Takeaways from the Latest Research in Consumer Financial Decision Making

Once a year I take a break from industry conferences and vendor analyst days by going to the Boulder Summer Conference on Consumer Financial Decision Making, hosted by the Center for Research on Consumer Financial Decision Making at the Leeds Business School at the  University of Colorado Boulder. Academics, regulators, central bankers, and a handful of private sector people (like me) gather to discuss the latest research in the field. For many bankers much of the content is, frankly, too academic, but there are always some nuggets worth passing along to those who are interested in forging closer connections with their banking customers. My key takeaways follow.

Consumer data is valuable; advertisers & consumers don’t get their fair share

We all know that data is valuable; The Economist has even called it our most valuable resource, the new oil. Banks have historically not done a great job of monetizing the data they have, but neither have consumers. Consider a three-actor model for internet advertising consisting of an advertiser, an ad exchange, and the consumer. In different scenarios (which vary by who has how much information on consumer demographics), the ad exchange typically is the big winner, the advertiser comes in second depending on how much data they have, and the consumer rarely gains any of the economic benefit. Who’s going to step up and design a business that helps consumers monetize the value of their data?

Scope Insensitivity can be used for good

I’ll admit that this is a new concept for me, and one that is completely counterintuitive. Here’s an example from a site called LessWrong:

Once upon a time, three groups of subjects were asked how much they would pay to save 2,000 / 20,000 / 200,000 migrating birds from drowning in uncovered oil ponds. The groups respectively answered $80, $78, and $88. This is scope insensitivity or scope neglect: the number of birds saved – the scope of the altruistic action – had little effect on willingness to pay.

Researchers studied this phenomenon with credit card bills. They found that a group of people struggling with debt tended to pay roughly the same (rounded) amount on their credit card bills each month, regardless of the balance, a classic case of scope insensitivity. Here’s the clever part: it turns out that if people are paying, say, $50 once a month, they’re generally willing to pay roughly that twice a month, thereby improving their financial position over time.

Getting people to take action, let alone change, is really tough

An experiment in the UK tried five different ways to let consumers know that they could earn a higher rate of interest with a different kind of savings account at their existing bank. In the best case, only ~10% of those notified acted on the offer. There were a variety of hypothesized reasons, and there was certainly a great deal of consumer inertia at play, but I was frankly surprised at the low take up rate. The most successful scheme used a form that a customer could sign and mail back in to make the switch. It was familiar-looking and relatively simple, but still had a low acceptance rate. I’d bet that a lot of people were suspicious of the offer; it simply looked too good to be true, and why would my bank offer to switch me into a product where I’d be earning more?

I also liked the categorization of three flavors of switching costs. Paraphrasing, they’re ignorance, inertia, and inattention. While it may be difficult to rank the relative importance of each, bankers seeking to change behavior should be clear about which obstacle they’re trying to overcome.

Using Prepaid Accounts to set aside funds shows some promise

I’ve long advocated that banks and credit unions consider taking a portion of their marketing dollars and use them to pay consumers directly to encourage better financial behavior. An experiment tested various methods to encourage consumers who held the American Express Serve prepaid card to save. There are now some early indications that incentivizing consumers by paying them $10 to try out the savings feature is an effective strategy. More details are available at a landing page for the study here; it contains a link to the full report.

As the research from the CFPB states,

The results emerging from this pilot suggest that incentivizing prepaid card customers to save, and providing an opportunity for them to do so using a savings feature that keeps funds dedicated for saving separate from those used for spending, could provide tangible financial benefits. Consumers in this pilot demonstrated a willingness to take up the savings feature, indicating interest in alternative savings vehicles, and some customers also reported actual changes in their financial behavior.

Financial Education, done right, can work

Much work at prior Boulder conferences has examined the failures of financial education / literacy programs to make a significant difference. My hypothesis has been that many of them simply weren’t very good, so they didn’t work. To simplify, it’s the difference between having a good teacher guiding a well-designed course vs. a bad one teaching crummy material. As program designers learn what makes a program good, they’ll design better offerings, and efficacy will improve. An interesting pilot on 529 enrollment used parent education via a 45 minute session, together with targeted incentives and a thoughtfully designed curriculum, showed promising results. So, too, did an experiential program called My Classroom Economy that incorporated elements of financial education into classroom settings throughout the day, regardless of the course, and without having dedicated lessons set up specifically to teach financial literacy.

