Expanding Strategic Perspective In A Digital World

I’ve spent my career working with corporations on the strategic issues impacting their brands. At the risk of aging myself, when I started, there was no social media and no mobile Internet, no apps and no such thing as real-time data analytics. Paper brochureware still mattered, TV ruled the marketing communications roost, and brands still relied heavily on physical focus groups to gain customer insights. And I’m only 38.

Todays world is rather different. Not only have business models been turned upside down and re-defined for a digital world, but the way in which brands interact with their customers has undergone an unprecedented level of transformation.

As technology has had a greater impact, the speed in which brands must act, respond and act again has increased exponentially. The idea of taking months to carefully craft a strategy is increasingly rare, and unlikely to come back anytime soon.

Along with this speed of change, we’re seeing a change in the way people think about brands. The new focus has become one founded on engagement. Seeking rapid iterations of campaigns and activities designed to engage customers in discreet ways that will hopefully add up to longer-term relationships. In overly simplistic terms, to get followers to like you and then keep liking you. It’s all very exciting.

Within this exciting new world, however, we’ve also seen a fundamental change in perspective related to brands by their agencies. In the digital world, what we see is a compression of strategic perspective. Where in the past the brand mattered more than anything, today there is an awkward tendency to be dismissive of the overarching stance of the brand. The focus instead moving more and more to the specific activities designed to drive engagement. To use a technology metaphor, it appears that digitally oriented agencies tend to see strategy as something that works in the ‘app layer’ of the brand rather than at the ‘operating system’ layer.

Contrary to this way of thinking, I believe there is a need to re-focus strategic thinking to the ‘operating system’ layer. Brands are becoming much more complex beasts to manage as product cycles shrink, communications channels explode and technology expands. Already we’re seeing brands struggling to manage their digital detritus that is building up over time, and all too rarely adds up to something cohesive.

But as the need for overarching strategy will become more important, the ways in which we approach strategy will also have to change. The methods commonly used by strategic brand consultancies and others like them appear to be increasingly slow and ponderous. Instead we need to approach strategy in a much faster moving, more agile and more iterative way. We need to embrace new tools like big data and social analytics that will enhance insight and real-time decision making, and we need to become better at filtering and identifying the things that really matter, as the signal to noise ratio of the Internet increases.

But the opportunities in this are incredible. To fuse a clear strategic direction for a brand with ability to build a set of highly integrated, fast moving and innovative engagements with your customer.

The only question for me is where it will come from first. Will the strategic brand consultancies develop new, faster, more fluid methods that help guide engagement activities? Will the fast moving digital and social agencies develop greater strategic muscle, and start thinking in broader terms about brands than they do today? Or, will they both lose out to large, integrated advertising agencies moving in and attempting to take this ground for themselves?


Advertising In 2020?

I was recently asked by my friend and former colleague Karl Heiselman, CEO at Wolff Olins if I’d help him respond to a request to predict the future of advertising in 2020. For two somewhat neutral observers of the advertising business, it seemed like something we could take an outsiders view of.

With the somewhat chastening caveat that the only consistently accurate prediction of the future is that predictions of the future will be turn out to be wrong, this is where we netted out.

Advertising in 2020: The New Brand Building Reality

By 2020, advertising as we know will no longer be the primary marketing vehicle used to build brands. Advertising will instead focus on driving transactions. Rather than a tool of marketing, advertising will predominantly become a tool of sales.

Replacing the role of advertising in brand building will be a slow process, but by 2020 how we build brands will have transformed significantly. Instead of relying on advertising to drive extrinsic perceptions, brands will instead be focused on new methods designed to create more powerful intrinsic value.

Why Advertising Will Become A Transactional Tool

Automated, digital, transactions driven advertising will be the single biggest advertising growth arena of the next ten years. The combination of big data (including social data) with ubiquitous smartphone usage and an intense focus on advertising ROI will create a hyper aggressive, transactions focused battlefield.

By 2020, smart devices and high-speed connectivity will have become ubiquitous among almost all consumer groups.  Media consumption will have continued to fragment, turning today’s remaining mass audiences into a set of smaller, more atomized and more on-demand groups. And while this new environment will bring significant threat, it will also provide significant opportunity. For in this digital environment consumers will continue trading their personal information for free access to services, providing more detailed, deeper datasets than we can imagine today.

