The Bank Branch Bloodbath Narrative Continues to Prevail Over Customer Preference Realities
Also in this issue: Prerequisites for a Digital Growth Initiative: Client Needs and Differentiation Capability, FSIs Could Support Minorities With Digital Education Instead of Echoing Myths
The Bank Branch Bloodbath Narrative Continues to Prevail Over Customer Preference Realities
The more satisfied consumers and businesses are with their financial services and insurance solutions, the fewer schemes exist for experts and media to create a sense of urgency. That is why an unproven GenAI is portrayed as a game-changer, while a 1-3% annual employee reductions are announced as breaking news of layoffs.
The chances of significant shifts due to new technology or client behavior are becoming less likely with time. For example, for almost three decades, experts have been predicting the disappearance of branches due to consumers embracing the convenience of digital channels. Their conclusion was especially puzzling until 2009, as the number of branches in the US kept rapidly growing despite ongoing bank consolidation since the mid-80s:
Since 2009, the number of bank branches has finally started to decline due to addressing duplication post-mergers-and-acquisitions after the Great Recession, coupled with the proliferation of computers and smartphones. The resulting media and expert narrative became even more extreme as if there were a war where mobile apps kept annihilating physical outlets:
In reality, the pace of the decrease in bank branches has been varying around a thousand annually, with no acceleration and about sixty-eight thousand left at this point. What is the underlying fallacy in a common narrative?
There is an obvious reason why clients need in-person interaction for more complex questions and products. Potentially more surprising is that clients are not changing their preference for meeting a banker even for a seemingly mundane act of opening a checking account:
Please also note the lack of a substantial difference between high- and low-performing FSIs in the above graph. According to a survey about to be published by Cornerstone Advisors, digital account opening has consistently been the top use case for new system purchase or replacement. And yet, the quality of that user experience doesn’t seem to have much bearing on customer preference for in-person engagement.
What an odd behavior by those FSI executives—year after year, transforming systems and processes that customers don’t seem to be viewing as pain points or as a differentiation.
Digital transformation is so expensive and risky that it requires massive pain points whose monetization could justify such an effort. If your clients are loudly complaining, or, even worse, attriting from your FSI for more digitally savvy competitors, then by all means, consider digital transformation to address that specific area. Ignore the sensationalist narrative elsewhere.
Prerequisites for a Digital Growth Initiative: Client Needs and Differentiation Capability
Customers are not only comfortable with traditional in-person interaction for a free or low-cost product like a checking account, but sometimes they specifically want to pay a lot more for a high-touch financial or insurance solution. For example, it's an annual tradition in early January to be surprised that 90-95% of active funds underperform benchmarks over the long term:
And yet, wealthy folks and pension managers continue doing business with active fund managers, with cheap passive equity funds finally surpassing active fund volume only last year:
It would be easy to devise a digital transformation play targeting those clients with a mobile app and passive funds. Many traditional asset managers and wealthtechs did, with no material impact on that particular segment. How come? This segment values the sizzle of exclusivity over cost. They would rather receive a brochure and speak with a renowned analyst than do it themselves with a nifty mobile app. Therefore, digital transformation for actively managed funds is exactly what the clientele does not need or want.
The second prerequisite for a successful digital growth initiative is the ability to differentiate. HSBC is already spending 10% of its revenue on technology, resulting in decent digital capabilities, including for cross-border money transfers. Similar to many other large FSIs, it just decided to launch a fintech subsidiary for that product, called Zing.
The puzzlement at the HSBC announcement was driven by a decade of failures among large FSIs in opening fintech subsidiaries under a different brand. Moreover, two European peers of HSBC launched similar fintechs, BBVA’s Tuyyo and Santander’s PagoFX, in the uber-competitive-low-margin cross-border money transfer space, only to shut them down 15-20 months later.
Has HSBC learned from those failures to develop a winning differentiation capable of achieving its goal to lure customers from Wise and Revolut?
Not in the business model—its prices are higher than Wise and Revolut. Not in the operating model—most of Zing’s executives are from HSBC and lack experience in competing with fintechs. The technology platform comes from Monese, a relatively small and unprofitable fintech in which HSBC invested in 2022.
How does the head of Zing explain this paradox?
Unfortunately for HSBC, these days, there are no clients left who are here for them. Moreover, even the world’s best fintechs like Nubank, CashApp, Wise, Revolut, and SoFi are struggling to maintain high growth AND profitability. For a traditional FSI to attempt a digital growth initiative without specific client needs and clear differentiation is designed to fail.
FSIs Could Support Minorities With Digital Education Instead of Echoing Myths
The majority of US media and government agencies view one of their primary purposes as saving minorities from perceived discrimination by white male executives who are accused of not serving those groups. The evidence is based on two factors: 1) minorities’ usage of some products is lower, and 2) minorities’ pricing for some products is higher.
This conclusion often falls apart once the analysis demonstrates that the variation between two groups is dwarfed by the variation within each minority group. A more interesting counterpoint to the common view of systemic discrimination is the frequent failure of fintechs and insurtechs to monetize that supposed opportunity.
Our newsletter already covered an insurtech, Root, that post-Floyd denounced the discrimination of minorities by incumbent carriers and decided to stop using credit scores in its underwriting decisions. Root’s logic was that since some minority groups have, on average, a lower credit score, its use is driven by discrimination rather than by a higher risk of filing a claim. Hilarity ensued: Root’s stock price collapsed while its revenue remained less than 1% of Progressive Insurance.
Another similar play post-Floyd is the fintech Greenwood. Founded by successful entrepreneurs from other industries, the startup has raised almost $90 million to specifically target minority groups. The premise was that if those groups are getting approved for credit at half the rate of other groups, it must be due to systemic racism.
Three years later, Greenwood still does not offer credit products. Where did the money go?
Treating minorities as victims of traditional FSIs will continue to result in failures. Being in denial of the higher average risk of certain groups is detrimental when selling risk-based products. For the same reason, when regulators mandate rate caps or limit price increases, it results in FSIs leaving markets rather than offering lower-cost products.
The success of Cash App is instructive in this regard. Black consumers in the US embraced Cash App not because it offered a credit product unavailable from other entities. Instead, it was a low-risk payment product, similar to PayPal and Venmo, but with a clever use of viral marketing.
If your FSI aims to assist poor consumers among minorities, the counterintuitive goal should be to guide them in spending less and saving more. Individuals with limited financial resources live in constant anxiety about how to make it to the next paycheck and where to find funds for emergencies. The value of financial services and insurance products should stem from instilling financially prudent behavior.
Unfortunately for FSIs, such digital education would generate relatively little revenue, as they couldn't charge much of a subscription fee for this segment. However, that is why it’s referred to as genuine assistance. Everything else amounts to virtue signaling while using poor consumers as a performance prop.