Like the American Express experiment, the use of a $50 offer to seed the 529 account was critical in enticing people to take the time to open the account before they left the education session. Immediate action to overcome inertia, together with a financial incentive, was critical.

Caveats and wrap-up

Let me end with a caveat: the researchers are much more precise, measured, and nuanced than I am in their reporting of their findings. They are extremely careful to note the limitations of their research and circumspect about its broader applicability. I may be overenthusiastic in my interpretation, and have not taken the time to caveat my interpretations of their research as carefully as they would. Nevertheless, the insights that these and other researchers continue to generate have potentially-far reaching implications as banks try to improve their relationships with customers and generate win-win outcomes.

Robots Offer Helping Hand to Fraud Investigators

Banks continue to be plagued by extremely high false positives. (They report anywhere between 75% and 90% false positive rates across their fraud and AML transaction monitoring systems.) False positives trigger alerts that then have to be resolved by fraud investigators. It is long standing and frustrating problem. Treating false positives, which in essence are low level alerts, require daily repetitive work by highly specialized employees. For each alert, the investigator has to toggle across multiple internal and external sites copying and pasting links and taking screen shot of information as evidence. It is a humdrum and error prone task. And, more crucially, it takes valuable time away from the investigation of high risk alerts.

So it’s good to see yesterday’s press release from @NICE_Actimize introducing robotic process automation (RPA) into the world of financial crime investigations. Actimize has integrated RPA into its case management solution. The solution deploys attended and unattended robots onto the investigators' screens to automate routine tasks involved in resolving alerts and cases.

I must note that @Pegasystems offers an RPA solution for repetitive back office processes for fraud resolutions. Several other vendors have RPA for financial case management on their roadmaps. However, it is far from being a mainstay of a bank’s financial crimes technology stack.

RPA is a low cost technology that has the potential to substantially increase the productivity and accuracy of AML and fraud investigations. Actimize’s ambitious goal is to potentially increase investigator productivity up to 50%. Whatever the percentage, the end result should be that investigators have the wherewithal to be proactive in the deterrent of suspicious activities.

It is not a stretch for banks to deploy RPA together with machine learning and natural language processing to automate not only repetitive tasks but to carry out simple, judgment-based tasks in the resolution of cases or filing of SARs/CTRs.

Actimize’s solution offers both attended and unattended robots. Attended robots are accessed by a tab on the investigator’s screen and, when required by the investigator, can support their daily tasks. Unattended robots are deployed in the background to quietly and quickly complete predefined routine tasks.

Unattended robots can perform checks on the queue of alerts to ascertain which alerts can be closed without exceptions. In most banks this can be up to 50% of the alerts in the queue. An unattended robot can automatically call or message the customer for further information and perform the process fulfillment activities of the outcomes of investigations such as issuing a new card or sending a letters.

Attended robots can be used on demand for such tasks as copying and pasting or navigating between systems and screens to help the investigator complete the evidence gathering processes.

As banks focus on operational efficiencies across risk platforms, it seems to me that Actimize’s goal is doable.

 

Paying with Google: An Exciting Prospect, Again

Last week in the Google I/O developer conference, Google made a number of interesting payments-related announcements. I would encourage anyone interested in this to look at the full video online, but here are some highlights and my takeaways. Google has discussed:

  • Google Payment API, which enables merchants to let their customers check out via any cards stored with Google. When the customer is ready to check out, they hit a "Pay with Google" button and are presented with the available payment options – any cards they have in their Google account they may have registered to pay for apps and services in Google Play or YouTube. Importantly, it also includes cards registered via Android Pay. Google is piloting this API over the the next few months and is partnering with the leading payment service providers, such as Braintree, Stripe, Vantiv, ACI, Adyen, First Data and Worldpay, to take it to market. This will work in-apps, via the browser, and via Google Assistant.
  • Google Shopping API to integrate into Google Home, and ability to build Purchase Actions with Google Assistant. In the example shared by the executives on stage, customers can talk via the Assistant to Panera, request an item, and pay for it via a card stored on the Google account while authenticating with their fingerprint. They also showed how the Gmail Send Money function can now be triggered via a voice command, bringing P2P payments capability to the Assistant. In the future, there are plans to onboard other P2P providers.
  • Loyalty enrollment, engagement and redemption support for in-store merchants. Participating merchants will allow customers to save their loyalty programs directly to Android Pay, get notifications of available offers via Android Pay, and redeem via Smart Tap, a service for which Google partnered with First Data and its Clover platform.