What will not have changed is the pressure on the business to deliver results, hit sales targets, and deliver growth. The pressures on business by 2020 will be intense. Product cycles will have shortened still further, competition become more intense, markets more volatile and consumers more informed and empowered than before. In this environment, making the sale will be imperative.

As a result, an understandable desire for ROI will be manifest in tomorrows advertising solutions. Tracking which advertisements drive the most sales to which people, when.

By 2020, winning advertising will be those methods that compress the time between the advertising impression and the transaction being made, and do it in a highly measurable and predictable way.

This means we will see advertising that is contextual to our actions and designed to encourage a specific transaction. Searching for a lawnmower? Here’s a deal for that. Eating at the same restaurant regularly? Here’s a deal for the one next door. Friends who like a certain store? Here’s a discount for you to try it too.

Contextual, automated, transactional advertising will be the perfect tool for the discounter but less so for the brand builder. An unintended consequence of the ROI imperative being that the coming era of advertising will act to compress prices, displace brand loyalty and reduce brand premiums.

In this new landscape, businesses will make a concerted effort to shift the risk profile of their advertising spend.  As focus shifts toward measurable sales effectiveness, a new set of advertising players will emerge that are paid not by % of media spent, but instead by % of sales generated. They will be accountable to the sales team, data driven and more interested in efficiency of sales than creative excellence.

The New Brand Building Reality

While advertising is likely to become highly transactional, brand builders have much to be confident about. For just as technological and social shifts will provide new opportunities for the deals driven discounter, they will also provide significant opportunities for the brand builder. Businesses that are focused on building and sustaining a brands premium will find themselves enabled by a new and more sophisticated set of tools with which to engage their customers.

By 2020, those same technologies that are driving discount advertising will be giving marketers and business leaders a more sophisticated understanding of their customers. They will be able to parse vast volumes of customer data, and monitor and hold significant social media based relationships. The knowledge and insights thus generated turning marketers into key actors in the delivery of innovation and the creation of new layers of brand value.

In specific terms, we believe that by 2020 we will see three major areas of brand building innovation take over the role that advertising plays today.

1.    Total Experience Management

Much as Total Quality Management transformed manufacturing in the 1980’s, Total Experience Management will transform brands in the 2010’s. Today’s brand experiences are highly fragmented and as a result are a significant source of competitive weakness (as any trawl of social media will demonstrate). By 2020, this will have changed considerably. Instead of focusing on individual touchpoints, brands will instead be considering the rich ecosystem of experiences they create. They will look at the integration of their brand ecosystem under a common “operating system” as a means of enhancing customer value. By thinking of the total experience, and usefulness, of the brand from the customer’s point of view, brands will create superior experiences across not just a single touchpoint but across the entirety of the branded experience. The beginnings of this transformation are already apparent in the way that technology brands such as Apple, Google and Microsoft are connecting their branded ecosystems together under a common user experience framework.

2.    Marketing Products

Marketing products are products designed to deliver a marketing benefit, rather than something you intend to charge people money for. They exist to expand the ability of a brand to create utility, and value, around its core offer. For many brands, the core offer is often quite commoditized and as such unlikely to change significantly moving forwards. Under these circumstances, a marketing product seeks to create additional layers of value and utility that can ‘lock’ customers in to your brand rather than have them switch to a competitor. Tied directly into the brand experience ecosystem, by 2020, marketers will be using their social monitoring of customers to find new areas of value that can be built up around the core product or service offered by the brand.

A today’s world example is Nike+, which effectively uses technology to connect a community of running enthusiasts together, and in the process lock these runners into the Nike brand ecosystem. The innovation happening around the shoe, rather than directly within the shoe itself.

3.    The Content Ecosystem

By 2020, the simple reality is that every brand will be a media brand, requiring everyone to consider how they produce, distribute and manage their content ecosystems. In tandem with brand experience and marketing products, brands will be focused on the overlap between content that informs a customer about products, services or propositions, content that educates them in it’s use or in the things they can do, and content that entertains them around the core proposition of the brand.

