Celent Model Bank Awards 2017: Banking Products Innovation

Celent Model Bank Awards 2017: Banking Products Innovation

This is the next article in a weekly series highlighting trends and themes from Celent’s Model Bank submission process. For more information on how the Model Bank Awards have evolved, see the first two pieces from my colleagues, Dan Latimore and Zil Bareisis

This week’s article focuses on Model Bank entries in the Products category. Part of the criteria for this category is that the solution needs to be in production and demonstrating business benefits. The Products entries for 2017 fall broadly into four sub-categories:

  • Payments Product — for launching the best consumer or business payments product.
  • Lending Product — for the most impressive consumer or business lending or collections initiative.
  • Open Banking — for the most impressive API strategy and results so far.
  • Product Innovation — for demonstrating the ability to launch multiple innovative products.

The majority of submissions in the Products category came from banks in developing markets, with only a handful from large global banks. The Model Bank award submissions came from Argentina, Germany, India, Korea, the Philippines, Poland, Russia, Singapore, South Africa, Spain, Taiwan, Turkey, UAE, and USA.

The Products category submissions were impressive indeed:

Payments: The submissions in this area focused on modernizing existing banking and payments infrastructure. With consumer expectations growing for real-time transactions and unified information across channels, banks are layering new capabilities onto legacy frameworks. Capabilities include accelerated check clearing, enhanced mobile wallets, simplified fraud controls, and streamlined charitable donations.

Lending:  Possibly threatened by alternative lenders, banks in this sub-category are improving the speed and convenience of loans for micro and small businesses. Some entries focused on expanding application channels, both digital and physical. New digital channels include SMS/text, ATM and Facebook. Physical channels include the local coffee shop. All of the submissions featured faster loan decisions through advanced analytics and paperless (or almost paperless) loan closings.  

Open Banking: Open Banking APIs have moved beyond hackathons and proofs of concept to production implementations. While some banks are rolling out Open API development portals in response to regulations like PSD2, the Model Bank candidates in this category are using APIs to improve the customer experience. The submissions represented two approaches to Open Banking. The first is the use of open APIs to connect directly with customers and developers, enabling transactions including B2B payments, personal remittances, loan disbursements, and e-Commerce refunds. The second is the use of open APIs as the core foundation for digital-only banking models. Third-party developers then create value-added client-facing applications using the bank’s exposed API services.

Product Innovation: This sub-category features partnerships with both traditional financial technology and start-up Fintech firms to make banking more convenient, create new offerings, improve customer service, expand a bank’s digital footprint, and personalize marketing offers.  

Want to hear more about the Celent Model Bank winners for payments product, lending product, open banking, and product innovation? Join us for the 10th annual Innovation and Insight Day on April 4th in Boston. In addition to revealing the winners of all the awards, Celent analysts examine the trends that are driving innovation in Banking. I look forward to seeing you there.

The new 4 C’s of commercial lending

The new 4 C’s of commercial lending
Last week, I participated in a Finextra webinar on the topic of “Connected Credit and Compliance for Lending Growth” with panelists from ING, Vertus Partners, Misys and Credits Vision.  As I prepared for the webinar, I thought back to my first exposure to commercial lending when I worked for a large regional bank and I recalled the 4C’s of commercial lending from credit training:  character, capacity, capital and collateral.  All of those original 4C’s are still relevant in today’s environment when evaluating borrowers, but when considering the state of the commercial lending business in 2016, we need to think about an entirely new set of 4C’s:
  • Constraints on capital and liquidity
  • Cost of compliance
  • Changing client expectations
  • Competition from new entrants
On a global basis, banks are being forced to restructure their business models, technology platforms, and organizational processes in order to grow their portfolios, remain profitable, and stay in the good graces of their regulators.  All the while, meeting the evolving demands of clients who can view and manage their personal finances on demand, at their convenience, using the device of their choice. Despite these challenges, the panel remains optimistic that banks can and will evolve to grow this critical line of business. finance590x290_0 Where does this optimism comes from? Alternative lenders provide both a threat and an opportunity for banks as they make the difficult decisions on whether and how to serve a particular segment of the commercial lending market. Fintech partners offer more modern solutions than the decades-old clunkers that many banks still use; providing for more efficient and accurate decisioning, enhanced visibility and processing within the bank, and where appropriate, self-service capabilities.  Connectivity with clients and partners will increasingly be the hallmark of a successful commercial lender. For more insights from the panel, please register for the on-demand version of the webinar here: Finextra: Connected Credit and Compliance for Lending Growth.  

Reports of small business lending’s death are greatly exaggerated

Reports of small business lending’s death are greatly exaggerated

I’ve spent much of my career in and around the financial services sector focused on small business banking. In the US, small business customers get bounced around like Goldilocks—they are too small to be of interest to commercial relationship managers and too complex to be easily understood by retail branch staff.

I applaud those banks that make a concerted effort to meet the financial needs of small businesses. After all, in the United States small businesses comprise 99.7% of all firms. (According to the US Census Bureau, a small business is a firm with less than 500 employees). In general, larger small businesses are better served as they use more banking products and generate more interest income and fee revenue than smaller small businesses. The lack of “just right” solutions for many small business financial problems has been a golden opportunity for FinTech firms.

