“Customer dis-intermediation is one of the biggest challenges that a retail bank must contend with when it comes to retaining its central standing as the number one go-to provider of financial services.”
– Bragi Fjalldal, CMO & VP, Meniga 1)Banking Technology: “The race to meaningfully engage with customers is on“
We are living fascinating times in the world of financial services industry and institutions. As the late, great business professor C. K. Prahalad and his collaborator Venkat Ramaswamy pointed out in their magnificent book The Future of Competition: Co-Creating Unique Value With Customers (2004), the role of the consumer is rapidly changing, and consequently the traditional mindset of company-centric value creation (and goods-dominant logic) is disintegrating before our very eyes.
Prahalad and Ramaswamy argue that we are now witnessing the emergence of “the informed, networked, and active consumer, combined with the convergence of technologies and industries. Driven by these two forces, the consumer is increasingly influencing the firm and the value creation process. The result: the emergence of co-creation of value, which actively combines the traditional roles of the firm and the consumer.” 2)Prahalad & Ramaswamy 2004, 90.
So, the radical change of financial services customers from mere unaware to informed, from isolated to connected, and from passive to active is not a coincidence, but rather it is the result of new kind of thinking – namely the co-creation of value through experiences. 3)Prahalad, C. K. & Ramaswamy, V. (2004). “Co-creation experiences: The next practice in value creation“. Journal of Interactive Marketing 18(3): 5-14. As studies carried out by Raechel Johns (2013), Daniela Andreini et al. (2015), and Vincenzo Formisano et al. (2012, 2016) quite clearly points out, the emergence of service-dominant logic has not affected the everyday reality of financial services in any meaningful way. Ilmarinen’s Chief Customer Officer Pekka Puustinen, on the other hand, has argued in his excellent book FinancialServiceLogic: In the Revolution of Exchange in Banking and Insurance that for the financial services industry to develop, the whole industry has to move away from goods-dominant mindset towards service(-dominant) logic.
From firm-centric tunnel vision to holistic customer-centricity
To understand the role of the empowered consumer, we need to understand the shift in the power relations between service providers and customers. Already in the early 1990’s Regis McKenna was one of those business gurus who called for new modes of business thinking. 4)McKenna, R. (1991). “Marketing is Everything“. Harvard Business Review 69(1), pp. 65-79; McKenna, R. 1991 (1993). Relationship Marketing: Successful Strategies for the Age of the Customer. New York, NY: Perseus Book Group; McKenna, R. (1997). Real Time: Preparing for the Age of the Never Satisfied Customer. Boston, MA: Harvard University Press.. David Siegel argued in his 1999 book Futurize Your Enterprise: Business Strategy in the Age of the Customer that the most significant driver of change is not actually the new technology, but instead, it is all about changing the corporate mindset to become a customer-led company. More recently, the tectonic shift towards customer-centricity has been rediscovered and well articulated both by Jim Blasingame in his various writings and Janne Löytänä and Kari Korkiakoski in their book. As Alexander Lofts points out, we have already moved beyond the era of the seller.
In 2011 Forrester Research published a famous piece of research titled “Competitive Strategy In The Age Of The Customer: Only Customer-Obsessed Companies Can Survive Disruption” and republished the original, slightly updated paper in 2013. These both articles, in addition to various insightful passages, included two significant figures. Figure 1 depicts the assumed developmental pathway from the age of manufacturing all through to the age of the customer, and Figure 2 shows how competition has changed about the age of the customer.
To understand this radical change, it is critical to know how the external and internal business environment is changing all the time and requires businesses to identify, understand and analyze customer behaviors, preferences, expectations, and interests. Classic business strategies are being undermined by the advent of new information technologies, and massive amounts of digital data as BCG’s Senior Advisor Philip Evans clearly explains in his excellent TED talk. The classic theories of corporate strategy (namely Bruce Henderson’s idea of increasing returns to scale and experience and Michael Porter’s concept of the value chain) were formulated in the 1970’s and 1980’s, and while they are still widely used, ongoing radical changes are rendering the traditional strategy theories obsolete. So, businesses were designed to succeed in the age of distribution and information but what about corporate strategy in the world where talent is scarce, trust is the new currency, phygital is the new normal, customers want personalized experiences, augmented and virtual reality are explored, and artificial intelligence is said to revolutionize everything? The age of the customer demands a fundamental rethinking of leadership and strategy. 5)Forrester (2015). “Digital Transformation In The Age Of The Customer“.
