Takeaways from the Latest Research in Consumer Financial Decision Making

Takeaways from the Latest Research in Consumer Financial Decision Making

Once a year I take a break from industry conferences and vendor analyst days by going to the Boulder Summer Conference on Consumer Financial Decision Making, hosted by the Center for Research on Consumer Financial Decision Making at the Leeds Business School at the  University of Colorado Boulder. Academics, regulators, central bankers, and a handful of private sector people (like me) gather to discuss the latest research in the field. For many bankers much of the content is, frankly, too academic, but there are always some nuggets worth passing along to those who are interested in forging closer connections with their banking customers. My key takeaways follow.

Consumer data is valuable; advertisers & consumers don’t get their fair share

We all know that data is valuable; The Economist has even called it our most valuable resource, the new oil. Banks have historically not done a great job of monetizing the data they have, but neither have consumers. Consider a three-actor model for internet advertising consisting of an advertiser, an ad exchange, and the consumer. In different scenarios (which vary by who has how much information on consumer demographics), the ad exchange typically is the big winner, the advertiser comes in second depending on how much data they have, and the consumer rarely gains any of the economic benefit. Who’s going to step up and design a business that helps consumers monetize the value of their data?

Scope Insensitivity can be used for good

I’ll admit that this is a new concept for me, and one that is completely counterintuitive. Here’s an example from a site called LessWrong:

Once upon a time, three groups of subjects were asked how much they would pay to save 2,000 / 20,000 / 200,000 migrating birds from drowning in uncovered oil ponds. The groups respectively answered $80, $78, and $88. This is scope insensitivity or scope neglect: the number of birds saved – the scope of the altruistic action – had little effect on willingness to pay.

Researchers studied this phenomenon with credit card bills. They found that a group of people struggling with debt tended to pay roughly the same (rounded) amount on their credit card bills each month, regardless of the balance, a classic case of scope insensitivity. Here’s the clever part: it turns out that if people are paying, say, $50 once a month, they’re generally willing to pay roughly that twice a month, thereby improving their financial position over time.

Getting people to take action, let alone change, is really tough

An experiment in the UK tried five different ways to let consumers know that they could earn a higher rate of interest with a different kind of savings account at their existing bank. In the best case, only ~10% of those notified acted on the offer. There were a variety of hypothesized reasons, and there was certainly a great deal of consumer inertia at play, but I was frankly surprised at the low take up rate. The most successful scheme used a form that a customer could sign and mail back in to make the switch. It was familiar-looking and relatively simple, but still had a low acceptance rate. I’d bet that a lot of people were suspicious of the offer; it simply looked too good to be true, and why would my bank offer to switch me into a product where I’d be earning more?

I also liked the categorization of three flavors of switching costs. Paraphrasing, they’re ignorance, inertia, and inattention. While it may be difficult to rank the relative importance of each, bankers seeking to change behavior should be clear about which obstacle they’re trying to overcome.

Using Prepaid Accounts to set aside funds shows some promise

I’ve long advocated that banks and credit unions consider taking a portion of their marketing dollars and use them to pay consumers directly to encourage better financial behavior. An experiment tested various methods to encourage consumers who held the American Express Serve prepaid card to save. There are now some early indications that incentivizing consumers by paying them $10 to try out the savings feature is an effective strategy. More details are available at a landing page for the study here; it contains a link to the full report.

As the research from the CFPB states,

The results emerging from this pilot suggest that incentivizing prepaid card customers to save, and providing an opportunity for them to do so using a savings feature that keeps funds dedicated for saving separate from those used for spending, could provide tangible financial benefits. Consumers in this pilot demonstrated a willingness to take up the savings feature, indicating interest in alternative savings vehicles, and some customers also reported actual changes in their financial behavior.

Financial Education, done right, can work

Much work at prior Boulder conferences has examined the failures of financial education / literacy programs to make a significant difference. My hypothesis has been that many of them simply weren’t very good, so they didn’t work. To simplify, it’s the difference between having a good teacher guiding a well-designed course vs. a bad one teaching crummy material. As program designers learn what makes a program good, they’ll design better offerings, and efficacy will improve. An interesting pilot on 529 enrollment used parent education via a 45 minute session, together with targeted incentives and a thoughtfully designed curriculum, showed promising results. So, too, did an experiential program called My Classroom Economy that incorporated elements of financial education into classroom settings throughout the day, regardless of the course, and without having dedicated lessons set up specifically to teach financial literacy.

