In the past days two interesting articles around banks and banking innovation found their ways into my browser. One by Knowledge@Wharton on “How Banks Can Keep Up With Digital Disruptors” and the second one by Mobile Commerce Daily on “How four Australian banks are challenging Apple’s stranglehold on mobile payments”. The first article is essentially stating that banks are not using the “essential assets need to turn aside many of the assaults on their business now underway from fintech”, while the second one seems to sing the song of the poor banks that are held at a disadvantage by evil Apple. The four banks that challenge Apple are Bendigo and Adelaide Bank, Commonwealth Bank of Australia, National Australia Bank, and Westpac. Another large bank, ANZ Bank, cooperates with Apple by offering their customers to import cards into the Apple Wallet and using Apple Pay, and is not involved. But what do the banks want? According to the article they want access to “Apple’s Apple Pay system as well as access to the NFC capabilities of the iPhone”, being narrowed down to “require Apple to only disclose access to the NFC capabilities of the iPhone to the banks and therefore their customers.” Essentially they want to be able to build their own mobile payment system and not go through Apple’s wallet and still be present on “one of the most popular smartphones in the world” And yes, it is true that Google’s Android operating system allows more access to the phone’s NFC capabilities than iOS. On the other hand banks are seeing disruption coming. Fintech companies are coming up left, right, and center, attacking banks’ business models, offering payments, simple international transactions, advice, finance- and wealth management, lending services, even alternative currencies. The list goes on.

By the Numbers

Still, the question remains whether there is a ‘stranglehold’ that deprives the banks of their ability to compete. After all it seems possible to work with Apple, as evidenced by ANZ. Also, the market share of iPhones sales worldwide in Q4/2016 has been 18.3 percent (up from 12.4 percent in Q3/2016), according to Statista. As it turns out the market share of iOS devices in Australia is at around 35 percent in July 2016, again according to Statista. Australian Mobile OS Market Share Source: Statista Let’s assume that all of these are iPhones as the title suggests. In this case the banks to not have direct NFC access to about a third of all devices; in case this data covers both, iPhones and iPads, it is about half of this figure, which correlates to the worldwide sales data. Older Business Insider data about revenue distribution by country and platform shows about an even distribution of sales on iPhones vs. Android devices. The same article also observes a socio-economic split between iPhone and Android users in the US, a split in favour of iPhone. Simply put iPhone users are more affluent, although they seem to spend less per order than Android users. The Q4/2016 Monetate Benchmark report confirms this by finding an approximately 20% higher order value on iOS devices than on Android devices.

My Take

“Banks seem to be headed the way of Blockbuster” is what the Wharton authors are saying. What in my experience also seems evident is that banks still need to transform from rigid organizations to businesses that are truly offering value to their customers. I have written about some personal experiences about bank shortcomings before, here, too. Banks’ main problem is not that they are not having full access to iPhone functionalities, but that they haven’t yet understood how to regain the trust that they need to have, to stay relevant. People more and more prefer to get banking services from a non-financial services company. That is their problem! Not that they cannot create an end-to-end payment system that they control – a market they are not in now. Banks are asking where they can have or get an additional advantage. They are not asking the question where they can provide real value to their customers. Being an occasional user of both, a banking app as well as Apple Pay (I am an ANZ customer) I ask myself where the bank’s access to the NFC chip offers value for me. I don’t see any. Why? Apple’s wallet is tightly integrated into the phone. Double click the button on the lock screen and the payment system is up. How can the bank make this simpler for me? Siri? I doubt it – “Open Wallet” opens … Surprise … Apple’s wallet. Open ANZ doesn’t do the thing and “Open ANZ app” is already longer. Do I really use the banking app? No! Why? Because I rarely need it. It doesn’t add much value. It is fairly cumbersome. At this time it even doesn’t allow me to log in using my fingerprint. So, in summary the legal action that is pursued by the banks is not about creating value for (or with) their customers but about gaining entry into an additional revenue stream for themselves.

What can the Banks do?

In simple words: Become trustworthy partners of their customers again. Banks have a tremendous amount of knowledge about their customers. This can be used for very personalized services. With their branches they have assets with direct access to customers. Yet branches seem to come out of fashion with their executives, getting closed or at least are pretty dull. Can there be more experience? Look at terms, conditions, and fees. There are reasons why people to transfers with non-banks: It is cheaper, faster, easier. Why do banks make it my problem if an international money transfer doesn’t reach its destination after paying for the service and getting a bad conversion rate? There is reach. In the past century banks managed to move themselves in a position that makes them indispensible. This is not an entitlement, nor a given. Exhibit customer orientation, innovate around the customer – and with the customer, showing clear value for the customer, using an outside-in point of view as opposed to the current inside-out one. It all starts from trust and value.