As Niraj Dawar argues, “Competitive advantage is gained by listening to customers and giving them what they want.” Listening to customers and understanding what they want, companies need to understand what’s going on in the age of the customer; and especially, how the rapidly emerging digital era is changing the playground. The saddest thing that can happen is to end up relying on various time-based myths as Matthew Kutz calls them in his new book Contextual Intelligence: How Thinking in 3d Can Help Resolve Complexity, Uncertainty and Ambiguity.
Namely, we should be aware of three things according to Kutz. First of all, it is a myth that “the solution that worked yesterday will work today.” As Kutz highlights, as time passes by, the context may change. Secondly, there is no certainty in hat “present-day trends will continue.” Thirdly, and lastly, the future is not completely unpredictable either. “There are things we do every day in preparation for tomorrow, which turn out to unfold exactly like we thought they would,” Katz writes. 6)Kutz 2017, 147. However, even if a company can create a deep understanding and almost total picture of its customers, there is still no way to be certain that this is enough to gain a competitive advantage. There is a variety of models and theories that aim to help companies to recognize the fact that customers tend to be quite complex, ambiguous and uncertain creatures. As Joel E. Urbany and James H. Davis point out, there are two reasons for this. “First, there may be a natural change in customer preferences and demand to external environmental events […] A second driver of changes in customer preferences is the rate of innovation-imitation cycles themselves.” 7)Urbany & Davis 2010, 163.
Although people emphasize the importance of understanding and listening to customers, there are many caveats to this general rule. As BCG’s Michael J. Silverstein and Tom Robinson carefully articulate:
“Consumers cannot think in abstractions. They cannot envision a new concept. They cannot predict their own behavior. They can only compare against their current frame of reference. So you need to make the big leap for them. You need to provide them with a reason to buy, a reason to brag to their friends. Expect new-to-the-world ideas to fall on deaf ears. Consumers will, however, change their tune when they can see, touch, and explore.”
One cannot expect, not even in the world of everyday financial services, customers to build their solutions to get their jobs done. People are lousy in explicitly stating what they want, and it is not even their job to do this. Back in the days when I worked in business development, I relied heavily on various quantitative measures ranging from simple Likert scores to full-scale surveys. Every single time I was “surprised” that even with the help of open answers, it was hard to make sense of the results obtained. This issue was particularly well exemplified in cases where customers were asked about more innovative solutions that they were not initially very familiar with.
What became apparent during the time was that people are not very good at explaining what they need and on the other hand expect. When I looked into the world of social trading and social investing, I noticed that it was tough to explain what this meant in reality, i.e., how to move away from abstract concepts to concrete, tangible objects without losing the focus of the issue at hand. It is pretty well established that people are not very good in understanding and imagining the future technologies and products, but this does not mean that consumer reactions are beyond our human comprehension. To do this, Peter N. Murray advised us to use methodologies that are “designed to elicit constructs and emotions rather than the traditional research measures of preference.” So, in the end, people did not really understand what social investing and social trading are all about at the abstract level, but when they were provided with real, tangible examples of the solution in use, users seemed to understand more abstract concepts much better.
So, what kind of things are affecting the banking customers today? It is critical for financial services industry to have the right situational awareness of the contemporary competitive landscape, and therefore there needs to be a correct comprehension of what has happened, what is happening and what is expected to occur. As Thomas Ripsam and Louis Bouquet argue, every company needs to have customer strategy in place. Why is customer strategy so important? Ripsam and Bouquet claim that it is required to come up with answers to various questions such as “Who are our customers?”, “Given our company’s overall value proposition and strategy, what customer experience should we create?”, and moreover, “What capabilities do we need in order to deliver that experience?”.
