- Maintain the consumer facing side of the business by letting customers access these service through your platform
- Increase cross-selling and marketing opportunities
- Preserve a convenient and frictionless experience by reducing the fragmentation of unbundling
September 9, 2015 by Leave a Comment
I´ve recently had multiple conversations with financial institutions about the trend of unbundling financial services by FinTech startups. In fact, it’s hard to discuss the future of the industry without touching on it. Articles from Tanay Jaipuria, Tech Crunch, and CBInsights speak openly about inexorable disruption. They all tell a fairly similar story. Unbundled products and services disintermediate financial institutions by improving on traditional offerings. Banks lose that value chain. Banks become a utility on the back end, essentially forced by the market to provide the necessary regulatory requirements and accounts for nonbank disruptors. With images like this (see below), it’s hard to argue that it isn’t happening—at least at some level. There are plenty of reasons to be skeptical about the hype surrounding disruption by FinTech players (shallow revenue, small customer base, etc.), but even if only a few manage to become sizable competitors, that still represents a significant threat to banks´ existing revenue streams. There’s also data pointing to higher adoption in the future. A study from Ipsos MediaCT and LinkedIn showed that 55% of millennials and 67% of affluent millennials are open to using non-FS offerings for financial services. This number is surprisingly high, and the largest banks in the world are paying attention. The threat of losing the customer-facing side of the business is a legitimate risk that banks face over the next 5-10 years. But there´s a possible solution that could enable banks to remain relevant even as they begin to see some of their legacy products or services fall to new entrants: be more like Fidor Bank. Fidor Bank is a privately held neobank launched in Germany. It has a banking license and wants to transform the way financial institutions interact with their customers by creating a sense of community and openness. The bank views its platform, fidorOS, as a key differentiator that allows it to offer customers services from start-ups or new financial instruments. For example, it offers its customers Currency Cloud for foreign exchange as well as the ability to view Bitcoin through its platform. Going forward, it may make more sense for financial institutions to take this approach. Banks can´t be everything to their customers, and there´s a healthy stream of market entrants trying to chip away at the banking value chain. A middle way is that banks become an aggregator for popular nonbank FinTech offerings as they become popular. This would preserve the benefits of traditional bundling by aggregating offerings and re-bundling them alongside its home grown services. Some benefits include:
August 4, 2015 by 2 Comments
A few months ago there was a question posed on Twitter which sparked a pretty intense debate: “What makes a bank a digital bank?” Perspectives varied, but after a reading through many of the responses, it seemed most were answering a different question. How far do incumbent banks have to go in order to adjust to the new age of digital financial services? At a very basic level, most bankers understand the importance of digital. Many started digital transformation years ago, but the strategies have often been too narrowly focused to make a significant impact. Efforts consisted of stand-alone projects running in isolation within a LoB, too vertical to meet the needs of a real transformation strategy. Simple point solutions and narrowly defined projects in turn produce lackluster results, and the perceived value of Digital decreases, potentially falling out of favor with key decision makers based on a cost/ benefit analysis. Stakeholders might think digital is important, but without a vision they´ll often decide that the risk isn´t worth the reward. This can be underpinned by an organization´s lack of understanding around what it means to be a digital institution. A Celent report from December of last year, Defining a Digital Financial Institution: What “Digital” Means in Banking, proposed a definition for the industry. Digital banking is:
- Delivering a customized but consistent FI brand experience to customers across all channels and points of interaction…
- … underpinned by analytics and automation…
- … and requiring a change in the operating model, namely products and services, organization, culture, and skills and IT…
- … in order to deliver demonstrable and sustainable economic value.
June 17, 2015 by Leave a Comment
The branch is an important channel is every bank, but the rise of digital raises two questions: what’s its role in with a digital engagement model, and how should banks think about its value? First, consider some of the challenges of the traditional branch for the modern, digital consumer:
- Branches suffer from lack of talent availability. The best person for the job is not always going to be in the right location at right time. Yet mobile is driving “right time, right place, instant” contextual interactions, and consumers are increasingly expecting this level of service.