Like the American Express experiment, the use of a $50 offer to seed the 529 account was critical in enticing people to take the time to open the account before they left the education session. Immediate action to overcome inertia, together with a financial incentive, was critical.

Caveats and wrap-up

Let me end with a caveat: the researchers are much more precise, measured, and nuanced than I am in their reporting of their findings. They are extremely careful to note the limitations of their research and circumspect about its broader applicability. I may be overenthusiastic in my interpretation, and have not taken the time to caveat my interpretations of their research as carefully as they would. Nevertheless, the insights that these and other researchers continue to generate have potentially-far reaching implications as banks try to improve their relationships with customers and generate win-win outcomes.

Going to Germany? Don’t Forget Your Cash!

Going to Germany? Don’t Forget Your Cash!

We analysts travel quite a bit to different places around the world. As someone who is always interested in what's going on in the payments world, I have a keener eye on my payments experiences than probably most people. I shared some of my observations about those experience on these pages in the past.

Most of the time these days I don't have to think too much about money – my trusted Visa, MasterCard and American Express cards have been serving me well, to the point that I don't even bother exchanging currency before I get on the plane to many countries in Europe, especially Scandinavia, and increasingly, the US as well. During my last trip to Boston, I left London with just over $30 in my pocket and came back with more of less the same. Cards for meals and coffees, and Uber for taxi rides covered the basics, so the only cash I spent was on a few tips in the hotel.

I just came back from a weekend in Germany, in Wuerzburg, a lovely little town in Bavaria, about half-way between Frankfurt and Nuremberg. And I am very glad I had plenty of cash with me!

Some of it was predictable – the main purpose of my trip was a small music festival, and I expected that once inside, I would need cash for most things, including merchandise (vinyl, cds, t-shirts), snacks, and drinks. Incidentally, buying a drink there was an interesting experience in itself, as each drink included a deposit. So, for example, you would pay EUR 3.30 (in cash) and would get a bottle of beer or a glass of wine and a red plastic token. If you take your empty glassware and the token back to the bar, you get 1 Euro back! I know that in some European countries, you can take your empty bottles and cans back to the store and get some money back, so perhaps that was the reason for the somewhat complicated procedure here. Or perhaps it was a creative way to keep the venue tidy? And, by the way, these prices are not illustrative – a large glass of excellent local white wine was indeed less than 3 EUR once you got back your deposit!

What did surprise me was when I tried to buy something in a proper store in town. I asked if they took cards, and the shopkeeper assured me that yes, they took cards, "as long as they were EC." At first, I thought that perhaps he meant EMV, as in "EC = electronic chip", so I tried first my credit, then my debit cards. Only when both were rejected, I realised that he meant they only accepted "EC = electronic cash or EuroCheque", a German payment instrument that is similar to a debit card, but only works locally. This was a relatively small, "mom-and-pop" store, but I also remember having exactly the same experience on another trip to Germany in a much larger department store. That time I didn't have cash, so had to leave the store empty-handed…

I must also say, before I create any false impressions, that my international cards worked just fine in many places, including the hotel and the restaurants. However, that's a typical T&E sector, which is always the first one to accept international payment cards. I do understand the prevalence of local payment methods and the merchants' preference for those, but by limiting choice, these places do run a risk of losing customers or at least individual transactions.

So, what's my travel advice? Do you homework and understand local payment preferences, but if in doubt, take cash! By the way, that process (getting cash) itself is getting a make-over – there have been quite a few announcements recently from banks enabling customers to withdraw cash from ATMs without a card. However, these announcements also highlight the diversity of approaches being deployed. I am in the midst of writing a report on different ways to implement cardless cash withdrawals, so if you are a Celent research client, stay tuned!

Improving the Banking Customer Relationship: One Simple, Non-Technical Solution

Improving the Banking Customer Relationship: One Simple, Non-Technical Solution

We’ve seen that banks are focusing intensely on the customer experience, and very often they’re using technology to try to make that happen, whether it’s through predictive analytics, bots, or new branches. There’s another tack to take that can complement these laudable efforts: just be more human – and mean it!

