Brett King

Posts Tagged ‘banks’

The Total Disruption of Bank Distribution – Part 1

In Bank Innovation, Branch Strategy, Future of Banking, Media, Mobile Payments, Retail Banking, Strategy on July 5, 2011 at 13:13

There’s a philosophy I characterize as “Lucky to be a customer” within banking today. A customer comes to the bank, we make him jump through hoops we often call risk assessment, customer profiling or KYC, and then maybe, if they are not too risky a proposition, we might let them be our customer.

This philosophy comes not from a monopoly play as a brand, but an exclusive club we call “banking” where the barrier to entry has been so significant in the past that there has been limited pressure to change on the traditional modes of banking. This is evidenced by the fact that although in rapid decline, much of the world still sees cheques lingering as a popular form of payment, despite being roughly two thousand years old and hopelessly antiquated in form and function. The basics of branch banking haven’t changed in the last millennia either. It is very rare for a physical artifact like cheques or a distribution model to retain such dominance over such a long period of time. The normal process of iteration, competitiveness and technology improvement results in more frequent change at the front-end for other industries.

It is not difficult to understand then why bankers, when faced with talk of the threat of ‘disintermediation’ or rapidly changing distribution models, meet such with practiced skepticism. There’s still bankers today who doubt the future of NFC mobile payments, of social media’s impact and of a fundamental and dramatic reduction in support for physical branch network.

So what evidence is there that we face a fundamental shift in the way we do our banking, the way we handle payments, or deal with financial services and will this significantly affect the way the business functions moving forward? Or is it more realistic to posit that we are simply seeing a change in mix, with the fundamentals of banking too embedded into our day-to-day life to really change in a major way?

I’d like to propose the following lines of evidence for a major and disruptive shift in modality when it comes to bank distribution models:

  1. History shows incumbent players rarely win out
  2. Rapid acceleration of technology adoption makes change easier
  3. Massive spend in innovation at the front-end is occurring through disruptors
  4. The increasing gap between behavior and capability, and
  5. Transparency challenging revenue and friction

I will warn you that this is an extensive analysis as compared with my usual read-over-breakfast blog post, but given the importance of this debate I think it needs a thorough analysis and review. Over the next two weeks I will provide a detailed analysis on each of these lines evidence, starting with historical precedents. The impact of these changes will be a complete disruption in the distribution of retail financial services in the next 5-10 years. The following is the first component of the shift that is forever changing the retail financial services sector.

1. History shows traditional incumbents rarely win out

In industries where a virtual monopoly of infrastructure exists, change normally occurs over a long period of time, but when it does it is a typically through a tipping point scenario. Traditional players are not afforded any protection by means of their existing infrastructure or distribution model when a new and improved core technology emerges, or a massive change in consumption behavior takes place. Here are a few examples of massive, disruptive change in long-established, traditional industries:

Telegraph to Telephone to Mobile

To understand the disruptive nature of a massive shift in technology adoption, let’s look at Western Union. Western Union today is a financial services organization, but back in 1855 Western Union was a company that provided Telegraph services. Inflation adjusted, Western Union was capitalized at US$830 Million dollars ($41m actual) in 1876. By 1900 Western Union operated a million miles of telegraph lines and two international cables.

Western Union’s greatest threat came from a new technology, the telephone. Alexander Graham Bell patented the telephone in 1876, initially referring to it as a “talking telegraph.” Bell offered Western Union the patent for the telephone for $100,000, but the company declined to purchase it. Western Union could have easily gained control of AT&T in the 1890s, but management decided that higher dividends were more important than expansion. By 1900 the rise in telegraph traffic had slowed, and by 1930 the number of net messages was in decline. By 1909, AT&T had already gained control of Western Union by purchasing 30% of its stock.

Over the past decade, the impact that mobile phones have had on the use of landline telephones is equally as disruptive. In June of 2010, the National Center for Health statistics stated that one out of every four Americans has given up their landline phone and are now using their cell phone exclusively. AT&T reported a 7.4% decline in landline usage in 2007, and 9.7% in 2008. Verizon reported a decrease of 10.9% in 2009, while Qwest Communications had a 17% decrease in landline usage from March 2006 to March 2008. AT&T and Verizon dominate this industry, which brought in $340 billion in 2000. By 2016, revenue is projected to have fallen more than $200 billion in 16 years.

