The Enduring Importance of Physical Engagement in Retail Financial Services

I take no issue with the growing importance being placed on digital in financial services. Indeed, it does not take extensive examination to see, in Wayne Gretzky’s words, “where the puck is going”. Digital needs to be a top technology priority among financial institutions – particularly in highly digitally-directed markets such as North America and Western Europe. But, that doesn’t mean physical engagement is unimportant. In my opinion, in-person (physical) engagement will be of lasting importance in financial services for at least three reasons:

1. Most consumers rely on brick and mortar for commerce and will continue to do so.

2. Most retail deposits still take place at the branch.

3. Most banks do not offer a decent digital customer acquisition mechanism

Most Consumers Rely on Brick and Mortar for Commerce

This week, comScore released its most recent measurement of digital commerce. It was truly exciting, with Q4 2016 m-commerce spending up 45% over 2015! But, even with that astonishing year-over-year growth, m-commerce constitutes just 21% of total e-commerce. And, with two decades of e-commerce, total digital commerce comprised just ten percent of total commerce in 2015. Plenty of consumers still like stores. * FRB Consumers and Mobile Financial Services 2011 – 2016, Percent of smartphone users with bank accounts
** US Department of Commerce, Internet Retailer, Excludes fuel, auto, restaurants and bars
***comScore

Digital is not equally important across segments. Books and music, for example, are highly digital. Not so much for food and beverage. I’m being simplistic for brevity, but the data suggests that most commerce will remain tied to the store experience – at least in part – for the foreseeable future. I don’t think financial services will be an exception.

Most Retail Deposits Still Take Place at the Branch

Banks are keen to migrate low-value branch transactions to self-service channels, and there is perhaps no better low-hanging fruit than check deposits. Yet, with a decade of remote deposit capture utilization behind us, a January 2017 survey of US financial institutions (n=269) clearly shows that the majority of retail deposit dollar volume still takes place in the branch. Like it or not, the branch remains a key transaction point for many consumers and small businesses. Sure, the trend lines support digital transaction growth (thank goodness), but we have a long way to go – farther than the hype would suggest.

Most banks do not offer a digital account and loan origination mechanism

Even as banks would love to acquire more customers digitally, most aren’t well prepared to do so. Unlike most every other retailer on the planet, most banks initially invested in digital banking for transaction migration, not sales. That is changing, but not quickly. The mobile realm needs the most work. In a December 2016 survey of North American financial institutions, Celent found that large banks, those with assets of >US$50b, had made noteworthy progress in mobile customer acquisition capability since the previous survey two years ago. Smaller institutions lag considerably. For these reasons, branch channels are getting a make-over at a growing number of financial institutions, with the objective of improving channel efficiency and effectiveness – effectiveness with engagement, not just transactions. Celent is pleased to offer a Celent Model Bank award in 2017 for Branch Transformation. We’ll present the award on April 4 at our 2017 Innovation & Insight Day in Boston. In addition to presenting the award trophies to the winners, Celent analysts will be discussing broader trends we’ve seen across all nominations and will share our perspectives why we chose those particular initiatives as winners. Make sure you reserve your slot here while there are still spaces available!