This content will serve to drive multi-way relationships with and within a consumer community, meaning it will be socially, or third party driven, necessitating new skills in curation, editing, governance and presentation.

Increasingly by 2020, informing, educating and entertaining audiences will happen through channels that are controlled by the brands and their consumer communities themselves, rather than channels brands pay to advertise on, meaning consumers will have actively chosen where to go in order to seek the emotional benefits that brands provide.

In Summary

By 2020, advertising will have become a major driver of transactional sales. It will be automated, data driven, contextual and ubiquitous. A disciplined focus on effectiveness will have created completely new models of advertising agency.

This advertising will be discount driven, ubiquitous and hard to opt-out of. As a result, brand building will happen by other means. Brands will be built through new methods: Total Experience Management, Marketing Products and Content Ecosystems.

Those brands that succeed will increasingly become opt-in, controlling their own channels to the consumer, where they enjoy multi-way relationships with an empowered consumer community made up of people who’ve chosen to actively seek the emotional benefits these brands provide.

The world’s largest relationships platform

The funny thing about all the talk about the revolution in marketing is that it generally hasn’t taken into account that every major marketing communications channel that has ever existed has basically been a broadcast channel. Even on the Internet.

The implications of this are pretty straightforward. It’s hard to shift from a broadcast mentality to something else if the opportunities to do so are limited.

Facebook, on the other hand, represents (for all it’s recent travails) the world’s first mass relationships medium. The problem is that from a marketing communications perspective I’m not entirely sure they’ve figured out what to do with this yet.

Advertising on Facebook today is a surprisingly weak proposition. I’m not really surprised that GM decided to pull theirs.

You have essentially two choices:

  1. You pay for display ads that live off to the side and that few, if anyone ever click on. Supposedly highly targeted to people’s preferences, I’ve yet to see one of these that made any sense whatsoever to me.
  2. You piggyback on an individual’s “like” of your brand, message or product and this becomes a sponsored “story” which in effect becomes the ad creative. This is very innovative, and Facebook claim a much higher recall rate for this kind of messaging because it comes from a “friend”. My belief, however, is that this recall will rapidly decline as people begin to realize that their ‘likes’ are being used for this purpose.

The problem with both of these approaches, however, is that they do little or nothing to reinforce the relationships strength of the platform. Ironically, both methods are locked into a broadcast mindset. And worse, neither of them add any real value to the consumer. (And arguably the newer ‘sponsored stories’ approach does the opposite)

As a direct comparator, the reason Google Ad-Words is so effective, so popular and such a huge revenue driver for Google is that it absolutely leverages the underlying strengths of the platform. When I am doing a search, I am specifically interested in a topic. To have targeted advertising based on what I’m looking for makes perfect sense. To have these ads appear as innocuously and helpfully as they do is possible the smartest UI decision Google ever got right.

Facebook today is nowhere near having their equivalent of Google Ad-Words.

On Facebook, the most impressive marketing R&D is actually being done by the brands themselves and not by Facebook as such. To take just a single example, I’m particularly impressed by what Ticketmaster launched in January.

Essentially they are connecting the relationship dots. They recommend upcoming shows based upon your Spotify listening habits, they allow you to share shows you want to go and see, as well as shows where you’ve already bought tickets. If you’ve bought tickets, your friends can see where your seats are and buy their own tickets for seats nearby. And vice versa. All from within the Facebook platform.

Not surprisingly, Ticketmaster state that this has become an incredibly powerful platform for them, with significant ROI.

This is just a single example, but a very good one, of a brand leveraging the underlying relationships strength of the Facebook platform in a much more effective and consumer friendly way than Facebook itself has.

Worryingly for Facebook, the tools Ticketmaster use to do this are currently given away for free. Their income only coming from a percentage of the on-platform sales.

The joy of this approach is that for the first time we are creating advertising that gets close to Peter Drucker’s ideal of marketing that gets a customer ready to buy, rather than marketing designed to sell.

And this is the crux. Rather than the broadcast mentality, what brands increasingly need is the ability to leverage the relationships potential of Facebook in ways that add value to their customers and that makes relevant purchasing behavior more convenient. Do this well and everyone wins.

This would suggest that the future of advertising on Facebook should lie less in solutions rooted in a broadcast philosophy, and more in solutions rooted in a relationships driven one.