I travel a lot, and so have been reading recent stories of airline customer service disasters with a mixture of horror and disgust. Yet some airlines manage to rise above this. Here’s a quick test: which airline offers this: a 2x4x2 business class seating configuration between the US and Europe? And then wouldn’t let a passenger switch to an empty seat in the same class? Is it Southwest or United?

Here’s the other one: which airline turned a plane around on the tarmac when a passenger’s husband called because their son had suffered a grievous injury? And then rebooked her to the city where he was in intensive care, for free? Southwest or United?

The answers are, of course, United and Southwest, respectively. So here’s my point: what would it take for your bank to have a reputation for customer service like Southwest’s?

Here’s one simple suggestion that has nothing to do with technology; it has to do with homes, the biggest assets of most families, and something invested with a tremendous amount of emotion. In the course of home ownership I’ve received a really nice bottle of wine from a contractor (perhaps an indication that he was overpriced, or maybe a referral inducement, or maybe that’s just the way he does business). We got flowers from our realtor. But never once has any of the banks I’ve financed or refinanced with acknowledged me with anything remotely personal. How hard would it be to send along a fruit basket, or a guide to the neighborhood, or even a decent bottle of wine? If my contractor can do it for a job worth a few tens of thousands of dollars, why can’t my bank do it for hundreds of thousands? Just a thought.

The Great Filter for Digital Challengers

The Great Filter for Digital Challengers

It seems like almost weekly I’m hearing something about a new challenger or digital-only bank brand.  The velocity of news is substantial, but despite years of hype, it seems this class of institution is still largely treading water.

It reminds me of The Fermi Paradox.

The paradox was originally posed as a question by the physicist Enrico Fermi about the apparent contradiction between the probability of life in the universe and the complete lack of evidence to support it. With so many supposed earth-like planets, why haven’t we been able to find success stories?

One of the proposed theories is the idea of a Great Filter in the evolution of life.  The theory goes that as life evolves it must overcome leaps in species advancement, one of which is a Great Filter that almost always stops its progress.

In the universe of banking there’s plenty of “new life,” specifically challenger banks looking to compete with traditional institutions (I won’t compare them to advanced species for obvious reasons). Despite major fanfare within the industry, however, these challengers have largely struggled to adapt and grow. Like life in the universe, could there be “great filter” keeping these new entrants from flourishing?  I’d say there are a few contenders.

Technology

What old technology lacks in flexibility it makes up for in stability.  It seems that for emerging providers, what’s made up for in flexibility is lost in stability. Simple, for example, has had its share of technical issues over the past couple of years. In late 2014, a systems upgrade lead to a number of glitches, including bill payment going down, online banking being inaccessible, and the safe-to-spend feature showing incorrect balances.  Some accounts were locked for more than 24 hours.  The transition process to BBVA also presented issues with integration.  Systems had to be rebuilt, and customers had issues with using debit cards, not being US citizens, and just recently, losing their accounts (Simple said it wasn’t able to transfer everyone before its relationship with The Bancorp Bank ended).

Monzo (formerly Mondo) out of the UK had multiple issues inside of a week.  It had outages with its third party card processor, and then a few days later customers reported not being able to properly view their balances or display transactions.

Traditional financial institutions have long known that trust is an asset, whether it’s trust to keep money safe or trust to keep data secure.  Technology has been built around establishing reliability.  Challenger banks and neobanks may be opening themselves up to risks associated with applying concepts of agility to the complexities of banking, and this may be a strong enough filter for reaching critical mass.

Revenue

In addition to trying to provide an amazing customer experience, almost all challenger banks share the same commitment to fee transparency.  In recent years, many traditional banks have used fee income to supplant lower than usual net interest margins.  Fees have been (often rightly) perceived as punitive and opaque.

The quest for fee relief is admirable, but ultimately emerging challengers need to make money to fuel new investments. For some that’s been an issue. The neobank Moven, after struggling to find a significant core audience in the US or overseas, decided to pivot and start selling its underlying front-end technology to traditional banks, most notably TD Bank. Customers Bancorp recently put BankMobile up for sale, citing profitability concerns stemming from limitations on debit interchange once the bank’s assets exceeded $10 billion.  BBVA also recently reported a total of $89.5 million in goodwill impairment from the acquisition of Simple Bank in 2014.

