June 26, 2012

Google. Apple. Walmart. PayPal. The list keeps growing.

While some of these non-bank competitors cater to customer segments not served by traditional banks — with payday lending and check cashing services, for instance — many target banks' existing customers. And while some undoubtedly are flashes in the pan and others potential partners, many pose a very real threat to banks.

The competitor most likely to instill fear in banks today is San Jose, Calif.-based PayPal. HP's (Palo Alto, Calif.) chief technologist for financial services, Ross Feldman, calls PayPal "the poster child of new technology," adding, "They are the No. 1 scary emerging player in the eyes of bankers." Noting that PayPal's capabilities continue to evolve, Nicole Sturgill, research director for CEB TowerGroup (Arlington, Va.), says the payments company is "a massive competitor" for banks.

For bankers, the key is not only to determine if alternative financial services providers such as PayPal are friends or foes, but to study what these companies do well (and not so well) and apply that knowledge to raise the level of service provided by their own institutions. Think of the quarterback who watches hours of video of the opposing team's defense — it's critical that the quarterback study the defense's strengths and exploit its weaknesses to make the big plays.

Similarly, for banks to beat non-bank competitors, they need to exploit their opponents' strengths and weaknesses. Here are five key plays for banks that intend to win:

1. Rethink the Branch Model

Even though most non-bank competitors — sans Walmart and a few others — eschew brick and mortar for online and mobile delivery channels, banks can advantageously use branches if they rethink the branch model, according to Bob Meara, a senior analyst with Boston-based Celent. As banks continue to migrate customer transactions to less-costly self-service channels, they should evolve their branch networks into an efficient and effective sales channel simultaneously, he explains.

5 WINNING PLAYS FOR BANKS
  1. Rethink the branch model.
  2. Watch payments closely.
  3. Mine data to improve customer.
  4. Keep it 'simple.'
  5. Get over regulations.

ATMs present a similar opportunity, Meara adds. "Walmart won't have its own ATM fleet anytime soon, since it's an expensive channel," he says. "Banks have an opportunity to leverage ATMs beyond just updating them for Americans With Disability Act (ADA) requirements."

The RHB Banking Group, the fourth-largest financial services firm in Malaysia, recently launched Easy, a branch network that comprises mini-branches as well as kiosks located in supermarkets, light rail stations and post offices that cost 85 percent to 90 percent less than ordinary branches. RHB designed the branches to attract Malaysia's mass market, an underserved market that other banks in the country deem unprofitable. "With Easy, RHB turned branch economics on its ear and massively increased its footprint," says Meara.

[Are You Making It Easier or Harder for Customers to Do Business With You? ]

Another bank successfully using branches is London-based Metro Bank, the U.K.'s first new high-street bank in more than 100 years. According to reports, customers line up outside when new branches open. The bank markets its "unparalleled levels of service and convenience," including non-traditional branch hours and the ability to open an account and receive a debit card in a single visit. The bank opened four "stores" in 2010 and projects 40 by 2014 and 200 by 2020.

RHB's Easy and Metro Bank have changed branch economics, says Meara. In contrast, he questions JPMorgan Chase's strategy of building 5,000-square-foot branches in the southeastern U.S. "How can those branches be a good financial decision?" he asks.

While physical branches have a place in their physical communities, banks also can leverage bricks and mortar to create virtual communities, says TowerGroup's Sturgill. Post a Facebook page or encourage branch managers to tweet information not only about financial products but happenings in the community, she advises. "By leveraging social media, the branch can serve as a point of reference for the local community." As an example, the PNC Virtual Wallet has won "rabid customer fans" by creating a virtual community to share information, Sturgill says.