- Many of the frontline staff are underpaid and undertrained, yet are the face of the institution. They often aren´t trained properly or paid enough to care about delivering the kind of customer service banks are trying to deliver through digital.
- It’s difficult to distribute foot traffic across locations. Some branches suffer from massive queues, while employees at other locations are killing time on Facebook. This adds cost, lowers efficiency, and is incompatible with demand for instant service from consumers as well as modern IT delivery.
April 27, 2015 by Leave a Comment
Celent recently released the report On the Margins: A Comparison of Banks and Credit Unions by Asset Tier, where community institutions of the same size are compared across a number of performance metrics, mainly efficiency ratio. One of the most interesting findings is that credit unions are becoming less efficient at a faster rate than banks of the same size. Efficiency ratios measure how much it costs an institution to create one dollar of revenue. Looking at the data in previous sections, credit unions are increasingly spending more money to generate as much revenue as banks of the same size. Efficiency ratio can be dependent on a number of factors, but as a way to look at simple margins, it´s one of the more useful industry metrics. At a glance it seems counter-intuitive. Credit unions are generally more customer-centric and have higher technology adoption. They use real-time systems, simpler product lines, invest in labor saving technology, and leverage community involvement like CUSOs and shared services to drive down prices. But there are obviously distinct business model differences, where credit unions, being member-owned, generally run thinner margins, returning more benefit back to the customer in the form of better interest rates and/or lower fees. Although this is an intentional business decision reinforced by member-centric charters, it leaves the institution with fewer resources than similarly sized banks that may take a more profit-driven approach. So what’s the issue here? It comes down to the effects of digitalization. Celent sees three challenges that may affect the credit union market going forward:
- As the complexity of business demands in financial services grows (e.g., technology), the resource requirements may present a challenge for credit unions (and all community institutions) running thin margins. Since raising capital is limited to retained earnings, non-profits need to be more intentional about how they prioritize tech investment.
- Banks in recent years have seen a significant shift in how they view customer service. Once a key point of differentiation for the CU market, banks are now coming on board to make customer centricity the new operating model, increasingly driven by the digital experience. While customer centricity is healthy for the industry as a whole, it’s unclear to what extent it indicates an erosion of credit unions’ key value proposition.
- As technology breaks down geographical barriers of financial services, customers are given more options, and the competitive landscape widens based on the availability of channels. Switching financial services providers is no longer a high-friction process, and the selection is wider than ever. Digital is also redefining what it means to be a part of a community, and it’s increasingly being decoupled from physical proximity. This puts pressure on institutions that have previously enjoyed relative isolation in well-defined localities.
March 16, 2015 by 3 Comments
This last week the American Banker Retail Banking Conference 2015 was going on in Austin, TX. As expected, it was a great way to read the temperature of the banking industry. The conference was well attended, with broad representation from all institution sizes and markets. There were a couple of overarching themes throughout the event. Competitive pressures on smaller institutions were top of many bankers´ minds. The conference was full of community bankers discussing evolving business models and the pressures its placing on their ability to gather deposits. Customer centricity is forcing a convergence of traditionally segregated value propositions. Large banks are now trying to compete on serving the customer and they´re positioning themselves to look and feel like a community experience. New entrants and delivery models are also opening up the competitive landscape. Consumers are no longer limited by geography when choosing a bank, and they have a growing number of alternative financial options from which to choose. Smaller institutions are finding it hard to overcome some of the barriers of resources and marketing that arise as the competitive landscape broadens. Many presenters discussed developing non-traditional revenue streams. With interest rates low and new regulations following the financial crisis, banks are running incredibly thin margins, and traditional revenue sources are no longer viable. Presentations focused on targeted marketing for “moneyhawks”, new P2P models (e.g. P2P lending), and new payment schemes. A few thoughts on some of the talking points:
- Breaking down omnichannel applications for financial services: Omnichannel within banking was a popular talking point between attendees and among presenters, and it´s obvious there´s still more than enough ambiguity around its application in the context of banking. One of the presentations used non-FI examples to look at how banks can approach integrating omnichannel into customer interactions. Home Depot was an interesting case study. The retailer combines the in-store and app experience to enhance the customer buying process. Customers can browse the app and make a list of the materials they need. The app shows only what´s in stock at the nearest physical location, and each item is given a corresponding aisle number for easy location on arrival. While in the store, customers can scan QR codes on each product to bring up specific measurements and statistics. This is the essence of an omnichannel experience. It´s not about doing everything from every channel—it´s about optimizing the customer experience across the variety of methods used to interact with the retailer (or bank).