Rethinking the Customer Experience: Themes from the 2017 Model Bank Submissions

This is the third article in a weekly series highlighting trends and themes from Celent’s Model Bank submission process. Dan Latimore and Zil Bareisis led off with two great pieces on the evolution of the Model Bank Awards.  Articles from this week on will explore some of the broader themes within each category. Customer experience initiatives are typically the most numerous.  While this makes the category more difficult to judge, it offers immense insight into what’s happening in the market. The standards of customer engagement are constantly changing, and banks are experimenting with new ways to drive increased satisfaction, higher revenue, and greater loyalty.  Three themes stand out this year. Digital banking subsidiaries: Many banks are finding that existing systems are too rigid to accommodate a truly digital experience.  A number of customer experience submissions this year focus on building out separate digital subsidiary brands within traditional institutions. Banks are typically going in two different directions.  The first is a digital subsidiary as an offshoot of the parent bank.  These brands are basically separate products that offer a digital-first experience to a certain demographic, but are closely tied to the main bank. Brands are similar and products/ services are frequently cross-sold. The second type is a completely separate brand ring-fenced under a different technology stack, operating under the umbrella of the parent organization but effectively a separate entity.  These banks may leverage the parent for product support, but are usually sandboxes for “testing” digital.  Submissions were a mix of the two approaches. Fintech partnerships: The shift from disruptive to collaborative relationships between financial services and Fintech startups feature prominently in this year’s award submissions.   They range from standard B2B vendor relationships to more advanced functional partnerships where portions of the Fintech’s offering is exposed within the traditional institutions digital UI.  Initiatives reflect the growing acceptance among the industry that banks can’t be all things to all people.  Institutions are acknowledging the valuable and complementary role Fintech can play in providing a modern, innovative customer experience. AI and bot technology: Bursting out of the gate in 2015/16, Banks have begun a mad dash towards AI and other bot technologies.  This is a broad spectrum of projects that include everything from simple bots to cognitive computing.  Submissions this year show institutions spreading their resources across many different applications.  Like any emerging technology, most institutions are in a “test and learn” phase.   These technologies are at varying levels of maturity, but the potential to revolutionize the customer experience through AI may be truly transformational, and Celent was pleased to see so many projects in this space. This is just a taste of what we’ll have in store at the 10th annual Innovation and Insight Day on April 4th in Boston. We’ll be diving much deeper into the various topics, revealing the winners of all the awards, and discussing how they combined serious innovation with tangible business benefits to stand out from so many strong contenders. I look forward to seeing you all there.

Three Common Mistakes Banks Make

In my work as a research analyst, I run into three particularly common mistakes. Banks aren’t the only ones that make these mistakes. I make them too and have to be vigilant to avoid them.
1. Failure to appreciate diversity of needs or preferences
2. Failure to appreciate the shrinking half-life of facts
3. Failure to skate to where the puck is going
Let’s look at each one briefly…

Failure to appreciate diversity of needs or preferences This is utterly common. You see it in headlines all the time. “Millennials this…”, “Small businesses that…”, Community banks are…”. The trap involves extrapolating limited data to an entire population. Two current examples illustrate: The Use of AI in Banking is About to Explode. Apart from confusing AI with predictive analytics (which is more broadly used), the article asserts “explosive” future adoption of AI right around the corner. I’ll just say that this assertion vastly overstates planned adoption of AI among North American banks based on recent Celent research. Bank on Changes. Among other things, this pleasant article states “Smaller community banks like Edison, which emphasize personal service, said they have no plans to scale back drive-through or other services at brick-and-mortar locations.” While referring to a small number of community banks interviewed for the article, it projects those results on the entire community bank population.

So, are community banks planning on maintaining their current brick-and-mortar services in their entirety – despite the growth in mobile banking utilization? Some are and some aren’t. the figure below displays results a very question posed in a December 2016 Celent survey of North American financial institutions. “Compared to your current branch count, how many branches do you expect your institution will operate five years from now?” The report is not yet published. The idea is simple: banks serve diverse markets and make a diversity of decisions as well. The diversity of expected response is glaring in this data! So as not to give away too much of the report’s contents, I refrain from graphing the results of that question by asset tier. Failure to Appreciate the Shrinking Half-Life of Facts Assertions abound about customers, what they do, want and value. Some data points supporting these assertions are dated. This is increasingly dangerous. Samuel Arbesman argues for a shrinking half-life of facts in his book, The Half-Life of Facts. Most substantive change takes a while to accomplish – particularly among large organizations. I think many banks are at risk by assuming the facts as they knew them at the beginning of a protracted initiative will remain after the initiative is finished. When it comes to mobile, for example, six months is a long time and a year is eternity.

Failure to Skate to Where the Puck is Going Even those of us who aren’t hockey fans are familiar with the famed Wayne Gretzky quote about skating to where the puck is going instead of where it has been. I saw this up close and personal as part of a research effort exploring the current and likely evolution of retail delivery channel technology. Omnichannel delivery clearly remains aspirational at most institutions (I’ll defend that assertion thoroughly in the upcoming report). Yet, even as most surveyed institutions concede the importance of omnichannel delivery, the significant majority are not yet meaningfully engaged in bringing it about. How could that be? Many banks – particularly those with below industry average mobile banking customer utilization – aren’t feeling the pain yet. They are skating to where the puck has been. When they do feel the pain, it will likely be the result of much damage already inflicted.

