Know Your Customer
Part of this evolution relates to how much banks know about their customers. Traditional banks have tried to adopt a customer-centric retail model for a long time, with varying results.
The Kansas City Fed's Weiner believes banks and nonbanks are on somewhat equal footing regarding customer knowledge. "For any business, in the end, customer satisfaction matters," he explains. "But some of the newer [financial services] entrants aren't really from consumer backgrounds at all. They're made up of technology people who see an industry where they can provide more expertise."
Metavante's Shannon, however, believes banks have the upper hand. "Yes, [retailer nonbanks] have strong selling skills," he comments. "But a bank that's constantly looking at customer attrition, strategy and data, and trying to anticipate their needs has the leg up on the competition because they have the relationships and know so much about them. A retailer may have a little bit of information based on a credit card, but it's not much" compared to what banks have.
In addition, banks are learning how to be more customer-oriented from people with first-hand experience. "A lot of business heads in banks are coming from the retail industry," explains SAP's McAllister. "They realize they have to sell. ... And banks are getting marketing-oriented, despite their old infrastructure and legacy systems."
Capco's Dener firmly believes banks need to get their acts together when it comes to knowing their customers. "[Retailer nonbanks] have way more customers than banks do, and they have more knowledge of them than the banks," he opines. "The most sophisticated segmentators focus on customer intimacy as an advantage. I'd be shocked if they didn't exploit this in financial services. It's a natural for them as retailers. Most banks are still trying to figure out what language their customers want at ATMs."
But don't be too critical of traditional banks, says Woodforest's Manning. "Part of the problem with customer knowledge comes from the diverse systems banks have," he explains. "Nonbanks are a little better at knowing their customers, [but] banks are moving to this model. ... We can get more information from our data because it is more electronically readable than ever before."
Manning says debit card information, for example, is easy for banks to track because of the format in which the data is presented. Much can be learned about patrons' financial lives by examining this information. However, "Retailers always know what their customers are buying. They want to turn their inventory," he says. "We're not turning inventory in banking. There's a different focus, and retailers are going to have to adapt somewhat to that also if they want to make certain inroads into financial services."
When all is said and done, most believe banks and nonbanks will continue to coexist and cooperate. "A lot of nonbanks go to banks to get into the payments system," says Manning. "Even if they issue cards, somewhere they are working with a bank." For example, PayPal uses Wells Fargo (San Francisco) as its processing partner in the United States and has relationships overseas with JPMorgan Chase (New York) and HSBC (London).
However, the competition will still be there, stresses TowerGroup's Khirallah. "Nonbanks are going to try for a bigger piece of the pie," she says. "They are competing with a limited product setwhat they see as the sure winners. They'll steal some business from banks, but this will make traditional banks more aggressive about serving their customersit forces them out of complacency.
"It's going to be Darwinian," Capco's Dener remarks of the competition among traditional banks and nonbanks. "Competition is not a genteel thingit's messy," he adds. "The whole idea that everyone will coexist peacefully is baloneyit's all win or lose in competition."