Who dominates the new space? Mobile operators. Not telegraph companies, or fixed line operators. Owning the wires or physical network infrastructure is not enough to save your business from changing behavior. Owning branches and payments infrastructure is the same thing. Consumer behavior trumps outdated networks.

In the midst of this you have defining moments around mobile platform too. You have Nokia usurping the #1 mobile player of the 90’s Motorola, and then iPhone doing the same to RIM and Nokia. Consumer behavior is the killer app – literally. It will kill your business every time unless you move with it.

Encyclopedia Britannica vs Encarta vs Wikipedia

In 1993 Microsoft launched the $99 Encarta encyclopedia. In 1991 Encyclopedia Britannica was doing sales of $450m a year (valuing the company somewhere north of US$1.5Bn), but the effect of Encarta on Britannica’s sales meant that the company was sold at a fire-sale event in January 1996 for just $136m to Jacqui Safra (a Swiss Billionaire financier). In 1991, a bound volume of Britannica sold for around US$2,000 with a $600 commission component going to door-to-door sales professionals distributing the publication. Today that sales force does not exist.

In 2009 both Encarta and Britannica were offered online in a limited form, for free, due to the impact of Wikipedia and Google itself. Search and content curation has replaced the traditional Encyclopedia. Owning traditional distribution networks was of no value in the end due to the shift from physical to digital artifacts. Even owning the content is of marginal value in the end because the fungible value of the raw content versus the collective consciousness of the living, breathing stream is not comparable.

Music, TV and Books

Today the biggest seller of books in the United States is Amazon. The biggest distributor of music is Apple. If I told you this 10 years ago it would have been unthinkable. A computer company selling Beatles Albums? Are you crazy??

“I think in five years, other than a few specialist booksellers in capital cities we will not see a bookstore, they will cease to exist,” Australian Senator Nick Sherry
The Age (14th June, 2011)

Borders, Blockbuster...who's next? Banks?

This shift in distribution powerbase has resulted in a complete disruption of the traditional music and publishing industry. Record labels, movie studios, booksellers, video rental stores, and others who relied on physical distribution models have been decimated. Borders, Blockbuster, MGM, countless newspapers, video post-production companies, and photofinishing facilities have simply been hammered by changing consumer behavior. It turns out that in 2010 65% of young people under 30 have turned to getting their news from the big bad Internet. No amount of wishing it isn’t so, lobbying congress, or trying to beef up regulations to protect existing businesses is going to save these dinosaurs.

IBIS World recently reported on dying business models and in respect to video rental and distribution it was quoted as saying, “price- based competition and ease of access has transformed the once-a-week Sunday night family movie session into an everyday possibility.” It’s not just Netflix either. We are downloading more and more content and abandoning the old habits of watching a show on a specific channel at a specific time. We watch content, not channels or networks.

So what does this do for TV?

Free-to-air TV itself is unlikely to survive, because the Ad revenue based model no longer works if you aren’t watching Ads as you fast forward through recorded content via your DVR or TiVo. While content might be able to make the shift to digital distribution, increasingly the model of 15 mins of TVCs every 1 hour of programming no longer works. How will you acquire customers and build brand when these broadcast methods of advertising no longer deliver ROI?

Next … The Rapid Acceleration of Technology Adoption

#Winning at the Social Media game

In Blogs, Customer Experience, Engagement Banking, Groundswell, Retail Banking, Social Networking, Strategy, Twitter on April 11, 2011 at 08:54

Ok, so the feedback from Finextra’s #finxsm event this week is that we’re finally coming to grips with the fact that Social Media isn’t going to disappear into the night like some passing fad. Good news!

