Any service company that continues to operate a product mentality is living on borrowed time.
And this holds especially true for Banks, Building Societies and Insurance companies.
Well, we live in an age of almost infinite choice. But the curious paradox is that product differentiation has paid the price for our profligacy. Products have become so commoditised by generic search tools, that most purchase decisions are now price-driven. And nowhere is this scenario clearer than in ‘mandatory’ product sectors such as car insurance and mortgages.
Think about it… would you honestly pay more for your car cover than is absolutely necessary? Would you willingly opt for a mortgage with one vendor when a competitor offers you an identical product for considerably less?
This instantly explains why companies with the lowest cost base have an in-built advantage. But that is an unwelcome truth in the boardrooms of most banks, building societies and insurance companies. Long established institutions with high cost bases simply cannot compete with agile newcomers with significantly lower overheads.
And for evidence, let me give you an example where – every year – a product mentality results in a critical loss of business…
Once, as a freshly appointed partner of Accenture, I was asked to fly to Tokyo to support my Japanese colleagues. We needed to demonstrate our innovative credentials to one of the largest insurance companies in Asia.
As our team was taken to meet the CEO and his most senior managers, we passed through a vast hall where people – all dressed identically in sombre grey uniforms – were busy processing forms. “These people,” I was informed, “are handling our annual car insurance renewals.” I looked again at the serried ranks of human automatons and slowly the germ of an idea crystallised in my mind.
Some minutes later we were ushered into the presence of the management Board. After formal greetings we sat down and the interpreter turned to me: “The CEO is most interested to learn of your innovative ideas for his business.” It was an invitation I couldn’t resist…
“Please tell me,” I asked, “why does your company deliberately sacrifice its valued customers every year?”
My provocative question met with a shocked silence. Finally, after a whispered conversation with the CEO, the interpreter replied: “With respect, we don’t… all customers are precious assets. Why do you accuse us of sacrificing them?”
Conscious that I could easily cause offence, I chose my words carefully. I explained that insurance was a commodity product. Every year, as policies came up for renewal, customers went in search of a better deal. In such a price sensitive market, there is little brand loyalty, so all companies are caught in a costly dilemma: cut margins or lose customers.
I could see heads solemnly nodding in agreement, so I felt confident enough to raise the stakes: “Since this problem is triggered by one annual event, why do you sell policies that last only 12 months?”
There was another long pause but, this time, it was an enlightened silence before the CEO spoke: “Sore wa, gyōkai no kanreidearu tame” (“because it is the industry’s convention”). This was the answer I needed. “Then perhaps it’s time to break with convention and step-off the treadmill,” I suggested. “Surely, drivers don’t suddenly perform so differently after 12 months that your company would need to change its prices, terms or conditions. If you offered people 2, 3 or even 4-year policies you could lock in loyalty, revenues and profits.” This notion caused a fair amount of vigorous nodding but, I regret to say, no change in behaviour. To this day that same insurance company only offers 12-month car insurance products and, as a result, loses a substantial number of customers each year. They, unlike so many other companies in their industry are stuck in a one-way mindset. And this could well be the death of them because their rivals – the new entrants – are totally unconventional.
Let me give you another example of traditional (in-bred) thinking.
Around the same time as my trip to Tokyo, I was invited to Harrogate to address the annual convention of the Building Societies. The Chairman was the very innovative CEO of a medium-sized Society and a close client of mine. He wanted to “stir up” his audience and invited me to be a contentious keynote speaker on a very traditional topic: The Future for Building Societies.
The day came and I stood up to give my talk to a large audience of suited senior executives (predominately male and grey-haired). My very first slide simply had these three words on it:
Stop selling mortgages!
There was a stunned silence from the room full of mortgage lenders. Genuinely, you could have heard a pin drop. I left the slide on screen, sat down and said nothing. After an uncomfortable silence, the Chairman whispered: “is that it Rob?”. I replied, “Well, since everyone in the room probably thinks I’m insane, it could well be… but I do have some more slides if you would like to see them”. He smiled cautiously…
My second slide had four words:
People don’t want mortgages!
By now most of the audience was convinced I should certified – but this time I didn’t sit down. Instead, I put up my next slide which said:
They want homes!
At last, I had grabbed their attention. The mood suddenly shifted, so I went on to explain that a mortgage was ‘merely’ a means to an end; not the end in itself. As a commodity product and the largest significant sum of money an individual would ever borrow, no-one (in their right mind) will choose a more expensive mortgage when a cheaper one was available.
I then challenged the audience – just as I had with the board of that Japanese insurance company. “Why,” I asked, “must customers take out a new mortgage when they move house?” By making this demand, building societies were forcing their customers to shop around and actively search for a cheaper alternative.
“What should we do instead?” came the inevitable riposte – so I suggested two possible paths…
Option One: offer a mortgage for life and then lend the customer more money each time they want to trade up, or…
Option Two: offer a fully-fledged home finding, buying, selling and moving service that, amongst other things, included the money necessary to buy the house of their dreams.
In this way, the building society would deliver the total ‘end-to-end’ solution and not just the means to that ‘end’.
I would like to report that these options inspired an animated discussion and a collective desire to rewrite the rule book – but they didn’t.
There was no ‘Damascus’ moment, just a polite round of applause matched by an unrelenting grip on the status quo.
A response that leads to one of two inescapable conclusions:
Either I should be fitted with a rather tight jacket and left in a well upholstered room or Building Societies are dangerously short-sighted. I’ll leave you to decide.
But let me leave you with this postscript…
Recently, I had fascinating discussion with the COO of another Building Society. This executive has a broad and impressive track-record – he is not a blinkered, dyed-in-the-wool ‘Society’ man. He looks at his industry with a refreshing candour and he is worried by what he sees…
In an era of rock-bottom interest rates, Societies cannot attract the savings they need to sustain historic lending levels. This problem is exacerbated by house prices that are so out of kilter with earnings that young people can no longer secure a mortgage (the average age of a first-time buyer in London is now 38!). This shortage of funds and eligible customers has created a toxic mix for Building Societies.
Our conversation ranged over a host of topics but it came to one uncompromising conclusion. Financial services will change and it will be radical – but it won’t be driven by traditional providers.
Much of the fresh thinking will come from the new FinTechs that are seriously threatening the old balance of power. Inspired and led by entrepreneurs from outside the Financial Services sector, they are changing the dynamics of the lending industry. They are talking ‘Services’ not ‘Products’. They are thinking Apps… and Bots… and AI… and Machine Learning… and Augmented Reality… and all thing digital. And most telling of all, they are not carrying the dead weight of costly branch networks or legacy systems or trust issues.
Will Building Societies – and many Banks – survive? I genuinely hope so – but they have to read and heed the writing on the wall…
Change mindsets. Think Services; not Products.
And focus on the End and not the means.
Robert Baldock is the MD of Clustre – The Innovation Brokers