- Community banks differentiating from large institutions: This was a common thread running throughout the presentations. How do community banks grow deposits in a climate of shrinking deposit share? Presenters proposed some solutions. One spoke of the need to market correctly. A recent study found that despite problems with megabank perception, 73% of those asked said a recognizable brand was important in choosing a financial institution. A regional bank poll of millennials found that not one could name a community institution in their area. These institutions find it hard to inform consumers about the value they provide, and often lacking the resources and experience to do so. A few small institutions spoke about shifting towards serving small businesses. Despite only having 20% of deposits, community banks are responsible for 60% of small business loans. Focusing on small businesses could be a way for small institutions to remain viable, without having to drastically alter their businesses.
- eCommerce and Merchant Funded Rewards (MFR) through mobile banking to help consumers save: During one of the sessions, a banker made a good point: consumers don´t need help spending, they need help saving. The comment reflected a number of discussions about the role financial institutions can play in helping consumers save money, but was echoed across a handful of presentations on digital commerce. US Bank discussed Peri, its eCommerce app developed in cooperation with Monitise, while other presenters spoke about card-linked and MFR propositions. These initiatives are definitely innovative, but is conflating the ideas of saving and driving commerce shaping the conversation around a fundamentally misaligned approach? First, will a bank´s eCommerce app be able to compete with the likes of Amazon and Google? Banks often do not have the customers, data, or pricing competitiveness to match big online retailers, and they seldom win on brand favourability. Second, even when these initiatives are successful, do they really help people save? For many, the data isn´t targeted enough for banks to offer deals on purchases a consumer was going to make anyway. For example, based on one bank´s demo, a customer would go to make a purchase at a retailer and the bank app would push out a geo-located card-linked offer for a nearby restaurant. This requires additional spending. Without the right data, these programs are mostly playing off impulse purchasing, not saving.
March 6, 2015 by Leave a Comment
Next week I will be moderating a panel discussion at American Banker´s Retail Banking Conference in Austin about the competitive pressures of community institutions. It’s an important topic that Celent discussed in a report published last year: And Then There Were None: The Disappearance of Community Banks. The figures below outline the decline of banks in the US, going from 11,462 at the end of 1992 to 5,809 in 2014. The challenge for many of these institutions has been organically growing their deposits despite shifting consumer demands and new alternatives to traditional financial services (e.g. prepaid services, P2P lending, etc.). The business model of banking is changing, and viability is increasingly dependent on tech investment. Consumers now expect a certain basic level of technological capabilities driven by their experiences across other industries. To accommodate, financial institutions are pressed to implement products such as customer analytics, mobile, CRM, etc. Yet these challenges come at a time of decreased interest margins and broadly defined regulations that require community banks to increase compliance spending and capital reserves at pace with large players. Online banking platforms are often basic, many have no mobile apps, and business platforms like treasury management are severely outdated. Even labor saving technology (e.g. video teller) often does not lead to short term cost savings, and new services typically run in tandem with other operations, adding operating expense to already thin margins. These conditions have made it difficult for community institutions to compete and have challenged the viability of many. Community institutions, however, operate in an extremely diverse landscape of micro-localities with varying competitive dynamics and local needs. This often carries with it a number of advantages over large multinationals with few local connections and an often impersonal understanding of the community. Small banks won´t be able to go head-to-head with large institutions on tech spending, but identifying the organization´s value proposition will enable a tighter strategic direction for meeting consumer demands while delivering a competitive community experience. In Celent´s upcoming panel, we´ll be exploring what community institutions are doing and some of the lessons that others can learn.
