Digital Self-Disruption
A Brave New World for Financial Service Marketing
Richard Kolsky

Phil Kotler, the father of modern marketing, once defined it as “solving target customer problems profitably.” In other words, growth-oriented marketers are constantly on the prowl for consumer segments with high-value, unresolved problems in their lives, and they embrace new technologies to solve these problems in less expensive and more customer-friendly ways. This combination not only unlocks untapped demand, but it also improves profitability by creating more willingness to pay for less expense.

The financial services industry is at a critical crossroads, with two gravely under penetrated growth markets for insurance protection against “life” risks and virtually unexplored technology frontiers for enhancing service to consumers. Specifically, aging Boomers are anxiously trying to maintain their lifestyles without running out of savings, and the even bigger Echo Boomer generation will need to protect their newly formed families. And, as in other industries, digital and social media and marketing analytics have the potential to delight (versus annoy) these consumers and dramatically reduce the cost of doing business. Rapid growth and better margins await financial services companies that embrace their own digital disruption. A recent McKinsey article underscores both the urgency and the industry opportunity:

For a long time, the traditional insurance business model has proved to be remarkably resilient. But it, too, is beginning to feel the digital effect. [Digital is altering] how products and services are delivered and increasingly will change the nature of those products and services.

I would add that it also will alter where and how insurers earn their profits. The article continues:

Opportunities abound for incumbent insurance companies in this new world. But they will not be evenly shared. Those companies that move swiftly and decisively are likely to be those that flourish. Those that do not will find it increasingly challenging to generate attractive returns.

The halls of fame and shame for digital disruption include Apple®, whose iTunes® and iPod® ecosystem disrupted music player makers and music publishers, but delighted artists (CD sales may be down, but concert revenues have doubled) and music lovers. How could we live today without Amazon®, which crushed Sears®, and has brought even the mighty Best Buy®, Walmart®, and Target® to their knees? How does Netflix®, a logistics and software company, consistently outsmart the studios, cable companies, and networks? These and other industry transformers share a few key attributes:

1. They target unarticulated, high-value, and unresolved consumer problems. For example, one glimpse at a teenager lugging a Discman® and a satchel containing 250 CDs in 2001 should have screamed “latent need for a portable juke box” to Sony®. However, the company was too stuck in its ways as the leading manufacturer of portable music players and, separately, as the largest music publisher in the world.

2. They ladder up to the “job to be done.” The iPod itself was not all that useful without an easy way to load and access the music we love. The product floundered until the iTunes software and store came along, providing easy access to the full catalogs of music publishers. Meanwhile, Sony was busy trying to put “pirate teens” in jail unless they were willing to inconvenience themselves by asking their parents for a ride to the store, searching for the latest CD, waiting at checkout, and then paying$15 for the two tracks they like on the album.

3. They get smart and reengineer activities. These companies proactively collect, analyze, and mobilize the full array of information at their disposal to help the consumer get the job done in a less expensive way. For example, in many ways, Amazon’s army of reviewers or “you might be also interested in” algorithms replace the less informed and less convenient sales clerk at the store. On a related note, companies can use the information they collect on customers to build better products. Netflix has done this by recognizing and nurturing “binge-watching” — particularly of its original programming — which was rooted in observing and analyzing viewing habits of its nearly100 million customer subscribers.

4. They add value in the mortar for deep, wide, and durable relationships. They don’t just cross-sell. They make sure the consumer value of the whole is greater than the sum of the parts of multi-product relationships — while the costs to serve are, in fact, lower. Back when the iPod was introduced, Apple’s share of the PC market was 1 percent. Today, however, more than 10 percent of consumers are addicted to the ease of the iPhone®/iPad®/MacBook®ecosystem. And, last I checked, Amazon has moved beyond books, and Netflix has evolved beyond mailing DVDs.

A Telling Example

The financial services industry is in the infant stages of digital disruption, but the lessons apply just the same. I’d like to share a financial services example, which I suspect may not be on your radar, before applying these principles to a couple of high-potential opportunities facing the industry over the next decade.

Alibaba® is the eBay®/Amazon/PayPal® of China, a darling of Wall Street worth more than $250 billion, with sales more than twice Amazon and eBay combined and almost 300 million buyers and 10 million merchants using its sites. Its now-separate subsidiary, Ant Financial, recently launched MYBank to disrupt the long-broken SME (small-medium enterprise) market for lending. In a few short years, MYBank has built a $5 billion portfolio of loans for 2 million SME merchant customers, with loan losses less than 2 percent.