In the FinTech space, much of the focus is on consumer-oriented solutions like Mint for financial management, Venmo for P2P payments, and Prosper for social lending. But FinTech companies figured out early on that small businesses weren’t getting the attention they deserved from traditional banks. Many of the top FinTech companies—Square for card acceptance, Stripe for e-commerce, and Kabbage for business loans, have gained prominence serving primarily small businesses.

Online small business lending by direct credit providers has especially taken off. Disruptors like Kabbage, OnDeck, and Lendio were quickly followed by more traditional players like PayPal, UPS, and Staples. Morgan Stanley reports that US small business direct lending grew to around $7.5B in 2014 and projects expansion to $35B by 2020. They also maintain that most of this growth is market expansion, not cannibalization of bank volumes. This makes sense—direct lenders usually attract borrowers that can’t get bank loans and charge accordingly. For example, Kabbage averages 19% interest for short term loans and 30% annually for long term loans. According to the Federal Reserve, the average interest rate for a small business bank loan (less than $100k) in August 2015 was 3.7% and current SBA loan rates range from 3.43% to 4.25%.

And that common wisdom that US banks have pulled back from small business lending? Let’s take a look at data compiled by the FDIC starting in 2010.

Small Business C&I Loans The overall volume of small business loans increased year-over-year from 2010 to June 2015, with a CAGR of approximately 3%. The total dollar value of small business loans outstanding dipped slightly in 2011 and 2012, reflecting slightly smaller loan amounts, a result of tighter lending standards. The facts are that US small business loan volume and dollar value outstanding are at their highest levels since the FDIC began collecting this data from banks. And by the way, there are almost 2,200 fewer banks in the US today than prior to Lehman’s collapse in 2008. Banks are happy to work with credit-worthy small businesses to meet their working capital needs. And direct lenders are happy to work with everyone else—-a win-win for all.

Technology, Humans and Customer Service

Technology, Humans and Customer Service
This is a story about bad customer service and lessons it holds for financial services firms. At the risk of disclosing more than anyone might want to know about my personal finances, my last round of home refinancing brought me to Charles Schwab, where I took out a conforming first mortgage and a HELOC.  Schwab then sold the servicing rights to Quicken Loans, who styles itself as the “Home Loan Provider of Charles Schwab Bank.” There were the not-unexpected glitches during the handoff, and my excellent local Schwab rep ended up giving me a customer service credit.  Thinks got bad, though, when I attempted to pay down some extra principal on the HELOC in August.  First, Quicken Loans credited it to the main mortgage. I didn’t notice for a couple of months (since I pay by autodraft, a point that becomes important later on in this story), and when I did, in October, the Quicken Loan CSR was very nice and said that they’d take care of crediting it to the proper account, the HELOC, right away.  You’d think that I’d pay attention, but she seemed so competent, and I was on the road so much, that I blithely assumed everything was fine. So one November day I happen to be working from home and notice Quicken pop up on the caller ID. Uncharacteristically, I answer the phone. A Quicken Loans CSR starts reading stiltedly from a script, informing me that I’m delinquent and asking when I’m going to pay my mortgage (the next day I got a half-inch thick nasty-gram telling me that my mortgage payment was 64 days past due and my loan was in default)! I realize what’s happened and not-so patiently explain that I’m on auto-draft, this is their mixup, it’s outrageous, etc.  I ask to speak to a supervisor. The CSR declines to put me through, but confirms that I’m on auto-draft and asks to call me back. She does, ten minutes later, and tells me that everything is resolved.  But that’s not the end of the story. The nasty-gram: Quicken Loans     Over the course of the next two weeks I receive three more calls asking why I haven’t paid.  I ask each CSR to read the notes and get this resolved.  Finally a “team leader” calls and assures me that everything would be squared away; she was apologetic and accepted blame – it was unfortunate it took so long to get someone who could do that.  As of this writing things appear to be back to normal, although I’m checking my statements much more assiduously now. So what has this cost Quicken? I asked for compensation; they credited me $250 and wrote a non-form letter stating this wasn’t my fault and hasn’t been reported to credit agencies.  My Schwab rep, who I called to let know what was happening, was mortified and spent time working the situation from his end.  He also credited me an unsolicited customer service gesture. So what are the lessons for an FSI?
  1. Have your CSRs do more than simply read dumbly from a script.  Train and empower them to look beyond what the system generates.
  2. Teach the CSRs to read the notes that their colleagues have left.  Better yet, assign one consistent rep to potential problem cases – it may be more efficient in the long run than passing a case among different people.
  3. Accept blame when it’s warranted – it goes a long way toward making your customers feel better.  At the end of the day, person-to-person interactions go much better when they’re between people, rather than a script on one side and a person on the other.

Financial Technology Startups: Giving Banks a Run for Their Money

Financial Technology Startups: Giving Banks a Run for Their Money
At the end of April I had the opportunity to attend Finovate Startup in San Francisco. I already blogged about my experience the day after returning. I also decided to writeup a report on financial technology startups – that report will be coming out next week. I decided to produce the report because much of the competition (to banks) and innovation in the financial services sector is coming from non-banks. The report singles out the innovative startups that Celent believes will have an impact on the banking space and/or the consumer market (many of these startups bypass the bank channel and market their products directly to consumers). Celent has selected the following companies to profile in this report: I am curious to hear your comments on these firms as well as your thoughts on innovation in the banking industry. Please feel free to post your comments and interact!