Developing positive financial habits, fostering long-term relationships with customers via digital platforms, personalization, and contextual dialogue are the cornerstones of meaningful engagement according to Bragi Fjalldal. This is easier said than done. My view is that before all of this, financial services firms need to start with who. “The truth is that great organizations build their core ideology by first defining and reinforcing Who they serve and the customer problem or need that they solve in the marketplace,” Lex Sisney highlights in response to Simon Sinek’s golden circle. So, before going to tactical level with financial habits, digitally augmented relationships, etc., every organization has to know who they serve and what is the job to be done. As Ludwig von Mises pointed out in Bureaucracy,
“The real bosses, in the capitalist system of market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in The Quotable Mises 45 what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses.” 8)pp. 20-21
Patterns, trends and value creation
So, as I pointed out earlier, we have incrementally advanced through various stages from the age of manufacturing to the age of the customer, and nowadays customers are assuming much more active roles such as being co-innovators. What this means, is that the role of the consumer and service provider have changed as well. “Buyers are looking for answers on the Internet,” Jukka Aminoff and Mika D. Rubanovitch write in their book, “and winners will be those players who provide the most useful information at the earliest possible stage of the client’s buying process.” 9)Aminoff & Rubanovitch 2015, 6. Trans. TB. Thanks to a vast array of alternatives and changing buyer behavior we can look for better offer almost indefinitely, and as Pekka Mattila and Mika Rautiainen note, these various changes in purchasing behavior are manifested everywhere around us; multiple studies and reports clearly indicate that more and more buyers, whether consumers or not, take advantage of online search and comparisons throughout their journey and even after one particular journey has been finished.
As one can expect, the landscape of selling financial services has changed as well, and in the future, the importance of new modes of selling, such as social selling, will most definitely increase in the financial services industry as well. As Pekka Puustinen, Hannu Saarijärvi and Peter Maas have argued, “[financial services] firms often need to move from product and firm centricity toward service and customer centricity.” This means that the nature of exchange in the context of financial services needs to be re-evaluated as “the discussion of value has been heavily asymmetric and focusing exclusively on exchange value.” It is not surprising that emphasizing and focusing on economic value limits considerably the ways financial service providers can support customer’s value-creating processes as Puustinen, Saarijärvi, and Maas point out.
The still-influential producer/manufacturer-oriented business thinking, revolving around goods-dominant logic, is probably the most disturbing trend for the long-term transformation of financial services industry. The main problem, as Jim Blasingame demonstrates here and here, is that it relies on the fundamentally mistaken idea that things in the marketplace have not been changed radically in the age of the customer. According to Blasingame, there are three primary elements in the market, namely the product, product information and the buying decision. In the past, the customers had to mostly rely on the service provider as there was a limited amount of options available and finding information about competing alternatives and comparing these against each other was pretty hard. “This paradigm shift is largely caused by online platforms that are: 1) increasing the access customers have to information about a Seller and its products; 2) allowing customers to express and share what they have learned about and experienced with a business”, Blasingame argues. So, what happened? Blasingame asserts that “[t]he Age of the Seller is succumbing to The Age of the Customer, as customers resist restrictions of the former Age and embrace the empowerment of the new.”
So, in the context of financial service, active, empowered and informed clients are frequently questioning the underlying producer-driven sales approach, and to understand this, we need to figure out what has happened regarding customer expectations, preferences and behavior in the past two decades. There is no lack of studies, research, and data in terms of diverse trends and issues driving the revolution of the customer throughout the world but it’s important to recognize that significant trends are not linear, but instead, all these various patterns tend to be mixed together and function as if everything is connected to each other. Some of these different trends are more important than others, and some of them have already had a considerable effect on customer behavior in the context of financial services and admittedly are still very relevant. But as Anders Sandberg, a computational neuroscientist turned philosopher, explains in his talk, we are in general incredibly bad in predicting the future. One of his ideas is that trends are not the only thing that matters but instead, there are also phase transitions, new discoveries (genuine surprises), and cascade effects present. Sandberg emphasizes the difference between the future and the future. There is a considerable difference in planning where we want to work, where to invest and how many children to have – this is something Sanderbg calls “near mode”. Saying something sensible about the far future – namely “far mode” – is significantly different from the pragmatic near mode. 10)Hanson, R. (2009). “This is the Dream Time“. Overcoming Bias, 28.9.2009.
