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Yes, Competition is Good — Even For Financial Institutions

Some industries seem to not only accept competition, but also use it to their advantage. Retailers are masters at this, while most banks and credit unions struggle with the concept but could benefit from embracing it.

Ever wonder why competitive businesses are often located next to one another? It’s hard to imagine any city that doesn’t have a cluster of fast food restaurants, streets lined with vehicle dealerships or gas stations on opposite corners of the same intersection. And, does anyone question the logic of shopping malls with all their shoe and clothing stores catering to the same audience?

Competition isn’t only good for the consumer, because it provides information, holds prices at reasonable levels and creates options. It’s good for many businesses as well in that it actually increases the size of the market. So while it might seem counter-intuitive, the same competition that could limit a financial institution’s (FI) slice of the pie helps develop a larger pie and thus more business overall. Think of it this way: infinitely more consumers visit the mall than they would an isolated shoe store. So while each merchant only gets business from a share of the shoe shoppers, the total number of shoppers is so much greater that all the businesses benefit. Unfortunately, all FIs don’t embrace that concept as readily as other retailers.

Two major television shopping networks consistently offer comparable products, such as a vacuum cleaner or air purifier, as their daily special either on the same day or one immediately after the other. This happens too frequently to be coincidence, so they may intentionally be creating competition. When similar offers are made on consecutive days, this practice extends the reach of the joint message (“you need this appliance”) and the total response window. The retailer that makes the offer first pulls in the early adopters, while the latter retailer benefits from the first’s promotion and attracts those who were slower to purchase.

Even with gas prices clearly visible to drivers without having to stop in and acquire, lines can be seen at the pumps for various stations immediately across the street from one another despite some stations charging more for a commoditized product. This doesn’t mean that businesses pricing themselves out of the market will be as successful as their neighbors, but it does confirm that price isn’t the only factor. The lesson for FIs is that they don’t have to be promoting the lowest rate, though they should have a reasonably competitive offer, but they absolutely need to be among the promotional mix. It’s important that they are one of the many telling their message and making sure their story is in the mailboxes of consumers. By doing so, they are positioning themselves in the consumers’ decision set.

Some banks and credit unions actually seem less willing to accept the “competition is good” premise than they have in the past, especially when it comes to direct mail. In the mid-90’s when CDs were regularly promoted in newspapers, FIs knew their weekly specials would be printed next to one another and consumers knew just where to look to compare rates. FIs didn’t refuse to advertise just because they would share the real estate with others. Yet now, some banks and credit unions seem reluctant to want to mail offers in a market where their competitors are also mailing, as though the mere presence of those offers will undoubtedly cause their initiatives to fail. Yet, a strong argument can be made that the repeated messaging created by multiple FIs not only adds value to the consumer, but it also reinforces important information and actually creates additional business for the FIs overall.

Consider the example of refinancing existing loans. While consumers may decide on their own to purchase a new vehicle, most are probably not thinking about refinancing an existing auto loan as they are arriving home from work and collecting the day’s mail, which contains loan offers. However, the repetition of refinance offers, regardless of the institution sending them, helps the idea penetrate increasing the pool of potential refinance opportunities for banks and credit unions. This phenomenon was evident during the home loan refinance boom when account holders who never initially considered refinancing started to feel as they were missing out by not researching the idea.

By thinking more like other retailers, financial institutions can reap the benefits of healthy competition. The alternative isn’t to try to find the perfect time to promote a product when the rest of the market is silent, which is unlikely to happen. The only real option is to make sure their message is being heard, and their name is out there among the other competing offers when consumers are ready to make their decision, thereby ensuring that their institution gets its slice of the pie.

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Harland Clarke Corp. is a leading provider of best-in-class integrated payment solutions and marketing services, serving multiple industries including financial services, retail, healthcare, insurance, and telecommunications.

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