving their existing customers and attracting new customers. The issue is not if current banking strategy will change to embrace the potential of the Internet, but when it will change.
In their current state, online bank web sites have become just another distribution channel for banking products. This approach has allowed web site costs to be controlled and online banking to become a profit center (although one whose recognized profits have not been exemplary). Banks have settled into a "me too" strategy in online banking, where websites appear to have the goal of functional efficiency and are used to maintain the bank's status quo in its markets.
Those banks that have thrown up their hands and settled for indifferent online banking web sites find their web sites a reflection of their overall banking strategy. Unfortunately, that strategy is one of resistance to change, an attachment to legacy systems, an emphasis on past successes, and an obsession with present market power. These banks become indifferent performers in the market whose only hope for success comes from merger with other similar banks to capture the short-lived benefits of an increased asset base and an illusionary increase in market power.
The opportunity is still present for banks to leverage their status and existing banking relationships to dominate the financial services market in the future. This will not happen unless banks alter their traditional static strategies toward the market they serve. The time has come to rethink banking strategy.
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