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Why banks fail to compete


It seems, banks have a particularly hard time to get their digital transformation programs up and running. No surprise their competitive strategies are seldom inspiring. Let’s have a closer look at the possible reasons.

The term strategy has its roots in the Ancient Greek language meaning the «art of troop leader». In the context of business, we usually refer to a long-term company plan of how to achieve its goals. However, the reference to war fits well. When companies compete, they try to take away business, respectively customers, from their opponents. The latter try to prevent this and fight back.

For many years, banks have fought their wars – fierce and intensively. They hired teams with their client portfolios from other banks, developed sophisticated products, expanded to new markets in other regions, increased efficiency and lowered prices, just to name a few actions. With the financial crisis in 2007 the focus changed. Eroding margins and protracted lawsuits with government regulators required their attention. To adhere to new the terms, banks had to spend a considerable amount of time and money. Thus, not much was left over for competition.

While banks were busy to deal with the legacy of the crisis - a telephone marked the beginning of a new age. Whether it was the iPhone that catapulted the digitalization of today’s society to the next level or not, doesn’t matter. What matters is, that the way we communicate and how we make decisions has changed dramatically Now that banks come closer to complete their biggest regulatory adjustments they feel it is time to invest more in the war for customers again. Some of them must have been puzzled when they took a closer look at the «battlefield», i.e. the target market. It had changed dramatically. Although some of their known adversaries were still there, new ones had emerged as well. And they were using completely different weapons, more effective than their own.

Traditional competitive instruments have become toothless

Basic concepts of strategic planning might still be valid but the relative weight of the market forces has shifted and with that the priorities of strategy implementation. For example, the customers negotiation power is much stronger. They are better informed, organized and have the means to sanction disappointing service. They basically dictate what a bank must offer today. (Read more about the importance of putting customers first here)

Considering this, makes push strategies in advertising questionable. Why should a customer bother about an ad if he can compare and choose the best offer within minutes once he needs it? Is a price leadership still a long-term option or will the new transparency lead to predatory pricing cutting down margins even more? I am sure you could add many more questions to this list.

Furthermore, traditional competitive concepts do not include all relevant factors. They originated in times when there was a common view of one world and one reality. Today, we would not question a person’s mental state when he or she distinguishes between a physical and a virtual world. In fact, it is normal to move intuitively between both, thus creating a new reality. As a result, the digital dimension must be added to the question where to compete.

Digital technology has made the war for customers more complex. However, there is also something positive about this development - a lot of possibilities we did not dare to dream of before. For example, being able to analyse large amounts of data within short time puts us into the position to improve the understanding of our customers. We learn what really matters to them, why and when. Scoring the likelihood of a person to buy a specific product is just one of the practical uses of big data. Of course, writing about it is way easier than doing it. And a score is not a sale. There is more to client acquisition than big data algorithms. Nevertheless, digital instruments have proven powerful when mastered properly.

Competing successfully requires a new mind-set

Old concepts and an increased complexity are not the main obstacles inhibiting to compete successfully. The prevailing classic value systems in banks are much higher hurdles as they determine decisions and actions. I still remember that day in my career, when we ran a pilot to introduce online acquisition in Private Banking. The project required no extra budget but we needed to adjust the governance on a higher level in the hierarchy. The responsible executive refused to deal with the request as the budget did not exceed a certain threshold. That translates into low cost is equal to low relevance.

Of course, there must be some criteria that prevent processes from collapsing due to an overflow of small tasks. Yet we should review and maybe replace them. Huge budgets are not necessarily paving the way to success. There are cases of large corporations starting digital transformation projects with hundreds of million dollars creating no significant value, while small start-ups appear to change the world.

Those young firms work under completely different conditions. Many fintech companies start with very little money, only few people but with a differentiating idea and the urge to make it happen. Why should a traditional bank not create similar conditions to stimulate the change to a new mindset. Why not starting digital programs with little money, short deadlines but have the people participate in the success. It is just a thought. But maybe it is worth considering it. No company is too much a Goliath for not being capable to learn from small David.

Contact me if you would like to continue the discussion and to look into changing the mindset in your organization.

André Höhn
Associate Partner
 André Höhn
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