Introducing Celent Model Bank 2017 Awards

As my colleague Dan Latimore wrote in the article that began this series, 2017 was the best ever year so far for Celent Model Bank programme in terms of quantity, quality and diversity of nominations. As we went through the judging process, we felt a range of emotions – grateful and privileged to receive so many amazing stories, and daunted by the prospect of having to pick the most worthy award recipients. In the end, we are excited and confident about our selection of winners, yet we are sorry that we could not recognize so many others that clearly also deserve recognition.

Over its ten years of existence, Celent’s Model Bank programme has always changed and evolved. In the last few years we have been awarding multiple initiatives in a small number of categories – for example, last year we had four winners in Digital Banking Transformation, the busiest of seven categories. While all the awards within the category were equal, we knew that some institutions craved for more exclusive recognition. This year, we decided to take it a step further and to introduce specific named awards with only a single winner for each award.

After long deliberations, the judging panel decided to recognise 21 initiatives as winners of the following Model Bank 2017 awards:
  • Consumer Digital Platform – for delivering an outstanding digital experience for consumers. The award is open for traditional financial institutions, digital-first, and challenger banks.
  • Small Business Digital Platform – for delivering an outstanding digital experience for small businesses.
  • Corporate Banking Digital Platform – for delivering an outstanding digital experience for corporate clients.
  • Consumer Banking Channel Innovation – for the most creative use of consumer channels, or the most effective channel integration.
  • Branch Transformation – for the most compelling branch transformation initiative, including branch format innovations and creative use of live agents.
  • Product Innovation – for demonstrating the ability to launch multiple innovative products.
  • Open Banking – for the most impressive API strategy and results so far.
  • Payments Product – for launching the best consumer or business payments product.
  • Lending Product – for the most impressive consumer or business lending or collections initiative.
  • Fraud Management and Cybersecurity – for the most creative and effective approach to fraud management or cybersecurity.
  • Risk Management – for the most impressive initiative to improve enterprise risk management.
  • Process Automation – for the most effective deployment of technology to automate business processes or decision-making.
  • Employee Productivity – for improving employee training or collaboration, incentivising employees, or enabling mobile agents.
  • Payments Replatforming – for the most impressive project to improve payments back office, e.g. payment services hub implementation or cards replatforming.
  • Core Banking Transformation – for the most compelling initiative to transform a traditional core banking platform.
  • Banking in the Cloud – for innovative approaches to implement a banking platform, e.g. deploying in the cloud.
  • Banking as a Platform – for creating an ecosystem of partners via a banking platform that connects and enables third parties.
  • Emerging Technology for Consumers – for creative deployment of emerging technologies for consumers (e.g. AI, ML, API, biometrics, wearables, voice, blockchain, etc.)
  • Emerging Technology for Businesses – for creative deployment of emerging technologies for small business or corporate clients (e.g. AI, ML, API, biometrics, wearables, voice, blockchain, etc.)
  • Most Promising Proof-of-Concept – for the most promising experiment – pilot or proof-of-concept – with emerging technologies.
  • Financial Inclusion – for efforts to bring financial services to unbanked and under-banker communities.
And of course, we also kept our Model Bank of the Year award, first introduced in 2012, which recognises one financial institution that in any given year simply stands out from the crowd and uniformly impresses Celent judges.

For the time being, only the nominees will know if they won any of these awards, as we begin working with them to distill their achievements into a series of case studies. We will be announcing all winners publicly on April 4 at our 2017 Innovation & Insight Day in Boston. In addition to presenting the award trophies to the winners, Celent analysts will be discussing broader trends we’ve seen across all nominations and will share our perspectives why we chose those particular initiatives as winners. Make sure you reserve your slot here while there are still spaces available!

Model Bank 2017: Some First Impressions

Growing up, a family Christmas tradition was that my mother would ritualistically proclaim, “That’s the most beautiful tree ever.” It seems that way with Celent’s Model Bank awards, too. In our tenth year we’ve just been through more than 150 submissions, and just like my mother, I can say that this was the best crop yet. The quantity emphatically broke records, and the quality was outstanding. Ongoing innovation in banking technology is clearly beginning to pay off, and we’ve been privileged to learn an immense amount from all of the financial institutions that took the time to tell us about their how they’ve been using technology and innovation to serve customers better, become more efficient, and mitigate risk.