It’s interesting though, whenever a major disruptor like social media, the internet, etc has come along, inevitably there are many traditional managers and practitioners who don’t understand it and label it as a ‘fad’. Just because you don’t understand something personally, doesn’t mean it is a fad. That’s the realization that the industry is going through right now, that is – social media isn’t a fad, it isn’t going away, we need to deal with it. Just because we don’t understand what the fuss is about doesn’t mean our customers won’t use it, and if they’re talking about us we better be listening.

No Facebook allowed here, unless you’re a marketer

So the first trick with social media and how it’s going to effect the business is learning about how it works. The knee jerk reaction for most banks when social media came along was two fold; The first was to try to figure out how to dump traditional advertising and PR campaigns down the pipe. The second was to shut down any access internally within the organization because it was risky for employees to talk directly to the public, and also because it was feared there would be wholesale time wastage from staff playing farmville and other sorts of unproductive, non-work related tasks.

The problem with this mind-set is that is was fundamentally wrong. Primarily, the organization was prevented from learning about the real capability of social media, and this hampered the brand from creating advocacy and engaging customers. Additionally, the reality was that employees were simply pushed away from the desktop internally to their mobile device and the risks that employers were hoping to prevent by shutting off access weren’t prevented they were simply pushed outside of a controlled environment.

Social Media ROI is not a marketing metric

The marketing-led thinking about attempts to control or spin the brand message out through social media characterized as just another broadcast channel, are also fundamentally flawed. Social media is more akin to a dialog with your broader customer audience, not a channel for slamming more corporate comms or campaigns down customer’s throats. Thus, the traditional marketing metrics don’t apply either.

“The ROI of Social Media is that your business will still exist in 5 years”
Erik Qualman, Socialnomics

I was pleased to see the response of Hakan Aldrin, MD of the Benche at SEB when asked if he has numbers to prove the value of his social media community platform he replied, “No. That’s not what it’s for.”

Having said that, while not being a broadcast channel, it is a channel for targeting key influencers to get your message out. Key influencers are those with a sizeable following (1,000 followers or more) who influence their follows – i.e. get lots of retweets, reposts, etc. Recently when Charlie Sheen burst on to the Twitter scene garnering 3.5m followers in just weeks, what did it mean for key influencer opportunities? Ad.ly worked with Sheen to promote internships.com, a new jobs board – one tweet from Sheen got more than 100,00 applications from 181 countries for the #Tigerblood intern spot. No classifieds ad in any newspaper has EVER been able to get that sort of response. Lesson: Engage key influencers!

You too can be #Winning on Social Media

What is Social Media for?

It’s a dramatic opportunity to listen to what your customers are saying and form useful strategies for advocacy, to inform product and marketing strategies based on real-time feedback from customers and it is increasingly a very powerful servicing tool. While there has been some viral marketing success on social media, if it social media is classified as a marketing tool or channel within your organization it means two things:

1. You don’t understand the two-way dialog nature of social media, and
2. You have too many traditional marketing people in your marketing team today

So now that we know social media isn’t a fad – what happens next?

Who’s responsible?

One of the biggest challenges is figuring out who is going to manage social media internally in the business today. Often this falls to some junior marketing staffer, maybe someone in the online team or perhaps a corporate communications or PR team member. All of these decisions would be wrong.

Social media can be used to build brand and advocacy, support and service customers, research new strategies, design new products, create new markets, and to educate and inform. This is going to require a whole kaleidoscope of supporting skills sets and capabilities underneath to do this properly. So if you limit it to being pigeonholed into the current organization structure, somewhere along the line your social media strategy is going to be deficient.

Do you have a head of call centre? Where does he sit in the organization chart? Well the head of social media should be at least equivalent in the organization chart to this resource. Why? If a customer like Ann Minch, David Carroll decides to target your brand because of poor service, bad policy or just plain ignorance, your share price is going to start to take a hit.

The strategy shouldn’t be to try to shut it down or attempting to force employees to refrain from social media activity. When Commonwealth Bank attempted this it backfired badly. The strategy needs to be one of informed engagement and encouraging positive use.

