During the financial boom of the early 2000s, a new generation of American consumers experienced a new level of wealth. The stock market produced significant gains, unemployment remained low, and most importantly, housing prices increased at unsustainable levels (partially fueled by exotic mortgage products). As wealth increased, financial institutions used new banking products and services to grow market share and differentiate a rapidly commoditizing industry. While the follies of products such as Option ARMs have been well documented, many institutions got away from what is commonly referred to (and derided a few years ago) as Vanilla Banking. If we look at just depository products, banking was getting more and more inventive with products, such as rewards and relationship checking, premium money market accounts, index based accounts, tiered savings accounts, and of course multiple life insurance products thanks to the repeal of the Glass-Steagall act in 1999.
As the economy recovers from near collapse, consumers are no longer as trusting of the banking industry as they once were. There has been significant consumer backlash towards institutions for selling products that were far more complex and expensive than what is now deemed necessary and appropriate. As consumers revert back to preferring traditional products on both the loan and depository side, financial institutions are following suit, offering more standard loan and deposit products.
While not as exciting as the idea of reinventing banking, a streamlined product suite with fewer and less complex products may be a blessing to bank personnel, as well as consumers. It is hard to be an expert on anything when an institution offers 20 different checking products. By streamlining the product offering, branch staff will immediately become more competent and better able to meet the needs of customers when discussing products and services. This translates into better customer service and allows customers to feel more confident in the individuals they are working with in the bank.
There are additional benefits that the bank may realize by having a simplified product suite. The technology costs to support more standard products are typically less than more complex products. And, with less customization come more vendor options and less need to maintain expensive and often complex systems. Middle and Back Office support functions are also impacted by having too many or too complicated products. If a certain legacy product has some benefit that only applies to certain customers, and only if they jump through hoops A, B, and C, how can you expect back office personal to know when to give this benefit and when not to? ATM surcharge rebates often fall into this category, where if the back office is unsure if the customer deserves the potential rebate they simply give it to anyone that asks for it.
Streamlining a product suite is often not an easy task. One of the first items that must be tackled is legacy, also known as grandfathered products. Often banks can have dozens of old legacy products that, while no longer offered, must be maintained and serviced. Cleaning up these products is an important first step in simplifying the product offering. Remapping these products will require an experienced project manager to work hand in hand with marketing, branch operations, and other departments to ensure the migration is successful. After this cleanup is complete, it is important to setup a product lifecycle that clearly shows steps that must be taken in order to ensure legacy products don’t just pop back up with the next merger or change in customer trends.
Simplifying the number of deposit product types offered to customers has benefits that are easily seen, such as reduced technology costs, as well as lowering total interest costs; for example interest tier consolidation. In the current interest rate environment, there is little benefit in offering tiered savings and money market products, as paying 0.01% on deposits under $10,000 and 0.05% above $10,000 does not create enough of an interest rate differential to impact customer behavior or incent customers to change financial institutions based on a minimal increase in rates across tiers. Collapsing interest rate tiers into a singular flat rate makes the account easier for customers to understand and often lowers total interest costs, while reducing attention drawn to products with numerous tiers paying rates very similar from the lowest to the highest tier.
Checking products have also been greatly simplified at many institutions. Often it comes down to a choice between interest bearing checking and non-interest bearing checking. Products such as student and senior checking have fallen out of favor as the demographics these accounts previously targeted have changed. Often, senior products begin at the age of 50. And, as most fifty year old customers do not consider themselves seniors, there is a growing trend to remove labeled senior products and allow all customers to choose the account that best fits his or her needs, regardless of age.
It will be interesting to see as the economy continues to improve and as consumer appetite for more sophisticated products changes again. Right now it is clear that both consumers and regulators favor the move back to basics when it comes to banking products. While more basic products are not exciting, to remain competitive banks must offer what customers want, and as we can see above, there are real benefits in embracing Back to Basics Banking.