Thoughts from American Banker Retail Banking Conference 2015

This last week the American Banker Retail Banking Conference 2015 was going on in Austin, TX. As expected, it was a great way to read the temperature of the banking industry. The conference was well attended, with broad representation from all institution sizes and markets. There were a couple of overarching themes throughout the event. Competitive pressures on smaller institutions were top of many bankers´ minds. The conference was full of community bankers discussing evolving business models and the pressures its placing on their ability to gather deposits. Customer centricity is forcing a convergence of traditionally segregated value propositions. Large banks are now trying to compete on serving the customer and they´re positioning themselves to look and feel like a community experience. New entrants and delivery models are also opening up the competitive landscape. Consumers are no longer limited by geography when choosing a bank, and they have a growing number of alternative financial options from which to choose. Smaller institutions are finding it hard to overcome some of the barriers of resources and marketing that arise as the competitive landscape broadens. Many presenters discussed developing non-traditional revenue streams. With interest rates low and new regulations following the financial crisis, banks are running incredibly thin margins, and traditional revenue sources are no longer viable. Presentations focused on targeted marketing for “moneyhawks”, new P2P models (e.g. P2P lending), and new payment schemes. A few thoughts on some of the talking points:
  • Breaking down omnichannel applications for financial services: Omnichannel within banking was a popular talking point between attendees and among presenters, and it´s obvious there´s still more than enough ambiguity around its application in the context of banking. One of the presentations used non-FI examples to look at how banks can approach integrating omnichannel into customer interactions. Home Depot was an interesting case study. The retailer combines the in-store and app experience to enhance the customer buying process. Customers can browse the app and make a list of the materials they need. The app shows only what´s in stock at the nearest physical location, and each item is given a corresponding aisle number for easy location on arrival. While in the store, customers can scan QR codes on each product to bring up specific measurements and statistics. This is the essence of an omnichannel experience. It´s not about doing everything from every channel—it´s about optimizing the customer experience across the variety of methods used to interact with the retailer (or bank).
  • Community banks differentiating from large institutions: This was a common thread running throughout the presentations. How do community banks grow deposits in a climate of shrinking deposit share? Presenters proposed some solutions. One spoke of the need to market correctly. A recent study found that despite problems with megabank perception, 73% of those asked said a recognizable brand was important in choosing a financial institution. A regional bank poll of millennials found that not one could name a community institution in their area. These institutions find it hard to inform consumers about the value they provide, and often lacking the resources and experience to do so. A few small institutions spoke about shifting towards serving small businesses. Despite only having 20% of deposits, community banks are responsible for 60% of small business loans. Focusing on small businesses could be a way for small institutions to remain viable, without having to drastically alter their businesses.
  • eCommerce and Merchant Funded Rewards (MFR) through mobile banking to help consumers save:  During one of the sessions, a banker made a good point: consumers don´t need help spending, they need help saving.  The comment reflected a number of discussions about the role financial institutions can play in helping consumers save money, but was echoed across a handful of presentations on digital commerce. US Bank discussed Peri, its eCommerce app developed in cooperation with Monitise, while other presenters spoke about card-linked and MFR propositions.  These initiatives are definitely innovative, but is conflating the ideas of saving and driving commerce shaping the conversation around a fundamentally misaligned approach?  First, will a bank´s eCommerce app be able to compete with the likes of Amazon and Google?  Banks often do not have the customers, data, or pricing competitiveness to match big online retailers, and they seldom win on brand favourability. Second, even when these initiatives are successful, do they really help people save?  For many, the data isn´t targeted enough for banks to offer deals on purchases a consumer was going to make anyway.  For example, based on one bank´s demo, a customer would go to make a purchase at a retailer and the bank app would push out a geo-located card-linked offer for a nearby restaurant. This requires additional spending.  Without the right data, these programs are mostly playing off impulse purchasing, not saving.
Do these themes resonate with your experience? Feel free to leave comments about how your institution is tackling these challenges.