The biggest risk FIs face today is reputational risk associated with a social media blowout. You need someone in charge with common sense, but also with the organizational wherewithal to actually get something done. This is not a junior role. You need a policy that encourages participation across the organization, but that provides strong guidelines, supported by training, on how to engage customers and how to support the brand through social media. But most of all you need a mechanism to take what you hear from your social media listening post and inform strategy, change policy and improve customer experience. That is the potential of social media that is so underutilized today.

SXSW: Where’s the Bank Innovation coming from?

In Bank Innovation, Customer Experience, Future of Banking, Strategy, Technology Innovation on March 13, 2011 at 02:12

South-by-Southwest’s Interactive sessions in Austin, TX are a major creative and customer-focused experience. The amount of networking that is taking place, the amount of active innovation and discussion on taking it to the next level is awesome and mind blowing. There’s only one thing…

If there was a game on at SXSW to find 20 bankers – It is highly doubtful that anyone could win that one.

There’s innovation discussions occurring around mobile, gaming, social media, user experience, geo location, but it appears SXSW only has 4 sessions that are connected with banking, which is indicative of the level of engagement. There are payments and retail engagement discussions, there are gaming and social discussions, there are startup and venture discussions, health and work discussions, but not so many on banking.

In our session today where we attempted to discuss innovation in the banking arena, we had spirited discussion around who are the innovators, but the reality is we didn’t get into really sexy innovations. We didn’t get into how mobile payments would change the world, the emergence of new digital currencies, virtual banking models that cross borders, distributed and pervasive banking content embedded into the retail experience, Infographics style PFMs transforming customer engagement, new banking models leveraging off the likes of P2P, social or community enablement, reinventing the credit score or improving financial inclusion through cheaper smartphone platforms. The reason we didn’t get into any of the really sexy stuff is that the problems of innovating the banking sector are much more fundamental today.

Some of the Twitter feedback based on the #BankInnovation hashtag from the session “Banks: Innovate or Die!” indicated frustration at not diving into more deeper matters of innovation.

One blog response from Oscar Llarena (aka @softwaremono) asked the question “Does Customer Service = Innovation?“. In many ways, this very question and the amount of time that was spent talking about customer behavior and the ability of banks to match customer expectations is very telling when it comes to what innovation is needed in the banking arena.

Organizational Inertia
One of the key issues and the reason expectations are low in the financial services space is that most banks don’t even classify these things as innovation. When you ask a die-hard banker about innovation you are more likely to hear about Collateralized Debt Obligations, Derivatives, Barbwire Hedge Contracts or Swaptions than technology integration or customer experience improvement. This is because fundamentally banking has really never had to rapidly innovate the basic model of engagement of customers; branches, cheques (checks), credit cards and other such mechanisms are innovations that occurred over the space of decades or centuries.

The other issue is that risk aversion, philosophical marriage to traditional distribution models and embedded metrics around products sold through branches, mean that organizationally the bank has to first start thinking about changing the way the performance of the business is measured, and structured, before serious innovation can take place. This will take time.

In the meantime the easiest way to create innovation (that goes against the grain of long-embedded business practices and performance structures) is to simply circumvent the traditional bank organization. It could be argued this is why UBank, Jibun Bank, First Direct and ING Direct have been so successful at doing banking better – because they didn’t have to solve the organizational problem first. However, when we see more fundamental business model innovations like P2P lending and new payments systems like M-PESA, these have circumvented banks all together.

Banks will eventually get their act into gear and either replicate alot of this stuff, or acquire it to get the innovations, but such an approach would be like Blockbuster putting up a website that looks like NetFlix. Unless you fundamentally redress the organizational reliance on a very traditional business model and structure, then it’s never quite going to work.

Why innovation has to start with the customer…
In retail banking or financial services, one of the reasons we get so hung up on just some simple elements around customer service, the user interface between the bank and the customer, transparency and the way a bank assesses the risk of an individual consumer is simply that these are the areas that are now so glaringly obvious that they need a more rapid solution. Why? Because they are the very areas where the gap between customer behavior and expectations is growing rapidly with the delivery capability of the average retail bank. Before you can really start with breakout innovation you need to be able to meet customer needs.

Can you do that if you are trying to convince customers to buy irrelevant products because they are higher margin, or if you are trying to force customers into a branch because you’ve got a substantial investment in real estate? No.

