The assumption that massive investments in technology are essential for our banks to remain successful and retain customers has been with us for decades now. “It’s table stakes”, we were told. We started with perceived core system upgrades and moved onto efficiency plays, followed by database management tools crowned by Salesforce, etc. etc.
The very same assumption, which focused in RPAs and upgrading human production to more value-add activities, is now followed by AI tools of all kinds, Stable Coins and possibly wholesale automation of entire functions. All are perceived as absolutely essential to our survival, while their absence is portrayed as an existential threat. Amazon’s workforce reduction by 30,000 people and others like it only heightens the effectiveness of the message.
All banks have limited dollars, from the largest to the smallest. What are midsize and community banks to do? They are disadvantaged both in absolute terms (none of us can spend the number of dollars that Chase does) and relative terms (Chase spends at least 1/3 of its tech dollars on new tools vs. maintaining bank operations; most of us spend 85% on keeping the wheels turning, leaving much less on the table for innovation and new applications).
McKinsey recently issued its always excellent report on strategies for success for midsize banks. Interestingly, it wasn’t much different from its strategy paper for the largest banks in the country. In the article “Banking on the next generation: A playbook for US mid cap banks”, the message was clear: “Midcap banks face challenges including an aging customer base and a heavy reliance on branches, but also opportunities to modernize, attract young consumers and build resilience.” McKinsey correctly pointed out the performance gap that has emerged in the segment. “Customers moved funds to Laurier institutions perceived to be more stable” following the SVB/Signature crisis. Consequently, banks that rely more on consumer deposits have dine significantly better than those that rely more heavily on commercial or wholesale funding. As we all know, consumer relationships are relatively stable, and the older they get, the more resilient they get. McKinsey predicts that in a decade our baby boomer customers who account for the bulk of retail deposits will be replaced by Millennials and Gen Zs. I agree with the prediction. Where we part ways to some degree is the conclusion. “For midcap banks … winning over consumers is becoming increasingly difficult as they are not people’s top choice for a primary financial institution.” The article proceeds to document this fact and the struggle to match the value of bigger peers. It highlights the opportunities for cross-selling and winning at customer service and recommends five moves to help midcaps win over consumers:
1. Modernize branches to drive sales, moving beyond just offering great service.
2. Pursue an AI-driven digital transformation focused in high-impact journeys.
3. Build a digital marketing machine.
4. Focus on effectively serving high-value customer segments.
5. Refine the retail product portfolio through specialization.
These five moves are all valid and all-too-familiar. Replace AI with previous technology “imperatives” and you’re where we’ve been all along. Digital transformation is essential and beneficial, but did it generate the returns, loyalty, customer acquisition and other benefits we counted on?
Technology is an integral part of our business and will remain so to ensure our competitiveness and continued organic growth. But are there other tools that can help us differentiate through our people while benefitting from technological efficiency and enablement?
One such tool that is but an example of what’s possible is Family Wealth Governance. While clearly not a mass market tool, is fits well into “effectively serving high-value customer segments”, and it certainly is a powerful differentiator. The tool, which has traditionally been applied only to the uber-wealthy, allows the wealth creators to articulate to themselves, and their family, what are their main priorities in life and the values that drive them. The process is people-intensive but not extremely time consuming. It entails conversation which leads to cross-selling the first generation as well as wealth retention by younger generations. It’s an effective way to build trust and relationships by creating both financial and emotional value to families that have a certain threshold level of wealth. You can think of it as the next tool post financial planning that most bankers see as the best way to generate accurate data and cross-sell customers from the mass-affluent upward.
An important and unique benefit of this tool is the involvement of the entire family in discussing sensitive topics and in developing a shared understanding of the goals of the wealth creators, who they are and how important family is to them. This social benefit is store times even more valuable than the clarity the process brings to the financial priorities.
This tool – and others like it – also play very well to Mckinsey’s prediction of the wealth possessed by our Millennials and Gen Z’s a decade from now. These younger generations will not only have more wealth and a larger share of our deposits. They will also be a decade older, and their priorities will be changing. We’ve seen this with our own children and throughout generations. It’s the circle of life. As people get older their needs change as do their resources.
We should not assume that today’s Z’s will be the same a decade hence. Just like many of our sofa-dwellers in our basements have finally left the nest and are making their way in the world. Instead, building upon the technology investments we’ve already made in the past 5-7 years, we can design a suite of tools and product offerings that will create value-add to the next generations and be used to capture their deposits and their hearts.