Capgemini, the 40-40 Rule, and the rise of the robots

Capgemini recently hosted a few dozen consultants and industry analysts to Chicago for their two-day Analyst and Advisor Day event. The presentations were held at the firm’s very impressive Accelerated Solutions Environment facility, with its dramatic curved glass exterior and prime views across the Chicago River to the famous Merchandise Mart.  Unfortunately, it was typical Chicago winter weather with sub-zero windchills and snow flurries, but for those who braved the conditions it was a very interesting and informative event. Things appear to be going well at Capgemini. Even though organic growth in revenue was only 3.4% in 2014 (to EU 10.5B), bookings were up 13%, operating margins were improved by 70 basis points (to 9.2%), and profit jumped by a full 31%.  The financial services business (covering banking, insurance, and the securities industries) provided Capgemini with significant sales momentum into 2015, with Q4 growth of 9.2% (second only to the firm’s public sector services business).   In the financial services sector, Capgemini’s business theme was digital transformation, which in their view would be driven by the replacement of knowledge workers by automation and algorithms. During Q4, Capgemini signed an important deal with First Data Corporation (FDC) to take over application management responsibility for its VisionPLUS card processing platform. VisionPLUS is FDC’s international card platform and serves over 180 clients in 70 plus markets in Central and South America, Europe and the Middle East, and Southeast Asia.  John Elkins, FDC’s Chairman of International, came to Chicago to talk up the new partnership, and it appears that FDC is very pleased that Capgemini is taking over responsibility for maintaining and expanding the functional coverage of VisionPLUS. Essentially, Capgemini will work with FDC to continue the build out of the platform, FDC will use the software to drive its own processing business, and the partners will share certain license and managed services revenues for new bank clients. Paul Nannetti’s made an interesting key note presentation covering emerging trends in Capgemini’s business, and several times he mentioned the “40-40 Rule”.  This was a new buzz word for me, so I was happy when another analyst asked Paul what he meant by the 40-40 Rule.  According to Paul, the 40-40 Rule says that 40% of the scope of new outsourcing contracts will be suitable for digitization (automation), and that within this realm, digitization will drive out 40% of existing labor content. In other words, global outsourcing companies like Capgemini will need 40% less FTEs to process the same work load due to the introduction of automation to its business processes. This brings us to the issue of robots.  A few weeks ago, I had read an article about the opening of a futuristic hotel in Japan called Henn-na Hotel (apparently translated as “Strange Hotel”) that will be almost entirely staffed by robots. The hotel will employ robots to clean rooms, staff the front desk, and run the bag room, and guests will be able to unlock their rooms through facial recognition.  Hotel president Mr. Hideo Sawada was quoted in the Japan Times as saying “We will make the most efficient hotel in the world. In the future, we’d like to have more than 90 percent of hotel services operated by robots.” Capgemini’s Global CTO Lanny Cohen shared that indeed robotics and artificial intelligence technologies were under close scrutiny at the firm, and the firm maintains a global network of 40 innovation labs to investigate this and other areas of emerging technologies. For a firm like Capgemini whose financial success over the past 10 years has been in large part based on managing a very large off-shore workforce, this is indeed a bold strategy. And that’s also very good news for Mr. Roboto, who may have a future in banking and insurance if he ever tires of his current gig at the Henn-na Hotel. Stay tuned. You can follow the conversation about the day on Twitter here.

Upcoming Celent discussion at the American Banker Retail Banking conference

Next week I will be moderating a panel discussion at American Banker´s Retail Banking Conference in Austin about the competitive pressures of community institutions. It’s an important topic that Celent discussed in a report published last year: And Then There Were None: The Disappearance of Community Banks. The figures below outline the decline of banks in the US, going from 11,462 at the end of 1992 to 5,809 in 2014. Picture1Picture2 The challenge for many of these institutions has been organically growing their deposits despite shifting consumer demands and new alternatives to traditional financial services (e.g. prepaid services, P2P lending, etc.). The business model of banking is changing, and viability is increasingly dependent on tech investment. Consumers now expect a certain basic level of technological capabilities driven by their experiences across other industries. To accommodate, financial institutions are pressed to implement products such as customer analytics, mobile, CRM, etc. Yet these challenges come at a time of decreased interest margins and broadly defined regulations that require community banks to increase compliance spending and capital reserves at pace with large players. Online banking platforms are often basic, many have no mobile apps, and business platforms like treasury management are severely outdated. Even labor saving technology (e.g. video teller) often does not lead to short term cost savings, and new services typically run in tandem with other operations, adding operating expense to already thin margins. These conditions have made it difficult for community institutions to compete and have challenged the viability of many. Community institutions, however, operate in an extremely diverse landscape of micro-localities with varying competitive dynamics and local needs. This often carries with it a number of advantages over large multinationals with few local connections and an often impersonal understanding of the community. Small banks won´t be able to go head-to-head with large institutions on tech spending, but identifying the organization´s value proposition will enable a tighter strategic direction for meeting consumer demands while delivering a competitive community experience. In Celent´s upcoming panel, we´ll be exploring what community institutions are doing and some of the lessons that others can learn.

