Have you ever caught yourself paying a $3 ATM fee to avoid driving across town to your own bank's ATM? Add up the value of your time, gasoline costs, the need to complete a necessary task and it's easy to justify that $3.
Convenience is king for many of today's consumers, and banks should adjust to this changing behavior. Customers are flocking to online, mobile and ATM banking like never before. By the end of 2013, the Federal Reserve expects 42% of bank customers to use their smartphones for banking. Rapidly changing technology and demographics are going to accelerate these trends.
For financial services companies, the transition to mobile and online banking is a paradox. To stay competitive, they know they need to offer popular online conveniences, such as depositing a check with a smartphone from any location. They also know every time a customer doesn't enter a bricks-and-mortar bank branch to make a deposit, they may be missing a face-to-face sales opportunity.
A decade ago, new bank branches were popping up on corners seemingly overnight. This trend was driven by customers choosing banks based on location. But the Internet is changing the traditional model. Customers are now able to choose a provider based on their product needs, and this may or may not be their local branch. Many banking products and services are commodities and, thus, customer behaviors are driven increasingly by price and convenience.
Because of dwindling foot traffic in bank lobbies, the leaders in banking are closing more and more branches every day. Branch economics are expected to be a major focus for banks and other financial services companies in the years to come, especially in light of the Fed's announcement that low interest rates will continue into 2015. Sales and asset origination opportunities for many institutions will likely not return to levels seen prior to the financial crisis until then.
Additionally, you're seeing more prepaid debit cards. Customers like them as an alternative to checking accounts and credit cards and banks like them because they can charge transactions fees that they can't with a regular debit card. This trend will also allow some non-traditional players to enter the banking marketplace. The recent partnership between American Express and Walmart is only one example.
What does this mean for banks? In an increasingly competitive marketplace, they must continue to innovate to compete in the new online banking market and properly engage and build loyalty among customers.
Using data collected from debit and credit cards transactions, banks can better target customers and sell them financial services products that are customized based on the particular customer need.
Based on the earlier ATM example, it would seem that banks could capitalize on customers who are willing to pay for convenience. Other tactics include image-enabled ATMs, automatic bill pay, online and mobile bank services and large ATM networks.
However, banks must set prices accurately because customers generally hate fees. Last year, when several large banks tried adding debit card fees to non-ATM transactions, customer backlash caused many banks to abandon the idea. Also adding to the challenge is the fact that banks are generally not very well perceived by customers for service and value.
With all these innovations becoming available, it's important that we put ourselves in the shoes of the bank customer. What do they value most? Is it personal service? Security? Convenience? Chances are it’s all of the above.
In this changing landscape in banking, it's important to realize our own preferences as consumers can help shape the products offered at financial institutions. It also will be increasingly important to understand the economics of those products and services to price them appropriately.
Brad Anderson is a partner at Armada Consulting, a professional services firm focused on strategic cost management solutions for clients across North America. He is also the financial services lead out of the firm's Charlotte, N.C. office.