Challenger banks are fully committed to reimagining financial services, but many haven’t yet reimagined the business model. Banks that are furthest along are the likes of Knab in the Netherlands and Fidor Bank in Germany (acquired by France’s BPCE Group) which have applied subscription-based pricing for consumers.  Similar to Netflix or Pandora, the idea is that consumers will pay for value.  What’s clear, however, is that the complexities of financial services require a scale of investment that presents a bigger barrier to entry than for other platform-based offerings (i.e. movies and music).  If consumers are paying for value, then the question is whether a challenger can persuade consumers that they’re receiving enough value to validate a subscription before it begins to hurt its financial viability.

Acquisition

When confronted with barriers to organic growth, some challengers have found it easier to be acquired. When BBVA bought Simple, CEO Josh Reich said that BBVA would provide them with the resources to grow faster.  Many took this as an admission that customer growth was slower than expected. When Fidor was purchased by the French banking group BPCE, the German bank said that the sale would “…allow Fidor to continue its international expansion…” as well as “…improving our overall financial sustainability.”

The question is: do challenger banks need traditional institutions? Well, they certainly need trust, and customers, and data, and  with the pressure to grow and invest in innovation, it’s obvious that the financial incentives of joining a large organization can be attractive.

Challenger institutions have been an important part of the banking ecosystem.  Most notably, they’ve moved the ball forward on what “good” looks like throughout the industry, better assimilating modern concepts of UX and UI design into their front-ends.  At the more extreme end, however, these challengers  were heralded as the white knights that would save consumers from pernicious traditional institutions with outdated technology.  So far that hasn’t been the case.

In the explanation of Fermi’s Paradox, humanity (or a challenger bank) is left with three possibilities, depending on where the Great Filter occurs: we're rare, we’re first, or we’re in trouble. Rare is the challenger that’s made it through the Great Filter.  First is the challenger within a pack of new institutions which has grown because of conditions that have only recently become favorable.  In trouble is the challenger that hasn’t yet reached the Great Filter.  There’s plenty of life in the banking universe, but it remains to be seen who will make first contact.

Banks aren’t Alone in their Omnichannel Unreadiness

Banks aren’t Alone in their Omnichannel Unreadiness

In December, Celent surveyed a panel of North American banks and credit unions to assess the current and likely future state of retail and business banking channel systems. The report is chock full of fascinating insights. Among them is a rather sobering self-assessment of banks' omnichannel delivery capability

A recent experience renting a car painfully demonstrated that banks aren’t the only ones that have a ways to go.

7:00 AM…

Me: Visited the company's website. Easily searched and located a car at a location very close to my home. Quickly booked the automobile and received an e-mail confirmation promptly. The web site displayed the location of all area locations and recommended this one based on its proximity to my known location. Reservation for 2:00 this afternoon. So far so good.

10:00 AM…

Enterprise called and left a voicemail indicating there were some “qualifying details” we would need to discuss prior to my 2:00 PM reservation.

10:30 AM…

I returned the call. The problem was that I reserved an intermediate size car and none were available – just large SUVs and 15-person passenger vans. That relevant information was not conveyed in my otherwise stellar digital experience with the brand.

  • Me: “What about other locations?” I asked.
  • Agent: “I can see what they have on the lot, but I don’t know the plans they have for them. Unfortunately, I can’t book for you. Feel free to call other locations yourself and see which ones may have an intermediate size car for you.”
  • Me: “You mean I have to dial for dollars around Greater Atlanta to find an intermediate size car? Your web site indicated availability and gave me a confirmation. What’s up?”
  • Agent: "Sorry, but that's a long story. Look, if you’re okay driving a large SUV, I can give it to you at an intermediate rate. Would that be okay?”
  • Me: “I think so. It’s not what I want, but I’ll take it.”
  • Agent: “Do you need a pick up also?”
  • Me: “Yes, please – just prior to 2:00 – thank you”

1:30 PM…

The phone rings again, it’s Enterprise. This time, it is the location calling, not the contact center.