The great thing for them, of course, is how many brands are already building on their platform and essentially engaging in R&D behavior on their behalf.

Of course, the need to do this is not just because the existing advertising approach has limited potential, but because the existing advertising approach doesn’t work at all on mobile. And mobile is increasingly where people are choosing to access the Facebook platform.

Put simply, the mobile environment demands a shift in mindset. And while the details are a topic for a different day, I’d argue that the mobile environment should accelerate the shift from a broadcast to a relationships mentality, rather than slow it down.

But we’ll see where it all ends up. I’m pretty bullish on Facebook to succeed. They’ve overcome every previous obstacle, so I hope their current troubles don’t lead them down a more short-sighted path.

Why Marketing Should Be Your Friend

I have a soft-spot for Box. I think Aaron Levie and his team are building a really interesting and valuable business. One with a simple proposition that is succeeding against multiple 800lb gorillas in an increasingly competitive cloud storage and sharing environment. Impressive stuff.

One of the major reasons they’re succeeding is that they’re really smart marketers.

Now, I know this statement is going to be about as popular as passing gas in an elevator for some people, but please bear with me for a second.

Lets start by heading back around 50 years to quote the late, great, Peter Drucker:

“The aim of marketing is to make selling superfluous. [It] … is to know and understand the customer so well that the product or service fits him and sells itself. Ideally, marketing should result in a customer who is ready to buy.”

The final sentence here is key. What Box have been so good at is creating customers who are ready to buy.

They do this by getting individuals to sign up for a free Box account, thereby familiarizing themselves with a product type they’d never considered they needed before. Once there is a large enough set of individuals from any one organization using (and demanding) the product, the Box sell to the enterprise buyer for that organization becomes as easy as saying “why not buy a license so that you control the use of the product your people are already using anyway? Secure and managed for you, no change in behavior for them.”

While the Box product is great, the above approach has nothing to do with product and everything to do with marketing. In Drucker’s words, they’re creating a customer who is ready to buy. And if you consider how conservative enterprise IT buyers have traditionally been, this approach is pure genious. In fact, in hindsight, it may have been the only way for them to succeed in the enterprise space.

Of course, I recently saw an article with the following headline: “How Box built a multi-million dollar business without spending a dime on marketing”.

The truth is that of course Box spent money on marketing. What they didn’t spend money on is advertising. Instead of going out there and spending on media placement, they gave the product away for free. Giving the product away for free is in fact a marketing cost. The revenue you forgo up by giving the product away for free is a pure cost of customer acquisition.

The difference, and why this really matters for startups, is that money foregone is very different from money spent. If you have $10m to spend building a product (and a business) you’d obviuously be foolish to spend that $10m on advertising. You probably can, however, afford to give away $10m worth of free product (particularly since the marginal cost per unit in the digital environment is generally very low). In effect doubling the available budget for your business. $10m on the product, $10m on customer acquisition. Navigating this course is exactly what Box have done so well.

Looking forwards, we can look again at Drucker to find another nugget of marketing wisdom:

“Because the purpose of business is to create a customer, the business enterprise has two—and only two—basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

This quote is again important when we look at the direction Box are innovating in. A recent article stated that they are working with their clients to create cross-platform solutions. The unmet need is simple. The modern day enterprise environment is multi-platform (particularly when we take mobile into account). However, the major cloud competitors all have their own platforms they want you to use exclusively, meaning little or no interest in building cross-platform solutions. (As cross-platform solutions mean lost revenue for them)

By working with their clients to innovate cross-platform, marketing is in fact driving product innovation for Box. Not marketing as advertising. But marketing as value creation. Marketing designed to create a customer by creating a product that will, in effect, sell itself.

Unfortunately, a fundamental misunderstanding of what marketing is has become pervasive today, particularly in this startup space. Instead of value creation (creating a customer) many people see marketing as a pure cost (selling me crap products I don’t want). And while this may be true for some, particularly some of the biggest advertisers, the advantages of marketing as value creation are so strong that we should be careful not to fall into this mental trap.

My advice for anyone who wants to replicate some of the success of Box is simple. Get past the idea that marketing is your enemy. Instead focus on how you will create a customer, how deeply you can understand this customer and how you can create a product that meets their needs so well that it makes selling unnecessary.

