Banks need to become smaller to add value for shareholders in future, according to new strategic analysis of the industry.A PwC report, "Escaping the Commodity Trap", argues banks need to become smaller, simpler and more deeply connected with customers than in the past.The commodity trap referred to in the title is the provision of undifferentiated products in an increasingly competitive market generating lower margins."Banks will need to get better at delivering differentiated offers to specifically targeted customers, rather than all competing to provide the same services to the same people," said the report, which was written by PwC Strategy& director Jim Christodouleas.This involves banks having a narrower view of who their "natural customers" are. It also means limiting product manufacture to areas of core competence and relying on third party relationships for the rest.Examples include California-based East West Bank, which concentrates on serving America's Chinese community. The bank has high productivity metrics and a high ROE.Another is USAA, which provides personal banking services to members of the US military and their families. It has a higher net promoter score than Apple.To connect more deeply to customers some banks are adding services to their front ends that provide help with tax, business management, healthcare and even choosing schools. These services, some of which will be outsourced, can compensate for diminishing returns on traditional lines of business and entrench customer relationships.Christodouleas said one of the biggest problems banks faced was that customers are confused by their offerings. There are too many variations on a small number of core products and services and these variations are often poorly explained.Banks should offer fewer products, while features such as fixed or variable rates should be customisable features rather than requiring different product choices.It is not just customers who benefit. One of the best ways to increase staff productivity is to give them a simple product set to explain to customers.The less is more argument also applies to points of contact, which need to be better integrated.