December 2, 2014 by Leave a Comment
Celent recently released two reports looking at the state of banks and credit unions: And Then There Were None: The Disappearance of Community Banks and Catch CU: The Ongoing Evolution of the Credit Union Market. The analysis within each report shows a clear trend towards industry consolidation. The number of commercial banks in the US is declining rapidly, from 11,462 at the end of 1992 to 5,809 in 2014, while credit unions in the US went from 10,316 in 2000 to 6,491 in 2014. As the industry consolidates, the majority of institutions disappearing are disproportionately coming from the lower tiers. For banks, the point at which institutions see rapid decline is around $300 million in assets and below. For credit unions, that number is around $50 million and below. The figures below provide a broad summary view of what´s happening in each industry. For every asset tier, the CAGR for inflation-adjusted deposit and institution growth is charted along with the difference between the two. Asset tiers with a negative difference between the growth of deposits and institutions are declining on a per institution basis. This is an effective summary when assessing the health of a tier. Banking is obviously becoming more complex, and competing is no longer a matter of opening a branch, setting up an ATM, and accepting deposits. The past 10 years have seen the rise of internet banking, bill pay, know your customer (KYC), Office of Foreign Assets Control (OFAC) compliance, mobile banking, consumer and business remote deposit capture, branch capture, and much more. Most small institutions don´t have the resources to stay on top of it all, and the requirements to “keep the lights on” leave pockets dry for modern customer facing applications and services that have become crucial to growing deposits. Is the consolidation good for the industry? What role will small banks and credit unions play in the future? Is further consolidation inexorable, or will the industry soon meet a healthy equilibrium? Feel free to comment.
November 12, 2014 by Leave a Comment
Since the launch of neo-banks like Moven, Simple, and GoBank, financial institutions in the US have been avidly monitoring their popularity. Some have written them off as non-starters; others have praised them as disruptors. In recent months, however, the neo-bank model has hit a few stumbling blocks that call into question the promise of the digital-only model, and gives credence to the sceptics. GoBank recently announced that it was going to stop allowing account opening via the mobile device. Users will now have to purchase an account opening “kit” from a store, adding significant friction to the process. Simple has experienced a number of issues related to payment scheduling, the “safe-to-spend feature,” and service outages or delays. Moven received $8 million to begin moving their app overseas in an effort to garner higher adoption. The promise of these new start-ups was a drastic improvement on customer experience, ditching traditionally stale financial services with improved digital offerings, social media integration, and a familiar/casual communication style. Yet these recent issues serve as a reality check for the neo-bank model—when your value proposition is customer experience, technical issues look 10x worse. It´s far from clear what will happen to these new market players, but Celent envisions a couple of different paths over the next few years.
- Neo-banks are acquired and rolled into larger digital channels offerings: I wrote earlier this year about banks acquiring technology companies, thereby acting more like tech companies than traditional banks. The neo-bank model and acquisition of innovation are not that dissimilar, and BBVA´s acquisition of Simple is the conflation of both strategies. Through acquisition, BBVA is able to jump the steps of creating a culture for digital channels innovation, establishing a customer base (albeit small), and aligning internal resources required to launch a new service. There aren´t many neo-banks, but digital channels start-ups are numerous. This could be the way forward for institutions that are struggling with adapting the existing operating model to digital financial services.
