AI is becoming increasingly interesting to bankers. Last year I wrote a blog about “Assistant as an App”, looking at how concierge apps like MaiKai and Penny are offering up AI-driven financial management services. My colleague Dan Latimore also recently posted a blog on AI and its impact.
The emergence of chat bots within popular messaging apps like Facebook Messenger, Slack, Kik, and WeChat similarly has the potential to shift how customers interact with financial institutions. Chat bots offer incredible scale at a pretty cheap price, making adoption potentially explosive. Facebook messenger, for example, has almost one billion active users per month. WhatsApp (soon to launch chat bots) has about the same. These apps offer some extremely high engagement, and with app downloads decreasing, users are spending more time on fewer apps. According to Tech Crunch, 80% of the time spent on a mobile device is typically split between 3 to 5 apps.
Chat bots give the bank the ability to automatically appear in almost all of the most used apps in the world. The opportunity with digital assistants is immense, and given the nature of bank transactions, it’s not hard to imagine chat bots becoming a widely used engagement method. Most of banking is heavily rules-based, so the processes are often standard. Frequent banking requests are pretty straightforward (e.g. ‘send this person X amount of money’ or ‘transfer x amount from savings to checking’). Bank-owned chat bots are also more built for purpose than some of the multi-purpose third-party products on the market, making the functional scope targetted. While chat bots are still very early days, it won't be long before these kinds of interactions are accessible and the norm. Bank of America already has one; many others have plans or pilots.
This video (skip to 7:30) shows what an advanced chat bot might be able to accomplish. The image below from the Chat Bot Magazine is another conceptual banking use case. The possibilities are compelling.
But while the opportunity with digital assistants is enormous, banks must be aware of how this affects their current ongoing digital strategy. For example, if chat bots overcome the hype and become a long lasting method for accessing financial services, then what effect will that have on traditional banking apps? Will chat bots make it foolish to invest large sums of money in dedicated mobile apps?
For all the promise this technology brings, banks need to be aware that this could be a step towards front-end disintermediation. The threat of tech companies (or other large retailers) stepping in to grab banking licenses and compete directly with incumbents was short lived. The more realistic scenario was always relegating core banking functions to a utility on the backend of a slickly designed user interface created by a fintech startup. The incumbents lose the engagement, even if they are facilitating the transactions.
Are chat bots a step towards front-end disintermediation, or are they an extension of the bank’s main app? If you believe that chat bots are a stepping stone (or companion product) towards a world where the best UI is no UI, and where AI evolves to the point of offering significant functional value, then banks could be at risk.
This isn’t a call to hysteria by any means, nor am I calling chat bots wolves in sheep’s clothing, but banks need to be aware of the potential impact. As voice or message-based interactions become the norm, they will have an effect on a bank’s dedicated mobile app. In this environment, the mobile app will need to evolve to become something different; non-transactional.
Chatbots will only further fragment the customer journey, requiring an even clearer understanding of how consumers are choosing to handle their finances and make transactions. Banks need to start thinking about how chat bots and AI fit into a long-term digital channels strategy, one that doesn’t handcuff the institution into a no-win proposition of competitive disadvantage versus wilful disruption.
A couple weeks ago I attended the Mobile Banking and Payments Summit in NYC for the first time. There was an impressive list of experts from institutions such as JPMC, Barclays, Citibank, BNP Paribas, the Federal Reserve, USAA, Capital One, BBVA, and Moven, among others. I was only able to attend the final day, but it didn’t disappoint. The day focused mostly on mobile wallets, with a few main points shared below:
Mobile wallets have been challenged by industry barriers: The old rule of thumb with a payments scheme is that it needs to please three parties: the merchant, the bank, and the consumer. These products and solutions have traditionally fallen short of one or more of these objectives, essentially stalling a lot of the progress.
- There’s still plenty of fragmentation in the market: Android is an open system utilizing Host Card Emulation (HCE), while Apple is a closed system using a secure element. There are others beyond that, but it’s largely contributed to a lack of standardization and unimpressive overall adoption. We know this is largely understood by banks and merchants, and many are willing to play along for the time being.
- Consumers can misunderstand mobile wallets: Many users of Apple Pay, for example, have a poor understanding of how the system actually works, with many assuming Apple is in control of their card details. While the system is safer than traditional cards, the perception that it’s less safe is keeping many users from adopting it.
- Getting the marketing right is tough: Often, the mobile wallet really isn’t about the payment so much as the experience around the payment. It might be easier or there might be a whole host of incentives like rewards wrapped around it. The potential is there, but until recently the market hasn’t been.
