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.

Needless Controversy in the Branch vs. Digital Debate

Needless Controversy in the Branch vs. Digital Debate

In a previous post I argued for the enduring importance of human, face-to-face contact in financial services. By the reactions I received, you’d think I was purposefully inciting controversy.

  • One influential industry observer thought I was irresponsible in advocating inaction.
  • Another wrote a lengthy and snarky rebuttal.
  • Others took issue with my comparing retail banking to other retail categories, as if there is nothing to be learned by studying the broader digital commerce landscape.
  • Others took issue with aspects of the surveyed retail deposit mix data I cited to demonstrate that branch deposits remain persistently common.

Honestly, I expected a mixed response: push back from those who are invested in advancing digital banking and agreement from branch technology vendors. We all have self-serving tendencies. But, I did not expect – nor intend – to precipitate such controversy. What is so heretical to my digital brethren’s ears that they would be so obviously offended with my advocacy that banks pay attention to both digital and in-person engagement mechanisms? That was, after all, the essence of my previous post which began with “Digital needs to be a top technology priority among financial institutions”.

Needless Controversy

I think part of the issue here was addressed in a previous post, Three Mistakes Banks Make. We are at risk by oversimplifying things that are inherently complex. In so doing, we fail to appreciate diversity of customer needs or preferences. Much of the digital/branch debate speaks to binary outcomes. Reality is much more nuanced.

This tendency reminds me of a well-conducted consumer research initiative that resulted in January 2016 news that for the first time, “mobile banking exceeds branch banking”. It made quite a splash in the press, for obvious reasons. The data is both relevant and important. It offers clear evidence of the growing importance of digital banking. But the common interpretation overstated digital’s current level of influence.

My issue is not with the research, but how it was interpreted. Many trumpeted the research as evidence of the final nail in the branch banking coffin. “See, the branch is dead!” was the nominal conclusion offered by most observers I think. However, a closer look at the data invites a different interpretation. The specific metric being graphed wasn’t explicitly cited in many references to the research. Too bad, because the graph compares the percentage of randomly surveyed banked consumers over time that use the branch or mobile channel in the past week. A graph showing past three month or past twelve month usage would be rather different. It would show that a much higher percentage of banked consumers visit branches. They do – just not in any given week, day or hour! Usage intervals are longer in the branch – shocking!

The enduring relevance of the branch channel is abundantly clear in Federal Reserve Board sponsored research, Consumers and Mobile Financial Services, conducted annually since 2011 and most recently published in March 2016. The graph below from the March 2016 report compares surveyed past 12 month usage among the general banked population (all respondents) as well as smartphone owners. This equally credible research suggests that roughly one year ago, twice as many banked consumers use the branch and ATM channels than mobile banking.

Both graphs present credible research. Only one fits a certain popular narrative.

The take away for most banks in my opinion is clear and transcends the silly, either-or debate: create and sustain a compelling customer experience across all points of engagement. As customer preferences continue to change, banks will need to continually adjust operating models. Easier said than done for sure. The needless controversy isn't helping banks get this job done.

Celent Model Bank Awards: Fraud, Risk Management, Process Automation and Flub-Free

Celent Model Bank Awards: Fraud, Risk Management, Process Automation and Flub-Free

It is my privilege to be part of the judging panel for Celent Model Bank Awards for 2017 for the following three categories:

  • 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.

A common theme across this year’s submissions for the above categories is the importance of agile technology, digital process automation, and consistent and focused practices across the organizations. A large number of the entries show that a streamlined and automated operational risk framework is critical to run a successful risk management program. Everything connects and has a consequence and unless banks can join the risk dots across their ecosystems, they will continue to spend at a very high rate with unsatisfactory and, at times, devastating results.

Improved data analysis and machine learning capabilities also featured prominently in the winning case studies. A central data platform, automated processes and improved insights have produced notable increases in efficiency, better control of costs, reduced resourcing requirements, reduced errors and false positives and have made it easier for the banks to adapt to their digital footprint, an expanding cyber threat landscape, and intense and complex regulatory obligations.

Hopefully, no flubs on the big day

Without exception, every submission is of a high-quality and we found it a daunting task to pick the most worthy award recipients. In the end, we are excited and confident about our selection of winners in the above categories, yet we are sorry that we could not recognize so many others that clearly also deserve recognition.

At the moment we are staying tight-lipped about who won the awards. 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!

 

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!

Three Common Mistakes Banks Make

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.

