The five p’s of banking
Since the birth of formal banking, banks have relied on the “five p’s” – people, physical cash, premises, processes and paper. Customers could not bank without being exposed to the five p’s. However, in the digital era, banking can be done on the internet, hiding bankers and bank tellers from the customer, who no longer even needs to visit a branch (premises).
Physical cash is being replaced by digital payments. Processes and paper are being removed by “frictionless customer journeys”. Whilst this digital transformation is not complete, we are much more progressed than you would think.
However, one thing that has not changed is the segmentation of customers. Banking today still focuses on mass market retail customers, the wealthy and businesses. Within these segments some basic sub-segmentation is done, like the creation of student accounts or basic business banking for contractors and small and medium-sized enterprises (SMEs). The speed in which new products could be brought to market and distributed was limited by the five p’s. Additionally, the breadth of products was limited by cost and complexity of educating sales teams.
In the digital era, these constraints do not exist. The reach is national or global depending on your vision or ability to execute. The initial neo-banks have focused their competition on lower cost of operation by being purely digital. However, banks are seeing leaner margins and growth is piling on cost which reduces profitability. These banks have simply replicated incumbents with a digital approach, better banking at lower cost. Initially, what differentiated these new players has been better digital service, frictionless onboarding processes and slick digital self-service interfaces.
Is there another way? What could be different? We are starting to see the emergence of experience driven banks. The key difference these banks offer is a “re-segmentation” of banking. These new players are finding customer segments with unfulfilled needs and aiming to facilitate their entire customer journeys. This will inevitably mean that they go beyond banking in the products and services they provide, so much so, they do not always “appear to be a bank”. Often, they will start without a banking licence, distributing third party banking products instead and taking referral fees. Eventually they may get a banking licence although this is optional. The key is how they go beyond banking and the best way to understand this is through some real examples.
One approach is taking a key life stage and managing the journeys for that life stage. For example, StorkCard manages customer journeys for new parents. It helps them to understand the cost of being a parent, helps with financing the cost and managing money through a period when parents have a choice to pay for childcare or give up work. It helps with getting discounts on baby products. Its focus is on helping parents focus on the new child and not worry about the finance. Not only is this purpose led, it is built on a profitable business model. Whilst this is a niche segment to start with, it is easy to see how StorkCard can extend its focus on parents to extend its offering through the lifetime of their child: school fees, university fees, wedding costs, deposit on a home.
Another niche player is First Home Coach (FHC), which consolidates the entire process of saving up for and buying your first home. Incumbent banks help with mortgages, but FHC helps you find a solicitor, surveyor, utility deals and they will continue to add services to become a one stop shop for everything you need to do to get your first home. It marries a rich set of services with content that educates and guides a buyer through the entire journey from saving to owning a home, it’s not just about the mortgage. In the case of FHC, it is not a bank but by owning the journey, the company is key to helping the buyer find the right mortgage. Eventually with the data FHC will gather, it is possible to see it launching its own specialised products.
My own new venture, Askhomey.com, focuses on the experience for households. Initially it focuses on managing property data (documents: manuals, warranties, receipts, images, facts: room sizes, layout and construction), managing tasks (maintenance, repairs, finance, projects) and managing finances (bills, subscriptions and accounts). Additional journeys like selling/buying or renting properties will be supported in the future. The key point is that all journeys will be supported through a single platform and backed by a rich ecosystem of suppliers (trades, products, services etc) to fulfil end to end journeys for households.
To be experience driven requires an initial focus on a specific customer segment and right now there are new players addressing key life stages and lifestyles. There are three key features for managing experiences:
- Aggregation of third-party products and services to build end to end journeys.
- Orchestration of third-party products and services to fulfil frictional customer journeys.
- A rich ecosystem of third-party products and services.
Previously, I’ve also given examples of Coconut (a bank for contactors) and Hammock (a bank for landlords). Each of these fintechs goes beyond banking and both now face competition from me-too variants of their proposition. This is a good sign that experience driven banking is gaining validation and momentum. Another positive sign is the creation banks focused on new segments, such as banks for entrepreneurs, banks for farmers, or for the Black, Asian and Minority Ethnic (BAME) community. Each going beyond banking to provide products and services to fulfil the complete needs of that specific customer segment.
I’m not saying all banks have to move to this model or that this is the only model for banks going forward. I am saying there is a new compelling model in banking, and it is experience driven.
About the author
Dharmesh Mistry has been in banking for 30 years and has been at the forefront of banking technology and innovation. From the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).
He has been on both sides of the fence and he’s not afraid to share his opinions.