1: What the Internet and "CrackBerry" Have Taught Customers
The author attempted to disconnect while working on this book - to turn of f his Blackberry, avoid checking e-mail, and give himself time to focus. It was only a few days before his phone rang - his absence and inaccessibility had caused something of a panic, even though he had prepared his staff for his absence. This is not unusual - technology has led us to rely upon devices that are always "on" and people that are always accessible. Things were not always thus.
Various causes are cited - technology, globalization, competition, etc. - but the bottom like is that people will be constantly available to one another, and respond in a timely manner. And customers have the same expectations of the companies with whom they do business, only more so, as business never sleeps.
The nine-to-five, Monday-to-Friday world of business is gone. People expect to book airline tickets, order flowers, trade stocks, buy goods, and anything else they like as soon as the notion occurs to them to do so, and failure to deliver upon this expectation is simply unacceptable. And given the number of competitors and aggressiveness of competition, they have no compulsion to accept anything less.
In this chapter, the author will explore two major factors in creating this change: the psychological impact of the innovation age and the process of innovation that have shifted their exceptions of the way others will engage with them. He will also consider the three phases of disruption that constitute a behavioral "paradigm shift."
Psychological Impact
The author refers to Maslow's Hierarchy (EN: skipping the details - it's a well known theory that doesn't need to be rehashed here) and suggests that the needs of the consumer in developed economies have shifted more toward high-level self-actualization needs, and the methods by which the customer seeks to fulfill these needs have likewise undergone a significant change.
Thirty or forty years ago, the customer in need of a mortgage loan would be compelled to visit the branch of a local bank, make an appointment with a manager, and undergo an "intense groveling session" to obtain a loan. In terms of psychology, the customer felt disempowered to negotiate rates and fees, and was largely at the mercy of the bank to favor them with a loan as if it were an act of charity.
Flash-forward to the present day, where the largest seller of home loans in the US (Countrywide) provisions virtually all of the mortgages on its books online. The customer is free to shop online, compare rates, obtain speedy pre-qualification (within 24 hours), and choose the lender. The power in the relationship, and the self-esteem of the customer, are radically different than in the previous scenario.
Some key differences are highlighted: the customer is in control of the transaction due to his ability to walk away, he is better informed about the rates and availability of competing products, he gets better deals because providers have to compete, he saves money because he can choose the best offer, and he gets a better quality solution because he has the power to negotiate terms. As a result, he feels that he's in control, is being treated fairly, and is generally happier with the experience.
The first such encounter with a financial institution is a refreshing change of pace for anyone who had previously done business with a bank manager in a branch office. Over time, it is no longer a "change," but an expected part of standard service. The customer will not stand for a provider who demands he come into a branch office and be treated like a charity case.
Process of Diffusion
The last period of major progress occurred in the industrial revolution, when a flock of new technologies (electricity, the telephone, the automobile, the radio) were introduced within a period of 25 years. These technologies would have a profound effect on the lifestyle and habits of consumers, but each took several decades to be adopted by the mass market.
The pace of adoption was slow because of the limitations manufacturers faced: they could not ramp up production, communicating to the market, get the product through channels, and undertake other tasks that are much easier to do, fast and on a large scale, in the current world. (EN: Ironically, its' because of these inventions that the same tasks are much easier today). It wasn't until nearly a century later that the infrastructure was in place, on a large enough scale, to facilitate the introduction and adoption of new technologies (in the form of consumer products.)
Turning to computers, it was likewise a slow beginning, from the development of the first "desktop" computers in 1975, to the release of "personal" computers in the 1980's, to the Internet in the early 1990's - but after that, things took off quickly.
The rate of diffusion is the speed at which a new idea spreads from one consumer to the next. In 1875, it took considerable time for a piece of information to spread from source to the general population. In 2010, it's very rapid (and getting faster).
Rate of adoption is slightly different - people must actually obtain something rather than just hear about it - but it is also extremely fast. Consider that it took about 50 years for the telephone to be adopted by 50% of households, the television took about 25 years (twice as fast), personal computers about 14 years (double again), and the Internet six years (twice again). If you consider Web technologies, such as Blogger or Facebook or YouTube, these are adopted by masses of customers in a matter of months rather than years.
(EN: The author tries to wrap this around to the need for business to adopt new channels or lose them to more nimble competitors - but it's an awkward leap from one to the other.)
Three Events Causing Behavioral Disruption
The author details three recent events that have been disruptive to the financial services industry, each of which has been, or has the potential to be, a "game changing" shift.