They achieved this success by applying our four simple principles. Let’s take another look:

They targeted an unarticulated, high-value, and unresolved consumer problem.

Historically, China’s state-owned banks primarily served state-owned enterprises, and they avoided small businesses like the plague. SMEs were not only expensive to underwrite and serve (for a limited line of credit), but they were also too risky because their books were often opaque and collateral was nonexistent. (We can draw a parallel to the middle market for life insurance here.) Unfortunately, most SMEs relied on local money lenders, who charged usurious interest (24 percent) with unsavory collection practices. It was bad service at a high price.

Consequently, the most successful SME merchants in Alibaba’s web malls were hesitant to finance growth. They feared being at the mercy of local money lenders who didn’t understand their business and who were likely to take advantage of them and “pull the plug” at inopportune times. Until 2012, Alibaba’s primary means of “financing” its merchants was via Alipay™, which assured merchants were paid in a timely manner but did not help finance inventory.

They laddered up to the “ job to be done."

Alibaba recognized that their most successful merchants needed more than access to, and a payment mechanism for, 300 million consumers. A great store also needed to finance the inventory to support the variety, availability, and delivery speed so highly valued by its growing consumer base. The real “job to be done” for the SME was profitably scaling its successful retailing business. Therefore, lousy financing options were a significant obstacle to growth for Alibaba’s most valuable retail merchants.

They got smart and reengineered activities.

But how can an online mall expect to make money lending to the world’s riskiest class of borrowers (namely, SMEs) without an army of loan officers and collectors? Analytics!

Alibaba, in the course of conducting its core business, collected far better underwriting information than any loan officer could dream of. The company not only had clean data on sales trends, but it also had data on a merchant’s competition and customer satisfaction. As a result, they used “proprietary big data” to automate and significantly lower underwriting expenses and loan losses, without requiring collateral. And instead of traditional, strong-arm collection methods, they simply grab a percentage of each sale through Alipay, thereby lowering payment expense and improving customer service. The bottom line is that big data and analytics allowed Alibaba to offer their SME merchants lower-interest loans at higher margins than either banks or money lenders could.

They added value in the mortar for deep, wide, and durable relationships.

Alibaba recognized that their “job to be done” support could go even further in helping an SME “profitably grow its successful retailing business.” Their SME merchants lacked financial management savvy, trusted networks of suppliers, and sophisticated merchandise and website management to complement their hustle and instinct. Alibaba now offers a full suite of low-cost digital services, including preferred access to vetted suppliers, financial analysis software (used by 500,000 of MYBank’s customers), and merchandising support based on best practices and sophisticated analysis of trends and competition. It’s a win-win proposition since it not only increases site revenue, but it also improves credit quality and merchant loyalty. Alibaba leverages its vast network of merchants and consumers and the zettabytes of information generated and analyzed with every search and sale in the network.

Recommendations for the Industry

So how can financial services companies apply these same principles? One way is to disrupt traditional life insurance markets, using the best digital tools available to marketers.

The Consumer Problem

Many American families have been underinsured for years, with life insurance in-force often able to replace just around a couple years of disposable personal income. Far too many people have limited coverage at work, no individual life insurance, and no financial advisor or life insurance agent. Their purchases fall far short of their stated “intent” because of, as Millennials cite, issues around affordability, intimidation, complexity, and trust.

Simultaneously, retirees and pre-retirees dread the prospect of running out of savings and being forced to cutback on their lifestyle — or, worse yet, becoming a burden on their children. According to a Gallup survey, only 27 percent of retired Boomers in 2015 were confident they will have enough money to last through retirement. Interestingly, that proportion rises to 47 percent for retirees who own annuities. Never the less, the vast majority of house holds do not own annuities, and only a minority of annuity holders choose the lifetime payout guarantee to protect against living too long. Instead, most plan to wait until they need the money before tapping their annuity, using it primarily as a safe and tax-advantaged investment. In other words, very few retirees are doing anything to protect themselves against the risk of living too long, instead choosing to economize on spending and counting on the actuarial tables to save them.

In sum, the two largest cohorts in the history of the United States, Baby Boomers and Echo Boomers, are entering stages of life seriously under protected against mortality risks.

