Actual vs. Perceived Value (Behavioral Economics)

Dan Latimore

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Aug 21st, 2014

Our humanity, as individuals and as consumers, continues to fascinate me, particularly as it relates to our irrationality. My dad would drive miles out of his way to save 2 cents per gallon of gas, just for the principle of it (whatever that principle was!). Behavioral economists, of course, have been onto this for years. For some accessible perspectives on the subject, try one of the following:

Thinking, Fast and Slow, Kahneman, 2011
Nudge: Improving Decisions about Health, Wealth, and Happiness, Thaler and Sunstein, 2009
Predictably Irrational: The Hidden Forces that Shape our Decisions, Ariely, 2009

One aspect of behavioral economics that resonates with me regarding banks is this: the notion of actual vs. perceived value. Actual value may be tough to quantify exactly, but it embodies the economic utility of a good or service, stripped of all emotional connotations and baggage. Perceived value, on the other hand, is the satisfaction – the feeling – that people get from that good or service, and is typically evidenced by their willingness to pay a higher price. The two often align, but just as often diverge. For some examples, see the chart.

Actual vs Perceived Value chart

Banks have a problem: they deliver a great deal of value (safe storage of money, ability to transfer funds, source of credit, etc.), and yet customers typically think that most of these functions should be free (on the deposit side) or should cost less than they do (lending). To be fair, many banks have moved away from free checking, but there’s enough advertising out there around free checking that consumers resent having to pay a fee to store and access their money.   In other words, banks deliver a lot more value than they’re getting credit for. Credit Unions, on the other hand, have a different relationship with their members, who value that relationship more highly. We can argue about the actual value CUs deliver relative to banks (lower fees and rates didn’t quite make up for large banks’ breadth of services in my calculations), but it’s clear that CU members feel they’re getting a better deal than bank customers.

An organization’s goal, of course, is to deliver high value and be recognized for it. I’d argue that many free internet services fall in that bucket; the examples in the upper right quadrant above are just a few. Potentially even better is to be perceived as delivering even more value than you actually do. I’d put luxury cars in that category, obviously, but would also put actively managed mutual funds there: the majority (after fees) fail to beat their benchmark over time, yet consumers still feel that they’re getting diversification, performance, and expert guidance. Wonga, a UK short-term lender, offers instant (ok, within minutes) credit, but at very high rates. Their cute commercials help soften the blow and make consumers feel better about paying such high rates, although for credit they likely couldn’t get elsewhere, and certainly not as quickly.

The low/low bucket is for things like junk mail – little value, and we feel it. And yet, there’s enough value for the sender that it keeps coming.

The worst quadrant for a provider is the upper left – it’s where products and services are taken for granted. Electricity is pretty close to a miracle, and the price we pay is miniscule. Yet no one sings it praises. And despite being the butt of jokes, the US Postal Service will deliver a letter from Miami to Anchorage for 49 cents; that’s, objectively, pretty phenomenal. But, we feel like…that’s just the way things should be. And it’s the same for banking services.

How do banks get out of this? Of the two levers, actual and perceived value, lowering the actual value is not an option given today’s competitive landscape, so banks have to increase the perceived value. Part of that lies in improving the actual, of course (through better products and services), but a more significant part lies in engaging customers in a visceral way and in materially changing the relationship that banks have with them. Each bank is going to have to chart its own course, but improving customer perception on a very basic level is critical for future success.


Innovation in Spain: A Way Forward for Banks Globally?

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Aug 8th, 2014

Innovation is global. This isn’t too revolutionary of an idea, neither is it new nor original. Yet, increasingly, conversations with banks, especially in the US, reveal that many institutions aren’t looking too far outside of their market, let alone their vertical, industry, or country, for inspiration on how to innovate. In effect, this is giving an outsized impression by bankers of innovation in banking.

The figure below, taken from a Celent financial services firm survey, and featured in the report Innovation in Financial Services Firms: The Leadership Gap, highlights the disconnect. It might seem intuitive at first glance—51% of respondents think their bank is worse at innovating than other industries. No surprises there. Digging into the other half, however, reveals that a startling 42% of survey respondents think that financial institutions are on par, better, or much better (!) than other industries. It begins to look a lot like Stockholm syndrome, where a hostage is kept for so long in a state of captivity that they begin to empathize and feel positivity toward their captors.

How well do financial institutions innovate compared with other industries?

Source: Celent

The disruption of traditional financial services is very much a global phenomenon, with financial services tech startups filling the gaps where traditional services have lagged behind evolving consumer demand. Moving in step with innovation is a shift in the way in which banks can foster innovation. There are plenty of examples globally.