I present some near mode trends here, and although it is meant only as an illustration, it should help you to be more perceptive in understanding the way the world is changing around us. Besides, it is important to note that there are long-term and short-term trends affecting the financial services industry as a whole, and banks and other financial services firms are well aware of the megatrends affecting the industry. 11)Marous, J. (2016). “Top 10 Retail Banking Trends and Predictions for 2017“. The Financial Brand, 21.12.2016; Capgemini (2016). “Top 10 Trends in Banking – 2017: What You Need to Know“. Capgemini.
In 2013, EY outlined four megatrends and their implications for banking in 2030:
- Nationalism vs. globalism: limits on the global banking model (Political)
- State capitalism: a new force in global banking (Political)
- Trade flows: opportunity and volatility (Economic)
- New markets: the emerging will have emerged (Economic)
- Demographics: an older, more urban generation (Social)
- Customer relationships: more personal, greater trust (Social)
- Payments: new markets and new models (Technological)
- Energy: challenging the old order (Technological)
- Rise of state-directed capitalism (Political)
- Technology will change everything (Technological)
- Demographics changing priorities and opportunities for growth (Social)
- Social and behavioural change (Social)
- Potential disruptors to this future (Social/Political)/Economic)
- Evolution and disruption – an imperative for change (Industrial)
- Primary Accounts: Changing customer preferences
- Payments: A cashless world
- Capital Markets: Distributed capital raising platforms
- Investment Management: Empowered customers
- Insurance: Growing connectivity
In 2015 Willis Towers Watson released an extensive report on six megatrends affecting the global financial services industry:
- Digitalisation and technological advances (Technology)
- Business Operating Model pressures (Business/Technology/Industrial)
- Demographic and behavioural changes (Social)
- Regulatory changes and complexity (Social/Economic)
- Global talent and skills race (Social/Business)
- Changes in investment, capital sources and returns (Social/Business/Economic/Industrial)
So, even after the financial crisis and its aftermath, it seems that business impacts of technological advancements and innovations are still very much in the center of the discussion concerning the future of the financial services industry. In addition to the ongoing technological revolution, (de)regulation plays a significant role in the future of the financial services industry. All those obscure acronyms ranging from MiFID II to AMLD IV are affecting the industry in various ways, and although some regulatory measures are intended to nurture additional competition in the financial services markets, interventionism is never without unintended consequences.
In addition to technology and regulation, many experts are emphasizing the importance of demographic and behavioral changes, but it is a bit upsetting that significant trends in financial services skills, jobs, and matching are not so much discussed in these various forecasts. 12)In Finland, Finance Finland has been pushing forward its agenda on these different HR, talent and skills topics for years. Finance Finland has published numerous reports on various issues ranging from flexible work and skills to digitalization and productivity in the financial services industry.
The apparent lack of debate on new forms of (flexible/virtual) work and the impacts of automation on the financial services industry is not surprising. There are, of course, some dissidents that are willing to argue on these topics. For example, Reijo Karhinen, Chairman of the Executive Board and Executive Chairman of the OP Financial Group, has been vocal about his concerns about the future of financial services workforce, and previously he has estimated that almost 30 percent of all jobs in Finland will be lost due to automation. “What do these people do in the future?”, he asked during an interview in last March.
So, what kind of trends will shape the future of banking, insurance and financial services industry overall? I think that various megatrends will shape the financial services industry, but I wanted to highlight just a couple of them to emphasize the importance of having a holistic picture of the things in motion. It is important to remember that individual companies do not really have their say in the way these megatrends manifest themselves and interact with each other, and therefore it can be complicated to rationally evaluate how they will eventually impact various businesses, and what kind of strategic options are available in specific time and place.
Let’s for example look at the claim that technology will change everything. What does this mean? Acknowledging the existence of global megatrends is nice – coming up with strategies in response to them is an entirely different thing to start with. So, to understand what megatrends are the most relevant for the financial services industry, data is needed so that it can be interpreted in the context of the industry, businesses, and markets (i.e., thinking via sociotechnical systems and systems theory frameworks). Only based on throughout understanding of various vital megatrends, estimates on their (interrelated) effects and implications can be assessed so that strategic options can be envisioned and appropriate strategic responses generated. It is crucial to remember that running static one-time scans or data gathering exercises is not a right way to understand trends on a broader scale as these various pretty complex trends are continually changing and evolving.
