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Companies Formerly Known as Banks

Tien Tzuo
CEO, Zuora

Happy New Year! This week we’re continuing our discussion with Michael Mansard, Principal Director of Subscription Strategy at Zuora and EMEA Chair of the Subscribed Institute, who has written extensively about digital transformation in the finance sector.

Welcome back, Michael! The last time we spoke about the future of banks there was a fair amount of doom and gloom in our discussion: threats, competitors, legacy mindsets, etc. This week I’d like to put on some rose-tinted glasses. Let’s talk about opportunity. Let’s talk about creativity. In their journey to digital transformation, banks are obviously starting off with a lot of inherent advantages, right?

They have a ton of advantages. They own a massive captive audience — often more than a million of customers — that many companies would love to market their services to. They have huge amounts of data to help qualify this audience, much of it completely untapped. Because they’re audited, scrutinized, and accustomed to operating highly sensitive services, they’re seen as trustworthy partners. They are able to handle complex processes at scale. And as we talked about last week, thanks to APIs they can tightly couple services with other relevant financial and non-financial services to provide differentiated solutions across their customers’ journeys.

Got it. So let’s walk through some examples of what a brighter future for banks might look like.

As I see it, there’s really two stages to this transition. The first step is for banks to go outside of the box. That’s sort of where we left off our last discussion: moving from a financial product vendor to more of a holistic service provider. But what does that mean if you’re a bank? Well, assuming you have the right architecture in place, all of the sudden, you can start capturing moments of truth about your customer. Today, most of the time a company sends you an offer, they’re essentially shooting darts in the dark. Lots of them talk about lifestyles and big decisions in their marketing, but they’re really still just scratching the surface from a data point of view. But what if, based on the signals you’re sending me, I could actually anticipate what you might be interested in?

That benefits me in four ways: First, I can capture a broader share of potential value – I might be a little ahead of where you’re at right now, but that’s fine. Second, I can increase your customer satisfaction. Third, depending upon your reaction, I can capture more insights about what you might need or be interested in. And finally, perhaps most importantly, I’ll be the first one to present you with the right offer at the right time.

Here’s a potential use case. Let’s say you’re a small business owner. You’re going to need some legal assistance with the incorporation papers. If you’re a startup, you might need some capitalization table templates and document management. You’re definitely going to need a bank account for payroll and revenue. What if I can not only take care of all these logistics and paperwork for you, but offer you something truly special: once you’re up and running, I can give you continual benchmarks so you can rate how you’re doing against similar SMBs in similar industries? Kind of like your monthly Google Nest report. Suddenly, you’ve got this new superpower.

Now your customers aren’t really comparing you to a bank anymore. You’re something else. You’re a company formerly known as a bank. And you can charge a premium for that, because you have a unique value proposition.

Exactly. There’s a Russian company called Sberbank. They started off as a bank, and now they’re turning into more of a Russian Amazon. They understand that they couldn’t just sit in financial services, so they’ve done some acquisitions and turned into a whole suite of services. Let’s go back to our example about small businesses. Sberbank can help you outsource your payroll, your tax compliance, your accounting, and of course they have cloud solutions as well. It’s all subscription-based. And now, instead of working off a bunch of lagging indicators, they can help you anticipate things, like the potential need for short-term financing right before the month’s payroll. They’ve created this experience to simplify people’s lives; they’ve become a one-stop shop and really created their own category. They’re not a bank anymore.

They’re more like “back office as a service,” if you really think about it. What about some B2C examples?

Here’s where things get a lot more interesting. Here you can introduce real delight into the equation. What if, just for fun, I bundle some streaming or gaming packages into my service? Just as a pure cool add-on. Or take a look at Fender Play, and how they’re focused on making you a happy musician. What if you’re a young adult, and you don’t know much about personal finance – maybe I put together some video content, with takeaways that you can directly apply to your current account. Maybe I can offer you some gamified goals for you to progressively learn how to manage your budget. Maybe I can wrap in a sports wearable or Peloton subscription. I can turn into more of a lifestyle enabler.

You do have to be careful with add-on services, of course, because at the end of the day, you want to be more than the sum of your add-ons! You don’t want to turn into a simple pricing play, or a generic app store offer. You don’t want to throw a bunch of random stuff at people. Barclays, for example, is a great example of how to bundle consumer services right – they let you curate all kinds of complementary home, travel, and media services directly from their app. Again, you need to make the right offer based on the signals you’re receiving. If you can’t start fishing with harpoons, that’s fine, you start fishing with nets.

Customer satisfaction is obviously a huge issue for the finance sector right now, especially since 2008. If you can get a significant lift there, that’s a huge differentiator. I know we said we were going to stay positive this week, but you mention in your research that a majority of millennials have said that they’d prefer to go to their dentist than go to their banks!

This brings me to my second category of opportunity: bringing a subscription mindset to your entire organization. Maybe you got into subscriptions as an acquisition or an add-on – how do you completely reinvent your entire organization as a service provider? As we say in France, how do you learn to drink your own champagne?

Take the insurance industry. This used to be a very inflexible industry. You had to pre-pay every six months or a year. Then along comes Lemonade. Alongside their revolutionary approach through AI, they were also revolutionary on the business model front.They say – pay once per month, stop any time you want. A huge differentiator. So you can experiment with your pricing and packaging, to make it more customer-centric. Another great example is Metromile (a recent Lemonade acquisition). Usage-based car insurance. Why should you be paying the same insurance bill every month, when your car has been sitting in your driveway for the past 18 months? Again, a huge competitive advantage.

Closer to traditional banking, there’s Fidelity Go. Let’s say you want to learn more about investing in the stock market. It’s an investment platform paired with an AI advisor, so it’s good financial advice at scale. Fidelity is asking the same question that Fender did: What’s the biggest obstacle to people using my services? There’s always one. In Fender’s case, it was that people were abandoning their instruments. They weren’t invested. In Fidelity’s case, it’s even worse, because you get charged to make a trade no matter what.

Makes sense. I’m a new investor. I don’t know what I’m doing, but you’re telling me I’m going to have to pay to start getting involved in this and I don’t really know what the upside looks like. So, what you’re presenting with me right now is just a bunch of friction points. It’s just stress.

Exactly. So for new investors, they go with a Netflix model. A simple monthly flat fee. Piece of mind. Then as your account balance grows, they operate on a tiered model.

I love how all these new financial services are taking inspiration from other digital platforms. You have social sharing with Venmo. The pay-as-you-go model with Metromile. Tiered subscriptions with additional features with Fidelity. Consumer subscription packages at Barclays. Back-office as a solution with Sberbank. And Amazon-like instant insurance quotes from Lemonade.

As we mentioned at the top of the interview, the banks have such a great head start. All they need is a little imagination — they need to find new ways to differentiate themselves against the entrants. It’s urgent to investigate new business models outside of the beaten paths: in financial services, outperformers have gained $1.3 trillion in market cap since March 2020 according to McKinsey… with 70 percent of those gains captured by “nonbanks”! But you shouldn’t let perfect be the enemy of the good. Build a team, give them some executive air cover, start small, then iterate like crazy.

Agreed. Thanks Michael!

Thanks Tien!

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