In Spain, innovation is coming from some of the largest banks themselves. La Caixa recently set out to make Barcelona the first ‘contactless city,’ improving in-store and ATM experiences through a new contactless payment system. BBVA launched innovative customer assistance platforms like a video-conferencing service that allows users to connect to branch personnel for specialized help, the intelligent assistant called Lola, and the Contigo initiative which gives users unprecedented control over contacting personal advisors. Banco Sabadell launched mobile cash withdrawal through “Instant Money,” and one of the first Google Glass banking apps globally. Spain, however, is an anomaly in the financial industry, and while financial institutions in countries like the US have attempted to innovate, success has varied.

One bank, BBVA, has been a leader in innovation, broadening the way in which new technology and value is discovered, fostered, and funded. Consider the following ways BBVA approaches innovation:

  • BBVA Innovation Center: Headquartered locally in Madrid, the BBVA Innovation Center is where many of the innovative ideas and designs are cultivated. Acting as an incubator for creativity, the bank is able to internally design and test prototypes for new ideas. Products like Tu Cuentas, BBVA Contigo, and ABIL ATMs have come out of the work done there.
  • Acquisition: BBVA, in the highly publicized acquisition of the US-based neo-bank, Simple, has ventured into new territory by leveraging acquisition to adopt innovation. It remains to be seen how the two businesses come together, and what role Simple will play in the larger BBVA vision, but the deal offers an example for other banks to follow. As institutions start to look more like software companies, they will begin to do what businesses in industries like tech and pharmaceuticals have been doing for a long time: letting others innovate, and then acquiring them.
  • Venture capital:  Innovation needs resources, and with BBVA Ventures, the bank has taken the step to partner and invest with entrepreneurs to help ideas grow and become successful. BBVA Ventures has already invested in companies like FreeMonee, SumUp, and Radius, and last year announced $100 million for investment into new projects.

BBVA is a mixed bag of approaches to innovation, but perhaps the most telling theme is the way in which it has viewed fintech startups as partners or investments, rather than future business threats.

Look forward to the upcoming Celent report, Innovation in Spain: Profiles of Spanish Financial Services Tech Startups, where the state of innovation is examined by looking at some of the most interesting new startup companies. Innovation doesn’t exist in a vacuum, and gaps in financial services are often global phenomena. Taking a US-specific view of innovation limits the potential for finding the next great idea, and institutions should broaden their horizon.


Why ‘Branch of the Future’ must be a Priority

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Aug 7th, 2014

Bank Innovation published a piece written by Brett King this week entitled, Can we Stop Talking about the ‘Branch of the Future’? In the article, King cites the industry’s use of the “branch of the future” terminology as evidence of “one of the key hang-ups that banks have over changing distribution models”. In other words, an inordinate amount of effort expended to “save” an obsolete delivery model. He argues that pursuing a “branch of the future” strategy, banks avoid the real work of improving customer engagement via digital channels. I think that’s nonsense.

These assertions may resonate with one heavily invested in Moven, a digital-only bank happily growing by serving a niche market. Most retail bankers know the world isn’t as simple as King asserts. The fact is, banks have more than one challenge ahead of them. Specifically:

1. Right-size the branch network. There are two important aspects to this imperative: first is to redesign the branch channel for its emerging purpose: selling and servicing, and away from its legacy — transactional delivery. The second is to reduce branch network costs (both densities and corresponding operating costs) to enable investment in digital channel development.

2. Learn how to sell and service using digital channels. Migrating low-value transactions to self-service channels is no longer adequate. Digital channels must become more self-sufficient. One important aspect involves learning how to engage customers virtually. In-person must no longer require a branch visit.

3. Catalyze growth in self-service channel usage. For the second mandate to have maximum effect, banks must influence digital channel usage.

Branch transformation simply isn’t optional as King suggests. Far from it!

Why is Branch Transformation Imperative?
Many reasons, but two are central in my opinion:
1. Most banks serve a diverse customer base, with widely varying and continually changing engagement preferences.
2. While customers increasingly transact digitally, they PREFER to engage face-to-face. Celent separately surveyed US and Canadian consumers in the fall of 2013, finding similar results. Contrary to what some would have you believe, young adults do visit branches. Both surveys found a rather weak correlation between age and channel usage – except for the mobile channel, which displays a strong relationship between past-30 day usage and age.

channel usage by age

But, past 30-day usage is mostly about transactions, not necessarily engagement. The same two surveys asked respondents, “If you had an important topic you would like to discuss with a banker, how would you prefer to do so?” Responses to that question paint a very different picture – one that explains precisely why most banks derive the majority of their revenue from the branch network. Most consumers – regardless of age – prefer face-to-face interaction on important topics (at least for now). Interestingly, preference for online appointment booking was much stronger in Canada. Not surprizing, since several of the large Canadian banks have been offering (and advertising) the capability for nearly two years, while the same capability in the US is nascent.

preferred engagement by age

But that’s where the puck is. Where the puck is going is towards more widespread digital channel usage – and engagement – across age and income demographics. That’s why mobile channel development is the #1 retail channel priority in most North American banks. It should be. Those same banks, however, neglect the branch channel at their peril.

