Once-'Sticky' Bank Customers Are Coming Unstuck

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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.

If almost no one seems to want access to personal service, this can only be because we've lost sight of ways to deliver individual value. (Schwab has done the opposite.) Test and learn about customers' willingness to pay for what's not available now. Steve Jobs said they'll know what they want when they experience it. Skip the focus groups.

Don't start by assuming everyone's rabid to spend more time on their finances. All the evidence points the other way. Customers have migrated to save time, effort and risk. 

Making your services stickier requires conscious, rational action. How easy or difficult do you want to make it for others to access your customers' data, for instance through integrative PFM processes?  That data can help your competitor know which of your customers to solicit for what. See how you can make exit less appealing—more demanding, slower, subject to some sacrifice. Stockbrokers are good at that.

When getting married, few men and women think about the need to facilitate painless and quick divorce.  But there is a right time, well in advance of need, for them to learn that the way out is rocky and slippery. Same for bank customers.

Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was for six years the founding CEO of First Deposit, later known as Providian.

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