Those who’ve followed the Model Bank Awards closely will note that our awards format has evolved to follow the market over the years. As the imperative to be more customer-centric has become more pressing, it has in turn begun to blur the lines between one of the oldest ways to divide banking: channels. And lines elsewhere begin to blur, too – for instance, should a mobile payments initiative be in mobile, or in payments, or in its own category? We’ve addressed this conundrum with five categories chosen to provide a broad cross-section of the banking landscape.
  • Customer Experience
  • Products
  • Operations and Risk
  • Legacy Transformation / IT Platform Innovations
  • Emerging Innovation
The entries were exceedingly diverse, and came from repeat submitters and new participants. EMEA led the pack quantitatively, with APAC and North America roughly the same, and the strongest showing yet from Latin America. We expected to see nominations around digital banking, branch and core transformation, and payments, to name a few, and we weren’t disappointed. We were also pleasantly surprised to see intriguing initiatives involving employee productivity, cross-selling, AI, Biometrics, and Blockchain.

Inevitably some will be disappointed; there were so many worthy initiatives that the judging was the most difficult by far. It’s certain, though, that Celent analysts will have a full plate for the next two months as we reach out to our Model Banks and complete the work of distilling their rich stories into pithy case studies that illustrate the incredible innovations banks are undertaking today.

As for what you can expect between now and April 4 in Boston, look for a series of articles from the Celent analyst team highlighting some of the many insights that we’ve gleaned along the way. We’d recommend that you check back in; as we notify the winners and begin to develop our case studies, we’ll keep you posted with a series of articles like this one that detail some of the insights.

And while space is filling up fast, there’s still time to register for 2017 Innovation & Insight Day, April 4, 2017 in Boston, Massachusetts. Find out more about last year’s event here.

Thoughts on Branch Transformation 2016

Last week, I had the pleasure of attending and presenting at Branch Transformation 2016, sponsored by RBR. The event was held in London on 6th-7th December. Unlike one once stalwart retail banking industry event in the US, RBR’s attendance has been on a multi-year growth trajectory. This year, attendance was up 20% over 2015 and included delegate representatives of 116 banks from 53 countries. It was time well-spent. [Read more…]

Goodbye PFM, Hello PFE (Personal Financial Experiences)

Personal Financial Management – PFM – has been a worthy goal pursued by many providers, yet consumers continue to ignore its possibilities. Rather than trying to incrementally expand the share of 10-12% of PFM users, banks should instead focus on the next stage in the evolution of personal finance: Personal Financial Experiences, or PFE.

We’re big fans of PFM (Personal Financial Management)…conceptually. We think that it has the potential to help people better control their finances and live happier, less-stressed lives. And yet, despite numerous efforts over the years, traditional PFM has not gained significant marketplace traction. It’s too cumbersome and inconvenient, while crucially often serving up bad news – and who wants that? At the same time, banks have recently begun to focus wholeheartedly on the customer experience of their clients, seeking to improve and coordinate the various interactions that consumers have across multiple and diverse touchpoints.

The convergence of these two trends is PFE, defined as A coordinated set of customer interactions that pushes and provides customers relevant, timely information and advice to enable them to live more informed and proactive financial lives. PFE gives customers the ability to access whatever level of financial detail they want, but focuses primarily on context and appropriate accessibility.

A variety of companies – both banks building their own, and vendors focused on developing white-labeled software – have created a wide range of PFM approaches. Most have historically required a fair degree of intentionality on the user’s part, and treat PFM as a discrete activity – a separate tab or a standalone app, for example. PFE changes that. Users will experience PFE without ever having to call it up; it will just happen to them via an alert on their mobile, an idea from a branch representative, or an unexpected landing page on their laptop. The “E” stands for Experiences, plural. PFE isn’t just one touchpoint; it encompasses the wide variety of interactions that a consumer has with her financial institution. Today’s Digital banking will, in fact, become PFE. When banks move to the end-state of PFE, customers will no longer have to choose to manage their financial lives (or by not choosing, default to unmanaged ad-hocracy); instead, financial management will happen in the background, facilitated and orchestrated by the bank, as part of the overall relationship.