  • Agent: “Sir, we have a problem with your rental reservation. We don’t have any intermediate size cars at this location.”
  • Me: “Yes, I know. I spoke with your colleague at 10:30 this morning. You agreed to rent me an SUV at an intermediate price and pick me up prior to 2:00.”
  • Agent: “Do you know who you spoke with?”
  • Me: “I’m sorry, no. I didn’t get his name”.
  • Agent: "Was it a man or a woman?"
  • Me: "It was a male colleague of yours, but I don't recall his name."
  • Agent: "Was he from this location?"
  • Me: "I don't know. By the way, why whould I care?"
  • Agent: "Well, I've been pretty much the only one working at this location all morning."
  • Me: "Thanks for sharing, but what does that have to do with my reservation?"
  • Agent: "I'm just trying to find out who you spoke with."
  • Me: "Why is that relevant? I have a reservation and we have an agreement – and it's almost 2:00."
  • Agent: "I dont think he was supposed to do that."
  • Me: "So, are you going to rent me a car, van, SUV or whatever for an intermediate rate or not?"
  • Agent: "Yes, sir, we'll do that.
  • Me: "Great – see you in a few minutes".

A few days later…

Atlanta traffic kept me from returning the rental during normal business hours. Handily, there are provisions for after-hours drop-off. The rental is processed the next business day and costomers receive a final receipt via e-mail.  That's the plan, anyway. It's been several days and no receipt. After calling the store, I was told the e-mail system has been down.

My bank looks very good about now.

Congratulations to All Celent Model Bank 2017 Award Winners!

Congratulations to All Celent Model Bank 2017 Award Winners!

Many of us at Celent just came back from a busy and exciting week in Boston. Undoubtedly, the highlight was attending Celent's Innovation and Insight Day on April 4th, where we celebrated achievements of the Model Bank and Model Insurer award winners.

The rain and clouds couldn't obscure spectacular views from the State Room overlooking the Boston harbour. And they certainly didn't dampen the mood of nearly 300 attendees representing banks, insurers and technology vendors from at least 15 countries around the world.

Craig Weber, Celent CEO, opened the day by presenting compelling evidence that financial services are more important than many celebrities. He was followed by an insightful presentation from Andy Rear, chief executive of Munich Re Digital Partners. The programme then split into parallel Banking, Insurance and Wealth and Asset Management tracks before reconvening again to close with a series of debates between Celent analysts on three topics: Internet of Things, artificial intelligence and blockchain.

During the Banking track we presented Model Bank awards, and discussed the winning initiatives and why they stood out from all others. As regular readers of this blog know, this year we introduced specific named awards with only a single winner for each award. I would like to offer my personal congratulations to all of our Model Bank 2017 winners:

Winner

Award

Alior Bank S.A., Poland

Emerging Technology for Consumers

Banco Original, Brazil

Consumer Digital Platform

Bank of America, USA

Risk Management

BMO Bank of Montreal, Canada

Process Automation

Capital One, USA

Emerging Technology for Businesses

CBW Bank, USA

Banking as a Platform

Citi, USA

Open Banking

Credit Suisse AG, Switzerland

Payments Replatforming

DenizBank, Turkey

Lending Product

Emirates NBD and ICICI Bank, India and UAE

Most Promising Proof-of-Concept

FGB, UAE

Corporate Banking Digital Platform

Idea Bank S.A., Poland

Small Business Digital Platform

India Post, India

Financial Inclusion

IndusInd Bank, India

Fraud Management and Cybersecurity

Millennium BCP, Portugal

Branch Transformation

Mizuho Financial Group, Japan

Consumer Banking Channel Innovation

National Australia Bank, Australia

Core Banking Transformation

OakNorth Bank, UK

Banking in the Cloud

Radius Bank, USA

Product Innovation

The Royal Bank of Scotland, UK

Employee Productivity

YES BANK, India

Payments Product

And of course, congratulations to Caixa Bank, our Model Bank of the Year 2017! The keynote presentation by Àngels Valls on how Caixa Bank has embraced digital was the highlight of the I&I Day for many of us in Banking – thank you! Finally, congratulations to Celent Model Insurer award recipients.

Each of the award winning initiatives is published as a case study and available to Celent research clients by following the links above. In addition, we also published an overall Model Bank 2017 report, which discusses how the Model Bank programme has changed over 10 years and reviews the content themes across all nominations in 2017.

We intend to run the Model Bank programme again later this year, so keep an eye on the announcements when the new submissions window opens. We have no doubt that you are all working on exciting things and hope that you will consider submitting your initiatives for 2018 awards. In the meantime, enjoy the case studies and let's celebrate the Model Bank winners of 2017!