- But many barriers are beginning to fall away, and there’s hope for adoption: For years, the industry has been declaring that FINALLY this year will be the year mobile wallets take off. The industry has been crying wolf for a long time, but there are some promising developments that hope to make mobile wallets a larger share of the payments universe. Currently in the US, 55% of merchants have updated their payment terminals, and 70% of consumers have chip cards. The chip card does a lot for security, but the argument is that it adds friction to the checkout experience. With the card dip taking away from the user experience, the expectation is that mobile wallets will finally offer enough UX improvement over traditional cards that consumers might opt for them during payment. It’s also reported that more than 50% of millennials have already used a mobile wallet at least once. This includes Apple Pay, Android Pay, or Samsung Pay. The growth in adoption with younger consumers is a good sign that broader adoption might not be too far behind.
My colleague Zil Bareisis has written about this quite a bit, and agrees that adoption could be driven by the emergence of EMV as well as an increase in handsets that support wallet payments.Wallets are also striking partnerships to add value, including introducing merchant loyalty, coupons, etc.The launch of Walmart Pay is a great example of a retailer applying these concepts internally, facilitating even greater adoption. For more information see any of the number of reports Zil has written on the topic.
Midsize institutions have a few paths to follow implementing a mobile wallet: Banks want to be a part of the adoption, but have so far taken a wait and see approach, unsure about the potential of existing wallets, and still trying to figure out what it means for them as the issuing bank. There are three primary ways a midsize or smaller bank can try to launch a wallet:
- Building an internal wallet: This provides the most control, customization, flexibility of functionality, and control over the release schedule. The drawbacks are that it can be a complicated task, a large investment is required, the institution needs sufficient subject matter expertise in-house, and there would be no Apple NFC support.
- Buying a turnkey white label wallet: A turnkey solution would have the benefit of being plug-and-play, there would be some customization options, functionality would be built in, fewer resources would be involved, and the vendor would provide some subject matter expertise. There would, however, be less control over the product, the wallet could be processor dependant, and the roadmap wouldn’t be controlled by the institution.
- Participating in an existing wallet: For many this is the road that will result in the largest adoption. The options are fairly universal, with Samsung, Apple, and Android offering networks here. Its plug and play, easy to get traction, includes a lot of choice, and frictionless. The drawbacks are mainly the lack of customization options or control over the direction of the wallet.
We often say that we go to these conferences so that our subscribers don’t have to. This is just a short summary of the day, and obviously there was much more detail shared. We encourage all of our readers to attend these events, but will be there in case they can’t make it.
A few weeks ago I attended Finovate Fall 2016 with a few different colleagues of mine in New York. For those who’ve never been, Finovate hosts three main events (New York, San Francisco, and London) where more than 70 fintech companies are able to present new concepts, services, or products in a rapid 7-minute format. Traditionally, the San Francisco event has catered to more of the pure start-ups, while the New York event gives larger, more established vendors the opportunity to show off their newest ideas, although typically there’s a bit of a mix between each.
As a temperature gauge for the industry, I don't think there’s a better event. The ideas generally reflect where the industry is at in its thinking, and what the major trends are for fintech. For example, 2-3 years ago the hot topic was PFM, big data, and mobile wallets. Last year, mobile onboarding, customer acquisition schemes, and AI were the most prevalent. Parsing through the hype and the reality is typically one of the more fun aspects of attending. This year I noticed a few things that caught my attention:
- Chatbots, Natural Language Processing (NLP), and general communication solutions were common: Companies like TokBox, Personetics, Kore, and Clinc were some of the more compelling examples here. These solutions were prominent in 2015, but the biggest change was the maturity of their capabilities. Last year, what stood out to most attendees were the many demos that fell flat. A handful of presentations completely bombed on-stage, and even those that made it through the process were often shaky and the inputs looked too rigid. These technologies have advanced quite a bit in the last year, and the proposition for banks is becoming much more attractive.
- PFM was hidden behind data analytics: PFM hasn't been a discussion topic in the industry for quite some time. The initial round of PFM deployments were troubled by poor execution and unmet expectations by financial institutions that piloted them. Many financial institutions we’ve spoken to become immediately sceptical of a vendor solution that even uses the term. Celent has been talking for some time about PFM merging with online banking and essentially becoming the landing page. What was traditional PFM (spending breakdowns, budgeting, savings goals, etc.) is now just digital banking. New methods of financial management demoed at Finovate, however, show PFM under disguise as platforms that leverage data analytics. MapD was one that stood out. Clean data has always been the holy grail for PFM, and it’s always been one of the biggest issues. More solutions focused on getting the data analytics right, creating financial value for the consumer, and cleverly disguising what should have been PFM from the beginning: insights unpinned by advanced analytics.
