The Future Model of Banking
JP Nicols is the founder and CEO of the research and innovation firm Clientific, and a partner at Bank Solutions Group.
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How Banks Can Escape the Fate of 'Dumb Pipes'

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Most prognostications on the future of banking focus on predicting winners and losers through the lens of consolidation: who will be the buyers and who will be the sellers? Just as important over the next decade will be the answer to a different question: who will leverage the power of their platform?

Over the last century telephone companies, cable television companies and Internet providers successively built massive infrastructures to create proprietary platforms on which to deliver services to their customers. Monopolistic market structures helped to protect the huge capital investments needed to build those platforms, for a while. But eventually alternatives arrived (wireless, satellite, broadband, and others), and merely having a platform proved to be inferior in the long run to providing the services and experiences customers want.

Winners innovated, pivoted, acquired, and yes, merged with others. But a merger of two or more inferior providers is not the path to success. It only buys time with the promise of reduced costs. Scale and an installed user base can provide some advantages, but it isn't an impenetrable moat, as AT&T, AOL and others have discovered. 

These companies found themselves as the "dumb pipes" through which other companies were profiting by distributing valuable content; and as competition increased, they went on the offensive to buy and create content of their own. Without consumable content, the pipes are worthless.

A friend told me about working for a start-up wireless company that was acquired by AT&T in the early 1990s, and the culture shock that resulted. "None of the executive leadership team even carried a cell phone," he told me, "and they literally thought that talk minutes were the only thing they had to sell."

The issue goes far beyond a lack of creativity or limited exposure to new technologies (AT&T owned Bell Labs). The bigger and more pervasive problem was being stuck in an old paradigm with managers focused on managing what they knew and protecting what they had already built.

Bankers have made similar infrastructure investments, and they are stuck in their own paradigm too— but instead of talk minutes, their equivalent paradigm is net interest margins from gathering deposits and making loans. These services are largely commodities that can be provided by any competitor indistinguishably, and the platforms of a branch and ATM networks, even payment networks, are not the competitive advantage they once were. They are just the dumb pipes for delivering the commodities.

The biggest winners will leverage their platform and invest in the products, services and experiences that customers want, and for which they are willing to pay a premium.

Look for these banks to leverage the deep knowledge they have about their customers to develop sharper insights and tailor their offerings to increasingly well-defined sub-segments. Think of the power of Google's or Facebook's platforms based on their intimate knowledge of their users' behaviors and preferences. The successful banks of the future will turn their petabytes of customer data into better experiences and better profits.

Banks know what their customers earn, how much they spend, and where they spend it; but most have done little to create lasting value out of that knowledge. Banks employing this strategy may also make some surprising acquisitions and partnerships outside of the industry as ambitious leaders look beyond legacy products for new revenue streams, and increasingly providing non-banking services to customers in branches and via online and mobile channels.

New innovations from nonbanks will need a platform to provide distribution and the ability to scale quickly, and smart bankers will partner with startups to provide together what neither could do alone. Even entrepreneurial darlings Moven and Simple removed the word "bank" from their names and partnered with banks to provide the underlying chassis to carry their innovative customer experience.

As banks scramble to react to cutting edge technologies developed by startups and launch innovations of their own, some of the brightest glimmers of the future may actually come from cooperation and collaboration.

JP Nicols is the founder and CEO of the research and innovation firm Clientific, and a partner at Bank Solutions Group. He writes about the leadership, advice and innovation for the future of wealth management on his Affluent Strategies blog at jpnicols.com.

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