Citi’s geolocation move

Citi’s geolocation move

American Banker just ran an interesting article about Citi’s foray into the use of geolocation (beacons) as it pilots several use cases in its “smart branches.” Several thoughts immediately came to mind as I read Tanaya Macheel’s well-written article:

  • The use of beacons for cardless access to branch ATMs after business hours was the lead use case cited in the article. But, that’s just one of a growing number of potentially very useful applications for beacons in retail financial services.
  • Banks have barely scratched the surface in more usefully integrating digital and physical channels as they seek to maximize customer engagement.
  • Geolocation, in particular, is under-utilized by retailers (especially banks) and remains largely experimental.

My hat is off to Citi for its purposeful investment in developing expertise in this area and to American Banker for writing about Citi’s work. In my view, the most impressive aspect of this initiative isn’t so much Citi’s pushing the technology envelope; it’s the organizational effort that was likely required. Getting its branch operations, mobile product management, IT and LOB leadership aligned represents real commitment to innovation.

How far ahead of the industry is Citi?

Here’s one data point. In Celent’s inaugural Branch Transformation Research Panel survey in (June 2015), we sought to establish a benchmark on just how far and how fast NA institutions were pursuing branch channel transformation. Of course, several questions addressed planned technology usage. Out of a dozen examples of technology usage, geo-location ranked dead last in terms of the liklihood of usage in future branch designs – just 27% of surveyed institutions thought the use of beacons would be "somewhat likely" or "very likely".

Branch Tech Usage

Pretty far I'd say!

Why are credit unions changing vendors at a higher rate than banks?

Why are credit unions changing vendors at a higher rate than banks?

Credit unions are almost twice as likely to change vendors as banks, with competitive churn rates of 7.6% compared to 2.7% for banks.  Churn Rate measures the number of institutions in a given time period that either change or drop a vendor contract.  Churn is broken down into two components: competitive churn, which measures the rate at which institutions are opting to change vendors, and consolidation churn, which measures uncontrollable factors like acquisitions or liquidations. The figure below (powered using data from FI Navigator) references total churn for the year ending March 31st, 2016.

FINPic

The figure reveals significant differences in churn between banks and credit unions.  But why is this difference so large? There are two possible drivers:

  1. Customer centricity: A focus on the customer could be a driver for higher churn. Banks and credit unions operate differently, and Celent has explored the variations in blogs and publications.  The mission statement of the credit union market has historically revolved around extreme customer centricity.  Over the last decade, mobile has become a critical component in quality customer service.  Emphasizing the needs of the customer could be driving credit unions to take more concerted efforts to maximize mobile/ digital, exploring competitive options more frequently than banks. Credit unions are low margin businesses that often give higher interest rates for products like auto-loans or deposit accounts through non-profit tax breaks.  Being member-owned, most of the smaller profits also go back into the business.  This creates a natural incentive to streamline the back-office, and credit unions have adopted cost effective technologies at higher rates. Thin margins combined with a focus on customer service could mean credit unions are more likely to evaluate provider options more frequently.
  2. Solution providers: Another perspective is that it’s the vendor market, not the CUs that are driving the churn. The vendor spectrum for credit unions in the US is much more diverse, with 43 vendors compared to 22 selling to banks.   This would reinforce the argument that competitive dynamics are more intense, and it would be reflected in sales cycles. With cost pressures that originate from their smaller size and lower margins, credit unions are more likely to look for alternative ways to provide products and services, leveraging mechanisms like Credit Union Service Organizations (CUSOs) to enhance the business.  Other similar joint ventures leverage cooperative arrangements to develop homegrown software products.  Consortiums not present in the banking market would introduce more competitors into the market, and as a result impact competitive dynamics.

Credit unions skew much smaller than banks (the mean credit union asset size is  $200 million vs. banks with around $2.5 billion), leading to a noticeably higher consolidated churn. Celent examined the pressures on credit unions here. As minimum viable institution size continues to get bigger, smaller institutions will be challenged to stay afloat. Vendors will face the risk that their customers are becoming targets for M&A activity resulting in more vendors competing for a shrinking demographic.

Credit unions need to think about how to best streamline their operations to remain viable.  This includes a mix of cost-effective customer service technologies like mobile banking.  Vendors need to have a better understanding of the competitive landscape into which they sell, as competition is intense.  Better data and detailed benchmarks can help vendors plan their strategy.

Celent is collaborating with FI Navigator to analyze the mobile banking market in financial services (in fact, FI Navigator wrote a great piece about credit unions and banks last year).  FI Navigator assembled a platform that leverages a proprietary algorithm to track every financial institution offering mobile in the US, as well as nearly 50 vendors.  Beginning with the first report at the end of April, Celent will be releasing a biannual examination of the mobile market. FI Navigator will also be making the platform available for further custom reporting and data analysis.  For more information on the nature of the collaboration and availability of data, go here.

