In the past, it was time consuming, chancy and potentially expensive for a consumer or a business to change banks.
You'd need to fill out paper forms, apply and wait to be approved. Meanwhile, your current checking or lending bank might cause difficulties. Furthermore, maybe no replacement bank would be equally convenient. "Fortress banking" was also strongly protected by government against most nonbank competition, such as Visa cards issued for finance or prepaid card companies.
The consequence was limited competition, making banking potentially very profitable. You could charge higher interest or pay less, knowing customers had a high barrier to cross to take their business elsewhere. Particularly because, unlike taxis (a similarly local and protected franchise), banks weren't subject to comprehensive price regulation.
All of that has been changing at an accelerating rate, as bank accounts and customers become progressively unstuck. Technological advances, universal availability of customer financial data, nationwide and virtual banking, and deregulation have loosened the glue. With customers free to switch, we lose our lock-in and have to compete more closely day-by-day on prices, benefits and service.
A recent survey found that customers want to "increase transparency and competition," including portability.
The first major phase of unsticking, the liberation of customers from "my bank"—enabling them to obtain different banking services from multiple banks and nonbanks—has, over a period of decades, progressed so far that we now take it for granted, though our grandparents would not have. Unshackling consumers from "my bank" made today's credit card and mortgage oligopolies possible.
But most consumers' accounts—their checking accounts, credit cards and mortgages—still persist for many years. For users of paper checks, it's a significant nuisance to switch banks. Credit card rewards (and the difficulties and perceived risks of getting a new card if you're not a confident prime credit) also harden relationships. And mortgage underwriting is again so time consuming, unpleasant and uncertain that borrowers don't refinance even when conditions are very favorable.
But, look what happens when a financial service isn't sticky.
Median life of prepaid card "relationships" is often less than three months. Many cards are loaded once and disposed of. Because, easy come—easy go. In consequence, prices have dropped rapidly. What used to cost $10 per month now costs practically nothing. And that's not because there's been a revolution in technology in five years.
Another example is computerized tax preparation. Since taxpayers need this service only once a year, many start all over again, without much attachment to last year's vendor. The result, again, was price declines towards zero, despite increased features and benefits.
Electronic payments and increasing automation and standardization of consumer loan underwriting, plus expanding prevalence of offers and preapprovals over applications, all imply faster exposure of major banking services to competition. This tends to make commodity banking less profitable—and potentially riskier. (New customers are the riskiest customers.)
How to respond to this adverse trend—other than buying back your stock and shrinking?
Some customers will pay more for decommoditized, customized services. But you won't hold many for long just by putting their pet's picture on their plastic cards. Especially when you get that capability from the same vendor who's selling it to all your competitors. Create exclusive, non-commodity benefits. So far, even the megabanks have accomplished remarkably little of that.
