Why the branch banking controversy will continue

Why the branch banking controversy will continue
The branch is dead, long live the branch! Controversy around the wisdom (or not) of investing in the branch channel amidst rapidly growing digital banking adoption is showing no signs of letting up. Consider three articles published in the past week:
  • Bank Innovation covering Associated Bank branch closures to fund digital channel initiatives.
  • BTN coverage of Wells Fargo branch/digital convergence alongside the banks’ steadfast advocacy for maintaining its massive branch presence.
  • Brett King’s Op Ed in Banking Exchange, critical of the recent FDIC report, Brick-and-Mortar Banking Remains Prevalent in an Increasingly Virtual World
  I’ve observed that most advocacy is binary; either branches are next to worthless or the branch is king. Where is the middle-of-the road position?   I’d like to offer one. For starters, retail banks serve a diverse market with diverse needs and preferences. Why then do so many critics insist banks must react to digital banking’s growth in lock-step? How many times have you heard the comment, banks are lemmings? Well, this time they’re not. Get over it! We will continue to see a diverse response to the digital ascendency.   But, I do struggle with the sustainability (or even desirability) of the current branch density in many markets – particularly in the US. I don’t think it will be defensible for very long. Let’s put it into perspective. Between 2000 and 2010, US bank branch density grew from 230 to 270 branches per million. Celent looked at a dozen other retail categories and couldn’t find a single one (except banks) that grew store density over the same period. Just the reverse happened, even though digital commerce remains less than 20% of total retail sales.
Source: US Department of Commerce, FDIC, Datamonitor, Celent analysis

Source: US Department of Commerce, FDIC, Datamonitor, Celent analysis

Like retailers, banks have certainly embraced digital channels. But, unlike retailers, banks have not invested in digital engagement. Until recently, digital channels weren’t about sales and servicing (that’s what branches are for…) but about facilitating transactions. Rare is the retailer of any size that does not have a digital presence designed to conduct commerce. But, the significant majority of banks do not yet have that capability. And, in some cases, the user experience is poor. Why? In part, because banks have focused on transactions, not sales and service in the digital channels. As this changes (and it is), I believe we will see a corresponding contraction in branch densities – just like in most other retail segments. Until banks demonstrate the ability to sell and service customers digitally, they will be overly reliant on the branch channel.
Source: Celent survey of North American financial institutions, October 2014, n=156

Source: Celent survey of North American financial institutions, October 2014, n=156

The next few years will be telling. What do you think?

The quest for Omnichannel continues

The quest for Omnichannel continues
Earlier this month, Celent published a report providing an analysis of an October 2014 survey among North American banks and credit unions. The effort sought to understand the state of retail banking channel systems. It should be no surprise to find that revenue growth broadly remains bank’s #1 strategic priority. Or, that digital banking channel development and omnichannel delivery are statistically tied with customer analytics in being considered the most important technologies in delivering revenue growth. What may come as a surprise is how far most banks have to go in terms of actually delivering what they say is important. Here’s one example; mobile banking. Everyone knows mobile is so hot right now, yet many institutions have difficulty monetizing those investments. That’s because precious few sales are closed in the mobile channel (at present) and institutions struggle with proper attribution when multiple channels are involved. What seems clear is that institutions find several compelling reasons for the mobile channel’s high priority, and cost reduction is the least likely reason. Institutions across the asset tiers have a similar strategic basis for mobile banking. However, valuing mobile for its ability to attract new customers is a sentiment largely held among large banks.
Source: Celent survey of North American financial institutions, October 2014, n=156

Source: Celent survey of North American financial institutions, October 2014, n=156

Customer engagement and upselling customers through the mobile channel? That’s a tall order for most banks when historic mobile channel development investment has been all about migrating “low-value” transactions. Even if consumers would be disposed to enroll in products or services on their device (a reasonably fast growing trend) precious few banks even offer that ability.
Source: Celent survey of North American financial institutions, October 2014, n=156

Source: Celent survey of North American financial institutions, October 2014, n=156

Moreover, simply having the ability means little if the user experience is less than satisfactory. A future Celent report will explore digital account opening experiences among large US banks. The quest for omnichannel continues indeed – and will be continuing for some time.