Gearing up for Money 2020

One key element of Celent’s value proposition is our attendance at conferences. To be a little flip, we attend so you don’t have to! More accurately, we attend because you have neither the monetary nor the time budget to jet all over the world to industry events. For us, it’s part of the job, and we get to keep our finger on the pulse of the industry at gatherings hosted by individual firms and neutral third parties. In September alone, for instance, I’ve been in Panama, Barcelona and San Francisco. A more comprehensive (although not necessarily complete) list of our attendance is below (and that’s just the third-party events!). Money 2020 image One event that’s come incredibly strong out of the gate is Money2020. Its first incarnation was two years ago and garnered more than 2000 people; last year it had over 4000, and this year is shooting for over 6000. Celent (Zil Bareisis and I) will be attending (and in full disclosure, we are a media partner of the event). We view this as a “must;” the breadth of the ecosystem attendees is immense, the diversity of topics fascinating. In the last two weeks I’ve mentioned Money2020 to two clients and both have replied that they’d have to look into attending, particularly based on my positive feedback from last year’s event. If you’d like to register, please go to http://money2020.com/register. Look for us to tweet, blog and otherwise have a host of insights after this and other fall conferences. What events do you consider crucial?

Where Will We Meet Next?

Traditionally, our conference season has always been September through November, when large industry events from BAI Retail Delivery to EFMA Retail Payments to Sibos take place. Increasingly, it feels that the conference season is all year around, and we often use these blogs to reflect on various events we attend. This time I just wanted to post a brief note highlighting a few events I plan to attend in London, such as:
  • May 22: Payments Innovation 2014, Tech UK and the UK Payments Council
  • June 10-11: Digital Banking, Marketforce
  • June 23-24: Innovation in Payments, Marketforce
If you are also attending any of these events and would like to meet up for a coffee or an informal chat, don’t hesitate to reach out. Look forward to seeing you.  

Technology and Service Providers: Different Beats, Same Tune

It’s been a whirlwind week for service provider analyst days and client conferences: Friday with Genpact, Tuesday and Wednesday with FIS, and Thursday with IGATE. Each firm is trying to differentiate itself amidst all the market noise; like banks, they’re constantly resisting the grind of commoditization. And while interaction was unique and fascinating, four common themes struck me as being indicative of the massive changes going on today in banking technology. Not coincidentally, they’re all consistent with what Celent has been saying about the evolution of the banking ecosystem.
  1. Focus
  2. Realignment
  3. Security
  4. Partnership
Focus takes on different meanings for different firms, but both Genpact and iGate were very clear about where they were going to spend time and energy, and where they weren’t (banking makes the cut for both of them). FIS may seem oxymoronic because of its product and service breadth and depth, but the company appears to be making steady progress towards rationalizing a variety of disparate products obtained through acquisition. Realignment follows focus. FIS is for the first time dividing itself into three groups: North America, International, and Global Institutions (roughly the top 30 international banks). Genpact and IGATE are both focusing on nine verticals (the specific nine vary), with IGATE putting P&L responsibility with the verticals for the first time. They will both have, however, certain horizontal practices that continue to run across their verticals. Security is a key value-add for these companies; with a broader base across which to spread costs, they tend to impose attention and discipline that many smaller banks can’t hope to match. While specifics vary, all made it a point to mention their approach to security. As the issue continues to increase in importance, we think this element of their value proposition will become ever more significant. Partnership is perhaps the ultimate defense against commoditization. Each of the three firms mentioned in their first breath the desire to work with their clients as Partners. Celent has written extensively on the transition from a vendor/customer to partner/client relationship in banking, and while talking about it doesn’t guarantee execution today, it’s a necessary first step for it to be tomorrow’s reality. What will be particularly interesting is the ongoing tension between providers’ professed desire to do the right thing and regulators’ apparent wish that contracts spell out in gory detail what will be required (including who bears responsibilities for mistakes). For more, see an interesting American Banker article here: http://bit.ly/1sAAE7j. For providers, guaranteeing that they can pass regulatory muster with minimum fuss will be a key requirement as they seek to win more business. As the year continues we’ll be watching keenly to see whether other providers’ actions echo these trends, and what banks’ reactions are. As a footnote, two of the firms have taglines, one brand new, the other a bit older: IGATE: Speed. Agility. Imagination. Genpact: GENerating imPACT FIS may have an opportunity here to help define itself; right now it’s self-admittedly one of the biggest companies that no one’s ever heard of. What do you see in the marketplace? Has my quick synthesis missed a key trend? I welcome your thoughts.

