Bankers have long paid lip service to the importance of customer experience. More recently, they have been putting their money where their mouths are.
KeyCorp invested in a new digital lending platform while Ally Bank, USAA and Bank of the West are among those institutions working to identify snags in service customers might hit when they use a bank. These initiatives come with a cost — and tough budget decisions are necessary to meaningfully advance their customer experience strategies. But the investments are starting to inspire pushback from investors. U.S. Bancorp, BB&T, KeyCorp and M&T all faced scrutiny during recent investor calls regarding the impact that technology investments may have on expense management and efficiency ratios.
This pushback illustrates a fundamental challenge facing banks: How do you balance the need to invest in long-term improvements in customer experience with the need to continually return short-term value to investors? A possible answer can be found in the operating strategy of the company that has inspired banks’ increasingly frenetic focus on customer experience: Amazon.
Amazon’s maniacal focus on customer experience is well known. In Jeff Bezos' own words, Amazon “aspire[s] to be Earth’s most customer-centric company.” Financial industry observers (including myself) have spilled barrels of digital ink opining on the disruptive significance of every move Amazon makes — from checking accounts to small-business credit cards to mortgages. The consensus is that fending off Amazon’s forays into financial services will require banks to provide the same frictionless, digital-centric experiences that Amazon already offers in other industries. I don’t disagree with this; however, there is an overlooked element of Amazon’s strategy that is ripe for emulation.
A key component of Amazon’s success is its ability to anchor every decision it makes on the impact that decision will have on the company’s lifetime relationships with its customers. Put simply, Amazon measures ROI in decades not quarters.
While it has historically been a source of frustration for shareholders, this long-term perspective gives Amazon the comfort to make investments that would seem, to most companies, preposterous. Take for example the company’s recent acquisition of the TV rights to J.R.R. Tolkien’s “The Lord of the Rings.” The acquisition costs the company $250 million. After factoring in production costs, it will likely put the total cost at more than $1 billion. Think about that. Amazon is prepared to spend more than $1 billion to produce a TV show that will be available to anyone who pays the roughly $100 annual fee for Amazon Prime. Conventional wisdom would tell us that those numbers don’t add up. However, Amazon has gotten so good at locking customers into their ecosystem that a $1 billion investment in making Amazon Prime slightly stickier will more than pay for itself over the next 50 years.
This type of long-term, customer-centric strategic planning has proven effective for Amazon in numerous industries. There are signs that it would prove effective in financial services as well. In a recent survey by Cornerstone Advisors, consumers were asked what they would do if Amazon offered a free checking account or a checking account bundled with other services like cell phone damage protection, ID theft protection and roadside assistance for a monthly fee of $5-$10. Despite consumer outrage over the elimination of free checking, the report found that more consumers would be interested in the bundled account than the free account. This finding tells us that there are new revenue opportunities available for banks that are willing to think differently about their product offerings.
Indeed, the financial services industry is littered with examples of how a longer-term view of the customer relationship could disrupt the status quo. Take, for example, premium credit cards. Arguably the closest thing that banks offer to Amazon Prime, these cards offer rewards and other benefits in exchange for an annual fee. The difference is that a majority of the benefits offered by these cards — extended warranty protection, auto rental damage waivers, lost-luggage reimbursement — are practically invisible to cardholders, while Amazon goes to great lengths to ensure every member is aware of and uses as many Prime perks as possible.
At the same time, a vast majority of auto loans originated by banks come indirectly through the dealerships. Customers have no prior relationship with these banks, and yet too often, these new accounts are serviced in silos rather than nurtured into long-term, multiproduct relationships.
Or think about the mortgage industry, which is largely transactional. Origination fees, servicing fees, asset-backed securities — no one in the value chain treats mortgages as the key to locking in a lifetime relationship with a new customer, even though mortgages have a 15- to 30-year life span and can be bundled with a slew of value-added services.
Disrupting the status quo in these product areas won’t be easy. The sheer number of different options available for helping homebuyers over a 30-year period — from move-in services to utilities price comparisons to smart home payment integrations — is staggering. Investing in these types of ancillary services will be an incredibly difficult (and likely unpopular) decision, but it will be necessary for banks that are serious about countering the competitive threat posed by Amazon. The first step is recognizing that Amazon — with its single-minded obsession with locking customers in for life — is playing the long game.