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Sunday, 29 July 2012

New economic models from collapse of exchange and use in retail banking

This post was brought about because of an exchange between Wim Rampen and Arie Golshlager on twitter. The conversation is captured in Arie's post and Wim's comment at

Essentially, Arie put up the Barclays ad on choices for retail banking and Wim commented that customisation is great but research has shown that giving too many choices stifles the customer (pointing to Sheena Iyengar's Ted talk

Arie asked me to comment on his post but there was so much to say that I decided to post this on my blog as well. It is also tied to my upcoming book and a recent keynote I delivered so if you are interested in more of this, sign up at the book page Value: Creating New Markets in the Digital Economy and check the keynote at service systems resource page

The problem I have with this ad is the revenue model/economic model for retail banking. To understand this, let's go back to fundamentals and evaluate what NEED a banking service is really satisfying. Keep my money safe. Give me interest for my excess at the best possible rate, give me my money whenever, wherever I want to use it securely and fast. If I don't have any, lend me some at the best possible interest rate.

What this means is that true retail banking service is a magic wallet for my money. It's with me all the time, and I can access, store, use, earn Interest (for excess), pay interest (for what I owe), but always at the convenience of being in my back pocket or handbag.

Now take a look at retail banking. It has grown into monolithic institutions, creating rules, transactions, norms, practices that we have come to accept as the 'solution' to our needs but actually makes us jump through hoops just to access money (dongles to log in) in the name of 'service'. And there is an academic term for this phenomenon. It's called an institutionalised solution. Basically, it means that we have been conditioned to think that the solution to our needs takes a certain form and that form has become 'institutionalised'. Markets are therefore formed from such institutionalised solutions (ref Steve Vargo who is researching in this area - need a cite here, Steve). So we believe that the solution to knowing the time at the bedside is a bedside clock, and managing our money is the current form of retail banking. So markets for bedside clocks and retail banking emerge because people accept that it is an acceptable solution (at that time) and it becomes 'institutionalised'.

Then technology comes along and disrupts all that because fundamentally, there could be other solutions that are way better, much easier for the consumer and in doing so, the market could potentially explode because there was so much latent need that was not satisfied with the previous institutionalised solution. Technology, in particular digitisation, can now potentially make this magic wallet come true e.g. through mobile solutions and other ways to access money. But of course, institutionalised solutions are hard to 'de-instutionalised' (reason why radical innovation is hard) so they try to modify the model to fit, by giving more choices. Often, new provisions are secondary to the 'primary solution' of retail banking; the idea that the primary solution could be wrong is unthinkable.

So why could the retail banking 'institutionalised solution' be wrong?

Well, wrong is a little harsh. It's just archaic, inefficient and rather 'inside-out' and sooner or later, it will be replaced (although one must never underestimate the longevity of entrenched institutionalised solutions)

To answer this, let's go back to the simple magic wallet again. The problem with the current retail banking model is that it is still based in an old good-dominant logic of exchange (cue SD logic music now.... Vargo & Lusch 2004, 2008). They are still thinking that revenue (and therefore service) is created at the point of exchange- which is why Barclays, and so many products are doing all these customization, that could result in too many 'choices' problem.

Why is this untenable? because the business model is now becoming too challenging to maintain.

Quite simple really. The value created by retail banking is not at the point of exchange. It's at the point of use in context. My magic wallet creates value with me at the time I need to access, look at, use my money. Making me choose the options for my magic wallet (retail banking solution) before I use it is just passing risks over to me, and in my opinion poor service.

At the keynote I mentioned that for all the choices that we have in the world for tea, coffee and cereal, the reality is that when you wake up in the morning, you only have the choice of what you bought. Retail banking is similar.

Because use contexts are complex, high variety and low visibility to the bank, they still prefer the exchange model which means the consumer has to make decisions BEFORE they use. They think the customer KNOWS what they want at choice but actually, they don't and even if they think they do, contingencies arise but these institutions are not thinking of new ways to serve use contexts, they are passing the risk on to customers at the point of exchange through choice-giving.

And they think that's good service.

What it is, truly, and why too many choices are stifling customers is because they try to use exchange to emulate possible use contexts. Customers are stifled because, in part, they cannot possibly envisage all contingencies of contexts.