6.11.2014 Celent Webinar: How to Better Leverage Celent

Celent CEO, Craig Weber This event is free to attend and we expect you to walk away with a better view as to how you can get more from working with us. For more information, please contact Anna Griem at +1 603 582 6137 or agriem@celent.com. Please click here for more information.

Reflections on NetFinance 2014: It’s about relationships

NetFinance 2014 just finished in Miami.  Celent spoke on “Engaging Mobile Customers through Content, Display, Alerts, and More,” which generated a number of follow-on conversations on how to execute on the notion of engaging with customers, and a great question on how long today’s innovation stays differentiated. Our answer: “not very.” I’ve mentioned before that customer-centricity is becoming a key concept that many banks are highlighting as a key point of their retail strategy. What NetFinance crystallized for me is that the necessary follow-on to this customer-centricity is this simple idea: The best defense against continuing commoditization is a solid customer relationship. Technology, clearly, can go a long way to enhancing that relationship. A number of vendors at the show (like AdRoll, Backbase, Domo, EarthIntegrate, Ektron, Epsilon, IgnitionOne, Leadfusion,  Liferay, Message Systems, Message Broadcast, and Personetics, among others) focus on helping banks touch customers at the right times, or giving them an omnichannel view of all customer touch points, or enabling customers to start a transaction in one channel and continue it in another. But for these technologies to be effective, customers need to be receptive.  And they’re going to be more receptive if they think, and feel, and believe in their gut, that their bank is going to do the right thing by them. All the technology in the world can’t replace some very visceral customer feelings. To engender these feelings with their customers, and stop them from transacting with one hand holding their wallet so their pocket doesn’t get picked, banks should consider some potentially radical ideas (simple concepts?):
  • Not every touch needs to be a sale.
  • Foregoing short-term income for longer term gain can (in many instances) make sense
  • Surprising customers on the upside can yield long-term benefits
Now, the natural reaction to this is that it potentially puts banks into a (short-term) revenue hole. And that may be true, but when the real game of ongoing commoditization is long-term, banks need to thinking beyond the next quarter.

4.2.2014: Celent Roundtable: Exploring Digital in Financial Services

Celent Banking Senior Vice President Dan Latimore, Insurance Senior Vice President Jamie Macgregor, and Tsukasa Makino, Manager, Corporate Planning Dept. & IT Planning Dept. at Tokio Marine & Nichido Fire Insurance Co., Ltd. Admission is free, and exclusively for executives from financial institutions. Pre-registration is required. If you have any questions, please contact Anna Griem at agriem@celent.com or at +1.617.262.5503. Please click here for more information.

2.19.2014: Celent Webinar: Current State of Innovation in Financial Services

Celent Senior Analyst Mike Fitzgerald and Mick Simonelli, Innovation Consultant and former Chief Innovation Officer at USAA. This event is free to attend for Celent clients, flex-plan clients, and the media. Non-clients can attend for a fee of US$250. If you are unsure of your client status, please contact Anna Griem at + 1 617 262 5503 or agriem@celent.com. Please click here for more information.