At the foundational level, Android Pay continues to make international inroads. It is already available in 10 markets, and is launching soon in Brazil, Canada, Russia, Spain, and Taiwan. Also, one of the most important features (in my view) is something that is already available today, yet perhaps didn't get enough acknowledgement in the market when launched – the push provisioning API. Issuers that integrate push provisioning API allow their cardholders to add cards into Android Pay directly from their mobile banking apps. More importantly, the user can get all the benefits of Android Pay without having to download and set up the Android Pay app itself. Certainly, that's one adoption barrier less to worry about. Bank of America, bnz, Discover, mBank, USAA, and Westpac are among the first banks that have integrated push provisioning API.

This is not the first time that Google made interesting announcements around payments – back in 2011, Google Wallet generated a lot of excitment among all of us following mobile payments. It appears that the latest API-driven approach with Android Pay as the foundation makes 'paying with Google' an exciting prospect again.

Internet of Things: Why Banking and Payments Professionals Should Care

There is little doubt that Internet of Things (IoT) is transforming many industries, from manufacturing to insurance. Celent's Insurance practice has been at the forefront of IoT research since 2014 and has published many insightful reports. At first glance, IoT’s impact on banking is less obvious. And yet, in a new research report published this week, Payments and the Internet of Things: Opportunities and Challengeswe assert our belief that IoT also matters for banking, and especially for the payments industry.

At Celent, we have been writing about “contextual commerce” — taking shopping to customers wherever they are (e.g., ordering something directly from a social media platform rather than a merchant’s site). IoT takes contextual commerce to an entirely new level.

We believe it is helpful to think about the IoT evolution in terms of three large stages of development – see the figure below. Each of these stages represents a qualitative step up in the complexity of how transactions are conducted and what is required of payments.

Wearables and objects with user interface (e.g. a fridge with a screen or an Amazon Dash button) allow customers to place orders and pay in ways other than a plastic card or a computer screen. But the customers are still in control – they decide what they want to buy, find the goods and services that are right for them, and initiate a purchase transaction. Going forward, we expect connected devices to play an active role in orchestrating a commerce transaction — realising that the user needs something, suggesting where and how those needs can be fulfilled, preparing a transaction, and potentially executing it. Think of a car keeping a parking meter topped up until you finish your meeting. Ultimately, we will see the emergence of semi-autonomous economic agents capable of acting independently, including making and accepting payments, to optimise their own, their owners’, and their clients’ objectives. Think of a self driving car paying other cars to get out of the way if it's passenger is in a hurry.

For the payments industry, IOT poses a number of challenges, but also represents a big opportunity. For Banking more broadly, IOT can also help achieve better customer engagement and improve cross-selling as well risk and collateral management. That is, of course, unless we have a major consumer backlash against technology’s intrusion into their privacy. As always, creating genuine value for customers, rather than doing something just because technology is available, will be what differentiates successful banking IoT propositions from expensive failures.

Celent Banking research clients can download the report here. If you are not a client, but interested in the report, please drop us a line at info@celent.com.

Reflections of Nacha Payments 2017

Analysts have definite fixed points in our year. For me, one is the spring conference season, and which nearly always includes Nacha Payments, the big US payments conference. I was unable to attend last year, so I was particularly looking forward to returning this year. Indeed, there are groups of people I often only see at the event.

After being away, the first thing was that struck the exhibition floor was now much, much smaller. Not just that the stands were smaller, but there were fewer of them as well. Indeed, no banks had stands (though several had meeting “pods”). I also noticed that, at some point (or perhaps I had never noticed it), Nacha had snuck onto the Payments logo the word Faster. And the floor and conference sessions were abuzz with talk of real-time payments.

This had some interesting side effects.

First, the belle of the ball was The Clearing House, with virtually every conversation I had referencing their real-time solution directly or indirectly. Same Day ACH, by comparison, didn’t come up in a single conversation at all. Even in the few sessions I managed to attend, it was only briefly mentioned.

