It’s time for smaller banks to fight for customers again
There are 95 banks in Australia, and while that includes a few specialists and some ownership duplication, this number should make for healthy competition. Unfortunately, it’s not working out that way.
Instead, the crushingly expensive forces of technology, regulation, and risk management are leading banks away from the diversity that keeps an ecosystem healthy. The market is converging into the undifferentiated middle, the big four banks, and increasingly the big one. Meanwhile, many smaller, stand-alone banks are slowing towards a questionable future.
This is not in the community's or category's best interests. Convergence will lead to commoditisation and price wars and leave us more exposed to global fintech competitors. It also stops us thinking about the needs of atypical customers and the resulting innovation that brings, accentuating the gaps between the population's haves and have-nots.
Excitingly, it is the smaller banks, not the big ones, who can change this trajectory. They have a long history of championing change and innovation. They push the big players to do better and provide the resistance a category needs to avoid collapsing into that undifferentiated middle. Whether it is the current challengers like Macquarie Bank or Up Bank today or the brands that have held that mantle in the past, the market has always benefitted when customers have strong alternatives to choose from.
To be in the fight, smaller players need to start outrunning the threat posed by the three macro drivers—technology, regulation, and risk management—that are slowing them down. They can do that by going into bat for a fourth driver—the customer.
Customers are the circuit breakers to category convergence
Customers (real people) aren’t like those other three drivers, which all lead to the same places. Instead, they draw you in different directions. The more time you spend at the kitchen table talking to real people, the more space you find in the market. They have genuinely different needs and often find themselves underserved by generic propositions.
Whether it is the unique pressures facing shift workers, the lifestyles of the FIFO crowd, or how finances work differently in intergenerational households, the conversations are a rich reminder that people have different attitudes, experiences, and circumstances.
Rethink your positioning
Listening to customers like that also shows us that markets move. Positioning that worked at one point in time needs to be reviewed and sometimes changed.
One of the shifts over the last few years is in consumers’ changing priorities. The big news recently was ANZ’s acquisition of Suncorp. It was a reminder that historically, big banks vs regional banks was the major divide; the brands played to it, and customers did make choices that way. But less so these days. Of course, people are still passionate about where they live; however, when you look at the data showing the population shifts from the country to the coast and major cities, you realise that hometown loyalty, whilst still strong, is not strong enough. Australians are becoming more concerned about how they live than where they live. The notion of community is not disappearing, but it is evolving. It is increasingly clustered around shared interests and lifestyles rather than geography. So, for the smaller banks, it’s the perfect time to listen carefully to what their primary segments care about and move with the times.
Lifestyle priorities are changing where and how Australians live
This is the competitive advantage for smaller players because the big guns are stuck at 30,000 feet, too big to zoom in. They argue that they can deliver personalisation at scale, but standardisation is the stronger force for both cost efficiency and risk management. This encourages propositions around ubiquitous needs: “Make it simpler”, “Make it easier”, or “Make it cheaper”, further accelerating convergence as they all chase the same things. Whilst everyone cares about ease, simplicity, and cost to some extent, there is a real opportunity for smaller banks to position themselves around the things that specific customer groups care about more. To build differentiation into rather than out of banking, and in doing so present a better and more valued proposition to their priority customers.
The challenges of tech, regulation, and risk costs are not going away, but things do change when you create the space for them to do so. That space is found around the differing needs and interests of people, who are a reminder to everyone we don’t want a flattened banking category. By making their stand around specific customer groups and the pitfalls of the generic middle ground, the smaller banks can change the rules of this fight. They will ignite an army of supporters, create differentiated value by presenting a better choice than the mass alternatives, and strengthen their case with the Government to be treated differently…which are three things they need right now.