- Traditional institutions begin offering their own neo-bank, digital-only services: Fundamentally, there`s nothing truly disruptive about a neo-bank. There´s no secret algorithm, intellectual property, or disruptive idea at work, and many banks are more than capable of offering similar levels of service. Indeed some of them have already begun offering digital services through a separate digital brand. Examples globally include NAB´s UBank, ASB BankDirect, Banamex´s Blink, Hello Bank by BNP Paribas, and Customer Bancorp’s new mobile brand. With new brands, and often new platforms, these banks are testing the digital model. This should satisfy a growing number of digitally driven consumers, as well as provide a clear path for banks looking to move accounts to more digitally-focused services.
- Neo-banks never become viable stand-alone business models, but they influence the way banks think about digital channels: Currently, most neo-banks aren´t banks–they rely on other institutions to handle the deposits, making them simple prepaid services with additional functionality. The reliance on third-parties is becoming a bottleneck for delivering the value neo-banks have come to represent. Without diversified financial offerings that encompass the entire financial need of the consumer, these “prepaid” services are pressed to create enough value to validate adoption. This is a major question when assessing viability.
September 12, 2014 by Leave a Comment
Not too long ago I was at a client event and had the pleasure of trying on Google Glass for the first time. The presentation used a simulation of how it might work to make a payment using the voice commands of the device. I found the experience to be much less intrusive or distracting as I expected, but the applications within banking were still too immature to be useful. The much-anticipated technology went public earlier this year, and the industry is already abuzz about specific applications. In October 2013, Banco Sabadell in Spain became one of the first banks to create a retail app that allowed users to locate the nearest ATM, check account balances, and use video conferencing for technical support. PrivatBank in the Ukraine released a video in July 2013 previewing some of the features it plans on releasing for its own Google Glass app (see video below). The device is receiving a lot of hype, and it’s a natural fit for functionality that hasn’t taken off through mobile, such as voice recognition or augmented reality. Financial Institutions and vendors like Fidelity, Discover, La Caixa, Wells Fargo, Westpac New Zealand, Intuit, MasterCard, and LevelUp have already voiced interest in Google Glass or other wearables. But should banks take Google Glass seriously as a possible channel? There are two ways to look at it. Google Glass, and more broadly wearables, should be taken seriously inasmuch as they COULD represent what the future of banking might look like. Wearable smart technology is indicative of the growing number of devices and channels. Whether those devices will be smart watches, Google Glass, a smart fridge, or whatever else is anyone’s guess. As banking becomes more digital, however, banks are going to be pressed to meet the customer on their terms, no matter the device. It’s the culmination of customer-centricity that’s so often talked about in the industry, and which forms the basis for most retail banking strategies. https://www.youtube.com/watch?v=YwMzg0keYOs Simply put, these devices are not yet worth the investment by banks. As with most new technologies, hype precedes real value, inflating expectations. A TNS survey from January 2014 found that, between August 2013 and January 2014, awareness of wearable technology grew in direct proportion with lack of interest, while adoption hovered around 1%. For head-mounted devices, awareness grew from 52% to 64%, while lack of interest went from 34% to 46%. At a time when many banks lack dedicated tablet or smartphone apps, it would be foolish to rush into a wearable app. Even the largest banks have struggled to keep up with number of smartphone and tablet devices that have much higher adoption. Why complicate the process by releasing or developing functionality for wearables? Banks are better served dedicating time to figuring out and overcoming the challenges of a unified customer experience, or building out existing, proven channels that are popular today. Multichannel banking will assuredly get more complicated in the future, especially as transactions move out of the branch and become more digital. Banks looking to plan for the future, one that may necessitate a Google Glass or smartwatch app, would be wise to design a multichannel strategy that is agile enough to move with the market. For many institutions, this kind of timing will allow them to stay up-to-date with the trends, while not allocating resources too quickly to devices that may become liabilities.
August 8, 2014 by 1 Comment
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. 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: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
- 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.