In banking, it’s the exact opposite:  ongoing banking operations are pretty easy, while attracting customers in a way that allows you to optimize your net margin and grow both sides of your balance sheet is the harder part.  Most bank and credit union CEOs I know don’t spend much of their time on questions like “how are we going to get these transactions processed? or “how are we going to process these loan applications?” Instead, their focus is on issues like growth and management–the more truly challenging parts of the business.

Yet when bankers sit down to answer a question like “how are we going to grow?”, the solutions they arrive at are, ironically, all about improving the “banking” part of their business.  Their answers tend to be things like “we will enhance our online service delivery,” “we will innovate our products and services,” and “we will provide the greatest customer service in delivering our products to customers.”

In other words, “we will improve the banking part of our banking.”

This is not where the energy should be focused.

The hard part of banking is not the banking itself–that’s the easy part. The hard part is creating something that people care about, breaking through apathy, and creating engagement that will drive the business forward.

That’s why the future of banking will be owned by banks that figure out how to address this hard part, and stop spending so much energy fixated on the same things the rest of the industry is obsessed with. They will understand the difference between “extreme customer satisfaction” (the typical goal) and “actually caring” about the bank (a yet-to-be-reached achievement, which should be the real goal).  They will create huge separation between customers who can “gladly tolerate” doing business with them (like most community banks and credit unions), and customers who relate so strongly to the brand that they feel incomplete without it (like Apple’s customers).

A long tail bank is all about achieving exactly those goals:  addressing the hard part.

Our plans for the long tail of banking involve utilizing banks in an “ultra-commodity” way.  Take an example outside banking:  Think of the manufacturing plant that gets hired by food companies to make and bottle ketchup under their brand names.  The manufacturer is expert at making ketchup.  Yet you don’t see them obsessing over making their own brand of ketchup, and trying to compete in the retail space. Instead, they’re happy being the focused, experts in making ketchup. In other words, they’re happy being the commodity:  unbranded ketchup.  They know what they’re good at, they know their role, and they are happy simply being the company that produces the private labeled product.  That’s their business, and they’ve got a successful model around it.

We don’t see much, if any, of this approach in banking. Please correct me if I’m wrong here, but generally speaking, every existing chartered financial institution has its own name and brand, providing banking services direct to consumers. How could you embrace ultra-commoditization and make a banking business model out of it?

Serving All Varieties of Needs…: You’re unbanked? We’ve got products to help you build a credit history. You own a small business? We can help you grow. You’re affluent? We’ve got private banking services!  Etc.

…And All Varieties of Values: You like to bank remotely without talking to anyone? We’ve got all the latest in remote deposit capture, mobile banking and more.  You like a lot of in-person hand holding? Great, because we’re relationship bankers!  You’d prefer better rates over personal service? Guess what, we can give you both! Yada yada.

When you’re a niche bank, it’s an understatement to say you don’t want to serve everyone.  In fact, you know you’re a flat out TERRIBLE fit for 99% of people…and even if those 99% wanted to bank with you, you wouldn’t let them.  You’d turn them away, because you know you’re not a fit for them, and that ultimately they’ll only be so-so customers at best.

But guess what?  Those 1% of people who you ARE a good fit for?  You’re not just a good fit, you are an AMAZING fit for them.  You are their dream come true, and they’re better customers than you could ever hope for.

A good example of themes can be found in Sin City. Take, for instance, the Paris casino and the Venetian casino in Las Vegas. These are essentially exactly the same product, just with different motifs. They are both still casino/hotel/resorts with the same business model.

Some people may incorrectly argue they are niches. That’s not the case for these companies–here’s why:

• They make money the same way: they sell hospitality experiences, provide gambling, shopping and other activities. Their revenue and expense categories are very similar.
• The experience they deliver is the same. Sure, things “look” like Paris or Venice at either venue, but the experience they are selling is the same.
• The experience is not authentic–it’s cosmetic and faux.
• The experience is not engineered specifically for customers of a certain segment.  People don’t come to The Venetian because they have a common love for Venice; they come because they want a fun Las Vegas experience…which is the same as what the Paris sells.

There are existing theme banks. Take Redneck Bank for instance. Catchy, funny and gets attention.  But does it create a true experience tailored to a certain group of people who align with being rednecks? And does it make money in a unique way that is centered around this redneck service?  Nope. It’s just like any other bank, but it comes in a different flavor.

The world deserves true niche banks.  That’s where Nicheruptive comes in.

Today, let’s discuss the differences and establish some definition:

Theme
A theme is like a motif. A creative idea that ties multiple parts of something together. Most importantly, it’s decoration. It’s a costume. It’s a flavor. It doesn’t change the core item itself, it just adorns it in a consistent and thematic way that is meant to attract certain people. “Under the hood,” a theme bank is the same as any other bank, it’s just dressed up differently to be more interesting to certain target audience members. The bank’s business model is still the same; it just has a consistent and unique aesthetic, cosmetic layer. Any existing bank could convert itself to a theme bank by simply putting on a new costume.

Niche Concepts
A true niche concept is not decoration, a flavor, a costume or any other type of cosmetic layer. Instead, a niche concept alters the item itself, so that the item is built differently to better serve a specific audience. “Under the hood,” a niche concept bank is not necessarily like other banks at all. It might not make money in the same way as others. It might not be organized the same way, staffed the same way, or provide the same products or services. Its business model is different. As a result, it does look and act cosmetically different on the outside…but it’s also different on the inside.