- Not many payments products or solutions leveraging blockchain: Surprising to me were the lack of payments startups as well as any startup leveraging blockchain. My thinking is that many of the solutions around blockchain are still in their early days, and probably not ready for prime time. Also, while I know of a number of startups leveraging the technology, they are more bleeding edge, and may have been attracted to the spring Finovate, which focuses much more on early-stage fintech companies. The lack of payments schemes was also a surprise, but it could be that Apple Pay has taken some of the wind out of the sails of fintech companies trying to solve very similar issues. Mobile wallets and payment products typically require a lot of industry leverage to make work. You have to satisfy the merchants, the banks, and the consumers, and most have failed to reach sufficient scale. Many in the industry said it would have had to be a larger more established firm, and indeed the launch of Apple Pay confirmed that prediction.
Finovate continues to offer great insight into where the industry is at and where it’s heading. We’ll continue to attend these events and provide some more analysis. Feel free to comment on your perceptions, if any, from the event.
In March of this year the Federal Reserve released the newest iteration of its consumer survey report on mobile banking, Consumers and Mobile Financial Services 2016. One fact that sticks out is how slow mobile banking adoption has been over the last few years. While 53% of smartphone users have used mobile banking in the last 12 months (nowhere near “active”), that number has only grown 3 points since 2012, a CAGR of just 1.9%! This is hardly the unrelentingly rapid pace of change espoused by many who thought evolving customer behavior would overwhelm traditional banks’ ability to adapt.
Obviously there’s a disconnect between the hype surrounding mobile banking and the reality of how consumers are actually interacting with financial institutions. But why then have forecasted rates of adoption not been realized? There are a few possibilities.
- Mobile banking is reaching peak adoption: In the consumer survey by the Fed, 86% of respondents who didn’t use mobile banking said that their banking needs were being met without it. 73% said they saw no reason to use it. While the idea that mobile banking adoption would peak at around 50% doesn’t intuitively make sense for those in the industry, it’s obvious that many consumers are perfectly fine interacting with their bank solely through online banking, ATMs, or branches; they may never become mobile users.
- Mobile banking apps need improvement: It’s likely that many mobile banking apps still aren’t mature enough to ease some of the UX friction and convince a large portion of consumers that they provide sufficient value. In the same Fed survey, 39% said the mobile screen is too small to bank, while 20% said apps were too difficult to use. With three-fourths of non-using respondents (mentioned in the previous bullet) finding no reason to use mobile banking, apps may need to improve functionality and usability to attract end users. The correlation between features offered and mobile consumer adoption is also well established. Mobile banking apps may have reached an adoption peak relative to their maturity, and institutions will likely see adoption grow as apps advance and as demographics increase usage.
- Channel use is a lot stickier than perceived: Consumers are still consistently using the branch. The two figures below illustrate what’s happening. The first graph comes from the Federal Reserve report on mobile banking usage, while the second is taken from the Celent branch channel panel survey taken of more than 30 different midsize to large banks. On average, 84% of consumers surveyed by the Fed report using a branch, while respondents of Celent’s survey see 83% of DDA/savings accounts and 79% of non-mortgage lending products originated from the branch channel. Mobile only has a 2% share of total sales. While many institutions find it difficult to attribute sales across multiple channels and have a well-known historical bias towards branch banking, these stats don’t support the notion that consumers are migrating away from the branch and towards mobile banking. We’re aware these numbers don’t take into account transaction migration, and likely the sales mix will shift as more banks launch mobile origination solutions, but regardless, it’s obvious the branch is still the most used channel by far.
Mobile banking isn’t taking over the financial lives of consumers as much as institutions and many analysts predicted it would, and at least for now is settling into a position alongside other interaction points. Consumers are clearly opting to use channels interchangeably, and it’s not obvious that mobile will have any predominance in the next few years. As a result, banks need to move away from arbitrary goals surrounding channel migration and instead let the consumer decide what works best for them. This certainly doesn’t imply that institutions should stop developing mobile—there’s clearly lots of areas for improvement—but it’s important to not get swept up in the hype surrounding emerging channels.
Remember, more than 60% of FI customers aren’t enrolled in mobile banking, and it accounts for only 2% of sales. Focusing so intently on capturing such a larger share of mobile-first or mobile-only consumers risks misaligning bank resources towards projects that don’t offer the maximum value. Banks shouldn’t be rushing into things—they’ve got time to do this right and in an integrated way.
Financial institutions need a mobile strategy for younger consumers who will most certainly prefer mobile, but older consumers aren’t going anywhere anytime soon. Mobile, at least for now, isn’t the end-state. Mobile-only banks aren’t going to take over the world anytime soon and institutions should be considering the broader proposition of digital in the organization. This means a solid digital strategy across all channels, and a focus on driving the experience, not pure adoption.
