Kodak, bookstores, and record labels could see they were going to be disrupted, yet wouldn’t do anything to adapt. Will banks do any better?
By Jeffrey Cole
One of the most powerful things to come out of the Center are the lessons we have learned from 18 years of studying and tracking internet use around the world.
At the top of the list is the hard-learned lesson that companies facing intense disruption almost never turn themselves around when they are profitable. Disrupting short-term profits to make the changes necessary to transform the direction of the company is too painful and strongly inhibited by shareholders’ immediate interests.
One example of this is Kodak, which invented digital photography and knew what was coming to its film business. But Kodak was making so much money it couldn’t turn away from that business.
Another example, the music industry, was wedded to forcing consumers to spend $17 when they only wanted two songs (not 12) and would not accept that eventually consumers would buy only those two songs. They wouldn’t adapt their core business, and they sat by as it was disrupted by illegal downloading, then legal downloading, and now streaming.
Recently we completed Year One of a major Future of Money Project. We strongly believe retail (consumer) banking is one of the next major industries to be disrupted by major external forces. Those banks are so profitable that they will focus on their short-term profits rather than their long-term viability.
Banks know what is coming, but they will not do anything about it until it is too late.
What is coming is competition from established and new on-line players, giving consumers options they never had before. The banks are not ready — and are unlikely to make themselves ready — for that competition.
Despite the highly publicized and questionable practices of Wells Fargo, and the fact that many Americans (and Brits) blame banks and Wall Street for the great recession, we don’t hate banks. A large majority (78 percent) is satisfied with their banks, and an impressive 46 percent are very satisfied, while only 10 percent are dissatisfied. That’s the good news.
Companies facing intense disruption almost never turn themselves around when they are profitable. Disrupting short-term profits to make the changes necessary to transform the direction of the company is too painful and strongly inhibited by shareholders’ immediate interests.
The bad news for banks is that with all that satisfaction comes no loyalty. Only 11 percent think it would be very difficult to switch banks. In the beginning of mobile phones, far more people felt it would be very difficult to switch carriers: look what has happened in that industry.
Banks have never had to work very hard for their money and therefore have rarely gotten to know their customers or provided very good service.
An entire generation of people under the age of 30 have never thought of banks as places where they put money to make money; they have seen one percent interest rates almost all of their adult lives. They believe banks make their money trapping their customers into unfair and onerous fees whose costs far exceed any expense to the bank.
The banks’ own practices are coming back to hurt them. In order to give their customers what they wanted (and to save money) banks provided ATM networks and online apps. But those very services eradicated any personal relationship with the bank.
Already, most customers under the age of 40 have moved to online banking. They do most of their banking through their computers, iPads and, especially, smartphones, and they report that they rarely visit bank branches. Anyone who has visited a branch sees fewer people than in years past and a customer base largely over the age of 60.
As most customers are comfortable with (and prefer) online banking, and as most banks’ online services look the same, it’s an easy sell to get customers to look at online companies they know and trust as alternatives to their banks.
Will the bank of the future be a different kind of bank?
We could not ask consumers about their willingness to bank at new Fin-Tech (financial technology) companies yet to be created (or not well known) since there would be no established trust. We did ask about their willingness to bank at:
- Gas stations
- Post office
- Fast food chains
Without being able to evaluate their offerings (since they are not yet in the business) and being able to compare fees and services to their banks, 35 percent of consumers indicate a willingness to bank at Amazon, 28 percent at Google, and 24 percent at Walmart. Far fewer were interested in Starbucks or Facebook.
We strongly believe retail (consumer) banking is one of the next major industries to be disrupted by major external forces. Those banks are so profitable that they will focus on their short-term profits rather than their long-term viability. Banks know what is coming, but they will not do anything about it until it is too late.
We believe the great faith in Amazon and Walmart (and to a lesser extent, Google) comes from customers being very familiar and comfortable with these businesses, trusting them, and associating them with great value.
Banks, like bookstores 20 years ago, know they will ultimately do battle with Amazon (and others). They understand that Amazon will use its vast resources to create an efficient, low cost, online alternative. And it will. But Amazon’s method is to do far more than efficiently compete: Amazon will completely disrupt the financial services industry as it did to retail with Prime Memberships, Dash Buttons, Alexa, and the Amazon Go Market.
Banks know what is coming. They are making early efforts to combat the coming threat. They’re bringing digital experts into the bank, changing their services, and trying belatedly to be more customer-friendly. These are good, if modest, efforts.
However, our work strongly suggests that even though banks do know what is coming, their high profitability will not allow them to disrupt themselves — to change quickly enough to preserve their importance to their customers’ finances.
Banks are likely to be the next major industry to learn the painful effects of digital disruption.
Jeffrey Cole is the director of The Center for the Digital Future at USC Annenberg.
November 2, 2017