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.3 comments
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.
Niche Banking: “A big chunk of a small pie” November 11, 2009
Posted by nichebanking in Niche banking, Problems with traditional banking.1 comment so far
A big chunk of a small pie. This headline is just 7 short words. But it represents a whole new way of segmenting the market of potential customers. Here’s what I mean:
Today’s banks look at the entire market (defined by geography and often demographics, but rarely more narrowly defined than “you can fog a mirror and live within 3 miles of our branch”) and try to gain a share of this market. In other words, today’s banks get a small piece of a big and extremely broad market.
Niche banks do the opposite. They look at the entire market, and then define a narrow slice of it (defined NOT by geography or demographics, but by psychographics, interests, passions, etc.). Then, they try to gain a LARGE share of that tiny little slice. We’ve put together a graphic to show the difference between traditional banking and niche banking.
Click to enlarge
The long tail of banking is about these small slices…and lots of them. So why don’t we see this strategy in the banking industry today? Because this doesn’t work in a brick and mortar world…which we have lived in until recently. More on this in our next post.
Banks: Target How Many Market Segments? November 4, 2009
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Today, in my normal Twitter activity (@nichebanking), I came across this good post on BankInnovation.net, called Target Niche Markets with Enhanced Online Experience. It starts out with a good, simple question: ”How many different market segments should banks target?”
I’d like to respond to a slightly different question: ”how many different market segments should the banking industry target?” My answer: infinite. This is exactly what the long tail of banking is all about–going further and further down the tail, “slicing and dicing” customers into lots and lots of unique segments based on psychographics rather than demographics or geography. Right now, as the article points out, the industry’s idea of segments is “consumers, small businesses, and micro-businesses.” These segments are about .2 centimeters down the tail. Instead, there is an opportunity for banks to go MUCH further down the tail, as the article (and the speaker at the BAI Retail Delivery Conference) points out.
As for the question of how many different segments an individual bank can target, that answer is depends on the bank’s ability to commit to a new model of doing business. Based on the Nicheruptive way of thinking (and I believe what Harris Bank‘s Nate Wehunt was insinuating), a “bank” could target dozens of different segments…and the customer wouldn’t even know or care. That’s because the key, of course, is that it may just technically be one entity (a “bank”) but in practicality and customer experience, it would appear as dozens of different banks.
What is The Long Tail? October 29, 2009
Posted by nichebanking in Niche banking, Nicheruptive, The Long Tail of Banking.4 comments
Who needs who? October 19, 2009
Posted by nichebanking in Niche banking, Problems with traditional banking.2 comments
Have you ever noticed the incredibly different tone and dynamic between a bank or credit union’s deposit-oriented relationships, and lending-side relationships? In a nutshell, here’s how it goes:
Deposit Relationship: The bank/credit union needs the deposits badly, but has absolutely no value proposition to help it win. Plus, the customer can go anywhere and get basically the exact same product. So the bank is desparate to get whatever deposit dollars it can get. In other words, the bank needs the customer worse than the customer needs the bank. Keep in mind deposits cost the bank money.
Lending/Borrowing Relationship: The bank/credit union needs to generate revenue, which it does by lending. The customer can turn to many different sources to borrow their money. The bank’s message and tone is “we’ll see if you can qualify to borrow money from us, and if you do, we might do you a favor and lend the money to you–consider yourself lucky.” The dynamic of the relationship is such that the customer feels lucky to be granted the blessing of borrowing money from this bank. In other words, lending is how the bank makes money, but the bank acts like the customer needs them worse than the bank needs the customer.
So to sum up, in the arena where the bank really needs to earn business so that it can make money (lending), it makes customers feel like they are lucky to even be considered for a loan. They might as well put a sign on the door that says “Welcome–just a reminder that you bank here because we let you be so lucky.”
Is this ass backwards or what?
This dynamic is interesting and odd–and quite different than what happens in other industries. For instance, if I walk into a car dealership with $25k in my pocket and want a Honda Accord, I feel like I have the leverage. I’m the one with the money, they’re the ones starving for a sale, and I can get the exact same product at a dealership down the street. And I’m not afraid to let them know that I have the leverage, and if they want my business they have to earn it.
This is not the case in banking, though…for some reason. In the future follow-up posts (Parts 2-?), we’ll examine why this is the case, and most importantly, how a niche banking model changes and improves this dynamic.
And hopefully lots more. Please add your comments and ideas to the discussion.