Credit unions are almost twice as likely to change vendors as banks, with competitive churn rates of 7.6% compared to 2.7% for banks. Churn Rate measures the number of institutions in a given time period that either change or drop a vendor contract. Churn is broken down into two components: competitive churn, which measures the rate at which institutions are opting to change vendors, and consolidation churn, which measures uncontrollable factors like acquisitions or liquidations. The figure below (powered using data from FI Navigator) references total churn for the year ending March 31st, 2016.
The figure reveals significant differences in churn between banks and credit unions. But why is this difference so large? There are two possible drivers:
- Customer centricity: A focus on the customer could be a driver for higher churn. Banks and credit unions operate differently, and Celent has explored the variations in blogs and publications. The mission statement of the credit union market has historically revolved around extreme customer centricity. Over the last decade, mobile has become a critical component in quality customer service. Emphasizing the needs of the customer could be driving credit unions to take more concerted efforts to maximize mobile/ digital, exploring competitive options more frequently than banks. Credit unions are low margin businesses that often give higher interest rates for products like auto-loans or deposit accounts through non-profit tax breaks. Being member-owned, most of the smaller profits also go back into the business. This creates a natural incentive to streamline the back-office, and credit unions have adopted cost effective technologies at higher rates. Thin margins combined with a focus on customer service could mean credit unions are more likely to evaluate provider options more frequently.
- Solution providers: Another perspective is that it’s the vendor market, not the CUs that are driving the churn. The vendor spectrum for credit unions in the US is much more diverse, with 43 vendors compared to 22 selling to banks. This would reinforce the argument that competitive dynamics are more intense, and it would be reflected in sales cycles. With cost pressures that originate from their smaller size and lower margins, credit unions are more likely to look for alternative ways to provide products and services, leveraging mechanisms like Credit Union Service Organizations (CUSOs) to enhance the business. Other similar joint ventures leverage cooperative arrangements to develop homegrown software products. Consortiums not present in the banking market would introduce more competitors into the market, and as a result impact competitive dynamics.
Credit unions skew much smaller than banks (the mean credit union asset size is $200 million vs. banks with around $2.5 billion), leading to a noticeably higher consolidated churn. Celent examined the pressures on credit unions here. As minimum viable institution size continues to get bigger, smaller institutions will be challenged to stay afloat. Vendors will face the risk that their customers are becoming targets for M&A activity resulting in more vendors competing for a shrinking demographic.
Credit unions need to think about how to best streamline their operations to remain viable. This includes a mix of cost-effective customer service technologies like mobile banking. Vendors need to have a better understanding of the competitive landscape into which they sell, as competition is intense. Better data and detailed benchmarks can help vendors plan their strategy.
Celent is collaborating with FI Navigator to analyze the mobile banking market in financial services (in fact, FI Navigator wrote a great piece about credit unions and banks last year). FI Navigator assembled a platform that leverages a proprietary algorithm to track every financial institution offering mobile in the US, as well as nearly 50 vendors. Beginning with the first report at the end of April, Celent will be releasing a biannual examination of the mobile market. FI Navigator will also be making the platform available for further custom reporting and data analysis. For more information on the nature of the collaboration and availability of data, go here.
- Tablets have low replacement cycles: Tablets aren´t being recycled at nearly the rate of phones. Partially this has to do with wear and tear—tablets typically sit at home, aren´t charged as often, and aren´t dropped nearly as much—but likely a bigger reason is the lack of major advancements in hardware. There simply hasn’t been a new tablet feature in the last couple years for which consumers are choosing to shell out another $400-600 (or more).
- Phablets have taken over as the preferred device: consumers are increasingly going for phones that can provide the screen space of a tablet with the mobility of a smartphone. Phones have been steadily growing in size to meet this need. Phablets can provide the processing power to accommodate the needs of consumers for less.
- Tablets haven´t carved out a distinct enough use case: It´s still unclear to what extent tablets are devices of leisure, business, lifestyle, etc. There´s the Surface 4 and others that are starting to seriously go after the laptop market with a full operating system and keyboard, but the best-selling tablets on amazon are all those with small screens and cheap price tags.
- Use responsive design: A bank may have been able to manage native apps when there were only a handful of devices, but that´s no longer the case. Responsive design has evolved to the point of being able to provide the same look and feel through an experience automatically tailored to the user´s device.
- Think about the consumer-facing branch tablet: This could be roaming personnel in the branch, tablet-like ATMs and kiosks, or as a way to streamline the on-boarding process. The characteristics of tablet interfaces should influence design in other channels.
- Design the right app if large tablets are going to continue to be a priority: As the form and function of smartphones and tablets begin to move closer together, institutions will have to reassess where the full tablet experience sits within its strategic digital priorities. The consumer-facing tablet experience may need to reflect the evolving use case.