Get this right and you too will be a great marketer.

Oh, and everyone should try to read Peter Drucker if they can. He said it better than I ever could a very long time ago.

Reputation Risk

In this world of 24-hour news cycles and instant access to information, reputation matters more than ever.

The B2B world has known this explicitly for years. Arthur Andersen wasn’t killed by operational failings; it was killed by a reputation that went from highly respected to highly toxic almost overnight. Proving in very public terms how hard it is to stay in business if no one wants to do business with you.

Over the past few years, threats to reputation have happened faster, and hit harder, than ever. There is no bank, professional services firm or energy company today who isn’t thinking hard about their reputations even as we speak.

Yet managing reputation isn’t actually very easy to do, and one of the most prevalent brand decisions of the past decade actually served to make the job harder rather than easier.

This decision was the overarching brand strategy of consolidation; a time where mergers and acquisitions created a new era of mega-companies trading under singular mega-brands.

There were three very logical reasons for this extreme level of brand consolidation:

  1. That by consolidating the brand under a single identity and a single set of values, that this would bring the disparate cultures of acquired businesses together to form a new, singular culture.
  2. That by creating a single brand under which to trade, you’d be maximizing brand building investments in order to drive superior brand value.
  3. That a single brand is more efficient, more cost effective and easier to manage than multiple smaller brands.

All of these factors do in fact have merit, but the thing they fail to take into account is reputation risk and the potential for negative reputation contagion.

Making this more specific, what this approach doesn’t take into account is the level of potential risk that exists across the disparate activities of the corporation and the potential impact a localized failure may have on the whole.

Take BP for example. It’s highly unlikely that any of the small business operators who’d franchised the BP name for their gas stations took reputation risk into account. For them, BP was a big and reputable brand name, something to take advantage of.

Unfortunately, in the oil industry, reputation risk appears to flow downstream. I’m sure that none of these gas-station owners thought their forecourts would become instant ready-made protest sites primed for 24/7 news-media coverage. (One also wonders how different things may have been had the only available BP location been an anonymous headquarters, hidden among the skyscrapers of a large city)

Equally in the banking space, it appears that reputation risk flows quite freely from the most risky to the most risk averse parts of the business. In this case, the risk-taking investment banking arms of large banks have created significant negative reputation risks for the more risk-averse, and publicity shy, private wealth management arms.

In fact, adding the reputation risk lens on top of the decision-making factors above, and I don’t think so many banks would have consolidated investment banking operations and private wealth management activities. In fact, I wouldn’t be surprised to see banks with large private wealth management businesses looking to undo these brand consolidations in order to create risk-managing separations over the next 2-3 years.

Beyond brand strategy, however, reputation risk also needs a new mindset going forwards.

In the past, reputation has largely been silo’d within the business. On the operational side, risk is a technical discipline where risk/reward decisions are calculated. On the HR side, risk is a behavioral equation to be mitigated by policies and adherence to values. On the communications side (both marketing and corporate communications) reputation risk is something to be mitigated by getting out ahead and projecting an image of success, competence and of admiration.

The challenge is not that these are wrong interpretations, but instead that they have to work much more in sync with each other.

Instead of thinking of reputation in separate ways, I think we need to consider reputation in terms of layers:

  1. The operational layer.
    This sits at the core, because very simply some business areas are inherently more risky than others. Understanding where the operational risk lies is central to considering how to manage reputation, whether or not to use multiple brands to do so, and what to do in the event of a crisis.
  2. The cultural layer.
    In this layer, the key is to set expectations for what is and is not expected, and accept that this may in fact differ depending on the amount of operational risk being taken.
  3. The communications layer.
    In this layer, the key is to focus on the areas of genuine value to be projected, and to create scenario responses to the worst potential impacts on reputation. These need to be developed with representatives of both the operational and cultural layer. While you can do much to mitigate reputation risk and build a strong reputation, it will be the job of the communication layer to deal with the fallout of something catastrophic happening. Successfully navigating this is likely to be much easier if you’ve already practiced your responses using disaster scenarios. In some senses, this will be almost like military exercises for corporations.