All this is going to change with digitisation because it means that banking (and other offerings) could actually build contingent revenue models, better context pricing models ie collapsing exchange and use into the same time and space, with new platforms of both exchange and use, better aligning customer outcomes (and needs) to the exchange. And guess what, there is actually more money to be made when exchange and use collapse into the same space (check the music industry example at the keynote). Now that is truly a retail banking service to look forward to. The only question is - which bank will lead. Be careful, competition dynamics in contexts are very different with different players coming into the scene. Bedside clocks are fast becoming a thing of the past, replaced by your phone.

I do some work with media and content context pricing - media as an industry is digitising faster than banking because they are less monolithic and entrenched and content is fast changing with user generation etc. so the product itself is evolving because of its ability to serve use contexts. At an abstract level, you can see industries changing from seeing how media and content is changing but I don't want to include more spoilers for the book coming up so I should stop here. Do also stay in touch with the research in this area at our RCUK funded New Economic Models in the Digital Economy (NEMODE)


  1. Hi Irene,

    Excellent contribution to the discussion & a rich post I'm thankful for.

    Some thoughts/questions arise:

    I fully understand and agree with the notion that value exchange and use must collapse into the same (time and) space. This imposes some difficulties though with regard to managing the Customer's journey..

    In other words: in this specific case a financial services company needs to have a "space" in which "in every context" the right option for a Customer is (made) available and brought to his/her attention.. At the same time, if this is a new service, the Customer needs to be educated as to understand what the service is for and how that will benefit her desired outcome..

    All of that is not a light task, specifically not in an industry serving needs that people (not only institutions) take for granted and don't really want to think about.. and when the right context is there, the time isn't..

    Even in the Entertainment business there is no real collapse of use and exchange (yet). Spotify is charging lump-sum every month and Itunes charges before use (classic GDL/value exchange model imo)..

    And there is some logic behind it. Companies need risk mitigation and prefer constant flows of revenue.. Even Customers might prefer it, because they need to plan their budgets as well, specifically in this time where it is made so easy consume a service.. (and pay for it)..

    Thus, in my humble opinion.. Customization of a service makes perfect sense for the service to better fit Customers needs. It will fit this need best, when the Customer can customize the service in context & use (or shortly before).. But it will depend on the specific context of the Customer's and the Service Provider's needs whether a full collapse of value exchange and use is desirable or (economically) feasible.. I think..

    Would love to hear your thoughts.


    1. Hi Wim

      Tks for your comment.

      I don't think banks should get rid of the traditional exchange model altogether but that all market segments should be served through multiple channels which would increase demand and/or revenues and serve customers better. There will always be advanced demand not only because of risks and planning as you have pointed out but also because often, buyers may not be the users eg corporate buyers of mobile services. However, my point in the post is that banks are not willing or good at serving more contexts of use and instead, prefer to collapse contexts of use into advanced exchange such as the Barclays ad and I propose that by doing so, customers get stifled as you have pointed out. This is often because banks think of channels as cost led, rather than market or demand led which shows their poor understanding of the market for retail banking. So in the case of Barclays, if I don't buy any beforehand, I have no option of accessing that service when a contingency arises and would like to have it, even if I wish to pay a premium for it. This could then lead to stifling at advanced exchange because the customer has no other options for accessing the service in use. Spotify exactly allows both subscription and if not, buy on the spot at higher price and many have done so because contingent/contextual needs are met.

      The best channel design for marketing is always multiple in nature, with self selection of markets and good revenue management (see an old paper of mine on explaining this). With self selection, we create more choices and better service and revenues/demand increases with a win-win solution for all. Those who want some services for free or low prices will have to take some risks and suffer rationing perhaps but those who want it at a contextual/contingent level pay more for them. The results may surprise banks. Often the expansion of demand at context level may drive prices down because of higher demand which is even better for the customers and firms but until they learn to use digital technologies better to serve contexts, they won't know better.

      Hope that this would explain the post better!


  2. Irene, Wim,

    the question that comes into my mind is: Do banks have an interest in changing their models to become more service oriented? Imo they for the foreseeable future are in a position of power, looking from a consumer angle ...


    1. reply below. sorry for the multiple typos - typing too quickly on holiday!

