- Customer Experience
- Operations and Risk
- Legacy Transformation / IT Platform Innovations
- Emerging Innovation
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.
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.
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.
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.
- We’re millennials, for better or for worse.
- 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.
- 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.
- 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
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
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?
This is a copy from my guest post for Finnovista that I wanted to share with you here as well.
A few years ago when we started collaborating in creating the Latin American Fintech community there were no Fintech associations, no Fintech conferences and for sure there was no mapping of Fintech start-ups at all. It has been quite a journey for all of us involved. Kuddos to the Finnovista team for being a key element and catalyser for these achievements!
What exciting moment to be in financial services! Many things going on. Banks are being unbundled; and its happening everywhere. Want to take a look? Check what’s going on in the US, Europe and in more near places across Latin America like Mexico, Brazil, Colombia, Argentina and Chile.
It’s making no distinctions, affecting personal and business banking equally. Consequently, the nature of competition is changing; and pressure is not expected to come from other financial institutions. In a recent Celent survey, to SME banking representatives from Latin American banks, most believe that fundamental changes that are expected to occur in the banking industry won’t come from other financial institutions; instead they are looking mainly to new entrants and adjacent industries.
In last year’s survey to retail banks in Latin America, Stanford University found that 47% of the banks see Fintechs as a threat. The same survey indicates that only 28% of the banks meet the needs of their digital customers. Not a position where you want to be.
Customer expectations, pressure on revenue and cost, and increased regulation don’t make the life easier for banks either. Fintech start-ups may advantage banks on responding to customer expectations and being leaner has Fintechs better positioned to pressure on costs; but they have to play under the same regulation and at some point earn revenues in excess of cost (a.k.a. be profitable).
FCA, the U.K. financial regulator, has opened its sandbox for applications from financial firms and tech companies that support financial services. Successful applicants can test new ideas for three to six months with real consumers under loosened regulations. This is something we haven’t see yet in Latin America, though regulators are increasingly open to the benefits of Fintech and innovation, particularly if it is related to financial inclusion: we have seen the support of regulators to mobile wallets across the region in the last couple of years. Mexico appointed this year an officer for Fintech development in what I see as the leading case in the region to facilitate the adoption of services provided by Fintechs under the umbrella – and supervision – of the regulator. Most lately, the Argentinean regulator has introduced changes enabling digital onboarding, and in payments facilitating competition and adoption; though no sandbox yet, but maybe a digital/branchless bank in the way? Will it be a disrupting incumbent or a new player? By themselves or in cooperation with Fintechs?
Indeed, there has been a lot of debate regarding the nature of the (best) relationship between banks and Fintechs; be it competition, cooperation or coopetition, banks need to play a different game. The ecosystem has changed incorporating a myriad of players and increased complexity. Banks must reconstruct their business models around three areas, recognizing that they are part of a broader and new financial ecosystem:
- Channels: How the bank serves customers
- Architecture: How the bank organizes to deliver value
- Innovation: How the bank delivers new ideas, products and services around both channels and architecture
Banks can innovate on their own, or partner with Fintechs or other 3rd parties; at the end of the day banks need to select and execute on the best innovation models. There is no single answer that fits all; each institution will have to discover the best combination of innovation models aligned with risk appetite, organizational culture and the target customers you want to reach.
It's hard to believe that an entire month has gone by since Oracle OpenWorld in San Francisco — but baseball fans will have noticed that things have been a bit hectic here in Chicago of late. Ironically, the Chicago Cubs clinched a playoffs berth on September 18th, the very day that Larry Ellison officially opened OPEN World with his first of several Keynote presentations.
My primary motivation for attending OpenWorld was to get an update on Oracle's two banking platforms — the new flagship Oracle Banking Platform (OBP) aimed at large retail banks and its stable mate FlexCube, the universal banking platform deployed by nearly 600 banks globally. After three days at OpenWorld, I realized that the real story of interest to banks is Oracle's emerging cloud story, which coupled with its existing core banking applications business puts them in a really interesting position to transform the core banking systems market.