In our instant response, 24/7 world, reputation risk is not going away. In fact, it will only become more and more difficult to manage.

Against this, the ability to take reputation risk into account when making big brand decisions, and then push it down to scenarios of the “unthinkable” are going to become increasingly important.

And hopefully, if fundamental brand strategy decisions were made with risk in mind, and strong response mechanisms trained, then reputation risk can become much, much less of a risk to the business.

Image borrowed from here

Collaboration. It’s like Prozac for corporations

The overwhelming meme of the moment is that collaboration is the new key to value. It will cure us of our sins. It will change the world.

All the challenges of innovation, marketing, brand, agencies and of business in general will be solved if we can all be just be that-little-bit-more-collaborative.

The problem is that it won’t work. Collaboration creates compromise and compromise blunts the edges of the brilliant.

Collaboration is the corporate equivalent of Prozac. By eliminating the extreme lows, you also eliminate the extreme highs. Which is a really big problem if you rely on those highs to cut through and make a difference.

There are two aspects of the idea that collaboration is the answer which are flat out dangerous:

  1. Collaboration will spare us the need for more radical organizational surgery. I’m sorry, but that’s a pretty wrong-headed way to think. A business landscape that has shifted radically doesn’t need collaboration between the now-defunct structures of the past. What it needs are new structures that adequately meet the new needs of the market and correctly align the incentives of all participants.
  2. Collaboration will spare us the need for real expertise. This reinforces today’s dangerously populist view that expertise is no longer necessary. That in a world where everyone can invent and create, that we no longer need experts in invention or creation. Yet look at the fruits of this. Have we seen greater creativity or invention from the explosion in crowdsourced advertising? In a single word, no. Have we seen an amazing product created by a crowdsourced team of consumer advocates. Again, no.

In fact, what we tend to see are pretty basic derivations of existing themes rather than brilliant departures.

While MyStarbucksidea.com might be an interesting example of collaboration, it isn’t because it will change the world. Rather it’s because it gives Starbucks a roadmap for incremental improvement. This fundamentally isn’t invention, it’s a beautiful new form of customer driven TQM.

Of course, this shouldn’t surprise us. After all most of the world’s most amazing inventions and inventors were written off as crazy before they became successful. And let’s not forget that a hell of a lot of them didn’t play well with others.

Call me old fashioned, but I actually think expertise still matters, vision still matters, leadership still matters, risk taking still matters and brilliant individuals and their brilliant ideas fundamentally still matter.

Now, of course collaboration is necessary to get things done. I’m not advocating on behalf of the brilliant asshole here. Instead, what I’m saying is that collaboration alone is not enough, it’s not everything. While collaborating nicely with each other might feel good at the time, like Prozac it won’t fundamentally solve any of the tough problems on it’s own. That still requires vision, guts and brilliant people.

Let’s face it, the iPhone, so ironically beloved of the advocates of collaboration-as-the-answer is patently not the fruit of collaboration. (That would actually be an Android phone. Probably running Cyanogen Mod) No, the iPhone is the fruit of single minded leadership and a highly performing organization clearly focused on an uncompromised end goal.

And that’s what it would be great to see more of out there. More people prepared to get off the corporate Prozac, admit that the benefits of collaboration might in fact be limited, and instead choose to focus their energies on coming up with things that are truly brilliant.

If only I could do it myself. Unfortunately, I’m stuck with trying to be a good collaborator…



Image borrowed from: https://pworthington.files.wordpress.com/2011/10/collaboration.jpg?w=300

Punishment Fees, Innovation & Disruption

Five Dollar Bill

Bank of America are about to start charging their customers a flat $5 fee per month for using their Debit cards. The bank claims this is necessary because Congress recently capped the fees banks were charging merchants for Debit transactions. Congress claims that a cap was necessary because Visa and Mastercard (and hence the banks) were monopolistically gouging said merchants with fees some 400% higher than the cost to process.

Irrespective of who is right and who is wrong, what this new fee does is to quite starkly highlight the innovation challenge inherent in retail banking.

Retail banking, and in particular the checking product, is a highly inelastic environment. Essentially, this means very few people are in the market for a new checking account at any given time (on average only about 9% of the total population will open a new checking account in any given year, and the number actually switching banks is much lower).

