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Sunday, 29 July 2012

New economic models from collapse of exchange and use in retail banking

This post was brought about because of an exchange between Wim Rampen and Arie Golshlager on twitter. The conversation is captured in Arie's post and Wim's comment at

Essentially, Arie put up the Barclays ad on choices for retail banking and Wim commented that customisation is great but research has shown that giving too many choices stifles the customer (pointing to Sheena Iyengar's Ted talk

Arie asked me to comment on his post but there was so much to say that I decided to post this on my blog as well. It is also tied to my upcoming book and a recent keynote I delivered so if you are interested in more of this, sign up at the book page Value: Creating New Markets in the Digital Economy and check the keynote at service systems resource page

The problem I have with this ad is the revenue model/economic model for retail banking. To understand this, let's go back to fundamentals and evaluate what NEED a banking service is really satisfying. Keep my money safe. Give me interest for my excess at the best possible rate, give me my money whenever, wherever I want to use it securely and fast. If I don't have any, lend me some at the best possible interest rate.

What this means is that true retail banking service is a magic wallet for my money. It's with me all the time, and I can access, store, use, earn Interest (for excess), pay interest (for what I owe), but always at the convenience of being in my back pocket or handbag.

Now take a look at retail banking. It has grown into monolithic institutions, creating rules, transactions, norms, practices that we have come to accept as the 'solution' to our needs but actually makes us jump through hoops just to access money (dongles to log in) in the name of 'service'. And there is an academic term for this phenomenon. It's called an institutionalised solution. Basically, it means that we have been conditioned to think that the solution to our needs takes a certain form and that form has become 'institutionalised'. Markets are therefore formed from such institutionalised solutions (ref Steve Vargo who is researching in this area - need a cite here, Steve). So we believe that the solution to knowing the time at the bedside is a bedside clock, and managing our money is the current form of retail banking. So markets for bedside clocks and retail banking emerge because people accept that it is an acceptable solution (at that time) and it becomes 'institutionalised'.

Then technology comes along and disrupts all that because fundamentally, there could be other solutions that are way better, much easier for the consumer and in doing so, the market could potentially explode because there was so much latent need that was not satisfied with the previous institutionalised solution. Technology, in particular digitisation, can now potentially make this magic wallet come true e.g. through mobile solutions and other ways to access money. But of course, institutionalised solutions are hard to 'de-instutionalised' (reason why radical innovation is hard) so they try to modify the model to fit, by giving more choices. Often, new provisions are secondary to the 'primary solution' of retail banking; the idea that the primary solution could be wrong is unthinkable.

So why could the retail banking 'institutionalised solution' be wrong?

Well, wrong is a little harsh. It's just archaic, inefficient and rather 'inside-out' and sooner or later, it will be replaced (although one must never underestimate the longevity of entrenched institutionalised solutions)

To answer this, let's go back to the simple magic wallet again. The problem with the current retail banking model is that it is still based in an old good-dominant logic of exchange (cue SD logic music now.... Vargo & Lusch 2004, 2008). They are still thinking that revenue (and therefore service) is created at the point of exchange- which is why Barclays, and so many products are doing all these customization, that could result in too many 'choices' problem.

Why is this untenable? because the business model is now becoming too challenging to maintain.

Quite simple really. The value created by retail banking is not at the point of exchange. It's at the point of use in context. My magic wallet creates value with me at the time I need to access, look at, use my money. Making me choose the options for my magic wallet (retail banking solution) before I use it is just passing risks over to me, and in my opinion poor service.

At the keynote I mentioned that for all the choices that we have in the world for tea, coffee and cereal, the reality is that when you wake up in the morning, you only have the choice of what you bought. Retail banking is similar.

Because use contexts are complex, high variety and low visibility to the bank, they still prefer the exchange model which means the consumer has to make decisions BEFORE they use. They think the customer KNOWS what they want at choice but actually, they don't and even if they think they do, contingencies arise but these institutions are not thinking of new ways to serve use contexts, they are passing the risk on to customers at the point of exchange through choice-giving.

And they think that's good service.

What it is, truly, and why too many choices are stifling customers is because they try to use exchange to emulate possible use contexts. Customers are stifled because, in part, they cannot possibly envisage all contingencies of contexts.

All this is going to change with digitisation because it means that banking (and other offerings) could actually build contingent revenue models, better context pricing models ie collapsing exchange and use into the same time and space, with new platforms of both exchange and use, better aligning customer outcomes (and needs) to the exchange. And guess what, there is actually more money to be made when exchange and use collapse into the same space (check the music industry example at the keynote). Now that is truly a retail banking service to look forward to. The only question is - which bank will lead. Be careful, competition dynamics in contexts are very different with different players coming into the scene. Bedside clocks are fast becoming a thing of the past, replaced by your phone.

I do some work with media and content context pricing - media as an industry is digitising faster than banking because they are less monolithic and entrenched and content is fast changing with user generation etc. so the product itself is evolving because of its ability to serve use contexts. At an abstract level, you can see industries changing from seeing how media and content is changing but I don't want to include more spoilers for the book coming up so I should stop here. Do also stay in touch with the research in this area at our RCUK funded New Economic Models in the Digital Economy (NEMODE)