Why Small Slices Didn’t Work…In the Past November 18, 2009
Posted by nichebanking in Niche banking, Problems with traditional banking, The Long Tail of Banking.trackback
In our last post, “Niche Banking: A Big Chunk of a Small Pie,” we discussed how the future of banking (niche banking, of course) will be in serving high percentages of small, narrowly defined customer segments. This begs the obvious question: “well, Mr. Long Tail Know-It-All, if pursuing high percentages of small, narrowly defined customer segments is so brilliant, why hasn’t the industry been doing it all along?”
It’s a good question.
Here’s why. Before the Internet became a primary delivery channel for banking services, banks were only brick-and-mortar based. If you wanted to start a de novo bank, you’d raise millions upon millions of dollars in capital, jump through the pain-in-the-butt regulatory approval process, and eventually open your doors. At that point, you had a huge financial burden to dig yourself out of, and a finite amount of branches (often just one) to work with in order to generate revenue and eventually profits.
You also had a finite potential market to pull customers from–probably the folks living within a 5 mile radius of your branch (unless you were in a super rural location, most customers would not drive more than 5 miles to get to you when there was another bank closer and more convenient). So, what was your strategy? Well, obviously, it was to be as widely appealing as possible to your potential market, so that you could draw enough customers to be viable and pay for the huge costs of capitalization and start-up that you just endured.
In other words, you had to be vanilla and generic enough so as not to turn anyone off…because you needed a lot of customers in order to make your bank viable.
In other words, you had to have mass appeal.
“So,” you may be asking yourself, “what has changed? Isn’t that still the case?” Well, no, it’s not necessarily the case any more. And the reason is that the Internet has created a whole new method of delivery that:
- breaks these geographic confines of the past
- greatly lowers the ROI hurdle
- allows for much stronger and more distinct brands to emerge, for more narrowly defined customer segments
If you’re lucky, maybe we’ll explain more in the next post. 
Stay tuned.
[...] segmentation, Niche banking, Nicheruptive, The Long Tail of Banking. trackback In the last post, “Why Small Slices Didn’t Work…In the Past,” we discussed how in the “olden days” (like last year) a brick-and-mortar bank would [...]
“If you wanted to start a de novo bank, you’d raise millions upon millions of dollars in capital, jump through the pain-in-the-butt regulatory approval process, and eventually open your doors.”
It sounds like you are saying these are bad things…the requirement of millions in capital and regulatory approval processes are in place in order to protect the depositor. I would be severely concerned with any relaxation in those areas.
You’re right–the regulatory process is a good thing, that protects depositors and stabilizes the system. No doubt about it. My point is simply that starting a de novo brick and mortar bank is A LOT of work and money, and consequently takes A LOT of profit to pay off that initial investment, let alone pocket any return. That creates a need to have a large volume of business from your customers. This makes the bank’s organizers say, “well if we need to generate so much business, we better be too niche oriented or else we’ll never get the volume of customers we need.”
For instance, if you wanted to start a brick-and-mortar bank in Kansas City, you probably couldn’t target cyclists and only cyclists….because even if every single cyclist in Kansas City decided to bank with you, it still wouldn’t probably be enough!