Who We Are…In Case You’re Wondering October 15, 2009
Posted by nichebanking in Niche banking, Nicheruptive.add a comment
If you’re following us on Twitter (@nichebanking) or reading this blog, you may be wondering who we are. After all, our website, http://www.niche-banking.com, doesn’t give any names or much contact info. So what’s the deal?
Well, it’s not a secret. We’re not trying to play games with you (although this anonymity is kind of fun, we admit). Seriously, though, we’re simply trying to get a few more ducks in a row before we open the kimono completely and share with you the full extent of what we’re up to. Believe us, we are REALLY excited to share it with you. And yes, we think it will be big. Super big.
Thanks for your patience, your interest and letting us participate in your communities: your blogs, on Twitter, etc. We look forward to sharing all with you shortly! In the meantime, carry on…
The current idea of niche banking October 12, 2009
Posted by nichebanking in Niche banking, Nicheruptive, The Long Tail of Banking.add a comment
Currently, if you Google “niche banking,” the first article you’ll get is at http://www.commercialappeal.com/news/2007/jun/29/execs-plan-new-niche-banking-firm-in-miss/. The headline this article is “Execs Plan New Niche Banking Firm in Miss.”. Then, in the second paragraph, there is a quote from the organizer, “We’re going to be a commercial and private bank.” The articles goes on to explain that the founder has a vision to create banks “catering to small and medium-sized businesses and individuals who need everything from banking service to insurance and investment advice.”
This, my friends, is the current idea of niche banking. Small and medium sized businesses, and individuals, who need anything at all? Wow, that’s really narrowing it down. Way to identify segment that market into niches, folks. Exactly who is NOT included in your target market, then?
Of course, this is also the reason there’s a market opportunity for Nicheruptive, so I shouldn’t complain. But the point is clear: the banking industry’s idea of what a niche market is (and why you might want to serve one) has got to change. Today, “regular banking” is like this: we’ll accept anyone who can fog a mirror. Using this metaphor, today’s idea of niche banking, then, is like this: we’ll accept anyone who is an individual or business with less than 250 employees and can fog a mirror. See the problem? This isn’t niche banking at all–this is merely taking a target market definition from 60,000 feet to 58,000 feet.
A real niche bank would identify its market much much more specifically, knowing that it was intentionally excluding more customers than it was catering to. More on this topic, of course, to come.
Not all innovation is technological October 3, 2009
Posted by nichebanking in Niche banking, The Long Tail of Banking, Uncategorized.add a comment
Technology is an amazing thing. These days, it’s downright hard to keep up with. In the banking industry, it’s technology advancements that tend to get the majority of the headlines when it comes to innovation. Attend a well-done event like Finovate 2009 and you’ll see a great deal of financial services innovations, from personal financial management sites like Mint.com, Wesabe.com and Geezeo.com, to others like Silver Tail Systems, Yodlee and Credit.com. These companies are awesome, and are truly moving the financial industry forward with innovation.
But what we as an industry tend to forget is that not all innovation is necessarily technological in nature.
Merriam-Webster dictionary defines innovation as “an introduction of something new,” and “a new idea, method or device.” I’m here to evangelize for “new ideas,” that come in the form of new paradigms and ways of thinking…not just in new technology.
Niche banking is an example of this. Niche banking is a new paradigm in that believes banks can and should serve tiny, tiny segments of customers–and can do so profitably. Executing on this new paradigm represents a huge change in thinking and business model, but doesn’t necessarily require a huge change in infrastructure, technology or operations.
This is an innovation whose main requirement is guts and entrepreneurial vision…not new technology.
Welcome to the long tail of banking September 7, 2009
Posted by nichebanking in Niche banking, Nicheruptive, The Long Tail of Banking.add a comment
Welcome to a new paradigm in banking.
With Nicheruptive, the long tail of banking has arrived–and it’s about time. The day has come for a new perspective on consumer banking. One that recognizes:
- banking products and services, and banking infrastructure, are a commodity
- what is not a commodity is the delivery of banking products and services
- communities are no longer defined by geography
- customers want a banking experience that aligns with what they stand for
In short, there are big profits to be made in serving very small customer segments, by tailoring banking experiences to narrowly defined niches.
On this blog, www.thelongtailofbanking.com, we’ll discuss and dissect all aspects of niche banking as the emerging business model for innovative, successful Internet banks. We hope you’ll follow along and join in our discussion. After all, you can change with niche banking, or be changed by niche banking.
The choice is up to you.