So is customer service innovative? Transforming the customer experience and engaging customers in new ways, is a massive leap forward in banking – it may not be sexy innovation, but it is transformational for a sector who thinks they make profits despite their customers.

Why SXSW still matters for banks
In this environment, there are massive opportunities for entrepreneurs and innovators to create bridges between the customer and the institution. This will be through start-ups, new apps or UIs, new user experience models, gaming, and all the sexy stuff that SXSW at large is discussing. But it likely won’t be through traditional banks (sorry @annaobrien). Why?

Probably because you will never see a traditional banker at SXSW because they don’t get the imperative for customer innovation. They send along the geeks, who they expect to build the apps and to maintain the social media presence, but those resources won’t be sitting in the boardrooms talking about new organizational structures, different performance metrics and how to transform the business wholesale.

In the end, the success of start-ups and innovators like SmartyPig, LendingClub, BankSimple and MovenBank will be initiatives that banks feel compelled to follow because customers feel affinity with these new brands. But don’t expect them to rush into it…

In the end customers will win and I guess that is all that matters.

Retail Banking Innovation Infographic

Is product innovation enough?

Mobile NFC payments – there’s an App for that…

In Customer Experience, Mobile Banking, Retail Banking on February 27, 2011 at 23:01

There’s a great deal of debate in the Financial Services community at the moment about the potential impact of NFC or Near-Field Communication technology within mobile phones and how it will effect the payments landscape. The financial services players are generally scratching their heads and although they admit that NFC phones like the iPhone 5, the Nexus S and others are interesting – they don’t see the need for rapid response. After all, the lack of POS (point-of-sale) infrastructure that supports NFC is in itself a reason why a sense of urgency is not necessary. There’s plenty of time to worry about that later. Right?

Wrong!

There’s an App for that…

In July of 2007 Apple launched the iPhone (what we call the iPhone 2G generally today). Since that time I’ve owned each successive generation of iPhone and I now also have an iPad. So what’s the big deal?

The most impressive thing about the iPhone is not necessarily multi-touch, retina display, ease of use, or core functionality, but is unquestionably the iTunes platform that brought us “Apps”. Prior to the launch of the iPhone, we’d never even heard of Apps, and yet today, just 4 years later, here are the stats on Apps:

  • 350,000 Apps for Apple and close to 200,000 for Android
  • 10Billion downloads for Apple, 2.5Billion for Android Marketplace
  • 15.1Bn in Apps Revenue expected for 2011
  • Daily downloads 22million per day – Apple
  • New app submissions/day – 587 (100 games/488 non-games)
  • No of Active publishers/developers – 72,000 on the US store
  • 160m iTunes account holders (that’s 160m credit cards on file)

So from it’s humble start iTunes was always more than just a place to come and download music or TV episodes, it became the core delivery platform for a whole new category of software and user experiences. At 10:26 AM GMT on Saturday, January 22, 2011, the 10 billionth app was downloaded from Apple App Store.

10 Billion Apps in 5 years is pretty impressive

Now, before iTunes, the iPhone and “Apps” there had still been software – both for PC screens and for phones. Prior to the so-called ‘JesusPhone’, there were Java “Apps”, games and so-forth you could buy and download for your phone, but these certainly didn’t become ubiquitous, primarily because the usability wasn’t good enough and there wasn’t a marketplace that distributed these Apps.

So here we are, just a few years later and there’s probably not a single person in the US, UK, Australia, Germany or France who doesn’t know what an “App” is. Worldwide mobile application store revenue is projected to triple to more than $15.1 billion this year and reach $58 billion in three years, according to Gartner Inc. That revenue was $0 in 2007.

And yet, there are bankers out there that still persist in the belief that mobile payments via your iPhone will take years to ‘take off’. In a debate on this via Twitter over the weekend one of the typical quotes was “I can see it, just not for some time…”

Why the App is a great paradigm for NFC

The dominant position from the card issuers and traditional too-big-to-fail banks is that there is already an existing point-of-sale infrastructure in place in the USA, for example, that will take years to replace with NFC or contactless capable terminals. This naturally limits the adoption of contactless payments technology because even though someone has a contactless credit card or a phone enabled with contactless technology, it still doesn’t mean that they can pay – if a merchant can’t accept their payment then it is essentially dead before it starts.

