Banking Industry Turns to Product Innovation

CU360
April 22, 2010 | COMMENTS

Proposed federal regulations and legislation that would limit the interest rates on credit cards and the fees on overdrafts could push banks toward greater product innovation based on consumer needs, according to David Stewart, senior expert at McKinsey & Co.

“Banks should be building products based on their customers' needs and values and their willingness to pay for valuable services rather than on their desire to generate income from punitive measures–as many have historically done,” Stewart said.

For too long, Stewart noted in a Bank Administration Institute (BAI) presentation, banks have looked to raise fees to increase the profitability of their retail products. They now might be forced to be more innovative as they attempt to retain customer relationships.

To meet consumer expectations, financial institutions will have to rely more on research and data-driven decision-making that looks at who their customers are, what they want, and what services can generate sufficient revenue.

For each institution, the findings are expected to be different. Using a simplified model, Stewart identified four basic consumer types, with each group likely to desire different product features:

• The fee-adverse,
• The rate-sensitive,
• Those who value online interactive features, and
• Safety seekers—those who respond the most to fraud-protection measures and customer service.

It's a mistake to presume what customers want and push products in that direction. Instead, research will be required to seek out the opinions of members or customers on what they want and what services they value enough to pay for, Stewart said.

Fee-adverse customers, for example, probably hate being charged a punitive fee every time their balance drops below zero. But those same customers might pay a monthly or annual overdraft protection service charge that keeps them from bouncing checks—a service that could be positioned in a more positive light.

For many banks, the result of their efforts will be a major overhaul in products. “You can't just tweak a few features and fees and expect to be competitive. You have to come up with a compelling offer that's different from what's already in the market,” he said.

Among the products cited by Stewart as going in the right direction with innovation:

• The Blueprint card platform, recently introduced by JPMorgan Chase. The card enables customers to pay in full for select purchases, split payments, track purchases, and create a plan to pay down the balance faster.
• PNC's virtual wallet online banking platform, which provides for a consolidated view of all accounts at the bank along with interfaces for activity between accounts. The platform is also available on iPhones.
• The Forward credit card from Citibank, which promotes responsible card use through such features as annual-percentage-rate reductions when customers stay under their credit lines and pay on time for three periods in a row.

One challenge for institutions attempting to come up with product innovation is to develop back-office systems that can provide a view into accountholder activities and behavior. “The most successful will be those that show the ability to innovate, conceptualize, and identify new products that will truly stand out in the market,” adds Stewart.

This article was orginally published online by CU360, an online portal for benchmarking tools, market insights, industry data, and analytical information at cu360.cuna.org. Reprinted with permission.