The days of traditional banking, and the hegemony of big brand-name banks, are coming to a close as consumers demand more transparent, responsive and honest treatment.
More than 5,300 Wells Fargo employees were fired last September after news broke that they secretly created millions of unauthorized bank and credit card accounts — unbeknown to the customers who incurred fees for accounts they never signed up for.
For the financial industry, this should be a moment of reckoning, an impetus to move away from a model of exploitation, and toward one of advocacy.
It’s no secret that banking is a highly competitive field where sales representatives are often tasked with meeting unrealistic, unreasonable sales goals. At Wells Fargo, thousands of employees decided that fraud was the only way to meet these targets and opened a flurry of fake accounts, going so far as to create phony PIN numbers and email addresses.
“Consumers, in turn, were sometimes harmed because [Wells Fargo] charged them for insufficient funds or overdraft fees because the money was not in their original accounts,” said the Consumer Financial Protection Bureau, which fined Wells Fargo $185 million, in a statement
While Wells Fargo’s actions were egregious, this is hardly the first example of wrongdoing on the part of banks. Over the past eight years, a parade of banking scandals have erupted around the world, including revelations about how Deutsche Bank helped wealthy Russians secretly funnel $10 billion offshore; the Libor scandal, in which “too-big-to-fail banks” manipulated global interest rates; and of course, the subprime mortgage crisis in the U.S., which kicked off a global recession.
The days of traditional banking, and the hegemony of big brand-name banks, are coming to a close, as consumers demand more transparent, responsive and honest treatment. It’s time for a “Netflix model” of banking to disrupt the status quo.
Netflix is a prime example of a company that demolished a legacy competitor and changed the world by making the simple decision to put the customer first. Instead of abusing its customers, it advocated for them. In 2008, then-CEO of Blockbuster Jim Keyes famously said that “neither Redbox nor Netflix are even on the radar screen in terms of competition,” and five years later, the bankrupt movie-rental company shuttered its last storefront. This should serve as a cautionary tale for traditional banking institutions. When customers don’t trust an institution, they won’t stick around, and customers do not trust banks.
The millennial generation came of age during the 2008 financial crisis. They saw the greed, corruption and recklessness of traditional financial institutions destroy the economy, devastate hard-earned life’s savings and create an economic climate that made it difficult for young people (among others) to find a job, much less build wealth.
As a result, many millennials are reluctant consumers of traditional banking services. A report titled “The Millennial Disruption Index” found that all four of the leading banks in the U.S. are among the 10 least-loved brands by millennials: 70 percent of millennials report that they would rather visit the dentist than listen to what a bank rep has to say.
These sentiments are reflected in their behaviors. Some 63 percent of American millennials do not have credit cards. Due to their mistrust of the corporate finance system, 53 percent don’t think their banks offer anything different from other banks, and one in three express no feelings of customer loyalty. In addition, this demographic is less likely to seek professional financial advice, and according to Moody’s Analytics, has an average savings rate of -2 percent.
Consumer concerns about banks’ trustworthiness are well founded and very much alive. Examples of lies, abuse and corruption are as prevalent today as they were eight years ago. Wells Fargo is the most recent example of how banks abuse their customer relationships, but it’s just the tip of the iceberg. There are many ways that banks mistreat their customers that are fully legal.
For example, banks love fees. If you are a student and open a typical checking account, there’s a good chance you will be charged a monthly service fee (ranging from $12 to $15) and won’t be able to write checks. If you use an ATM from a different bank, you are charged a $3 transaction fee. If you visit a bank teller, you could be charged a service fee. The absurd part is that these fees are being levied on bank accounts in the range of a few hundred dollars or less. From a customer experience standpoint, this is unacceptable. Customers deserve better.
One of the reasons Blockbuster failed so hard so fast is that it treated its customers badly, and they were desperate for better alternatives. At one point, the company generated nearly $800 million in late fees — around 16 percent of total revenue. In fact, Reed Hastings was inspired to found Netflix after getting charged a $40 fee for failing to return a Blockbuster movie on time. Blockbuster made it abundantly clear that punitive actions alienate customers, whether they are renting a movie or opening a bank account. Customers who have a negative, abusive experience with a bank, who find their money sapped by unfair and unreasonable fees, are not going to stick around if they find a fairer option.
Advocate, don’t abuse
Banks need to adopt an “advocacy approach.” This allows businesses to offer a strong customer experience, better customer service, and cultivate trust and loyalty at the same time. The advocacy approach puts the customer at the center of the business model and pursues an unwavering commitment to satisfying their needs. It was this mindset that enabled Netflix to succeed in a crowded and highly competitive industry, where the likes of Comcast, AT&T and Verizon own the pipes and control distribution; companies like Disney, Time Warner and Fox own the majority of the content; and there are deep-pocketed competitors like Apple, Amazon and YouTube that are competing for the same content and viewers.
Even in that environment, Netflix prevailed, because it committed to providing the best user experience. If banks hope to survive in today’s market, they must take the advocacy approach and focus on innovation. Part of putting the customer first is understanding the type of experiences that customers want. Physical banking is expected to decline 20 percent to 50 percent over the next decade, and for the first time last year, more people opted for mobile banking than visited their local branch. Their physical branch networks that have long represented a competitive advantage for traditional banks are becoming an albatross around their necks.
Furthermore, in each of the four pillars of banking — cash deposits, wire services, payments and lending — innovation from financial tech companies is putting pressure on their core business. Smaller, more nimble companies are using technology to differentiate the user experience in each of these areas. When you combine a better UX with a fair price, upstarts can peel existing customers away from traditional banks and win young customers who are new to banking.
With these shifts in demographics and technology, the transformation of banking is already under way. While traditional banking faces serious threats, startup companies have unprecedented opportunities to innovate and improve the front-end experience of banking. Major banks should heed the lessons of Netflix and prioritize advocacy over abuse. If they don’t, they will be reduced to a back-end utility at best, or risk disappearing completely.
Kalpesh Kapadia is the co-founder and CEO of SelfScore, which opens the U.S. financial system by providing financial services such as credit and scholarships to international students who are underserved by the current system. Prior to SelfScore, Kapadia was one of the foremost analyst/investors in Wall Street’s tech sector. In 2004, he was ranked the No. 1 analyst in the U.S. across all sectors by the Wall Street Journal. In 2005 he founded Equanum Capital and successfully managed it through 2012. Reach him @kalpeshkapadia.