In our Twitter debate over the weekend Rich Clow (@richclow) from Citi came up with a strong analogy likening the existing POS infrastructure to the ‘rail network’ that opened up the frontier of the US in the 1800’s. Without the ‘rails’, without contactless point-of-sale terminals, how exactly will customers make payments using their NFC phones? What’s the good of having a locomotive unless you have rails you can put it on? It’s an excellent point.

Is the lack of 'rails'/POS infrastructure going to limit NFC payments adoption?

Except … prior to 2007 there were no rails for Apps. The App didn’t effectively exist, but that didn’t stop Apple from creating the rails and the locomotive as part of the iPhone ecosystem at the time of their launch. Right now today Apple and Google are working on alternative payment schemes that will circumvent the traditional visa/mastercard POS systems and networks to enable both P2P payments and commercial transactions with merchants and retailers via phones. There may be some hook into the traditional payment networks behind the scenes, but all you’ll need to pay is an NFC phone and wireless network access.

How quickly will payments from one phone to another become ubiquitous? Answer: How long did it take Apps to become ubiquitous?

Put it this way – those out there that think this will take another 3 to 5 years to honestly compete with plastic mag stripe or chip and pin POS terminals, need to change their terms of reference. Apple and Google won’t wait for the rails. They’re going to jump straight to supersonic transport and the banks will still be waiting around for the train to stop at their station. Meanwhile, we’ll be choosing new payment networks as the paradigm for the next generation of commerce interactions.

Goodbye checks, goodbye plastic! If you’re a banker or card issuer, the sonic boom is coming your way…

Innovating the customer experience pays dividends – literally

In Customer Experience, Retail Banking, Technology Innovation on May 31, 2010 at 03:07

No one can deny that banks have had a tough time of it when it comes to stock market valuations over the last couple of years. The global financial crisis, massive debt and NPL issues along with punishing public opinion led to a massive collapse in banking stocks and company valuations in recent times. It would be simple to blame the sub-prime and global financial crisis as the sole cause of all the ills of the banking sector, but I have a different theory which explains a large part of the picture.

In the last 5 years the S&P 500 has experienced incredible volatility. On October 9, 2007 the S&P 500 hit its all time record of 1,565.15, but it was followed by the biggest annual loss in the S&P’s history, losing 37% in 2008 (the previous record being -22% in 2002 at the end of the dot com boom). As a result you’d expect any participants in the US market to have suffered similarly, and they have. Volatility, or the range/spread of buy and sell trades in the US markets is at an all time high and according to many analysts this volatility is here to stay. The certainty in the market has largely disappeared, and with it, the status quo in respect to valuations.

In the last 5 or 6 years, however, a new component has come into valuation metrics for listed companies. We still have revenue, we still have market share, branding and so forth, but innovation is clearly an increasingly significant part of the story. Let me illustrate:

Comparative Performance – S&P 500, Tech and Banking Stocks

Below is a graph (source: Yahoo FinanceBloomberg) showing the comparative performance of a selection of key stocks from the US market, the S&P500 Index being the dotted yellow line.

Innovation is being rewarded like never before in market valuations

Clearly Apple and Google have differentiated themselves. What has made the difference? Why have Google and Apple performed so much better over the last 5 years in market terms? Let’s examine the facts and see what conclusions we can draw.

Is it revenue?

Microsoft’s Revenue in 2005 exceeded Apple’s by more than 300%, and Google’s by almost 600%. In the last 5 years Microsoft’s Revenue has increased from$39B in 2005 to close to $60B in 2009, certainly not a bad performance. Google’s revenue certainly has increased, but in the years 2007-2009 it has only jumped from $16.5B to $23.7B. Since 2005 Apple has increased their revenue from $13.9B (2005) to $36.5(2009). Apple has certainly benefited from the popularity of the iPhone (Released June 29th, 2007) and more recently the iPad (Released April, 2010).