The first event is the arrival of the Internet itself, which many banks dismissed as a passing fancy, irrelevant to their business - but the Internet eventually changed the way many customers establish and access financial accounts, and had a significant effect on the balance of power between bank and customer. Within ten years, customers have switched their primary channel to the Internet, and less than ten percent of financial transactions are conducted through other channels (branch office, phone, or ATM).
The second event is the emergence of the smart device, such as the Google Android or Apple iPhone, whose capabilities (finally) fulfill the promise of mobile computing and communication. The potential is there for the customer to conduct any transaction via a mobile computing device as they could at an ATM, except withdraw or deposit cash - and while this is event is still relatively new (and has not become as widespread as Internet use), the adoption rates in the early phases suggest it will live up to its potential.
(EN: The author presents some statistics as evidence, but they are very stilted - e.g., the suggestion that 93% of U.S. households use cell phones do not mean that they use smart phones, which are still a very small sliver of the market - however I think his point is credible, and such distortions do more to discredit an otherwise credible argument.)
The third phase is believed to be mobile payments - the use of the mobile device to replace cash or payment cards. When these changes occur, the need for hard currency will reduce rapidly and the disruption will be far-reaching.
(EN: My sense is the potential is there, but consumer adoption has been poor. While popular in parts of Asia at one time, it hasn't caught on in the US, and similar technologies, such as the use of an RFID key fob to make payments at gas pumps, has failed dismally. That's not saying that service providers won't eventually discover a way to get it right, in a way that the customer will accept, merely that it's not as foregone a conclusion as this author implies.)
The author refers to the "great unbanked" - people who conduct their affairs on a cash-only basis, and suggests that these will largely be replaced by payment cards, smart cards, and mobile phones in the next five to ten years.
(EN: Again, this is not impossible, but overly ambitious. In industrialized nations, a very small fraction of the population fall into this category, generally the underprivileged, but it's still quite a large share in developing economies, and I have a sense that it will be quite a long time before cash can be phased out entirely. If credit and debit cards haven't killed cash, I doubt mobile technology will be able to do so, and cash is likely be around for much longer than ten years.)
Customer Empowerment
Changes that have empowered customers constitute a "real threat" to the industry.
Given the intangible nature of the product, the necessity of middlemen is even less plausible, and just as the Internet has all but eliminated the need for travel agencies, so has it all but eliminate the need for stock brokerages. The majority of customers have shifted to self-service online trading.
The net effect of this has been a short-term boon to brokerages, who are able to collect commissions on trades executed through their systems without the need to add to head-count. For example, 80% of trades at HSBC are executed digitally - and if the Internet channel shit down, the company could not possibly handle these transactions by phone.
However, in the long run, there is a looming threat: should stock markets seek to enable customers to trade directly on the market, without a brokerage at all, and at a lower commission structure than brokerages can match (given their overhead costs), then the brokerage industry would almost immediately disappear
It's also noted that empowering the customer has led to expediency of service. In 1980, it took an average of 14 days to be approved for a credit card or personal loan, and a month or more for a mortgage; whereas in 2008, credit cards and personal loans are same-day, and a mortgage can be approved within 48 hours. Customers who have become accustomed to being able to purchase tickets or make restaurant reservations right away, through a mobile device, see no reason for their banking products to take any longer.
The speed of service also facilitates shopping behavior: it is no longer a burden for customers to visit several bank branches, or fill out multiple application forms, to solicit multiple offers from different companies - this can be done online, very quickly, enabling customers to get the best rate, often without lengthy or surreptitious application processes. The bank that refuses to respond quickly will lose these loans to more aggressive competitors.
Channel preference is also a consumer demand that must be accommodated. Banks have no negotiating power to insist that the customer visit a physical office to apply for a loan or open an account - if they do not do business through the customer's channel of choice, the customer will not even consider them, and is not compelled to make exceptions.
Putting Service Back into Financial Services
Underlying the changes in technology and customer empowerment is the need for financial services to become service-oriented. Given a myriad of options, customers will no longer abide banks that dictate the terms of service. The loyalty, or perhaps apathy, that keeps them doing business with the first bank they ever opened an account with, fades quickly as they are subjected to a constant barrage of better offers.
(EN: while the book is new, it's entirely possible that the manuscript was completed before the banking meltdown, which is also a significant psychological factor. The public exposure of corrupt and irresponsible behavior by major financial institutions has done much to undermine an image of an institution that is to be respected or revered, and the ways that banks have reacted, attempting to squeeze more revenue out of loyal customers, has further weakened the bonds of loyalty.)
As such, the customer of today has been increasingly demanding, and service providers increasingly accommodating to those demands, and it's highly unlikely that there will be a reversion to the culture in which the customer passively accepted the level of service banks begrudgingly provided. To win customers, a bank must cater to the customer, which is a new and uncomfortable position to those in the financial services industry.