The Legacy of Uberization
The signs of the great unraveling first appeared early in this millennium as e-commerce grew from a nascent specialty industry to become a virtual shopping mall that captured a small but economically meaningful slice of total annual retail sales in the United States. Over this time, brick and mortar retailing began to feel the impact as customer traffic decreased materially. Some retail categories, e.g., bookstores, evaporated into the virtual world.
Other industries saw their entire landscape scorched as consumers gained access to services via their smartphones anytime, anywhere. The music industry was one of the first to be so comprehensively impacted. The convenience of downloading tunes was compelling enough to deliver a TKO to other media for recording music. These changes were controversial as, in many cases, the music creators were not paid when their music was accessed, but the genie was out of the bottle.
It took Uber, the ride-sharing app that turned the economics of the taxi business upside down, to give us a word for the kind of sweeping change technology was bringing to industries that had done business the same way for decades (even centuries): “Uberization.” In all these cases, the change was so radical that the industry was barely recognizable after the fact and from most consumers’ standpoints much improved.
It is important that banking – especially at the community level – understand that this same type of change is happening in financial services. Banking is not being “disrupted.” It is being redefined; it is being uberized.
Guess Who Isn’t Coming to Dinner
Ever had a special event and the absence of someone you thought was coming became a worry on some level? Maybe it was a dinner party with those fancy place cards. It was obvious who was missing, but why they were not there was the question on most everyone’s mind. Believe it or not, markets are like dinner parties. You can tell who the guests are by where they are seated. It also can be very telling if someone is not in their appointed seat.
In most verticals, the players can be grouped in one of four categories. Market leaders eat at the head of the table. The food from the kitchen is delivered directly to them. Sitting on the right of the market leaders are the followers. Even though they almost never describe themselves that way, it will be obvious if you check their plates. On the plates of the followers, you will see they are eating the scraps from the plates of the market leaders.
On the left side of the table, sitting a few chairs down from the market leaders is a group of players that consider themselves different from everybody else at the party because they are early movers. However, they are not too different from everyone else at the table. Though it may not look like it, if you examine the food on their plate carefully, you will see it is basically the same food as what you find on the plates of the followers. They have rearranged it a bit, mixed this with that, but it’s the same stuff.
There are some seats at the table that are empty. The place cards call them challenger banks. For the most part, they are digital-only financial institutions. They are in the room standing against the wall, dressed differently than everyone else. They are snickering at one another, pointing to what’s on the plates of those seated at the table, and saying, “You call that food?”
These folks are the ones that will ultimately be responsible for doing to the banking industry what was done to the bookstores, the music industry, and taxis. They are somewhere in their development between being a fad and becoming a habit for some. The momentum they have gained suggests they are more likely than not to be around for the long haul. They are not disrupting banking. They are redefining what banking means.
Before You Sack the Bats
Before we sack the bats on community financial institutions and surrender the field to the new whiz kids, let’s consider one important positive. A meaningful percentage of those needing banking services still would prefer to do their banking locally.
It is unclear how long this will last, given that banking without branches was made the norm for months during the pandemic, perhaps accelerating a change in consumer preferences concerning how they define a bank. Short-term action is required if community banks and credit unions want to give people inclined to stand by them a reason to do so. That action will require these institutions to “redefine” banking for their clients. n
Luckily, FinTechs offer some options that, when integrated into an institution’s offerings, adds value for the customer or members than redefines how they think about banking. This is where locally-based institutions need to be focused on the near term. Upgrading a digital banking platform or a core processing system will take a long time, cost a lot of money, and do nothing to redefine banking for clients. In the now normal look first at what FinTechs can do to help your bank or credit union redefine how its customers and members think about banking. Otherwise, there will be fewer people at the dinner table in the not-too-distant future.