Celent Model Bank 2017 Awards: The Payments Preview

Celent Model Bank 2017 Awards: The Payments Preview

This is the next instalment of our Model Banking preview blogs, and it’ll come as no surprise that I will focus on Payments.

Reading and evaluating the Model Bank entries is always fascinating. It’s also somewhat frustrating too at times – payments, covering so much territory, often ends up with the tricky task of comparing two very different projects, and trying to decide which is best. This year was no different, with the quality of entries high.

Until we announce all winners publicly on April 4 at our 2017 Innovation & Insight Day in Boston, we’re unable to say too much more – very frustrating! In addition to presenting the award to the winners, we will be discussing broader trends we’ve seen across all nominations and will share our perspectives why we chose those particular initiatives as winners. Unfortunately though, if you’ve not already registered, it’s too late. As with every year, it’s not only sold out, there is a growing wait list too!

So until April 4th, what can we take away from the Payment entries as a whole this year?

First, the entries this year reinforce how hard it is for any single bank to come up with a cutting edge product innovation in payments. As a result, we had a number of entries submitted jointly by multiple FIs describing their initiatives on blockchain, P2P infrastructures, and other collaborative efforts.

We also saw, particularly in the retail space, the adoption of innovations in one market, transposed from another. There were a number of these, particularly in wallets and P2P. Not bad, just not new and often with a very specific market context. For example, one technology had been in place in a different country for at least 5 years, yet the impact will be huge for the bank who submitted it, and is leading edge for their market.

This perhaps serves as a timely reminder that innovation isn’t always about cutting edge technology, but doing something different. Scanning other markets for what they do, and why, is a great source of new ideas, Given that these innovations are, by definition, tried, tested and live, it also has the benefit of being easier to adopt, from the likely business benefits to the actual technology used and lessons learnt.

The second theme is the continued payments back-office renovation story, particularly around the adoption of payment services hubs, which continue apace. Whilst we have defined what is or isn’t a hub, we have always been clear that no two hub projects are exactly the same, and the entries this year reinforce that.

A few things really stood out in particular about the entries. First, some clients still consider hubs to be mainly European, yet we had entries from right around the globe. Second, whilst the details may differ, common to all was the belief that the bank had to re-engineer payments, not just for the future, but to better respond to changes that were imminent. Given the change in the last 10 years, and the likely change in the next 10, perhaps the question for many banks is more about when than if they also undergo their own transformation.

Look out for the case studies being published on April 4th for more detail!

How to Woo a Bank

How to Woo a Bank

When it comes time to choose a business partner, banks will favor those who help them execute their third party risk management (TPRM) responsibilities over those who begrudgingly comply.

The risk to a bank of doing business with a third party is real; the consequences of a risk event are not only disruptive, but often result in long-term reputational damage that can seriously affect the bottom lines of both the bank and the third party. We have all seen the media coverage. Parties who can make TPRM easier for banks by being proactive, transparent, and helpful will distinguish themselves in an ever more competitive environment.

They must show that they are compliant with the bank’s risk management requirements throughout the RFP, due diligence, onboarding processes, and lifecycle of the engagement.  OCC1 TPRM regulations alone require the bank to evaluate 16 risk dimensions when engaging with a third party. And, if the relationship involves a high or critical risk activity, the bank will carry out a much more thorough due diligence; often including an on-site visit to inspect operational risk procedures in the case of a risk event.

Furthermore, there is now an expectation that the third party will willingly take a portion of the liability of such an event.

Banks are introducing a new level of discipline and quantification around the measurement of third part risk. With this knowledge, banks can determine third party indemnification provisions and allocation of liabilities at the contract stage. You will be at a disadvantage if you do not have a way to measure and verify the scope of a potential risk event that involves your products or services.

Celent is also beginning to witness the inclusion of provisions within contracts that require a third party to reimburse the bank for out-of-pocket costs relating to data security breaches that occurred due to the third party's negligence. As banks continue to push back on third party risk liabilities, third parties need to ensure they have in place insurance policies that can fund indemnification obligations.

My recent two research reports discuss the changing and expanding landscape for TPRM and explain why banks, regulators and third parties need to commit to their significant other in the management and responsibility of risk.

The Enduring Importance of Physical Engagement in Retail Financial Services

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

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.