Trendscouting, scenario planning, weak signals and other forms of foresight are becoming increasingly crucial for the financial services industry. As Michael R. Czinkota and Marc F. Schrader point out,
“A trend is not simply a future occurrence, but rather an event line that becomes apparent through current incidents pointing in the same direction. The challenge is to see through a multitude of ambivalent incidents to find those that eventually will become a straight line of change. Single events don’t make a trend but may well mark the beginning of one and therefore need to be tracked.”
So, making better sense of various possibles futures, financial services industry can understand their clients better. It’s important to have the right mix of near mode (real-time) short-term research (e.g. (n)ethnography, focus groups, workshops) and long-term research (e.g. technology monitoring, forecasting, and foresight, cross-impact analysis, the Delphi method, simulation and games, CLA, etc.) as a way to avoid analysis paralysis and extinction by instinct. 13)Langley, A. (1995). “Between ‘Paralysis by Analysis’ and ‘Extinction by Instinct’” Sloan Management Review 36(3): 63-76. Robin Hanson has argued that our “practical concrete reasoning about things up close” (near mode) and “abstract reasoning about things far away” (far mode) are odds with one another as “far mode was tuned more for presenting a good image, it is much more tolerant of good-looking delusions”. So, in the end, does it make sense for a company to engage purely far in the future research? No, not really.
With the help of these various near mode methods, and incorporating multiple tools and assets provided not only by megatrend research and analysis but also by service design and design thinking, it is conceivable to recognize hidden assumptions, biases, and uncertainties at some precision. These are the things that are ingrained in the way we very often end up conceiving and interpreting clients in very general, mechanical and abstract terms that might not bear any resemblance to the inherently messy realities of people’s everyday lives. 14)Ramaswamy, V. (2011). “It’s about human experiences… and beyond, to co-creation”. Industrial Marketing Management 40(2): 195–196. In the future, it’s of surmounting importance for banks and other financial institutions to really understand the everyday lives of their customers – whether they are retail, corporate or institutional clients. It’s not enough to “develop” something if the service provider is not able to describe and understand the jobs-to-be-done.
|↲1||Banking Technology: “The race to meaningfully engage with customers is on“|
|↲2||Prahalad & Ramaswamy 2004, 90.|
|↲3||Prahalad, C. K. & Ramaswamy, V. (2004). “Co-creation experiences: The next practice in value creation“. Journal of Interactive Marketing 18(3): 5-14.|
|↲4||McKenna, R. (1991). “Marketing is Everything“. Harvard Business Review 69(1), pp. 65-79; McKenna, R. 1991 (1993). Relationship Marketing: Successful Strategies for the Age of the Customer. New York, NY: Perseus Book Group; McKenna, R. (1997). Real Time: Preparing for the Age of the Never Satisfied Customer. Boston, MA: Harvard University Press.|
|↲5||Forrester (2015). “Digital Transformation In The Age Of The Customer“.|
|↲6||Kutz 2017, 147.|
|↲7||Urbany & Davis 2010, 163.|
|↲9||Aminoff & Rubanovitch 2015, 6. Trans. TB.|
|↲10||Hanson, R. (2009). “This is the Dream Time“. Overcoming Bias, 28.9.2009.|
|↲11||Marous, J. (2016). “Top 10 Retail Banking Trends and Predictions for 2017“. The Financial Brand, 21.12.2016; Capgemini (2016). “Top 10 Trends in Banking – 2017: What You Need to Know“. Capgemini.|
|↲12||In Finland, Finance Finland has been pushing forward its agenda on these different HR, talent and skills topics for years. Finance Finland has published numerous reports on various issues ranging from flexible work and skills to digitalization and productivity in the financial services industry.|
|↲13||Langley, A. (1995). “Between ‘Paralysis by Analysis’ and ‘Extinction by Instinct’” Sloan Management Review 36(3): 63-76.|
|↲14||Ramaswamy, V. (2011). “It’s about human experiences… and beyond, to co-creation”. Industrial Marketing Management 40(2): 195–196.|