The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘Business Models

The Dangers of Thin Value


Umaiar defines thin value as a mirage that will eventually evaporate. it is value that has no point nor reason, other than generate revenue for the corporation. The landmark example he offers is ARPU, or Average Rrevenue per Customer in the telco business. The 15 second instructional wait time in front of every voice mail is worth $620 million to one telco is one example he offers. The sole purpose of the 15 seconds is to generate revenue, notwithstanding claims that it is for the benefit of the user.

The Value Every Business Needs to Create Now
| Harvard: Umair Haque Edge Economy

Profit through economic harm to others results in what I’ve termed “thin value.” Thin value is an economic illusion: profit that is economically meaningless, because it leaves others worse off, or, at best, no one better off. When you have to spend an extra 30 seconds for no reason, mobile operators win — but you lose time, money, and productivity. Mobile networks’ marginal profits are simply counterbalanced by your marginal losses. That marginal profit doesn’t reflect, often, the creation of authentic, meaningful value.

He goes on to refer to other examples of thin value, and its the last that interests me here.

Thin value is what the zombieconomy creates. The healthcare industry profits, but Americans get poor healthcare. Automakers fought tooth and nail against making sustainably powered cars. Manufacturers of all stripes stay mum about environmental costs. Clothing companies can’t break up with sweatshop labour. The clearest example of thin value, is, of course, banks: they invested our national wealth in assets that turned out to be literally worthless.

That got me to thinking what examples of thin value in retail banking are – value that has no direct correlation to benefit received.

  • no interest on the first $ xx
  • chequing accounts vs savings accounts
  • credit card interest
  • credit card terms
  • overdraft fees

The list can go on. The theme I see in the thin value concept is this: there is no direct attributable consumer benefit associated with the cost paid out. Everyone accepts there is a value expected for their financial services, and the thin/ thick value approach focusses on the relationship between the cost and the benefit.

Thin value suggests that the operator cannot rationalise the value they are creating, therefore must use back door methods to bring in revenue in other ways.

Relevance to Bankwatch:

Here is Umair speaking on the concept some more. The concept is scary for corporations, because it means that business is not going back to the way it was before. It is all to easy to assume that the crisis is easing and recovery means going back to business as usual.

But this is not going to be business as usual, as i have talked about previously here [consumer mindsets] and here [Enter the Zombie Banks]. Consumers are more self aware than ever, and more aware of switching opportunities through bank and non bank designed tools to perform self assessments online. Services such as Wesabe exemplify.

How will your bank redesign services to demonstrate thick value?

Written by Colin Henderson

August 1, 2009 at 09:26

The Good, the Bad and the Ugly | which is your bank?


In this video commentary on the US Banks results they note that while large profits are announced, any parts of the business related to the US consumer consumer is flat. This includes all retail banking and credit cards. The only bright spots are the fee based revenue from the investment banking units, hence JP Morgan and Goldman Sachs results, although poor old Citi did not even make it there.

One quarter does not make or break anything in banking in and of itself. However the predictions of Roubini and Baker linked below are playing out as expected, so which banks are going to wait it out and hope for the best, and which will challenge and break out?

Citi and BofA fail to allay fears | FT

The problem with Citi it is not firing on any cylinders, at least with the others they are at least firing on one cylinder.

Relevance to Bankwatch:
The word ‘bank’ is quite generalised. On this blog I focus on retail and commercial (small ‘c) banking. I care little about investment banking. Looking at the US this week, the US consumer base is still being hit with ever increasing unemployment, and there is no indication that will change soon. Europe and Japan are no better. I go back to an earlier post about ‘recovery’ which is a word used too loosely by economists and politicians. What will the future look like? What will recovery look like and what does that mean for your bank?

While technical recovery meaning positive GDP growth may occur later this year or earlier next, that is of little interest here. That ‘recovery’ is driven by Government deficit spending in all major economies. What matters is the state of the consumer, their aggregate confidence level, and frankly their income level with which they choose to save, pay down debt or spend.

