Apr. 11, 2012
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Analysis by Steffen Binder, Research Director

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How Social Media Will Shape the Competitiveness of Banks

In his seminal work, ‘Competitive Strategy’, the world-renowned Prof. Michael Porter has identified five major forces that shape competition and success for the players in every industry:

  • Threat of new competition

  • Threat of substitute products

  • Bargaining power of customers

  • Bargaining power of suppliers

  •  Intensity of competitive rivalry

If you look at social media through the perspective of these five forces, the consequences they unleash for the competitive dynamic in the banking sector become very clear.

Social media is already bringing new competitors to the banking industry. Websites like Stockpickr help investors to shape their investment strategies and replace advisors. Other services like peer-to-peer lending (“Prosper” and many other networks) or crowd funding ( e.g. KickStarter or ArtistShare) are other examples. These might be only small initiatives but it is not merely possible but probable that some of these players will grow significantly in the future.

The threat of substitute products is related to the threat of new products. Many services in the financial industry still rely on personal relationships and personal contacts. One of the most important examples is the personal relationship of (private) clients to their advisors. But such personal services are heavily under threat of being replaced by advice and services that use new social technologies to reach customers. Mobile technology and video-based apps allow the build-up of personal yet remote relationships between client and advisor. Even worse from the bankers’ perspective, social media allows the replacement of the advisor by fellow investors and peers The intensity of competition is reinforced through social networks where recommendations for financial advisors can be easily obtained through one’s widespread (virtual) personal network. Such networks also give recommendations and rankings on all kinds of financial products and services.

The bargaining power of customers is at the core of the social media revolution. Peers, experts and competitors join together in a multitude of social networks to communicate about services, products, quality and prices (MyPrivateBanking is only one example). It has become easy to check the reputation and experience of a financial advisor or insurance agent just by using LinkedIn or Xing. Various websites evaluate and rate the quality of banks and advisors (just take a look at WiserAdvisor). These are all examples of how customers band together to achieve a better understanding of what’s on offer and eventually get a much better deal from their current bank (or their next, better one).

Even suppliers to banks can gain greater bargaining power. If one thinks of human resources as the most important supply for banks one can easily see how employees and job seekers are using social networks already today to give themselves a better bargaining position versus their employers, sometimes causing controversy in the process. In particular, the market for highly skilled human capital in investment banking as well as private banking is facilitated through social networks like LinkedIn or other professional networks where users share their job experiences.

Overall, the intensity of competitive rivalry is being greatly intensified through social media and networks. Client retention and the acquisition of new clients are already strongly influenced by the use of social media. As a new generation of bank customers, adept at using both social media and mobile apps replaces the old guard, banks’ business models and customer interfaces need to change. The year 2012 will be decisive in this respect as many banks and wealth managers face decisions on whether to enter the battlefield of social media and, if so, by what means. Developing an integrated, consistent and comprehensive strategy for this new generation of technology will be critical for success.
 

 

My Private Banking



Analysis by Steffen Binder, Research Director

How Social Media Will Shape the Competitiveness of Banks

  Apr. 11, 2012

In his seminal work, ‘Competitive Strategy’, the world-renowned Prof. Michael Porter has identified five major forces that shape competition and success for the players in every industry:

  • Threat of new competition

  • Threat of substitute products

  • Bargaining power of customers

  • Bargaining power of suppliers

  •  Intensity of competitive rivalry

If you look at social media through the perspective of these five forces, the consequences they unleash for the competitive dynamic in the banking sector become very clear.

Social media is already bringing new competitors to the banking industry. Websites like Stockpickr help investors to shape their investment strategies and replace advisors. Other services like peer-to-peer lending (“Prosper” and many other networks) or crowd funding ( e.g. KickStarter or ArtistShare) are other examples. These might be only small initiatives but it is not merely possible but probable that some of these players will grow significantly in the future.

The threat of substitute products is related to the threat of new products. Many services in the financial industry still rely on personal relationships and personal contacts. One of the most important examples is the personal relationship of (private) clients to their advisors. But such personal services are heavily under threat of being replaced by advice and services that use new social technologies to reach customers. Mobile technology and video-based apps allow the build-up of personal yet remote relationships between client and advisor. Even worse from the bankers’ perspective, social media allows the replacement of the advisor by fellow investors and peers The intensity of competition is reinforced through social networks where recommendations for financial advisors can be easily obtained through one’s widespread (virtual) personal network. Such networks also give recommendations and rankings on all kinds of financial products and services.

The bargaining power of customers is at the core of the social media revolution. Peers, experts and competitors join together in a multitude of social networks to communicate about services, products, quality and prices (MyPrivateBanking is only one example). It has become easy to check the reputation and experience of a financial advisor or insurance agent just by using LinkedIn or Xing. Various websites evaluate and rate the quality of banks and advisors (just take a look at WiserAdvisor). These are all examples of how customers band together to achieve a better understanding of what’s on offer and eventually get a much better deal from their current bank (or their next, better one).

Even suppliers to banks can gain greater bargaining power. If one thinks of human resources as the most important supply for banks one can easily see how employees and job seekers are using social networks already today to give themselves a better bargaining position versus their employers, sometimes causing controversy in the process. In particular, the market for highly skilled human capital in investment banking as well as private banking is facilitated through social networks like LinkedIn or other professional networks where users share their job experiences.

Overall, the intensity of competitive rivalry is being greatly intensified through social media and networks. Client retention and the acquisition of new clients are already strongly influenced by the use of social media. As a new generation of bank customers, adept at using both social media and mobile apps replaces the old guard, banks’ business models and customer interfaces need to change. The year 2012 will be decisive in this respect as many banks and wealth managers face decisions on whether to enter the battlefield of social media and, if so, by what means. Developing an integrated, consistent and comprehensive strategy for this new generation of technology will be critical for success.