According to a new report by Forrester Research, Inc. traditional financial services that fail to reinvent themselves quickly will not survive in a marketplace driven by Net-powered consumers.
The report added that, so far, many brick-and-mortar financial service companies have failed to take the new challenges spurred by burgeoning e-commerce seriously.
“Financial companies have responded to the Internet’s impact by pulling a page right out of the do-more-of-the-same playbook,” the report said. “But financial institutions will not succeed online by reacting as they always had.”
Old Strategies Won’t Work
Forrester’s report identifies and focuses upon several past strategies that must be abandoned if traditional financial institutions hope to avoid extinction:
Firms must let go of the strategy to change gradually. Brick-and-mortar financial service players that “dip their toes slowly into the Internet waters are doomed — because the Net crowns winners more quickly than the offline world.” To underscore this point, Forrester points to E*Trade’s phenomenal growth compared to the slow growth of Lombard Securities, which was purchased by giant brokerage house Dean Witter in 1997.
Traditional financial service firms must stop trying to force-feed their house brands to online consumers who have a choice. According to Forrester, sites such as InsWeb, which make it easier for consumers to comparison shop insurance products, is the kind of model the stolid firms shouldemulate — rather than that of First Union, where only the house brand is on the shelf.
The New Rules Reflect Future Customers
Forrester reports that an emergent market of consumers who range in age from 16 to 22 is driving the new rules governing banking and insurance e-commerce. This group does not want to delegate the control of their investments or need offline branches, because e-commerce is already firmly integrated into their daily lives.
While this group currently numbers only 5.7 million in the U.S., Forrester forecasts that it will swell to 21 million by 2003.
Guerrilla Tactics For Traditional Financial Services
Although Forrester’s report paints a bleak picture for brick-and-mortar brokerages, banks, and insurance companies that do not revolutionize their online marketing, it also offers specific steps that each segment can take in order to avert an e-commerce crisis:
Full-service brokerages should go ahead and cannibalize. “We estimate that this lower-margin business will siphon off at least a third of a firm’s existing customers — but better to eat your own than feed your enemy,” the report said.
Banks must create an online subsidiary that can win under Internet rules. “To keep predators like E*Trade and Waterhouse at bay,” the report warns, “banks must spin out interactive divisions and let them create new businesses that conform to Net Rules.”
Insurance companies must start an acquisition spree now. Forrester concedes that insurance companies are “simply too risk-adverse to cannibalize existing business,” so they must get into the game by gobbling up successful insurance Web sites.
According to Forrester, if these brick-and-mortar firms hope to keep up with the changing online market, they must be willing to swallow this prescription, which the research firm has appropriately labeled “proactive destruction.”