Telcos and banks struggle with delivering a good customer experience despite being competitive markets. Michael Porter’s competition analysis model could explain why.
I was in Italy and needed mobile data, as I was without a broadband connection. I bought three SIM cards, never got exactly what was promised and one sales person even refused to sell to me because his shift had just ended.
Meanwhile, we have a legal entity in a country where we probably don’t need to have it anymore. I talked with our accountant about it, and she said it probably makes sense to keep it, because it has a bank account, and nowadays it is so hard to open a bank account.
The common thread in these anecdotes is a poor customer experience with businesses that are not monopolies. Think about that: mobile carriers and banks have plenty of competition, so how it is possible that these kinds of customer experiences are typical?
Michael Porter has developed the “five forces” analysis to evaluate competition in an industry. The forces are:
- Threat of new entrants
- Threat of substitutes
- Bargaining power of customers
- Bargaining power of suppliers
- Industry rivalry.
Porter’s model has been criticized and it has its weaknesses, but let’s look at how it could help us to understand customer experience in telecoms and banking services.
In both banking and telecoms, the threat of new entrants has been quite low. Both industries are regulated, which makes it impossible (especially in mobile business where you need frequencies) or very expensive to enter the market. The needed infrastructure investments are significant, which means very high capital requirements. Customers have also been quite lazy to change their service providers, partly because the customer experiences are often so bad that customers hesitate to do anything once they get something to work.
The threat of substitutes has also been low. There is some substitution, but normally you still need a bank account or a mobile subscription – in fact, just to be included in society, you will likely need a phone number and a bank account. There are additional or related services (such as which messaging services to use, or how to invest money) that have more competition, but the basic services are dominated by the carriers or banks.
The bargaining power of customers has been also been quite low in these industries. Customers need these services, and most services providers offer similar pricing and terms. Regulation also creates limits in terms of how much service differentiation exists. It has also been difficult for customers to compare offerings. Both banks and carriers often have a complex pricing structure, and quite often customers feel they have experienced surprises when they have started to use a service.
Both telecoms and banking have had very big suppliers, especially in technology. Of course, carriers and banks have power when they are big customers for these suppliers, but typically they depend on a few suppliers, and it is complex and expensive to make any significant changes for operations and services. And when investments are really significant, they tend to keep utilizing old systems, which results in the infrastructure becoming very complex, which imposes further limits to change anything.
Industry rivalry is more difficult to evaluate in the telco and banking business. In principle, it exists and companies spend a lot of money on marketing. At the same time, there’s a question of how much they really want to compete, e.g. by having a unique strategy or investment in innovations. At the very least, it often looks like different companies have quite similar strategies and basic products.
Based on this quick high level Porter analysis, it is not so difficult to understand why the customer experiences in telecoms and banking are not great. But could we expect that this will change soon? Or are we doomed to endure this ecosystem and market for a long time?
Perhaps we should draw differences between mobile services and banking services, since they are in separate phases. In mobile services, it is hard to see substantial changes coming soon. Maybe totally new kinds of network infrastructures that significantly decrease market entry costs, and more flexible use of frequency, could change the game. But we have already seen a notable change in the value chain and service structure as a whole. A significant part of money goes to mobile apps, content and other services, while carriers are becoming bit pipes. Customers buy from operators only the minimum they really need, while those other higher value services play in a totally different competitive environment.
Meanwhile, we can see that FinTech is potentially driving banking services in a similar direction – i.e. banks offer only the basic money pipe and money storage services, and all value added services such as lending, investing, wealth management, money transfers and even payments are provided by other competitive parties. But actually this is not yet guaranteed, because banks have still a chance to change, and new banks can also be game changers. Banks can still be significant in the future, if they innovate and play their cards smartly.
Regulation is one element that limits change, but regulators have become more and more open minded to allow innovations – regulatory sandboxes is one way to do it in practice. But another significant factor is IT and infrastructure costs. Really tremendous changes are happening in that area. Nowadays, for example, cloud-based finance back offices can deploy their entire IT infrastructure for 1/1000th of the total costs of legacy banking IT. It could be the single biggest game changer for the whole banking industry.
As we can see, mobile and banking services have a lot of similarities, and their capability to offer good customer experiences, innovations and changes have been poor. At the moment, we expect that finance services can actually change more than mobile services in the near future. FinTech is changing finance services, one way or the other – it can either help banks to reinvent themselves, or it can help other companies to kill them off. Innovative technologies (e.g. back offices and service applications) are among main drivers for these changes – only regulation remains the biggest question mark.