The Job to Be Done

The excuses of affordability, intimidation, and trust will continue to haunt the life insurance industry until there is a singular focus on securing families’ quality of life. Consumers buy life insurance to protect their family financially from the loss of a loved one. Companies that are serious about this would follow the lead of initiatives like John Hancock’s Vitality program and support healthy lifestyles. For example, they could offer discounts on activity trackers, health club memberships, wellness tips, and help to quit smoking, as well as the opportunity to lower their premiums as their health improves.

Are we ready to tap into social media and big data to lower operating costs, improve mortality outcomes, and enhance customer journeys?

And how many of the underinsureds who say they can’t afford life insurance have ever done a serious budget? This is an opportunity to take a step back and help them outline one. If parents buy life insurance to fund their child’s education, do companies then connect them to non-financial resources to help their child realize that dream — from tutoring and testing prep to scholar ships and parenting tips? These are the kinds of simple, very low-cost acts that close trust gaps.

For Boomers, shouldn’t the conversation around annuities change from “rates, guarantees, riders, and fees” to simply “guaranteeing a standard of living til’ death do you part”? Do most retirees really need a complicated fixed or variable annuity contract with a surfeit of riders and contingencies, especially when their primary risk is longevity? According to the President’s Council of Economic Advisors, for a mere $80,000 at age 65, people could guarantee lifetime income of $50,000 per year starting at age 85. Live to 100, and they get back10 times what they put in.9 There are affordable ways to help people avoid “hoarding” their way through retirement. That is, most retirees effectively insure against longevity by economizing on their spending, just in case they outlive the actuarial tables — which is good for their children, but unfair to themselves.

Reengineering Activities

Are we ready to tap into social media and big data to lower operating costs, improve mortality outcomes, and enhance customer journeys? Consider how SoFi®has used graduate school alumni networks to create a peer-to-peer student loan business. Leveraging social networks, SoFi bypasses traditional banking markets and connects pools of alumni more than willing to refinance the student loans of recent graduates10 — in the tradition of mutual insurance companies.

What is your company doing to fully tap the promotional, financial, and operational potential of natural social networks that have been turbocharged by the digital revolution? In an era of electronic medical records, how can life insurance companies ease the complexity and expense of underwriting and also lower mortality risk? For example, can you partner with health systems to automate the underwriting process and even promote and track healthy lifestyles that are mutually beneficial to insurers and insureds?

In a similar vein, companies that are sincerely interested in helping retirees maintain their quality of life forever should provide discounts and senior spending and lifestyle tips to make their dollars (and activities) go further. In other words, what is your company’s equivalent to MyBank’s financial advisory and merchandising support services? Reallocating low-value channel spending to such high-value/low-cost support could help companies escape the rate/guarantee/rider “pricing wars” that commoditize the product.

Adding Value for Stronger Relationships

Once we are able to view the problem through the lens of the extended family, a variety of potentially connected opportunities surface. Most companies have massive bases of highly profitable life insurance policies for seniors, most of whom are empty nesters and many of whom are orphan policyholders. Conventional wisdom is to “let these sleeping dogs lie.”

But why are retired 65-year-olds continuing to purchase life insurance, especially if they are healthy? Taking the customers’ perspective, companies could return to these policyholders with a winning proposition: Use the premiums to help your children buy life insurance to protect your grandchildren, and use the cash value to buy longevity insurance (and annuities, if there is anything remaining).

Advisors (especially younger ones) would be delighted to provide this service, the process could be streamlined based on existing relationships, the premiums and assets would remain in-house, and two generations would painlessly solve pressing concerns. In marketing terms, this isa win-win-win x 2 (insurer, advisor, and two generations of families) — simplifying the product design and sales. process, leveraging relationship information, overcoming Echo Boomers’ affordability challenge, and using family ties to overcome trust issues. To overcome any opposition from within, you can remind them that it’s likely only a matter of time before Google®, Amazon, or Facebook use their proprietary information, trust, relationships, and simplicity to disrupt the life insurance business.

An Exciting TimeIn sum, there has never been a better time to be in the financial services business. The “latent need” for products like life insurance is in the early stages of its own echo boom — as is the untapped potential for longevity protection and extended family lifestyle enhancement for agingBoomers. Further, big data, analytics, and social media offer a plethora of opportunities. They can help companies be more customer-friendly and dramatically lower the costs of promotion, sales, underwriting, and service forBoomers, Gen Xers, and Millennials alike. To unleash your company’s full growth potential, keep the four simple principles discussed here top of mind.I look forward to witnessing, celebrating, and chronicling your subsequent successes!

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