Now a robust 72-year-old, Larry joked with the audience about being prohibited from climbing the stairs to the Keynote stage, but he still exhibits the intense competitive burn that served his company well during the ERP battles of the 1980s and 1990s. The difference is that these days, he's less focused on IBM or SAP as he is two new challengers: Amazon Web Services (AWS) on the IT infrastructure side and WorkDay on the applications side.
Of course, what AWS and WorkDay have in common are that they are both businesses with long-term prospects predicated on the continued growth and development of cloud services. Larry's first Keynote noted that we are witnessing generational change as companies move from "lots of individual data centers" to a smaller number of "super-data centers called Clouds". In a separate presentation, Oracle CEO Mark Hurd shared Oracle's view that within the next ten years, 80% of corporate-owned data centers will have been closed, with the remaining data centers running at 20% of today's capacity, running legacy workloads that are not easily ported to a cloud services environment (hey COBOL — I think they're talking about you!).
According to Larry, Oracle's "overnight success" in cloud services began ten years ago when it started reengineering its original ERP products — licensed software designed primarily for the on-premise market — into a new multi-client, multi-tenant architecture, as befitting a company that was pivoting to the emerging SaaS model. At OpenWorld, Larry shared how Oracle was extending its original SaaS business to embrace both the Platform as a Service (PaaS) and Infrastructure as a Service (IaaS) models — putting AWS, Google, and Microsoft all squarely in Oracle's competitive sights.
Of the three, AWS appears to be the primary target of Oracle's competitive ambitions: Oracle's new "Gen2" IaaS platform offers a virtual machine (VM) that offers twice as many cores, twice as much memory, four times as much storage, and more than ten times the I/O capacity of a comparable AWS VM. But there is a catch, according to Larry: "you have to be willing to pay less" than what AWS charges for a comparable VM. (While AWS might take issue with Larry's claims about performance and value, what is clear is that Oracle is planning a serious competitive challenge to AWS's supremacy in the IaaS race.)
In Larry's words, "Amazon's lead is over. Amazon's gonna' have some serious competition going forward."
This represents great news for the growing number of banks that have gotten past the question "Why cloud?" and have moved onto the more interesting question "How cloud?". For the largest banks like Capital One that have significant IT development capabilities in-house and with the willingness to experiment with new technologies, AWS makes a lot of sense. Banks can roll their own code, spool up a VM, and off they go. Capital One's cloud journey has been so compelling in fact, that the bank is in the process of closing down 5 of its 8 data centers while swinging many workloads to AWS. Most banks, however, are not Capital One.
For the mere mortals among us — banks coping with practical limitations on their ability to develop and host banking apps — having an IT partner with demonstrable experience on the application side and the infrastructure side can represent a real game changer in terms of the bank's appetite to make a leap into cloud-based banking services. While some banks have in the past been a bit overwhelmed by Oracle's ambitious sales pitch featuring its all singing, all dancing suite of integrated applications ("that's very impressive, but I only want a G/L!"), with Oracle's new IaaS offering a bank could mix and match Oracle applications (offered via SaaS) with third-party and in-house developed systems. That potentially a game changer for banks interested in cloud services, but overwhelmed by the complexity of going it alone with a public cloud provider.
That brings us back to OBP and FlexCube. OBP is a recently built Java-based core banking solution built for the needs of large scale retail banks. As such, OBP is aimed squarely at mainframe-based core platforms like Hogan, Celeriti and Systematics. FlexCube is a universal banking platform and has also seen some renewed investment from Oracle in the last few years. While today its primary market appears to be international banks, as a modular solution FlexCube can address specialized needs in the US market like cash management and trade finance. OBP and FlexCube continue to compete in the global core banking systems market on their own terms — with OBP having some recent success as a foundation for a new digital banking platform for Key Bank (Cleveland) and as the foundation of a complete core replacement project at National Australian Bank (Melbourne).