Three key principles provide the foundation of a robust set of Personal Financial Experiences.
1 Automatic: Users don’t have to put much conscious thought or effort into entering the data or even asking for guidance. The system gathers that information and proactively provides nuggets of advice and discrete, concrete calls to action.
2 Intuitive: There is no learning curve. Just as kids can start using a new mobile phone out of the box without reading any sort of manual, PFE will be intuitive and user-friendly. PFE becomes normal digital banking.
3 Relevant: PFE will deliver only the information needed at the appropriate time. No longer will a user be confronted with a huge dashboard of charts and dials confusingly presented. Relevance and contextuality will rule.

The iPod wasn’t the first MP3 player; it built on and refined pioneering work done by others. So, too, is PFM the first step in the journey to PFE; we’re not there yet, but we’re well on our way, helped by advances in technology and the incremental changes that FI tinkerers continue to make. We’ll be exploring this concept in greater depth over at celent.com; please check back in, or reply to this post, if you’d like to learn more.

Banking Third Party Risk Management Requirements are a Big and Expensive Ask

Celent, through its work with Oliver Wyman, estimates the cost to US financial institutions of undertaking due diligence and assessment of new third party engagements to be ~ $750 million per year. Institutions are paying three times as much as their third party to complete on this exercise. The average cost to an institution to carry out due diligence and an assessment of a new critical third party engagement is $15,000 and takes the institution approximately 16 weeks to complete.

The top ten US banks average between 20,000 and 50,000 third party relationships. Of course, not all of these relationships are active or need extensive monitoring. But the slew of banking regulatory requirements for third party risk management is proving to be complex, all-consuming and expensive for both institutions and the third parties involved. In a nutshell, institutions are liable for risk events of their third and extended parties and ecosystems. The FDIC expresses best the sentiment of worldwide regulators:

“A bank’s use of third parties does not relinquish responsibility… but holds it to the same extent as if the activity were handled within the institution." www.fdic.gov

If an institution doesn’t tighten its third party risk management, it is significantly increasing the odds of a third party data breach or other risk event and will suffer the reputational and financial fallout.

In the first report of a two-part series, just published by Celent, “A Banker’s guide to Third Party Risk Management: Part One Strategic, Complex and Liable”, I show how institutions can take advantage of their established risk management practices such as the Three Lines of Defense governance model, and operational risk management processes to identify, monitor and manage the lifecycle of critical and high-risk third party engagements across functions and levels. It describes the components required for a best-practice program and shows examples of two strong operating risk models being used by the industry that incorporates third party risk management into the enterprisewide risk management program.

Unfortunately, there are few institutions that have successfully implemented strategic third party risk management programs. Most institutions fall between stage 1 and 2 of the four stages of Celent’s Third Party Risk Management Maturity Curve. But continuing to operate without a strategic third party risk management practice will leave your institution in the hands of cyber fate and the regulators.

Leapfrogging the bank app to go straight to the electronic assistant

 

No one downloads a banking app from their store of choice for fun, nor do they open it up to amuse themselves. Instead, bank apps are used to accomplish specific tasks – check a balance, pay a bill, send money to a friend. Despite the undeniable utility of these apps, institutions struggle to persuade their customers to use them; adoption rates, depending on the specific measure, hover around 50% and have been stuck for a while at that plateau. Furthermore, while it’s undeniable that many customers want a better customer experience, and at least some of those customers would like more and better features, digital executives struggle to find the ROI of investment in their apps. Of course, there’s the argument that it’s analogous to malls that put up Christmas and other holiday decorations – consumers just expect it, and there’s not an explicit ROI – but that’s the subject of another post.

What if consumers could perform their basic banking tasks without ever having to open up their banking app? They could say, “Siri, what’s my bank balance?” or “Alexa, pay the water bill out of my main checking account.” While we’re not there yet, consumer desire for convenience (aka “seamlessness” or the “frictionless customer experience”) knows no bounds. My experimentation with Siri and Alexa, together with my preliminary research into Artificial Intelligence in banking, have led me to hypothesize that this scenario is a lot closer than many bankers might imagine. In the obligatory Uber example, the payment is invisible; what happens when the consumer makes this happen in all other sorts of interactions?

