Competition in the financial services sector is a given, but the chairman and CEO of technology vendor Digital Insight is warning credit unions and their community bank counterparts that they should beware of "predators" lurking in the online waters.
John Dorman gave the closing keynote address at the Digital Insight National Conference here, and argued that the "usual suspects"-large financial institutions such as Bank of America, Citicorp and American Express-are not the biggest threat.
"There are new e-finance predators out there," he declared. "State Farm, E-Trade and Merrill Lynch are leveraging their nationally known brand names to try to become people's primary financial institution."
The "hook," Dorman counseled, is that everyone is using free online banking and bill pay services to lure consumers on board.
"If you can get people to do those two things, you have a good probability of being the primary (financial institution)," he said.
If these companies, along with other national brands such as Allstate and Target-which Dorman said also have plans in the works to offer financial services-are successful in establishing a foothold in the space, then CUs and community banks will be in danger of a possible "Wal-Mart effect," he asserted.
"Wal-Mart squeezed out local and regional retailers by selling products with near-zero margins," he said. "These companies could squeeze out financial institutions by leveraging their national brands."
To counter this potentially devastating scenario, Dorman said smaller institutions must offer superior member/customer service. "Will that be enough? I don't know, but they must be aggressive," he said.
Dorman noted that it isn't just small institutions that are facing threats from the larger retailers. He suggested the big players, BofA, Citi and AMEX, also have weaknesses and are product-centric and have niche product offerings, while the new e-finance predators are customer centric and have consolidated financial offerings.
More problems for the big banks: Dorman characterized their IT (information technology) systems as "creaky and old," with numerous constraints due to the legacy of previous decades. The predators, he said, are technology innovators who have the advantage of starting from scratch in recent years, with knowledge of the power of the Internet.
Exploiting The Loyalty Effect
Finally, he said, CRM (customer relationship management) is "still a dream" for the big banks, which are constrained by their sheer size. The so-called predators, he said, understand the "loyalty effect," and are prepared to exploit it.
"The industry is evolving-from the segmented way of doing business in the past to a financial services information hub," said Dorman. "The usual suspects are struggling, because the predators know how to integrate all of the pieces."
Internet banking does not merely "fit" the predators' plans, it is their "leading value proposition," he said. "For multi-channel competitors, online banking is the strategic cornerstone for ubiquitous access."
The "predators" offer incentives to get people to sign up for online banking. At a minimum, it is free, and some companies offer monetary rewards for joining. Online bill pay is marketed as a free, time-saving convenience.
A third service-online funds transfer-is being used by the emerging players as a means of removing the barrier of having a limited number of branches.
To counterattack, Dorman said smaller financial institutions must capitalize on their strong consumer ratings for service. "It is still a service business," he said. "Evaluate your strengths and focus on them."
The smaller institutions have the ability to create a strong value proposition for online financial services. Dorman recommended removing fees and transactional barriers in order to focus on consumer needs.
Dorman said he has hope that the smaller institutions can succeed. He cited a study that found 54% of consumers call regional/community banks or credit unions their primary financial institution, compared to 46% that go with the major banks. The advantage for the smaller institutions is even greater in small business market share- 67% of small businesses are with the smaller institutions, compared to 33% with major banks.
"The reason is simple-the smaller institutions offer better service; especially credit unions," said Dorman. "Credit unions have the highest ratings for service."
Those Who 'Get It'
Both the usual suspects and the predators "get it," Dorman said. They understand the need to lead with online banking and bill pay to capture consumers. Once captured, they employ targeted marketing to expand wallet share. "And they have their brand name and huge advertising budgets to accomplish this," he reminded.
To compete, he reiterated, credit unions and other small institutions must understand the value of the online member/customer, remove online fees and use their reputation for member satisfaction to their advantage.
"If we understand our strengths, we can win the game," he declared. "But we have to move aggressively, promptly and strategically."
