For at least 20 years, banks have been trying to stem the tide of disintermediation: consumers and businesses bypassing them in favor of nonbanks ready to provide a wide variety of financial products and services. Unfortunately, too many bankers are trying to solve the problem through re-intermediation, which is going back to the wrong future.

SUPERMARKET THEORY. With this 1970s approach, a banker might reason: "If stockbrokers and mutual fund companies are competing with us for deposits, then we must react by establishing our own mutual funds and by acquiring brokerages." Following this typical re-intermediation path, the new bank-as-conglomerate hopes to reclaim its role of provider-in-the- middle by offering a wider variety of products and services.

But re-intermediation strategies are likely to fall short for three reasons. First, the most successful businesses today have rediscovered the virtues of sticking to their proven core competencies and now disavow conglomeration. Most of the 1970s-style conglomerates-such as Sears, which attempted to enter the financial services arena-learned the hard way that adding unfamiliar lines of business can dilute their ability to compete, weaken shareholder and customer loyalty and multiply management complexity. Is there any reason that the new bank-owned conglomerates will fare any better in the decade to come?

Secondly, banks have long since recognized that simply offering additional products such as credit cards to all their customers indiscriminately will result in loss of market share to specialized organizations such as Advanta and MBNA who target customers. As a result, many banks now use sophisticated technology to glean insight from their customer information databases to more effectively cross-sell products.

This type of marketing approach has a weakness; namely, it is a one-way exercise. The bank is making an informed guess about what it thinks is best for a customer, without fully knowing what that person's preferences and goals are. So while the bank may increase short-term business, longer term customer loyalty may be sacrificed.

Finally, via the Internet, nonbanks offering financial products and services are adopting a dramatically more effective means of forging profitable relationships with customers: "neo-intermediation." Successful Internet-based companies are putting themselves "in the middle" in a new way by providing customers with two-way, personal and interactive services at little or no cost. This trust-building approach earns companies the opportunity to learn directly and accurately from each customer what's actually important to him or her. Armed with this intimate customer knowledge, these companies are better positioned to build loyalty and increase profits for the long term.

As a result, innovative Internet-based companies are the real threat to banks' primary role in the financial marketplace. Take, for example, Fidelity Investments. Based on the personal financial goals I enter into retirement planning software at fidelity.com, Fidelity advises me on how much I need to save and invest and where. Or, at riskview.com, Infinity Financial Technology will analyze my investment portfolio and calculate my "embedded risk" so that I can decide if I need to act. And, from my near- real-time personal portfolio update at my yahoo.com, buying or selling stock is only a mouse-click away at E*Trade.

This "new" way, of course, is really an old way that too many banks have forgotten. There was a time when the banks themselves had the trusted personal relationships with their customers. Now, customers often view banks primarily as aggressive sales organs or as faceless corporations interested only in fees-the downside of overdone cross-selling.

INTERNET INTELLIGENCE. Even what banks tout as innovative Internet banking can be misdirected if it follows the one-way marketing model. For example, when a bank charges an extra monthly fee for Internet bill payment services that already save it money compared to paper checks, the bank misses a key opening to earn the gratitude and loyalty of the very customers who are most likely to be looking elsewhere for alternatives.

The more astute banks realize that there are new and effective ways to turn cross-selling into interpersonal banking. Like their nonbank, Internet-based competitors, they are now gearing up to go back to the time of interactive and personal commerce-neo-intermediation. In short, they understand they need to go back to the right future. n

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