Banks are historically bad at product management and user experience. It’s easy to chalk it up to laziness or lack of strategic foresight, but the primary driver is more subtle. The product function in banks, community banks especially, was and continues to be populated by finance types.
Why? “Product design” is largely an exercise in Excel when rates, terms, and fees are the major levers that can be pulled because those are the variables available in the core. “Product management” was an exercise in pricing interest paid on deposits vs. rates on loans relative to the competition in the branch footprint. Net interest margin is sustained by inefficient markets keeping customers underpaid for deposits and overpaying for loans. Alex Johnson lays it out exceptionally well in his Fintech Takes essay on Product Management > Risk Management.
There are many great articles on this topic, including JPs post on The Secret of NIM and I probably have a conflict referring to my own work in You’ve Got a (Deposit) Problem.
Many banks seem to have forgotten the level of price transparency brought about by the internet while interest rates hung out around zero. There was no incentive to price shop because the answer was always the same. A bank CEO recently told me the story of being berated by his mother in his branch lobby when she found she could be getting 10x the yield from an online account over her son’s bank. “It’s pretty bad when your own mother accuses you of abusing her trust.”
Historically, the effort involved in opening new accounts and moving money kept money static when rates were ubiquitously low. Money is moving now that there is an economic benefit. Large balances, whether they be corporate accounts or the wealthy, tend to move the fastest because of the greater economic benefit. Rate sensitive deposits are hot money.
Alex argues that in the future all deposits will be hot as open banking and AI help lazy or ill-informed users chase rate (h/t Matt Harris and his Moov DevCon keynote). A sort of seamless money moving bot always optimizing between rate and liquidity needs the same way a corporation leverages treasury management. This is bad news for community banks using low-cost, lazy deposits to support their NIM.
Alex argues community banks need to inspire irrationality to survive. They need to build a brand or become “taste-makers” that consumers will value despite it not being in their economic best interest. The comparison he draws is to the Apple iPhone’s appeal and price premium despite sub-par performance characteristics. The role of product management in Alex’s view is to persuade irrationality because most deposit products are commodities where price is the stage upon which they compete.
Michael Porter argued in Competitive Strategy that there are two generic choices a company makes in their strategy, regardless of what industry. The first is a choice between differentiation vs. commoditization. The second is the scope of competition e.g. the scale at which you compete.
In efficient markets, it is hard to win at a small scale with commodity strategies. Large players typically have economies of scale to win on cost advantages whether that be lower prices or investment in other services. Chase is a low-cost player but not a low price to the customer players; they can afford invest in branches and a full suite of products because of their extra margin. The financial service industry becoming more efficient at a staggering rate. Using old strategies when market conditions change is dangerous.
For banks those looking to escape the lower left quadrant but aren’t interested in acquiring or being acquired to reach scale, the role of the product management is to create sustainable differentiation. Future essays will cover the other quadrants, including what if a bank wants to stay in Bermuda Triangle of the lower left.
Sustainable is not a throw-away word in the above sentence. Features that are easily replicated, like faster settlement times for direct deposit, aren’t sustainable and rapidly become industry standards. They aren’t durable differentiators because they have mass appeal. Common sense features that rapidly become standards are typically because of inefficient markets allowing participants to make excess profits; once someone dares to remove junk fees, efficient markets force all players to comply.
The test of durable differentiation is if another player following a different strategy could also win making an opposite choice or one that doesn’t include that feature. This means developing deep customer insights to alleviate pains the customer might not even know exists. This is why focus groups don’t often yield insights; customers fall into the trap of being constrained by what they already know.
The role of product management is to find actionable insights customers are willing to pay for, directly or indirectly by not pursuing a lower price elsewhere. This isn’t about inspiring irrational action but building products customers value enough to pay a premium or switch from other products. These features might exist in other product categories but not banking or they are bundled together in unique ways that create value. This is different than brand appeal or other taste making options. These are rational choices that take into account the value brought by intangibles.
For me, the Apple decision is a rational choice because it is an ecosystem play. My Mac Mini works with my MacBook. I can control the kids devices on a family account. I can assure my mother she did not leave her iPhone at the grocery store because I see it at her address on my iFind. Can I replicate this on Android? Yes. Is it a lot of effort. Yes. This isn’t about hardware interoperability. It exists in financial services.
Portfolio company Atmos Financial operates a neo-bank to gather deposits with the pledge they will be used to fund climate friendly initiatives. They use their low cost structure to pay competitive rates but there is a significant segment of the population that is willing to trade some yield to know their deposits are used in a way that aligns with their values. Are they willing to give up all yield? No. And Atmos can even tell you the elasticity of that interest rate because they’ve calculated it.
Carefull , another portfolio company, is a platform for adult children to help manage aging parents’ finances. Their insight was many aging adults fall victim to scams, missed payments, or double payments. These mistakes can be costly and challenging for caregivers to uncover. Delivered through the bank, an institution the parent trusts, it becomes a win for all involved. Banks are enjoying increased balance’s with out paying top rates while gaining new customers.
Product managers don’t need to “surprise and delight” or disrupt with every new product. They do need to provide value that customers will rationally choose. And maybe. Just maybe, something customers irrationally love
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