GPS, Musicians, Analytics and Banking Culture

GPS, Musicians, Analytics and Banking Culture
Three things came across my Twitter feed the same afternoon. Consider the following and see if you think they are related: “When we depend too much on our GPS, we lose the will and skill to explore.” Tom Peters via Twitter, 20 November 2014 “A creative person is by definition inefficient. She/he is wandering along odd paths, backtracking; the life well-lived is mostly detours.” Tom Peters via Twitter, 20 November 2014 “Using analytics in decision-making requires banks to think more like musicians. If you start jamming, maybe something cool will come out, and it will sell a million records.” Yours truly as quoted by Penny Crossman, Bank Technology News, 19 November 2014 First, I must say that by including my own comments among those of Tom Peters, I am in no way suggesting that my thinking is on par with his. It is not. Rather, my Twitter feed lit up since American Banker published the article referenced above, Bank CEOs Fear the Data-Driven Decision, and Peter’s tweets seemed both humorously consistent and coincident with Penny’s article as well as my previous blog post. What in the world do they have to do with each other? A common element emerges when viewed through the lens of organizational culture. Consider the culture in which you work. Is it a get there using the shortest path every time with no wrong turns (e.g., GPS) culture? Does it tolerate taking a longer route (even occasionally) to explore and better learn one’s surroundings? Does it value the unfamiliar? Does it encourage and reward learning new music? More radically, does it celebrate creative discovery beyond established norms? Are you even permitted to improvise, or are you directed to always play from the sheet music? If so, your organization likely won’t enjoy much innovation. As it relates to becoming a data-driven organization, banks need to learn how to be good at both using the GPS and at improvising – with discernment. Each approach has value. Too many senior managers in financial institutions, however, have never experienced the kind of culture that tolerates the “test and learn” way of using analytics. Instead, it seems strange and uncomfortable. It’s not easy to do things so differently. That’s why culture is such an important element in the skilful use of data analytics specifically and innovation more broadly. Technology may be an enabler or even a disrupter, but without a culture that values and rewards new ways of doing things, investment in the best technology will disappoint. Another quote to finish today’s post: “While there are many challenges [to becoming an analytical company], the most critical one is allocating sufficient attention to managing cultural and organizational change. We’ve witnessed many organizations whose analytical aspirations were squelched by open cultural warfare between the “quant jocks” and the old guard.” Thomas H. Davenport and Jeannie G. Harris, Competing on Analytics, HBR Press, page 124

Is Your Financial Institution Data Driven? Survey says, ‘Probably Not’