After some investigation into SME CRM Nimble and Freshsales and travel management software traform today is the day of a reflection on customer orientation in one of the industries that managed to become almost indispensable in our lives. Banks. So let me tell you

A Bank Tale of Mystery and Imagination

But not an invented one. This is life in 2016. Imagine the following extremely uncommon scenario: You want a mortgage for a house. Imagine also that you have a fairly good income, so you want to pay down fast. After all interest rates in NZ are still pretty high compared to other developed nations – although they are very low for NZ standards. And remember – one of the basic premises of neoliberalism is that everybody has equal negotiation powers (the Kiwi in me says “Yeah, right” to that one …). What are the variables you have in a mortgage? The total amount, interest rate, pay down period, term of fixing the interest rate, unless you go floating, that is, and the start of the pay down. So you start doing some maths on what you are able and willing to regularly pay and start negotiating a rate, finally coming to an agreement, clearly communicating that you want a fixed term of one year, and a calculated pay down period of, say 10 years, and weekly payments. You are happy. The documentation arrives, actually three pieces of it.

• A summary of the agreement
• Terms and Conditions on about 30 pages of legalese. No need to go through it here; it basically details out that the bank has all rights and you none.
• A third document that tells you that the bank is so happy to do business with you that they give you a cash incentive of 1% of the mortgage amount. Nice, but why not reducing it from the interest rate, thus faster reducing the principal – or improving your cash flow by making ongoing payments smaller? After all this money goes directly away from their income in the year of fixed interest. Do some maths by reducing it off the accumulated interest of the one-year contract period or only off the principal that remains after one year. Observe the interest rates. You will be amazed.

There is only one reason for doing it this way: Bind the customer for longer using a clause in the incentive document (yeah, there it is: a multiyear condition …) and now the bank nicely gets this returned in multiples as the higher interest rate leaves you with a higher remaining principal after the year, means more interest for them … Of course you can put the money onto a savings account and take it off the money you need next year – but I deviate. Try negotiating this ‘incentive’ into the interest rate and let me know the outcome. Now you look into your main parameters: Amount: Check. Interest rate: Check. But what is this repetitive statement about the interest rate might change, formulated in a way that it might change even during the fix period (of one year, as we assume so far)? Hhmm, confusion. Fixing period: 2 years? Oops, didn’t we say 1? Calculated pay down period: 30 years! Yes, THIRTY. Assuming 4 per cent of interest and a $ 100,000 mortgage this makes an accumulated interest of $ 71,869 as opposed to $ 21,494. This is a bit of a difference. Payment period: Every two weeks. Payment start: 3 weeks after start of the mortgage. Hhhmm, you didn’t say anything about that but there is no reason for you to wait with the payment start, right? Well, at least the bank got one parameter right. But still, you feel somewhat cheated upon. The remaining question is whether these errors are genuine or part of a method. After all, nearly every single parameter was wrong in favor of the bank. Even the seemingly generous incentive is built in a way that it is least beneficial to you. I learn two lessons from this tale:

• Obviously: Read what you sign. It might not be what you expect
• Even in the best case this shows that banks care more about securing their income than about the customer. Although this is a short sighted position, because experiences like this are shared. And this erodes the same income that shall get protected

Of course, some phone calls later all the parameters are fixed. But still, a bad taste remains …

So, what could be different?

On the outset this is blatantly obvious: Deliver documentation as per the agreement. As said, in the best case this failure shows poor process. The worst case is, well, worse … In our scenario there was one variable (the start of the payment) untreated. As a perhaps unexperienced borrower you might not always think of it, as a bank you probably should have asked, not assumed something. Again, poor process, or … While it is understandable that banks try to protect their business it does not show good faith to attempt a lock in of the customer or to attach 30+ pages of terms and conditions to a simple thing as a mortgage. The lock in happens via tying ‘incentives’ to longer term conditions or asking for securities that are far in excess of the value of the mortgaged property. This is simply to make it harder to change to the competition whereas the better way would just be to be better, easier to deal with, and continuing to have the overall better package. Part of this could be limiting the terms and conditions to something that the average customer can easily understand in a short time. This can be done. A mortgage broker who is a friend of mine tells me that there is a bank around that has terms limited to three pages only, with the offer summary being a one-pager.

The Bottom Line

All this boils down to customer orientation rather than product orientation. Starting with an outside-in view rather than an inside-out one would help to easier contribute to the customer’s job-to-be-done while reducing internal process cost. This will make the customer want to return without the need for tying him/her via clauses. Part of this is a continuing digital transformation but most importantly there is a need for a culture change. There are new fintech companies emerging left, right, and center that address these issues and threaten to disrupt the banks’ business. Time to think. And act.