How are you prepared to offer your customers this new level of service? Do you have APIs that will let this happen? And is there a strategy to go beyond simply fulfilling a request and offering more insight, advice, or perspective than simply what being asked for? Like European banks facing the challenge of PSD2, all retail institutions can look at this as a moment where they’ll be relegated to the background or one where they can revamp their service models to build better, stronger, and deeper customer relationships.  

A Millennial’s Home-Buying (and Mortgage) Journey

At Celent we take a very customer-centric view of the banking experience. My husband and I recently relocated and bought a new house. As first-time home buyers, we were nervous about the biggest purchase of our lives. Where do we start? How much will it cost? How do we know what type of loan is right for us? Before I start, there a few things you should know about us.

  1. We’re millennials, for better or for worse.
  2. Like most millennials, we are fans of online/mobile banking and rarely step inside a branch. In the last few years, I’ve only been to a bank branch a handful of times.
  3. We both have very good credit (mid 700s) and had enough saved up to put 20% down to avoid PMI. Anyone else who has gone through this process knows that these factors can strongly impact which lenders will approve your loan. So even though this was our first major loan, we were considered relatively low-risk.
  4. We have a fee-only financial advisor who I’ve been using for the last 10 years.

One piece of advice from my financial advisor that stuck with me was, “As tempting as it is, don’t just go with the lowest advertised rate you see on the side pane of Zillow.” He warned me that interest rates are only one of several factors to consider when shopping for a mortgage and that those ads are only giving you one piece of the puzzle. This advice stuck with me because that’s exactly how I had been shopping for mortgages! Clearly, I had no idea what I was doing.

As I got further into my shopping experience I quickly learned that those low advertised rates obnoxiously flashing in a pop-up window were rarely the rates you were actually quoted. This is especially true if you are young and a first-time mortgage customer. In fact, some of the actual rates I was quoted were almost double the advertised rate. Many other lenders just simply never got back to me or made it difficult to reach a live representative.

One of the things I valued most was customer service, including the ability to talk to someone without going through a million different menu options only to be put on hold for 20 minutes. Like many others in my age group, I don’t like talking on the phone; I prefer communicating via email and text. This, though, felt different. I felt like I needed much more handholding and someone to explain all of the legal jargon in this daunting process.

My financial advisor suggested I reach out to Wells Fargo since many of his other clients have had pleasant experiences with them. I took his advice and requested an application for a Wells Fargo mortgage, and I received a phone call the next day from one of their home mortgage consultants. Right away, I noticed he had a kind and personable demeanor, and about 15 minutes later, I was preapproved for a loan. During our conversation, he explained how the mortgage process worked and introduced me to this handy online tool they call yourLoanTracker.  

Figure 1: yourLoanTracker Homepage

jeannie-blog-image-1

Source: Wells Fargo

Basically, it tracks the loan’s progress and acts as a portal for everything related to the loan: documents, disclosures, contact information, due dates, etc. If there was something I needed to sign, I could digitally sign the document via the portal. The mobile app was another feature that I found somewhat helpful, but was mostly there just to provide an easy way of seeing the loan’s progress on the go. There was also the option to receive text and email alerts when I had a new “task” on my to-do list and to remind me of approaching due dates.

Figure 2: Mobile Alerts and Apps

jeannie-blog-image-2jeannie-blog-image-3

Source: Wells Fargo mobile app

A few “closing” remarks (no pun intended!):

  • We were not and still are not Wells Fargo banking customers, and aside from recommending a few products during our initial conversation, I appreciated that we were never aggressively cross-sold or pushed to open a checking account.
  • About 75% of the entire process was done digitally. We never visited a branch or talked to anyone in person; everything was done either digitally or over the phone. While some may prefer in-person visits, I found that phone conversations were more than sufficed.
  • After closing, our consultant called to ask how everything went and if we were happy with our experience (a nice personal touch).
  • Our actual interest rate was only two-tenths of a percent higher than what was advertised, and they were up front about all fees. In fact, we paid less in closing costs than what they initially quoted us.
  • We closed on time, just under eight weeks after being preapproved.

While Wells Fargo didn’t have the lowest rates, the combination of digital tools and customer service was worth the slightly higher rate. Yes, simple touches like customer service and communication are valued even among millennials, particularly when they’re going through something new and complicated! Shocking, right?