Banks Aren’t Alone in This
The Wall Street Journal published an excellent article this week that provides some much-needed perspective on the branch channel debate (Seriously, why is there still a debate?). Citing data from ShopperTrack, the article asserts a -5% CAGR in store traffic across a broad mix of retailers. Sound familiar? And, banks aren’t the only retailers enjoying the majority of sales from stores. According to the U.S. Census Bureau, online sales now make up about 6% of total retail sales and are growing at more than 15% per quarter. SIX percent! We can argue about the precision of this figure, but the reality is unavoidable – after two decades of digital commerce growth, in-store shopping still dominates. Why no debate about the “store of the future”? Probably because, unlike banks who have largely neglected the branch channel for a few decades, most stores continually invest in optimizing their retail delivery model.

Moven can neglect the branch channel because it chose a delivery strategy that alienates the majority of consumers that value in-person engagement. That’s a fine strategy for a niche player. Mass market institutions don’t have that luxury.

Facebook Banking: Don’t Bank on it

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Jul 23rd, 2014

On May 5th 2014, La Caixa, one of Spain’s largest financial institutions, officially announced the launch of a Facebook app that provides users access to online banking features through the Facebook platform. It’s just the second bank in North America and Europe to launch a Facebook banking app, and, as far as Celent is aware, the seventh globally. In the weeks following the announcement, I was able to speak with a few different banks about the news, and surprisingly, while they were aware that Facebook banking existed, most were unaware how many banks around the world supported it. This couldn’t come at a better time, as Celent’s recent report, Banking on Facebook: An Overview of Banks with Transactional Facebook Apps, provides detail and analysis of the current offerings, highlighting interesting use cases and opining on the broader applicability of Facebook banking apps in financial services.

Efforts are in the early stages, and even the most mature Facebook banking applications have not come close to replicating what’s possible through mobile apps. But are customer customers ready to adopt Facebook as a channel? Not really. In the figure below, taken from a Celent consumer survey last year, only 1% of respondents favored Facebook and Twitter as methods for engaging with their financial institution. In 2012, Citibank asked users about Facebook banking. The response was a resounding ‘NO.’ Users made it clear that they were not ready, echoing long-held sentiments about the perceptions of social media, and illuminating the challenge banks face in developing the channel.

Consumers Preferences For Engagement Do Not Include Social Media


Source: Celent US/ Canada Consumer Survey, July 2013/ November 2013; If you had an important topic you would like to discuss with a banker, how would you prefer to do so? N=1028

Celent believes that Facebook banking is only going to be the right choice for a very small group of institutions, given the following:

  • Banks don’t have unlimited resources to dedicate to throwing things against the wall in order to see what sticks
  • Most banks have a long way to go in other channels
  • Social media popularity is a guessing game
  • Despite the popularity of social media, consumers and banks are still uneasy about conducting transactions over social channels

This isn’t an indictment against innovation in social media. Social media is becoming a bigger part of financial services, and many, including Facebook themselves, are investing in social transactions. Social media and banking have a bright future together, however many in the industry are having a hard enough time developing functionally rich and well-designed mobile or tablet apps. Institutions should prioritize those investments for the time being.

Banks like ASB Bank, DenizBank, FNB Bank, GTBank, ICICI Bank, La Caixa, and Tangerine (ING Direct Canada) have made Facebook banking applications an integral part of a broader social media strategy. FIs will gain the most value not by mirroring these applications, but by looking at what these institutions have done through social media. Celent found that banks supporting Facebook banking tend to have robust and highly innovative social media strategies. ASB Bank hosts a virtual branch through Facebook, GTBank allows for ‘instant account opening,’ and FNB Bank has created a social media persona that unifies the customer experience across all social platforms. The convergence of social media and banking marches on, despite the uphill battle that many institutions face validating some of the concerns consumers have, and the inherent challenges of each platform. Facebook banking isn’t going to work for all (probably most, at least for now), but lessons can be learned from the ways in which these banks have crafted solid social media strategies. Institutions looking for social inspiration need only visit their pages.

