April 02, 2012

Advances in digital media and technology are empowering consumers and diminishing the control traditional retail banks have in the customer relationship. In the midst of these changes, banks run the risk of being left behind if they do not begin to exploit the advantages that lie at the intersection of data and digital. Up until this point, the risk was largely a lost opportunity. Now, it is rapidly becoming a threat.

From the earliest days of data-driven marketing, banks had an advantage that most industries could only envy: a direct engagement with their customers and an ability to identify the customer at every level of interaction. The intersection of engagement and identification provided deep behavioral insights about their customers. These insights, coupled with available credit bureau data, meant that no other industry had more information at its fingertips to support customer-driven marketing. Nearly 30 years later, the industry has only begun to scratch the surface of this advantage. More worrisome, however, is that despite a wealth of consumer insight and broad experience in data-driven marketing, most banks are failing to capitalize on the emerging opportunities provided by interactive and digital media.

While the business model of direct engagement has provided banks with a level of consumer insight well beyond most industries, it has also made the exploitation of those insights a challenge for two specific reasons. First, the products and services offered by banks remain largely siloed. As a result, rather than cultivating profitable customer relationships, direct marketing groups in the banking industry have focused primarily on product and campaign optimization. Second, as other industries have gone to great lengths over the last decade to exploit the small insights they do have to develop profitable customers; banks have been complacent, subsidized by overdraft and interchange fees that reduced competitive pressures and innovation. Now that those subsidies have been largely regulated away, banks are finding themselves lagging behind other industries and out of touch with the evolution of digital media.

Part of the problem is that banks have traditionally relied heavily on direct marketing programs -- direct mail and in some cases, e-mail. But this model has to change. At its peak before the financial crisis, the large banks and card issuers had enormous direct marketing budgets. Their competitive advantage lived in branch network scale, and particularly for credit cards, direct mail volume. Now, branch networks are becoming too expensive to maintain while many offline direct marketing strategies are experiencing diminishing returns. Most significantly, consumer media consumption habits have changed and advertising technology has advanced at break-neck speeds. While return on direct mail for some programs is diminishing, the opportunities provided by targetable and measurable digital media are largely being missed. In short, banks have their assets and insights pointed in the wrong direction.