Digital banking is ready to take off in Latin America

Digital banking is ready to take off in Latin America

Digital is the new reality in Latin America. In a recent Celent survey 100% of the participants recognized that a scenario where all financial products get digitized needs to be addressed sometime in the next 7 years and 59% of them believe it needs to be addressed immediately. There is also a general consensus that most banks are entering into Digital late, despite some are already moving in that direction. Threat of fintechs is also a reality. Over 80 fintechs in Brazil and 60 in Colombia are a good sense that the industry is already being challenged beyond incumbents.

In other geographies Banks have responded to this threat by becoming extremely digital and also neo-banks have been launched to attract those customers seeking for a more friendly and digital relationship with its financial institution. Atom Bank in the UK, Fidor Bank in Germany, and mBank in Poland are only a few to mention. In Latin America the major milestones in Digital development we had seen were Nubank (Brazil – Market Cap $500M) and Bankaool (Mexico – ~$142M in assets), until March of 2016 when Banco Original (~$1,67Bn in assets) launched in Brazil.

While Nubank is focused entirely in offering a credit card with a customer friendly personalized real-time view of expenses and modern contact channels (email, call or chat), Bankaool is mainly focused in a checking account with a debit card, SME loans and investment vehicles.

Banco Original is the 3rd step in this digital only bank strategy in the region, becoming the 1st universal digital only bank in Latin America.  As part of its strategy to position the bank as different and innovative they launched this advertising campaign featuring Usain Bolt. As part of a strategic definition in 2013 the bank started a ~$152M investment over the period of 3 years to become a digital bank. They launched in March of this year . The bank has no branches and the interaction is 100% through digital channels and a call center. This move was central to its strategy of becoming a universal bank moving away of being solely focused in agribusiness.

While most of neo-banks and fintechs looking to change the customer experience in financial services have adopted in-house development to support their digital strategy, this is not the case of Banco Original which relied in a 3rd party Open API solution. Commercially available solutions that can support a digital only bank means that as an industry we are ready to take off. There is no reason now why other banks should not follow, and software vendors will do their part pushing their offering into banks of all sizes.

I believe that we are in a tipping point were banks in Latin America will need to re-think their investments and strategies towards digital: the threat is now real.

Two upcoming reports will be covering Digital and a couple of disruptive scenarios in the banking industry in Latin America, so expect to have more information soon if you are a Celent customer. If you would like to become a Celent customer please contact Fabio Sarrico (fsarrico@celent.com).

 

Mobile in the time of digital

Mobile in the time of digital
Bank of America recently announced that it would triple spending on its mobile app. While no exact dollar amount was given, it made me wonder: what exactly does that entail? In the past, Celent has praised the Bank of America mobile banking apps as some of the best out there. The bank has been going strong with its digital strategy for years, even closing branches and reducing overhead to drive adoption. Bank of America recently added features like touch ID, debit card toggling, two-way fraud alerts, and more to its app, and has been outspoken about the desire to personalize the digital experience. Its commitment to new features and functionality is reflected in the comments and ratings on iTunes and Google Play. Shown in the graph below, the bank´s mobile banking adoption has been steadily growing, with a growing share of deposits. Pictureforblog                     Source: BofA Annual Reports/ Investor Presentations So again: what does “tripling” mean when talking about an app that has obviously been well-funded for quite some time? As digital assumes a larger role with the business, the funding required to build a digital customer experience will extend beyond the reaches of mobile. The capabilities many consumers demand can be difficult if not impossible without significant effort on the backend to align technology. Banks are starting to realize this, building out unified digital platforms that streamline the architecture and better position institutions to offer truly modern, data-driven, and value-added consumer experiences. These kinds of initiatives can often run in tandem with larger cultural and multi-channel efforts. In the press release for the announcement, Bank of America said it was launching a digital ambassador initiative which, similar to the Barclays Digital Eagles program, will see front-line branch staff reskilled to be able to assist with digital channels. The bank is also launching cardless ATMs later this year. I´m assuming the coincidence of these announcements is anything but, and that the funds for “mobile” will largely be dispersed over (or fit into) a wider array of strategic digital initiatives. Institutions need to create a solid digital base within the institution, bringing in culture, personnel, and technology across all channels and lines of business to start transforming digitally. Banks are being challenged by the notion of “becoming digital.” Many have reached the point of recognizing the inevitable digitization of the business model, and are in the throes of decision making that will determine how equipped they are to appeal to the new digital consumer. Most institutions are experiencing these growing pains, and very few have committed to digital at the level demanded by customers. If Bank of America is indeed tripling its budget just for mobile, then I´ll be very interested to see the kind of features the bank develops over the next few years. Yet there´s a lot that goes on to make the front end look good and spending more on the front will mean more spending on the back. Mobile banking is a significant part of digital banking, but remember that it’s only ONE part. While new functionality gets the headlines, it’s what’s under the hood – culture and backend – that truly matters.