Second, the number of attendees (by our estimates) was up, though still down on a few years ago (my trip report blog for 2012 reported 2,500 vs. the 1800 this year). The result was a definite buzz, particularly on the exhibition floor, where most vendors reported good activity and good levels of conversation.

Third, the topic of conversation was real-time. If name checks in discussions are a valid, albeit unscientific, measure of which real-time solution will succeed, then The Clearing House is significantly ahead of Zelle, but with no other real-time solution even mentioned. Indeed, there seemed to be surprise that so many solutions were going through the Fed process. Whilst the Fed obviously is respecting confidentiality of those going through the process, the vendors themselves need to be very vocal and visible, or they could find themselves being seen as late to the party. I’m party to a number of the names, but I’ve not seen anything from those organisations at all.

Finally, and most interesting, was the sudden appearance of APIs. In Europe, because of PSD2, for the last couple of years, APIs have been something that banks have to discuss because they will become mandated. Their appearance in the US has quite probably been triggered by some of the international banks, but the types of banks discussing them was much broader. In Europe, APIs and real-time will most likely go hand-in-hand – it’ll be interesting whether that will be the case in the US too.

Next year Nacha Payments is back in San Diego. Given where the real-time adoption will be, it’s likely to be a pivotal moment in the industry. I think that sets up the event to be a must attend event. See you in San Diego!

Going to Germany? Don’t Forget Your Cash!

We analysts travel quite a bit to different places around the world. As someone who is always interested in what's going on in the payments world, I have a keener eye on my payments experiences than probably most people. I shared some of my observations about those experience on these pages in the past.

Most of the time these days I don't have to think too much about money – my trusted Visa, MasterCard and American Express cards have been serving me well, to the point that I don't even bother exchanging currency before I get on the plane to many countries in Europe, especially Scandinavia, and increasingly, the US as well. During my last trip to Boston, I left London with just over $30 in my pocket and came back with more of less the same. Cards for meals and coffees, and Uber for taxi rides covered the basics, so the only cash I spent was on a few tips in the hotel.

I just came back from a weekend in Germany, in Wuerzburg, a lovely little town in Bavaria, about half-way between Frankfurt and Nuremberg. And I am very glad I had plenty of cash with me!

Some of it was predictable – the main purpose of my trip was a small music festival, and I expected that once inside, I would need cash for most things, including merchandise (vinyl, cds, t-shirts), snacks, and drinks. Incidentally, buying a drink there was an interesting experience in itself, as each drink included a deposit. So, for example, you would pay EUR 3.30 (in cash) and would get a bottle of beer or a glass of wine and a red plastic token. If you take your empty glassware and the token back to the bar, you get 1 Euro back! I know that in some European countries, you can take your empty bottles and cans back to the store and get some money back, so perhaps that was the reason for the somewhat complicated procedure here. Or perhaps it was a creative way to keep the venue tidy? And, by the way, these prices are not illustrative – a large glass of excellent local white wine was indeed less than 3 EUR once you got back your deposit!

What did surprise me was when I tried to buy something in a proper store in town. I asked if they took cards, and the shopkeeper assured me that yes, they took cards, "as long as they were EC." At first, I thought that perhaps he meant EMV, as in "EC = electronic chip", so I tried first my credit, then my debit cards. Only when both were rejected, I realised that he meant they only accepted "EC = electronic cash or EuroCheque", a German payment instrument that is similar to a debit card, but only works locally. This was a relatively small, "mom-and-pop" store, but I also remember having exactly the same experience on another trip to Germany in a much larger department store. That time I didn't have cash, so had to leave the store empty-handed…

I must also say, before I create any false impressions, that my international cards worked just fine in many places, including the hotel and the restaurants. However, that's a typical T&E sector, which is always the first one to accept international payment cards. I do understand the prevalence of local payment methods and the merchants' preference for those, but by limiting choice, these places do run a risk of losing customers or at least individual transactions.

So, what's my travel advice? Do you homework and understand local payment preferences, but if in doubt, take cash! By the way, that process (getting cash) itself is getting a make-over – there have been quite a few announcements recently from banks enabling customers to withdraw cash from ATMs without a card. However, these announcements also highlight the diversity of approaches being deployed. I am in the midst of writing a report on different ways to implement cardless cash withdrawals, so if you are a Celent research client, stay tuned!

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