But if we compare the top 4 US banks we see that their revenue makes the tech companies look fairly ordinary. If revenue was the key driver, then we’d expect to see that the banks would have better comparative valuations. Given that Microsoft’s revenue is still close to double that of Apple’s revenue, and more than double that of Google – if the answer was that ‘tech’ revenue was valued at a premium then we’d expect Microsoft to be fairing better.

2009 data Assets ($B) Revenue ($B)
Bank of America (BAC) $2,300 $113
J P Morgan Chase (JPM) $2,000 $101
Citigroup (C) $1,800 $106
Wells Fargo (WFC) $1,200 $51.7

On this basis, revenue, while a critical component of a company’s valuation, would seem to not correlate cleanly with the exceptional performance of Apple and Google recently. Well before the GFC started to impact company valuations, they were already being hurt by something…

So is it future revenue potential?

P/E Ratios show somewhat the expectation of the market in respect to future revenue potential. For the ‘blue chip’ performers like Microsoft, JP Morgan Chase, Wells Fargo – P/E Ratio (Price/Earnings Ratio) are all performing in the range of 15-17, whereas Apple and Google are at 21.8 and 22.1 respectively. Certainly expectations are that Google and Apple have not yet hit their peak in earnings capability because their valuations show a higher multiple. Indeed, the S&P 500 typically tracks at around 15 – so Google’s and Apple’s performances are something special.

Future earnings might account for a higher valuation today, but this is not necessarily the sole factor in their comparative performance which, over the last 5 years, has been much better than Microsoft, the top banks and industrials. In fact, you have to look very hard globally to find better performing stocks in respect to either new or established companies in terms of growth in both revenue and share price over the last 5 years.

So future revenue is a factor, but not the sole factor. If it was, then you’d expect Microsoft would get some of the joy too as part of the ‘tech’ clique, but they’ve not received as much optimism as their tech buddies have.

What differentiates Apple and Google’s revenue from the rest of the pack?

You might attribute Apple’s success in respect to valuations from their great products. But if you compare market share both Google and Apple really still are minority players when compared with Microsoft, purely from a product perspective. While Google’s Android and Apple’s OS-X are taking some share of the mobile market, Windows is still a force to be reckoned with.

So where is the differentiation? Google’s strength to date, and Apple’s more recent success with great new device technologies has centered around one key area. Their ability to create great, but simple and intuitive, propositions.

Google.com as a search engine is the perfect representation of search (at least for now). When Google launched their search engine in 1997, there was really no one that could touch them in terms of simplicity of experience and validity of results, and today, although many have attempted to copy Google’s formula, (read Bing.com) we still see Google maintaining a 65.6% market share of the SE space. What Google bought to the table, their foundation or core, was innovating the customer experience and making technology really simple to use.

The simplicity and user experience differentiate Apple devices

Apple has done the same. User Experience is at the heart of why the iPod, iPhone and iPad have captured not only the imagination of the consumer market, but why Apple and its products are increasingly part of the common vernacular. Sure Apple’s stuff looks great, cool and is about as aspirational as branded products get in the Y-Gen/Digital Natives space today. But this stuff just works.

Innovating the customer experience is the ‘secret sauce’

Innovating the customer experience is at the heart of why Apple and Google are outperforming the market today. It’s also at the heart of why traditional banks are suffering. As market analysts, consumers and as media commentators we just see more of the same.

While there has been pressure on the banking market, bankers seem content to ‘wait it out’ until more sane, normal times return. Banking is an old and traditional industry and it doesn’t take kindly to change. But that is problematic – because right now their lack of adaptability is hurting bank valuations significantly. There’s nowhere for banks to go from here if they can’t innovate around the customer. The lack of innovation means less future revenue and earnings potential.

In fact, as of today it’s more likely that a Google, Apple, PayPal or new start up like Square will innovate the customer experience in banking, rather than banks themselves. This is where banks need to take a good hard look at themselves. The lack of capability to innovate the customer experience is costing them, and it’s only going to get worse.