Is Your Financial Institution Data Driven? Survey says, ‘Probably Not’
Data analytics is not a new pursuit. SAS, for example, has been offering solutions since its inception in 1976. But owing to the inherent complexity of advanced data analytics platforms, experience with data analytics has been the domain of only the largest organizations. However, the last several years have witnessed an explosion in applications for data analytics, especially in the area of customer analytics. With the growth in applications came conveniently pre-configured software solutions that were fine-tuned for a bevy of specific applications. The combination of product evolution, specialized analytics-savvy consultants, professional services firms, and cloud computing, has brought advanced analytics swiftly down market. Now, even small banks and credit unions can foray into customer analytics with a comparatively small investment and without a legion of data scientists on staff. But are they? Well, that depends on what you mean by data analytics. Celent recently surveyed about 100 North American banks and credit unions to understand the state of analytics adoption and the drivers behind its growth. In our resulting report, “Customer Analytics Adoption in Banking: When Management Doesn’t Lead” (September 2014), we noted that about half of the financial institutions in the sample had some experience with data analytics. However most of these efforts might be considered rudimentary, such as customer profitability or web analytics applications. A third of the respondents to the survey had experience with social media sentiment monitoring, an example of advanced analytics, but inexpensively available in the cloud and easily used by non-data scientists. In contrast, usage of predictive analytics applications is far less common. Just one in five financial institutions demonstrated experience with next-best-action analytics, and one in ten showed an understanding of customer lifetime value. What gives? If customer analytics holds such great promise, why aren’t more banks and credit unions deriving value from its use? I think there are at least two reasons. First, we are seeing an immature state of data analytics at most financial institutions. Second, and perhaps more important, there appears to be a lack of interest by leadership at the top of these financial institutions in driving data-driven strategies. Is Your Organization Data-Driven? Using data to make decisions is not the same as being data-driven. An organization doesn’t become “data-driven” simply by installing an advanced data analytics application. So, what does it really mean to be a data-driven organization? Celent asserts that data-driven organizations use analytics extensively and systematically to influence and execute strategy. Practically, this takes many forms, but it begins with attitude. Organizations start by deciding to value data, develop confidence in its validity, and make decisions based upon data even when doing so is uncomfortable. In other words, being data-driven amounts to having faith in the efficacy of data and acting accordingly. It means walking the walk, not just talking the talk. How many banks are true data-driven organizations? Not many, we find. It’s probably fair to say that the concept of an organization being data-driven isn’t a binary thing. Instead of a “yes” or “no” answer, perhaps the question is best posed, “How data-driven is your institution?” and additionally; “How data-driven would your organization be if it were up to you?” The survey found that just 29% of responding financial institutions thought their organizations were highly data-driven. Nearly 90% of that same sample said their organizations would be highly data-driven if it were up to them. In other words, they wished for it. Clearly, we think that the industry wants to be data-driven, but doesn’t think it’s there yet. analytics self assessment Source: Celent survey of North American financial institutions, July 2014, n=78 Lack of Leadership Intuitively, this suggests a leadership problem, but does the data support this conclusion? It does. We cross-tabbed the survey results by respondent roles and found significant differences in attitudes surrounding data analytics. Specifically, responses to the question “How data-driven would your organization be if it were up to you?” varied dramatically by role. It turns out that all respondents in IT/IS roles wished their organizations were highly data-driven – or would be if it were up to them. In contrast, respondents in strategy or innovation roles as well as those in marketing, showed somewhat less passion for being a data-driven organization. Perhaps a surprise, coming in last in support of data driven strategies were those in executive management; compared to those they lead, this group was the least desiring for their organizations to be data-driven. data drivenness Source: Celent survey of North American financial institutions, July 2014, n=78 Although surveys aren’t the final word on any topic, the results do suggest a leadership problem, which if addressed, would go a long way towards better serving customers through skilful use of data analytics. As banks better understand the merits of being data-driven, we think that financial institution leadership will ultimately lead the march to supporting data-driven business strategies, particularly those focused on customer analytics. I will be addressing this topic in more depth in a session at American Bankers Banking Analytics Symposium in New Orleans on Thursday, October 16th.

Why ‘Branch of the Future’ must be a Priority

Why ‘Branch of the Future’ must be a Priority
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.

First Impressions: SunTrust Branch Redesign

First Impressions: SunTrust Branch Redesign
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.

Customer Analytics: Time to get Your Feet Wet

Customer Analytics: Time to get Your Feet Wet
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.

Is RDC Risk Overblown?

Is RDC Risk Overblown?
In retrospect, sure. Looking forward, I’m not so convinced. I had the pleasure of attending WAUSAU Financial System’s annual Customer Conference in Chicago last week. One of the sessions focused on surviving RDC audits. The prevailing consensus among banks in the session was: “RDC and ACH are very different animals. What are the regulators thinking? Why all the scrutiny on RDC?” Despite the regulatory scrutiny, remarkably few financial institutions have suffered loss uniquely attributed to RDC. In Celent’s October 2013 survey of US financial institutions, 95% of respondents indicated that losses associated with RDC were at or below established risk thresholds. But, history is not always a good predictor of what is to come. With the growth of mRDC popularity, it is incumbent upon banks to both be vigilant and to use the best tools available to manage what will certainly be increasing risks associated with RDC. After several years of relative tranquillity, fraudulent activity is on the rise. The changing state of things is apparent when we look at where losses have occurred. Once the near exclusive domain of commercial banking, RDC losses are quickly migrating to the retail bank – along with 20 million or so consumer users of mRDC. RDC Loss Mix Source: Celent surveys of US financial institutions, Oct 2012 and Oct 2013, n>200 And the loss mechanisms are changing too. From 2012 to 2013, the percentage of losses associated with check kiting and fraudulent or altered items declined, while losses associated with duplicate presentments increased. The most vexing challenge is how to manage items deposited at more than one financial institution. This unintended consequence of Check 21 legislation presents a systemic risk with no particularly good fix at the moment. As banks seek more automated and flexible RDC risk management approaches, Celent sees a replacement market emerging. Vendors are increasingly competing based on the efficacy of RDC risk management capabilities along with the ability to be the bank’s enterprise distributed capture platform, managing all deposit channels, from RDC to branch, ATM and lockbox. This is where the action needs to be if RDC is to deliver its full potential.

