A number of years ago The Wall Street Journal carried a front page story about the owner of a music store chain in North Carolina. He was selling his stores because he could no longer compete with Internet downloads, and he wanted to get out while he could still make some money on his business.
Had you bought Apple stock that day, you would have achieved a return of more than 800% in just under four years.
The point is not that the stock was a great buy, but that this businessman had the wisdom to see an early signal and react to it. I see banks today at that same inflection point, and I see a lot of denial in financial services boardrooms.
Let me draw the industry parallels. The music industry pushed its product through physical distribution in packaged bundles. Consumers had no option but to buy eight songs they did not particularly want in order to get the two they did, because the industry made its margins on those bundles.
Sound familiar? Banks compensate their sales force to make sure every consumer walks out with 3.4 products, whether the consumer wants them or not.
As the population that prefers the face-to-face model approaches retirement, and fewer and fewer walk into bank branches, the scramble gets worse.
But rather than focusing on the Internet (as Apple, Wal-Mart, and other music disintermediaries did), many banks are doing the opposite — building more stores. If the average consumer's checking account holds $700, how many checking accounts do you need to acquire before you pay back that million-dollar investment? And how much further does your margin deteriorate as you compensate the sales force for every product they sell that the consumer never uses?
If we return to the music industry parallel, the disintermediation has occurred through the Internet because of several key factors. Consumers can buy when they want from wherever they want; they can purchase only what they want; they get instant gratification (listening to the song as soon as they have paid for it); and a price that is reasonable encourages them to return.
Banks need to follow the same strategies on the Internet. Enabling account opening online — and yes, you can build in all the "know your customer," risk, and security management you need — means consumers no longer have to leave their desks and spend their lunch hour opening that account.
I have also found that decluttering the decision by allowing people to apply only for the product they are looking for means that they are much more likely to finish the application (bundled applications mean much higher abandonment rates) and to return to buy the next product, because that initial purchase decision was so uncomplicated.
Give them immediate gratification in the form of instant account opening, so they can log into their new account in the same session they open it. And give them great rates, in recognition of the fact that they are servicing themselves. Consumers expect pricing on the Internet to be better. What is the cost of opening these accounts online? Around $6-$8, because of the automation of the back-office process.
A 2005 consulting study on branch banking indicated that urban areas would soon become oversaturated by banks, and that physical distribution would reach 30% excess capacity by 2010. As more banks open branches on every street corner, you wonder if it will even be that long before banks begin to shutter the branches they only recently opened.
WebProNews recently reported that a study of people under the age of 34 showed that 75% preferred to bank online, and Synergistics Research reports that over a third of mass affluent customers say they have used a direct bank or online financial institution.
Again, to return to the music analogy, it is these under-34-year-olds who have driven much of the success of MP3 players and music downloads. They have grown up with instant messaging, video games, and constantly-on technologies. Their idea of "high touch" is text messaging. They spend more time on the Internet than they do watching TV, and many of them cannot remember where they put their checkbooks.
It is time to embrace today's version of high touch. The Internet is fundamental, but the mobile market will be even more important before long. Remember, this generation will soon experience the largest transfer of wealth in the history of our country, so reaching out to them now through the medium they prefer is essential to capturing those dollars later.
The No. 1 used car dealer in the country is eBay — a real demonstration of a formerly high-touch activity that has moved online. A one-day home page on Yahoo or MSN gets you more eyeballs than a full-page ad in seven of the largest newspapers combined.
ING Direct went from start-up to the No. 3 thrift in the country in less than five years — with no branches. Last Christmas season, the Internet was the only retail distribution channel that saw year-over-year growth. Need I say more?
One last thought. Does anyone remember Tower Records?