It’s important for us to gain a common understanding of the differences between themes and niche concepts. Those who don’t understand the difference will perceive the niche banking movement as a new marketing gimmick. Those who get it will see it’s a revolution that will change the industry’s DNA.

Stay tuned for more discussion on themes vs. niche concepts.

In this case, today’s banks don’t develop strong niches because they are afraid.  Afraid of what, you ask?

Afraid of leaving opportunity on the table.

Afraid that if we don’t cast the net wide enough, we won’t catch enough fish.  Afraid that if we aren’t as generally acceptable to the masses as possible, we won’t maximize our customer base. Afraid that if we don’t maximize our customer base, we won’t make as much money as possible.

So the question becomes, is this fear legit? Are we justified in being scared?  Are we not afraid, but actually just being prudent and responsible?

To be fair, it’s understandable that there is so much fear. Being broad (the opposite of niche) seems like the commonsense strategy to gain a critical mass of customers. And in the olden days, like pre-1995, it was probably a legit concern.

But not today.  In fact, today, broad is less appealing than ever before. Consumers have become accustomed to tailored, personalized experiences that fit them like a glove.

So when will the industry change?  Well, like with everything else in banking, banks want to be innovative but don’t want to be first.  So somebody has to be first, setting a precedent and a “case study” for Boards of Directors across the country to take solace in.

That is what we’re working on.

So how do you break through the apathy?  You create an experience that engages people on their turf–the playgrounds of their lives.  Engages their existing interests, their passions, their hobbies.  You give them an experience that’s first and foremost about those things they love, and let the banking part come in where it fits naturally.  It’s the difference between a bank having a sales culture, and having an engagement culture.

That’s niche banking.

Niche banking is the apathy killer.  Think of it this way:  traditional banking strategies and marketing are about taking banking, and decorating it in a way that attempts to encourage people to care.  This rarely works, though, which is evidenced by the undeniable apathy consumers have for their banks. Niche banking is the opposite–it takes something people already care about, and just adds banking services as an unforced extension of that thing they already care about.

I think we need to say goodbye to expectations of PFI status, and hello to role player status. The migration of certain (not all, I realize) customers to online-only direct banks and alternative financing resources (peer-to-peer lending, for instance) has created this wallet splintering even more. You might have your high-yield checking account at the local community bank, have a CD through Ally and then a personal loan through Lending Club. Each company plays a role in the customer’s life, but doesn’t have all the business, nor does it try to be all things to that customer.

Instead, it has that one piece of the business that it does really, really well.

This is really the same premise as with niche banks. Instead of trying to be everything to all types of customers, the niche banks we are building here at Nicheruptive are focused on doing what they can do really, really well: creating unique, social customer experiences that are 110% about that niche’s passion. The banking is secondary.

So will Nicheruptive banks not want to be their customers’ PFI? It’s not critical, and we don’t expect that we will be PFI for most of our customers. But the irony is this: we’re confident that our long tail approach to banking is going to create much more passionate customers than any other bank or credit union…meaning we just may get more of their business after all.

@Matt_Vance used the term “micro-segmentation” in his tweet, asking if there was really a point to micro-segmentation in banking. Based on the concept of the long tail, the answer is a resounding yes! In fact, it’s micro-segmentation that is truly the basis of niche banking: dividing customers into tiny segments. (Special thanks to Matt for providing a great term, micro-segmentation, for us to use in explaining our concept.)

But the key for niche banking is in how the micro-segmentation happens. For long tail banking, customers must be micro-segmented by interest, passions and pursuits…not by demographics. I point this out explicitly, because the natural tendency in banking is to slice and dice customers and targets by criteria such as age (Gen Y), geography (within a region, or a credit union’s charter zone), social status (high net worth, etc.), race or profession (business owners, teachers, etc.). With niche banking, though, it’s important to tap into people’s passions, and become part of the communities that form around those passions. After all, it’s not “being a business owner” that brings people together into social communities, it’s a passion for being one’s own boss, or commiserating about cash flow woes, that brings people together.

With the Internet, however, that’s no longer the case.  In fact, the Internet is making that approach totally obsolete.  You see, the web is amazing at delivering tailored, specific and relevant content to people, based on what they’re interested in.  You’re into left-handed crocheting?  No problem.  Love baking your own vegan dog biscuits? Easy to find others who share that passion.

In fact, not only has the Internet enabled this, it’s training us to expect this level of niche information.  It’s showing us that we no longer have to put up with boring, generic content or experiences.

Thanks to the Internet, banking today knows no geographic boundaries–and there’s no need to try targeting every-other-person in a specific region, in order to create a viable bank.

Let’s look at a rough, crude calculation, just to make a point.  Each US-based Internet direct bank has access to the 227 million Americans online.  If you assume an average $2 billion bank might have maybe 50,000 customers or so (just a ballpark), that means each of those banks needs 0.02% of the US population as its customer.  Two one-hundredths of a single percent.  That’s a pretty small and narrow slice of the population, and you don’t have to cast a very wide net to get that portion of the market.  So why are banks marketing as if they need to be attractive to everyone?

See–there is no need to be generic anymore.  In fact, there’s a need to NOT be generic anymore.  There’s a need to be so ridiculously focused that you can deliver a highly specialized niche experience that a certain group of people will LOVE, and all the others (the vast majority) will hate.  Today, mass appeal is almost off-putting.  It’s niche appeal that gets people fired up and passionate.

The question then, of course, is how exactly do you go about doing that?  The answer to that question is exactly why we formed Nicheruptive, and we look forward to sharing our plan with you.

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