Wingspan Bank. Remember the short-lived online-only bank launched by BankOne in the late 1990s?
A recent post at Bankwatch called attention to an American Bankers Association survey showing that online had become the most-favored channel for bank customers for the first time. Memories of Wingspan, Telebank, Jupiter Bank, and others that made a go at the online-only business model came flooding back along with the unanswered questions. Was online-only banking the wrong idea, or was it just the wrong time? With changing consumer preferences, might we expect a new breed of online-only banks to emerge soon?
The failure of the online-only banking model provides an interesting contrast with online-only brokerage, which has been a resounding success. Online brokers have approximately 20 MM accounts, or 15 - 20% of all retail investors. The largest public company in the space, Charles Schwab, commands a market cap of $20 B+. And while there are dominant players, there are many smaller brokers trying to carve out space in the industry with a variety of strategies centered on low prices, customer focus, and innovation.
Why the different outcome? Online brokerage had the chance to significantly increase value for consumers in two ways. First, these firms were able to significantly reduce brokerage fees, which remained stubbornly high at full-service brokerages even after the deregulation of fees in 1975. Second, the internet was a fundamentally superior channel for distribution of investment content for the increasing number of self-directed investors. In more recent years, online brokerages have introduced sophisticated trading and investing tools that historically would have been available only to professionals.
These big opportunities to add value were not available to retail banks. More intense competition had already significantly reduced or eliminated many retail deposit account fees by the 1990s. In fact, First Chicago provided the famous example of having to raise fees in order to create room for incentives to use electronic channels.
Banking is also a more transaction-intensive than information-intensive activity when compared with investing. Online-only banks likely found trusting the channel for transacting from a primary account was a bigger leap for most than performing research on investment opportunities and conducting a trade at the end of that process. By the time the culture had shifted enough to make online banking transactions more commonplace, the moment had passed, and online was left as a channel for traditional banks rather than a chance to build a new banking business model.
However, continued increases in comfort with, and preference for, online banking might combine with other developments to open a new window for online-only banking business models.
First, retail deposit and credit fees are increasing, creating the opportunity for lower-cost operators to steal share. An interesting study by the Federal Reserve's Timothy Hannon has demonstrated that even before the financial crisis an increase in market share for multi-market banks was leading to higher deposit fees. Combined with the well-publicized fee increases over the past year, a window may be opening for new competition.
Second, the current crisis points to the need and desire for new banking business models. Colin Henderson at Bankwatch has been blogging on the topic of innovation and new business models in banking for some time. Notable posts of his worth reading include discussions of utility vs. risk-taking banking (see his post, The Great Unwinding). Umair Haque presents some more aggressive ideas, such as Can Google Take on Wall St -- and Win? The future of banking is clearly unknowable, but it's a good bet that the combination of shifting consumer preferences and market turmoil create a great opportunity for some entrepreneurs to shake up the industry.
Takeaways for marketing strategy and analytics:
1. Another example of how hard it is to change consumer behavior. Multiple areas of increased value are often required to get consumers to shift channels, and lower prices is part of the equation.
2. Timing is critical. Sometimes the stars need to align, and early innovations may fail. But that doesn't mean the idea won't eventually catch on.
3. Industry structure matters. Sometimes old tools like industry structure analysis and Porters Five Forces rust away in the tool box (e.g., how concentrated is the industry). But they remain relevant and can powerfully explain business success or failure when used in conjunction with good customer research.
Comments