  3. Hi Irene,

    Great post and very insightful and inspiring comments aswell from Wim as your reply to that.

    Just a less hollistic remark comes to mind:
    Like you said, maybe the business model of a traditional retail bank should change. It could very well be that
    1) a retail bank at this moment just offers its services too cheap. After all a savings account is free of charge and interest gets paid to the customer. I see the value to customer but not yet the value to firm. Charging customers for a service would be more realistic but probably not feasable in a world of goods dominant logic.
    2) a banks' business model in general is not up to par with todays posibilities and therefor revenue streams from and to the bank should change in order to create value in use.

    We all know the examples of competition from different branches. Maybe retail banks need to think outside the world of "financial services" and change their entire business model accordingly.

    Curious about your take on the matter....

    Michel van Leuven

    1. reply below. sorry for the multiple typos - typing too quickly on holiday!

  4. Michel/Thomas

    I'll give you an example of how it can work. Public service of naturalisation (i.e. conferring citizenship on a migrant) is not free because in applying, you actually have to pay a fee but once you have paid it, you would think that all the processes, e.g. getting your certificate, swearing in ceremony etc. they will all be part of it. If you have ever become naturalised in the UK (a friend of mine recently did), here is the process.

    1. you apply by sending off your documents with payment (cheque or debit card) where you for (separately) for both the administration and citizenship ceremony
    2. assuming you are eligible, you then get your letter telling you to make an appointment for a citizenship ceremony, which you have paid already for.
    3. you call the council to check the times/dates of the citizenship ceremony. these are only held twice a week, and you are only allowed to bring one other guest.
    4. chances are the times given to you is around 1-2 months later.

    this is where the fun starts:

    5. You can choose to have it earlier, private citizenship ceremony, at £95 where you can bring as many guests you wish. the availability of the dates are much earlier (probably within the week onwards). there is a further premium if it is before 10am in the morning and if it is on friday afternoon i think.

    what do you think my friend chose? she was SO HAPPY those options were even available that she paid for the same week friday afternoon and happily paid all the premiums. This is the typical hybrid public/private economics of incentives where public purse require rationing (taxpayers money, priorities and all that) and the private purse is tapped into for differentiated service. This is what the NHS has still yet to figure it out. And this is exactly what i mean by self selection. i don't mean a denial of service or price gouging. I mean CHOICE.

    in the case of retail banking, they do not know when, why, where and how their customers want the magic wallet, and they don't provide enough channels to serve EVEN IF THOSE CHANNELS COULD EARN THEM MORE REVENUES because they THINK more channels are more costly. They don't understand their market and their understanding of markets and economics are very very poor. By the way, in the example above, my friend paid premium price. There are MANY examples where customers who want the premium service actually pay NOTHING AT ALL because sometimes providing that service INCREASES DEMAND SUBSTANTIALLY to the extent that prices go down. I give the example of IKEA in my book (pricing & revenue management of services where they cannot increase price for more service (e.g. a nursery) but they are rewarded with additional footfalls (demand), because that service reduces the outlays of customer and bring out the unserved market. So don't think additional channels or service cost more money. if they are access or demand related that caters to latency (i.e. unserved market), prices could come down to nothing.

    Of course, as Thomas has put it - if the type of competition doesnt make banks more service centric, then you wont get them incentives to serve!

    Hope this helps!


  5. Sticking my neck out here...

    It seems that the current banking model's days are limited with the impending split of retail and investment banking in the UK. Will this be used to drive a change of models? I expect that retail banking will become a chargeable service because without the investment side a retail bank will need other sources of revenue. So retail banks could use this as a reason to change their offers. OTOH they may simply start charging for what they're already offering.

    But reading your post and the comments it seems to me that mPESA is an instantiation of the magic wallet. It's interesting that this is driven by a Telco and not a bank, and was initially created for those without bank accounts. That's the sort of disruptive business platform that could be a model for the retail banking industry if they become willing to think outside of their existing models.

    1. Well said Pete and my upcoming book ( directly covers where disruption is likely to come from (ie from industries that have a stake in a particular use of an offering by another industry). Telcos have lots of stake in anything contextual and mobile and the magic wallet (retail banking) is particularly vulnerable!


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