Posts Tagged ‘Product Companies’

Engineering vs. Banking

Thursday, November 4th, 2010 Mike Ficco

One of the great advantages possessed by engineers is that many of us can do arithmetic.  An engineer friend of mine used his ability to multiply and realized his bank was more than a little deceptive.

With interest rates at historic lows and the grim reaper seemingly poised over the stock market, many people, including engineers, are struggling to find ways to get a good return on their money.  Banks are well aware of this situation and devote great effort to attracting new customers, sometimes to the disadvantage of their existing customers.

Over the past few years the rate on my friend’s interest paying checking account had decreased to 0.01% (one hundredth of one percent).  He just assumed that was due to the pervasive low interest rate environment.  Then one day he was looking at certificate of deposit interest rates on the bank’s web site and quite accidently noticed that interest checking was supposedly earning 0.15% interest.  He double checked his account and verified that the bank was advertising a 15x higher rate than he was getting.  How dare they advertise such nonsense he thought?

To my friend’s surprise, the bank’s customer service center verified the advertised rate.  It seemed the interest bearing checking account he had was no longer offered.  Apparently he, and thousands of other banking customers, were “grandfathered” into a product with 0.01% interest while new customers were receiving 15x higher.

The good news is the bank allowed him to convert to the new type of account.  He had only to ask.  The bad news – he had to know to ask.

What does all this have to do with engineering you say?  Well, small engineering companies make lots of money and become large engineering companies in a number of ways.  One very successful approach is to create a new market segment and grow that segment (think PCs, wireless LANs, and smart phones).  Critical to growing a new market segment is to publish a standard, then to work with other vendors to create “killer apps” that adhere to the standard.

Small and large engineering companies may also attempt to improve their bottom line with the highly exotic and mystical approach of making a great and reliable product and selling it at a reasonable price.  Sometimes companies purposefully sacrifice profit to grow their market share.  Their plan is not to give away money, but to give customers such a great deal that the company rapidly attracts a large number of customers.  This forward thinking strategy believes that by foregoing profits today, the company will reap much larger profits tomorrow.

Technology companies seem to create an endless stream of new products and new markets.  I don’t work in a bank but it looks a little harder to create new products in the banking world.  A long time ago someone created the mortgage.  More recently the credit card was invented.  Still more recently we got debit cards.  These are innovative products to be sure, but far from the avalanche of new electronic stuff we see every year.  It seems to increase profit; banks must attract more customers and figure out how to extract more money from each of them.  Charging 20% interest on credit cards worked well, but banks are losing this revenue stream as people pay down their debt (and the government implements greater protection from gouging).

To be fair, it’s not just banks that continually shift the rules of the game.  All companies based on providing a service do this to some extent.  Subscribers to Internet services, for example, regularly discover the service they have is no longer offered to new customers.  They discover they were “grandfathered in” to a no longer available product that is less desirable than that being offered new customers.

There is a core difference between service companies and product companies.  Both benefit by trimming their costs.  Both benefit by having more customers.  However, when a service company desires more money (and their stock holders would be unhappy if that was not their goal), they tend to invent ways of getting more money from current customers.  They offer credit protection plans, reduce payments or benefits, and raise fees.  In a sense, the consumer must be aware of always-shifting terms.  This is a somewhat retroactive Caveat Emptor – “Let the buyer beware that they no longer have as good a deal as they had previously”.

Haggling over the price of a new car or waiting for a sale on a new television may be painful but at least you only encounter such problems every few years.  In dealing with service companies, however, it seems the consumer’s work is never done.  There is always the next rate change, software update, or change in terms and conditions.  There are no regulations that require banks or other service providers to notify existing customers that new customers are getting a better deal.

The consumer’s pain seems only destined to get worse as our economy slides ever further from manufacturing towards a service based economy.  I think engineers may be especially susceptible to overlooking changes in rates and fees since their personality is highly optimized to nail down a problem and move on to the next.  As a service consumer, however, they must continually revisit already solved problems.  As a geeky engineer I feel compelled to paraphrase the last line of the classic 1951 science fiction movie “The Thing” (aka “The Thing from Another World”).

“Watch The Fees”