We’re back…a brief expanation of our absence

Dan Latimore

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Jul 22nd, 2014

You may have noticed that our blog has been rather…inactive…over the last several weeks. We were hit by a virus and it (of course) took longer than we thought to get back up and running. The complexities involved in fixing what would seem to be a relatively innocuous problem serve as a not-so-gentle reminder of the fiendishly difficult tasks that our clients deal with daily as they bend technology to their strategic will.

Despite our blogging absence, rest assured that we’ve been continuing to follow and research banking technology trends; they never stop evolving, and neither does our coverage. Please check back in over the next few days to see the backlog that we’re ready to unleash.


First Impressions: SunTrust Branch Redesign

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Jul 21st, 2014

Branch transformation is no longer optional for retail financial institutions. But, the task is enormous and is best undertaken carefully and cautiously. This appears to be exactly how SunTrust is undertaking the task.

I had the opportunity to visit a newly redesigned branch in downtown Atlanta adjacent to the bank’s corporate headquarters building. The branch is located in a food court area, with no street access. The food court enjoys significant foot traffic throughout the day, but particularly during the early morning and lunch periods. I arrived there near 7:00 AM and the place was bustling.

Outside the branch were two NCR interactive Tellers flanked by two NCR SelfServ 32 ATMs . The interactive teller machines were staffed from 8:00 a.m. to 8:00 p.m. while the ATMs were available 24/7. The branch opened at 9:00 a.m. Not shown in the picture below is a large interactive digital wall used to merchandize many of the bank’s products and services.

STI Branch Redesign

The interior of the newly remodelled was similarly non traditional, with a prominent information desk, several private offices and a digital banking bar, where customers could interact with the bank – with or without staff assistance.

Well before the branch was opened, a SunTrust employee was stationed outside the branch, greeting passers-by and explaining the new Interactive Teller devices. She courteously explained that the bank was testing the new devices and would welcome my input. In fact, SunTust was promoting trial of the video teller machines through a $5 promotion in return for a short survey following the interaction. The survey was administered by the bank employee using a tablet device.

While waiting for my meeting, I struck up a conversation with a SunTrust customer sitting nearby. She was traveling through town and apparently needed access to funds she held in a money market account – something she could not perform with an ATM. Her first encounter with a video teller was apparently satisfying as she left the area smiling and commenting on how it was “kind of fun” interacting with the bank this way. She was on her way at 8:05, nearly an hour before the branch opened for business.

In contrast to video teller machines inside the branch, this is a great use-case for the devices in my opinion. Used in this way, the devices add convenience through efficiently extending service hours. Placing the video tellers adjacent to ATMs offers teller interaction when desired, without adding overhead to ATM transactions. But, investing in separate devices with extensive overlapping functionality (not to mention non-working capital tied up in the form of additional cash) isn’t ideal. A better approach requires NCRs forthcoming release that would permit a single device to do double duty.

Will this branch design be a win for SunTrust? I have my opinions, but the important thing is that SunTrust is actively experimenting with branch channel transformation. This is something many more banks should be doing.

Real-Time Payments Gathering Pace

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May 28th, 2014

A number of you will know that I’ve been working on real-time payments with many clients around the world, and will have seen previews of some of the information in my forthcoming reports. One chart I have shown regularly is the likely adoption curve for real-time payments. This takes a classic innovation adoption bell curve. The top of the curve is where the market has reached 50% adoption. Of course, the question then becomes how many and of how many to plot where we are today.

Many of the conversations I have with clients often start with a belief that there are only a handful of schemes globally. The truth is rather different. A good but not exhaustive scan showed that there were actually 35 systems globally. Using a set of criteria, such as levels of GDP, maturity of electronic payments, presence of an RTGS system, we estimate that there are 115 countries which we believe could adopt a real-time systems. That actually puts us just over 30% market adoption.

At this point, I ought to point out that there are a few fudges to this figure. For example, note that we say systems, not countries, as some countries actually more than one real-time system (India for example). But it doesn’t detract from the underlying trend. Indeed, the use of the past tense was deliberate, as yesterday saw the announcement from the Finnish Federation of Financial Services of an RFI for a real-time payment system, bringing the total to 36.

We also hear rumours of several other countries in advanced discussions. This also supports our other hypothesis. A study of the adoption of RTGS systems globally proves remarkably similar to both the shape of the adoption curve but also to the timelines. If we take that adoption pattern and project forwards, it would suggest that the next 5 years will see a flurry, if not significant numbers, of other systems being announced.

It would seem that we are on the cusp of a revolution in payment processing – are you ready?

Is St. George Bank really getting rid of online banking?