I will repeat that banks as they move into this post ‘recovery’ world will do well to consider what it will take to succeed in that world. James Baker worried about Zombie banks back in March. We are beginning to see the evolution of zombies, financial utilities who operate under government supervision and ownership with little benefit if any to people or the economy.

If it is not going to look like the pre recession world and if we accept that it will be a relatively smaller, more careful world with far less money velocity, then how should your bank adapt products, services, service and business model to thrive?

Written by Colin Henderson

July 17, 2009 at 15:12

“Instead of extracting value, they create it” | Haque


Umair continually presses us to think about new types of corporations that are creating genuine value.  The definition is evolving, and you can check back with his earlier posts about the companies mentioned, but the final sentence in this paragraph is a great objective.

An Open Letter to 20th Century Business | Umair Haque

Who are some of those innovators? We’ve discussed lots of them – Apple, Google, Tata, Threadless. What makes them different is simple. They are more profitable and valuable than rivals because, well, they do stuff that counts. Instead of extracting value, they create it.

Written by Colin Henderson

May 25, 2009 at 20:53

“Even though we were in and looking you still couldn’t see [where the bottom was]” | KKR


Listening to this interview is interesting and sobering for banks. The highlighted quote below tells all.

Henry Kravis and George Roberts (KKR) | FT Interview

FT: How do you see the opportunities that have been thrown up by this incredible dislocation? Is the government a good partner for KKR?

HK: We looked at quite a few of the banks over time and we turned them down because we couldn’t see what was in the banks. Even though we were in and looking you still couldn’t see [where the bottom was]. I think there may be some programmes where it will be appropriate for us to partner with the government. One area in particular that is a very big need and an area where we will have opportunities to participate in is infrastructure.

This goes to the core of what transparency means, and to the business model of banks. i have long maintained that one fundamental negative for many banks remains their lack of investment in effective IT over a sustained period to support their growth in product diversity and merger activity.

The result is that many banks to this day, rely in Excel spreadsheets or locally managed offline databases to analyse and interpret their customer information. And worse … the assessment of holistic customer information is jeapordised because customers can show up in multiple product systems with mutiple information designs making is impossible to fully determine how many products any one customer has with that financial institution.

Relevance to Bankwatch:

it is one thing for KKR to suggest that they are not sure “where the bottom is” in the context of an economy that may be worsening and that may impact on the value of the bank product portfolio. It is quite something else to have doubts based on the value of the information offerred by the banks, and I suspect that is largely what the above quote highlights.

Written by Colin Henderson

May 22, 2009 at 12:24

We will not hear about bricks and clicks after this recession


Deloitte pick up on an interesting characteristic of banks here. Cost cutting occurs during downturns, but its spend spend spend when things are looking good.

Banks rarely get to the point of incremental efficiencies that they note here. Citi are a classic example as noted in the FT this morning.

This fits with the view that this change we are undergoing is not just another blip before we return to business as usual. There is no business as usual coming. The future is smaller, framed in different business models, contains a greater mix of small business, and smaller companies and with retail consumers working harder, longer and for less money.

All this points to realignment of the banks’ models to be more efficient, more effective in customer interaction, and more automated, with much greater reliance on online banking and mobile banking, with less on branch banking.

This time we will not hear about ‘bricks and clicks’ as we did in 2002.

Improving Efficiency: The New High Ground for Banks | Deloitte

The turmoil in the financial markets, coupled with the economic downturn, is fundamentally altering the financial services environment. In this new world, improving operating efficiency has become a competitive necessity. But while financial firms have typically moved quickly to reduce costs when the business cycle is contracting, far too often these efforts have been quickly forgotten when business picks back up.
In this report, we present research conducted by the Deloitte Center for Banking Solutions demonstrating the critical importance of operating efficiency to the fortunes of financial firms. Among the findings is that building efficient operations is not enough — steady, continuous improvement in operating efficiency are required. In fact, banks that have achieved continuous improvements in efficiency have also generally experienced far greater gains in their share prices.

Written by Colin Henderson

May 22, 2009 at 10:59

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