How Your Bank Is Going to Change

Banks active in retail banking need to change perspective in the current market environment. Retail banking is not a very profitable activity and involves dealing with individual clients, commercial activities, and SMEs.
Changing perspective means two things: banks should substitute the precise targeting of the customer base to the traditional priority of which services to produce and sell, and they should give their services distinctive features, which are relevant for clients and capable of differentiating their supply vis-à-vis the competition. Only by doing so will banks be able to reduce the substitutability of their products, decrease price elasticity and increase the loyalty of their clients, by improving at the same time profitability and competitive strength.
Differentiation can occur along two dimensions: a horizontal dimension, which concerns the services offered to each market segment which is differentiated from other segments due to the characteristics of the target to be served; a vertical dimension, which concerns the opportunity to differentiate one's supply to a given segment with respect to the competition on the same group of clients being served.
The economic literature has yet to come up with a veritable theory of the differentiation of banking products, probably due to subjective logic inherent to several differentiation factors. Consumer expectations and behavior are very diverse when it comes to credit. Also the nature of banking services makes it difficult to perceive differentiation, as the final market tends to treat them as standardized products.
Banking is the production of services, but technical differentiation in terms of various financial instruments being offered must go hand in hand with functional differentiation in terms of supply and delivery. This way, the organizational component, which includes professional skills, courtesy and quality of personnel, the technological sophistication of the bank, gets to be properly emphasized.
These factors give distinctive characteristics to banking products that can make the latter relevant in the eye of the potential buyer, so that the potentially customized uniqueness of the service offered can stand out with respect to the competition. The choice of differentiation criteria must thus be aimed to the achievement of competitive advantage.In this perspective, differentiation does not include pricing. Differentiation strategies are non-price competition strategies. Thus they are the opposite of strategies aimed at containing prices. Consumer satisfaction is undoubtedly both affected by price and a cost-benefit factor, but when price is the only variable considered during the purchase of a service, the client is inclined to think in terms of standardized products, which are not substantially different from commodities.
Every bank must then make its products different, in some aspects, from those offered by rival banks, and preferable to existing and potential clients, tending to give uniqueness to each one of them. With product differentiation, a bank can achieve competitive advantage and thus better meet the demand of its current and future customers.