Is the ACH the Best Path to Faster Payments?

Is the ACH the Best Path to Faster Payments?
Yesterday, NACHA issued a press release announcing initial steps towards same-day ACH. This is a second attempt at accelerating ACH payments. Rather than a “big bang”, this second attempt advocates a phased approach, inviting banks to invest in three projects instead of one. The sentiment seems worthwhile, but I’m not convinced that this is a good idea. In considering faster payments, there are many considerations. Among them: what exactly needs to be faster and who is the customer? Who stands to benefit from faster payments? What Needs to be Faster? Particularly in the case of real-time payments, it is important to distinguish: 1) Notification of payment 2) Payment guarantee/ funds availability and, 3) Settlement In my view, accelerating 1 and 2 are more important than 3 and less costly to bring about. Who is the customer? Who would stand to benefit the most? Many assert strong and growing consumer demand for faster retail payments. We see more interest than demand, particularly if costs are factored in. Celent surveyed over a thousand US consumers in August 2013. In part, we explored payment expectations. With little variation across age demographics, more consumers expect instant confirmation of payment (59%) than expect real time gross settlement (42%). Other factors weigh more heavily than speed. When I Pay Source: Celent survey of US consumers, July 2013, n=1,053 In my view, merchants and regulators are more invested in faster payments than are consumers. Faster payments mean earlier access to funds (retailers) and less systemic risk (regulators). That’s why most systemically important payment systems are RTGS. Faster payments are a certainty – in time. What’s far from certain is how it comes to be – what rails are used. Some advocate using the ACH. I disagree. Moreover, I find the current dissatisfaction with the ACH amusing. Designed as an efficient, electronic, float-neutral payment system, the ACH is highly effective at fulfilling its designed purpose. More recent demands on the ACH, while not without efficacy, have also resulted in increased cost and complexity. Same-day ACH, in my opinion, is simply not compelling. If enacted through a rules change and offered optionally at a premium price, it may succeed, but would result in precious little use. Real-time ACH would be altogether different – a fool’s errand in my opinion. The ACH works splendidly when used as designed. An analogy if I may. The NACHA press release stated: “The Network has always served as a foundation upon which we can build and innovate to meet the growing needs of today’s users and those of tomorrow.” That sounds a bit like inviting telco’s to build more phone booths in response to consumer’s demand for mobility. The “square peg in a round hole” analogy may work as well. I’d love to hear your views.

Banking by Appointment – Bring it On!

Banking by Appointment – Bring it On!
Last week, Wells Fargo promoted new banking by appointment via outbound e-mail marketing. I say it’s about time! Here’s how it appeared: Wells bank by appointment Online appointment booking is just plain smart. It’s also overdue. For years, consumers have been able to schedule appointments with healthcare providers, hair dressers and restaurants – why not banks? The idea makes sense for several reasons: • It provides an easy call-to-action as part of marketing communications. • It helps banks balance staff capacity with sales and service demand. • It allows front line staff to be prepared for customer meetings, rather than reacting on the spot as customers approach. • It is clearly preferred by some consumers and minimizes wait times. Celent surveyed US and Canadian consumers on two occasions in 2013 and found them highly digitally-driven – except when they had something substantive to discuss. Then, they preferred face-to-face interaction. Preferred method of engagement Source: Celent US consumer survey, June 2013, n=1,033 Q: “If you had an important topic you would like to discuss with a banker, how would you prefer to do so?” In my opinion, effective online appointment booking capabilities would be: • Omnichannel – offered in multiple channels for engagement via multiple channels, not just the branch • Integrated to existing calendaring applications to be low-friction for both consumers and staff • Set up to automatically remind consumers of their appointment and easily revisited in case a change was needed. This should minimize no-shows. • Tracked – rigorous measurement of appointment booking and subsequent results is key to continual improvement. I’m wondering why this functionality remains a rarity among retail banks.