The current issue of Life&Health Advisor has a great article by Larry Cohen of Strategic Business Insights on the future that financial institutions must embrace if they expect to competitive in the “New Normal.”
Mr. Cohen points out that over the last three decades, though the regulatory barriers between insurers, investment firms, and banks have been removed, “the successful model of financial cross-fertilization has yet to materialize.” Attempts “to take advantage of convergence through financial supermarkets, bundled accounts, cross-selling, and other foibles”, have failed (witness Citi’s retreat from the “financial supermarket” model earlier this year).
Though the financial supermarket concept of servicing a consumer’s ‘every’ possible financial need from credit cards to LTC might be overreaching, the fact is that most financial institutions do a poor job of converting ‘one’ to ‘most’ (or even ‘some’). The reason? Though the regulatory barriers have been removed, the silos remain. “[W]hen financial institutions sought to combine products and services and offer them to consumers in spite of the stated goal of being customer centric, institutions did not alter their systemic approach of focusing on pushing the products. Many times, different product silos continued to have competing incentives, and different channels would blanket affluent targets redundantly, with no differentiation or coordination, from the same institution!”
In his article, Mr. Cohen discusses the proliferation of financial products in the 1990s. The 1990s were an interesting time; deregulation had encouraged companies to expand their product lines beyond their historic core competencies, the bull market was creating demand for more products and new features, and the Internet had begun to open up new distribution channels and change the nature of marketing. Because change was more revolution than evolutionary, financial institutions found themselves in a land grab. Since growth was not particularly well coordinated, financial institutions found they had generally not increased the portfolio share of their existing clients, but instead increased the number of portfolios in which they had any share.
On the face of it, that wasn’t so bad. Financial institutions experieced growth in product lines and in reveunes. Growth is good. And, to be fair, in periods of disruption, this kind of scattered, uncoordinated growth is not unexpected. What is surprising is how long many companies operated (and continue to operate) without a deliberate, holistic, customer-centric, business strategy after the inital shock wave of the boom dissipated.
On the consumer side, households had more products and more relationships with more institutions. More relationships to manage, but, as Mr. Cohen points out, managing those relationships doesn’t feel so burdensome for consumers when their current pile of monthly statements show higher balances than last month’s pile of monthly statements. Unfortunately, the good times came to end. Violently. Twice in fact.
Mr. Cohen notes that most financial institutions are facing “consumers [that] are feeling disengaged from their financial services. They are highly skeptical of any and all marketing claims. This skepticism extends to the institutions’ and financial professionals’ motivations and goals. At the same time, they have learned that there are huge gaps in their own knowledge when it comes to knowing what they should be doing. It is no wonder that the priority of dealing with any of their financial needs is declining, whether it is figuring out how much insurance is right, picking a good investment, consolidating their debts, planning for retirement, even closing a savings account or getting a new credit card. Unless a need is immediate and pressing, consumers are more likely to put off dealing with it.”
This isn’t good for financial institutions looking to provide solutions. This isn’t good for consumers that are avoiding making important planning decisions. And this isn’t good for the economy to see capital sitting on the sidelines.
The financial companies that survive will be the ones that succeed in overcoming fear, anger, and the most powerful force of all, inertia.
Mr. Cohen provides a blueprint for success in three sentences: “[F]inancial institutions need to break down the walls between their products and segments and think cross-silo, outside of the box, and from the customers’ point of view. The solutions need to be complete and simple from the customer’s vantage point, with all the complexities of the different underlying products, services, and back-office, systems coordination, worked out ‘behind the curtain.’ Any potential internal conflicts are irrelevant to the customer—the only thing that matters to them is that their need is met and any problem is cleared up immediately.”
You heard the man. Get to it!