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May 22nd, 2014

There was an interesting headline in the news last week that grabbed my attention - St George Bank to ‘decommission’ online banking for mobile. I read this article with great interest, particularly since St. George was such an early mover in online banking.

The message is confusing, as is the quote from the bank’s CIO:

“We will have our first implementation for tablet in October 2014, a second mobile implementation in March 2015, and then desktop sometime in 2015, so we’ll have it as one system altogether.”

All this really tells me is that the bank is going to have a single digital platform and they are focusing on a mobile first approach. The next gen desktop implementation will arrive next year!  This also begs the question of what really is mobile or desktop these days? Is a Windows 8.1 convertible unit a tablet or a desktop? If I access “online banking” through the web browser on my iPad is it online or mobile banking? It doesn’t really matter. Customers expect to pick up their device of choice and have the appropriate experience. The burden is on the bank to provide it.

The controversial nature of the headline certainly grabbed my attention. Online banking is far from dead. Feel free to add your comments, I’m interested in your opinion on the St. George bank announcement.

Customer Analytics: Time to get Your Feet Wet

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May 22nd, 2014

I had the pleasure of speaking at Fiserv Forum 2014 in Las Vegas last week, discussing “The Payoff of Turning Data into Action.” During the presentation, I offered some suggestions to financial institutions that have not yet made inroads into customer analytics.

Why Here, Why Now?
Quite a few community bankers have resisted implementing CRM solutions, for example, and lived to tell about it. Like big data, the promise of CRM in its early days was somewhat overblown. But, that was then. Is customer analytics the New CRM? I say “no” for at least four reasons:
1. The “new normal” in retail banking – Banks need to grow top-line revenue, but it is increasingly hard to do. Analytics applied to customer segmentation, marketing and customer experience can play a critical role.
2. The growing imperative for customer centricity – As consumers increasingly interact digitally with financial institutions, the branch channel is losing relevance and impact. In addition to improving branch channel efficiency and effectiveness, banks must learn how to engage customers digitally. Analytics is the way to do so.
3. Technological advancements – Analytics used to be the domain of data analysts and large, expensive implementations, but modern analytics applications are tailored for business users and integrated with business applications. Getting started is no longer expensive.
4. There’s money to be made – As the use cases for customer analytics multiply faster than rabbits, financial institutions are finding a growing number of ways to profit from customer analytics. In a 2013 survey of North American financial services firms, 70 percent of those having at least one year’s experience with one or more big data initiatives met or exceeded their business case. Not a bad batting average, to be sure.

If you remain unconvinced, the Celent report, Customer Analytics in Retail Banking: Why Here? Why Now? may persuade.

Getting Your Feet Wet
How does an organization get its feet wet with customer analytics? Are there best practices for turning data into action? From interviews with a number of those in the 70 percent, as well as banks who struggled initially, I offer these getting started tips.

Begin with the end in mind – Analytics is a means to an end. Successful examples of data analytics share a common element of focused energy to achieve a limited and specific business objective.
Start small, remain focused – Like its sister topic, big data, there is really no end to customer analytics. Unlike CRM projects, one is never through with analytics – its very nature requires continual refreshing of models and their use. Analytics invites a new way of doing things as much as it invites using new technology. Get started with a single, manageable project and prove its value before moving on.
Get help – There is a steep learning curve associated with fully leveraging data analytics. A modest up-front investment in assistance from firms that specialize in analytics may hasten your project deployment and product better results. Fiserv is well positioned to help – and may already be hosting your data.
Change your culture – Benefitting from analytics requires a devotion to cultural, organization and procedural change. That’s why it is important to start small. Cultural change can and will come alongside socializing the value of early successes. Tom Davenport has authored several books that shed light on the power of making analytics more than an IT project: Analytics At Work, and Competing on Analytics.
Manage expectations – Firms like Amazon and Google make analytics look easy. It’s not. Deriving benefit from customer analytics will be more of a journey than a destination and the road will seem long at times. All the more reason to get your feet wet soon.

Where Will We Meet Next?

May 21st, 2014

Traditionally, our conference season has always been September through November, when large industry events from BAI Retail Delivery to EFMA Retail Payments to Sibos take place. Increasingly, it feels that the conference season is all year around, and we often use these blogs to reflect on various events we attend.

This time I just wanted to post a brief note highlighting a few events I plan to attend in London, such as:

  • May 22: Payments Innovation 2014, Tech UK and the UK Payments Council
  • June 10-11: Digital Banking, Marketforce
  • June 23-24: Innovation in Payments, Marketforce

If you are also attending any of these events and would like to meet up for a coffee or an informal chat, don’t hesitate to reach out. Look forward to seeing you.