As consumers connect more services to their checking accounts – credit cards, savings accounts, recurring payments, mortgages etc, then the pain of switching becomes ever higher and as a result most people don’t bother. No matter how the bank ultimately treats them.

As a result, when facing an enforced revenue decline such as that faced by BofA, the temptation is for the bank to squeeze consumers as hard as possible rather than to innovate, because the most likely scenario is that only a very small number of customers will actually switch.

Why does this matter?

It matters a lot because in an inelastic environment punishment fees like the $5/month debit fee will always be less costly and more profitable than true value-adding innovation could be. In a direct comparison, the potential success of a value-add innovation will always be competed out of the running by an almost guaranteed-return from a punishment fee.

Going further, I believe that the banking prediliction toward punishment fees as a means of generating incremental revenue serves to materially harm their ability to innovate in ways that actually add value to their customers. Like a muscle that never gets used, the customer centric value-add muscle eventually withers and dies.

Importantly this also creates a huge brand conundrum. For what is in the best interests of the bank (to squeeze as much fee income as possible from the consumer) is manifestly not in the best interests of the consumer (who doesn’t want to be squeezed and punished for simple levels of service provision).

Which becomes an even bigger conundrum when you consider that the banking sector overall is facing the worst levels of consumer sentiment ever. Something which is cutting across all brands, and from which none seem able to release themselves.

If BofA stays true to the formula used by banks in the past, it will add this punishment fee with one hand and engage in a significant advertising campaign aimed at bolstering consumer trust with the other.

They’ll then be confused as to why the advertising isn’t cutting through and seperating them from their competition.

The answer, of course, is that the customer is intelligent enough to understand that the brand is actually manifest in the actions of the bank rather than its communications. And when the actions are so manifestly anti-customer (as all punishment fees are) then they speak much louder than words.

The scenario outlined above is very real, and so tempting that almost certainly the other large banks will soon follow BofA’s lead. And considering the recent massive consolidation of retail banking in America, true choice will become seriously limited.

So how could this potentially change?

The only thing that will break the banking addiction to punishment fees and force true value-add innovation will be if the customers were to act en-masse to switch their banking relationships away from the banks with the highest level of punishment fees and toward those with the least.

I believe sheer anger will actually create a significant shift here, moving people away from the big banks into the hands of smaller regional players and credit unions. However, convenience is a powerful force and the hassle factor of switching will be too high for this to become a mass exodus.

For a mass exodus to truly happen, we will need to see technological innovation focused on increasing the convenience of switching. Someone needs to make switching your checking account as simple to do as switching your cellphone provider (in terms of the ease of porting your number rather than the cost of breaking your contract)

I believe there are only two types of actor who could do this, and in the process create the conditions for a large scale re-shuffle of the retail banking landscape:

1. A new intermediary
If you had the technology to make switching any checking relationship from any bank to any other bank, then you have the potential to create a highly valuable new relationship with the customer. You in effect become their banking broker. Aiding their shift from high to low fee charging institutions.

Doing this would mean either a new technology enabled startup focused on taking on this role, or some other trusted, non-bank, technology savvy player stepping into the breach. Amazon perhaps?

2. A medium sized bank
An aggressive, growth focused, medium sized bank could potentially make this play. Unlike an approach focused on moving any banking relationship from any bank to any other bank, this would be designed to create a seamless transfer of the checking relationship from any bank to their bank only.

Doing this would require investment resources and technology capability. The bank in the US which most closely reflects this profile is probably Citi.

In the consolodation of a few years ago, Citi were the manifest losers in US retail banking. In scale terms, Citi have found themselves stuck as a mid-weight regional player.

However, they have the brand, they have the technology and they certainly have the investment resources to make something like this happen. If they were to combine convenient switching with a game-changing low cost, low fee online distribution and service model then the potential for national disruption is absolutely there. Not only this, but the potential to meaningfully and positively improve the reputation of Citi in the process.

Could they do it? Do they have the capabilities and desire to do it? Has their value-add muscle withered too much? These things I don’t know.

It might be nice for all the $5 paying BofA customers to imagine they could though…

image borrowed from: http://www.valdosta.edu/~lomartin/fivedollarbill.jpg