For larger banks intrigued by the promise of cloud services, but daunted by the complexity of building and operating their own environment, the opportunity to pull down an OBP license that is hosted in the Oracle Cloud while dragging other applications from their private data center to Oracle's IaaS platform could help achieve in one move the twin goals of core banking system and data center transformation. That's a rare 2-for-1 in a world where a widely-held truism is that every IT decision involves trade-offs among alternatives.
According to Larry, Oracle's annual revenue run rate for cloud is currently about $4 billion. Amazon recently announced that its revenue run rate for cloud services was north of $10 billion while just yesterday Microsoft announced its own revenue run rate for cloud has approached $13 billion. These are undoubtedly different businesses (AWS is more or less pure-play IaaS while Microsoft skews towards SaaS by virtue of the strength of its Office 365 business), so I won't pretend to make any apples-to-apples comparisons. The point remains that while it's still early in the cloud ballgame for Oracle — with deep financial resources, an impressive portfolio of banking applications, and Larry's intense "Will To Win" against the current market incumbents — bank CIOs need to pay close attention to what is going on in Redwood Shores.
Since my coverage areas include branch and ATM channel technologies, I often get asked, “What distinguishes successful branch channel transformation initiatives?”
Questions like this cut to the chase. Spare me all the charts & graphs, Bob, just tell me what successful institutions are doing. Fair enough. But, don’t we all want easy answers? How many diets are out there being promoted? They all sound pretty easy. If only…
But, I got to thinking… There are at least two hallmarks of successful branch transformation initiatives, despite there being a diversity of approaches and outcomes. Here goes:
1. Two, Not One
Except for the smallest of community banks, branch channel transformation involves two, concurrent initiatives – the current network and the future network. Why’s that?
Most banks appear to associate branch channel transformation with radical changes in the branch operating model. Arguably, for many banks, radical changes are needed. At the same time, very few North American financial institutions appear to have a clear vision of what they’d like to build. The “branch of the future” is not yet in focus. This is understandable given the cacophony of vendor voices urging banks to adopt a growing variety of physical designs, automation approaches, and paths to superior customer engagement. Banks should, in Celent’s opinion, embark on an ambitious branch of the future project with deliberate caution and methodical rigor. Proceeding in this manner — even with swift internal decision-making — will take several years. And implementation is rarely a “big bang.” Instead, new designs are rolled out over time, taking years to reach their eventual maximum impact.
The problem with this approach is two-fold. First, it tends to justify inaction until a clear future branch vision is embraced. After all, how can one begin a journey unless the destination is clear? The second problem is more significant — it confuses developing a future branch design vision with preparing the existing branch infrastructure for those new designs. For example, physical design is clearly a new branch design element. By contrast, underlying software platform choices and how new loans and deposit accounts get originated can impact both current and future branch designs.
I’ve spoken with too many banks who, for example, postpone a teller image capture initiative on legacy branches until their “future branch” design is finalized. Most institutions are under pressure for short-term results. Most branch transformation efforts won’t produce a near-term ROI. Two projects are needed – one on the current network and another focused on the future network – with close coordination between the two. Something like this:
2. Lead with Human Capital, Not Technology
The second hallmark has to do with when human capital plans are implemented – prior to, coincident with, or following future branch initiatives. Strongly-held opinions abound. What appears to resonate broadly is this: branch interactions are becoming more about sales/service and less about transactions. This invites new, more highly-trained roles with a different skill mix.
The prevailing argument for positioning human capital strategy at the tail end of the journey is typically cost-focused. No one wants to pay the price to recruit, train and compensate Universal Bankers – only to spend much of their day playing the teller role.
The prevailing argument for leading with human capital is user experience-focused. In the final analysis, what differentiates a branch experience from the constantly improving digital experience, if not face-to-face engagement? Leading with human capital may indeed be a more costly experiment. But every financial institution I’ve interviewed who did so are glad they did. Conversely, every institution I’ve interviewed who didn’t (many of them) wishes they had.
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.