What Video Rentals Teach about Banking Business Models

What Video Rentals Teach about Banking Business Models

Image-01The story of Netflix vs. Blockbuster is one for the ages. And it can teach us about how to react as the banking business model changes.

When Netflix was just a new start up with a crazy idea about renting videos through the mail instead of stores, many thought they were crazy. Including Blockbuster. Back then Blockbuster was the undisputed champion of video rentals. Every one who was anyone had a Blockbuster membership card, and along the way, had paid the late fees that went with it.

When Netflix announced they would send videos through the mail and that you could keep them as long as you wanted, it was a new idea. And Blockbuster decided it wasn’t a threat. Sounds like banking to me.

First Big Mistake: Ignore a Growing Trend. Even a Small one.

While Blockbuster decided to ignore Netflix, their stock prices started to slowly drop. At the same time, Netflix subscribers started to grow. The correlation between the two isn’t surprising, but still ominously strong.

It’s tempting to look at a new banking business model and decide it’s not a threat. But even at the first signs of growth, we should start analyzing what about that model seems to be appealing. For example, people dropping out of the “traditional” banking market to use prepaid debit cards instead. It’s no longer just about not having access to the banking system. Some are choosing to do this on purpose. It’s a small number today, but take a look at the Netflix subscriber growth curve. It started small too.

Second Big Mistake: Blame Your Legacy Systems

Eventually, it got to the point where you couldn’t ignore the growth. Blockbuster responded by claiming its legacy systems made it impossible to do something similar. Analysts and investors demanded a response to the growing threat. But Blockbuster was slow to move. They had IT issues. They had integration problems.

They had excuses.

And that’s all they had. During the second phase, the stock price fell and Netflix subscribers grew – fast.

Many a bank has used “legacy systems” as the excuse not to modernize their offerings. Core systems don’t allow product changes or segmented pricing. It takes months to make price changes or to even tell how a product is performing.

They’re all excuses. Because newer players don’t have those problems, and when Google, Amazon, and PayPal come into the main banking space – which they will – your IT backlog won’t help you. The banking business model will change … is changing.

Inevitable Ending: The New Model Wins

Finally Blockbuster offered a video rental by mail product. They even allowed you to drop off and pick up at the store, saving time and not having to wait for mail delivery. They even briefly followed Netflix’s lead by offering video streaming. But it was all too late. Blockbuster stock price crashed and Netflix has become the go-to name for video rental (now online instead of through the mail).

Even though Blockbuster’s final offering was actually better than Netflix’s in terms of service, it wasn’t enough. Blockbuster was finished. And we see the results today. Blockbuster stores that used to dot neighborhoods are now gone. Netflix, which is slowly expanding licensing internationally is now the sought after service in countries where it doesn’t exist today.

If we ignore the change that’s coming, and come up with excuses for why we don’t have to move, banks will end up as Blockbuster: dead and gone. Don’t believe it? Neither did Blockbuster – which, at its peak in 2004, had a “branch” footprint bigger than any bank in the United States does today (almost 9000 stores.) A new banking business model is arising.

There are three big mistakes that most banks make that keep them from achieving the right customer experience. Clearly, the use of analytics is key in achieving that experience.

We fail to learn history at our own peril.

I talk about the new banking business model in my new book, Seven Billion Bank: How a Personalized Banking Experience Will Save the Industry.