AI is becoming increasingly interesting to bankers. Last year I wrote a blog about “Assistant as an App”, looking at how concierge apps like MaiKai and Penny are offering up AI-driven financial management services. My colleague Dan Latimore also recently posted a blog on AI and its impact.
The emergence of chat bots within popular messaging apps like Facebook Messenger, Slack, Kik, and WeChat similarly has the potential to shift how customers interact with financial institutions. Chat bots offer incredible scale at a pretty cheap price, making adoption potentially explosive. Facebook messenger, for example, has almost one billion active users per month. WhatsApp (soon to launch chat bots) has about the same. These apps offer some extremely high engagement, and with app downloads decreasing, users are spending more time on fewer apps. According to Tech Crunch, 80% of the time spent on a mobile device is typically split between 3 to 5 apps.
Chat bots give the bank the ability to automatically appear in almost all of the most used apps in the world. The opportunity with digital assistants is immense, and given the nature of bank transactions, it’s not hard to imagine chat bots becoming a widely used engagement method. Most of banking is heavily rules-based, so the processes are often standard. Frequent banking requests are pretty straightforward (e.g. ‘send this person X amount of money’ or ‘transfer x amount from savings to checking’). Bank-owned chat bots are also more built for purpose than some of the multi-purpose third-party products on the market, making the functional scope targetted. While chat bots are still very early days, it won't be long before these kinds of interactions are accessible and the norm. Bank of America already has one; many others have plans or pilots.
This video (skip to 7:30) shows what an advanced chat bot might be able to accomplish. The image below from the Chat Bot Magazine is another conceptual banking use case. The possibilities are compelling.
But while the opportunity with digital assistants is enormous, banks must be aware of how this affects their current ongoing digital strategy. For example, if chat bots overcome the hype and become a long lasting method for accessing financial services, then what effect will that have on traditional banking apps? Will chat bots make it foolish to invest large sums of money in dedicated mobile apps?
For all the promise this technology brings, banks need to be aware that this could be a step towards front-end disintermediation. The threat of tech companies (or other large retailers) stepping in to grab banking licenses and compete directly with incumbents was short lived. The more realistic scenario was always relegating core banking functions to a utility on the backend of a slickly designed user interface created by a fintech startup. The incumbents lose the engagement, even if they are facilitating the transactions.
Are chat bots a step towards front-end disintermediation, or are they an extension of the bank’s main app? If you believe that chat bots are a stepping stone (or companion product) towards a world where the best UI is no UI, and where AI evolves to the point of offering significant functional value, then banks could be at risk.
This isn’t a call to hysteria by any means, nor am I calling chat bots wolves in sheep’s clothing, but banks need to be aware of the potential impact. As voice or message-based interactions become the norm, they will have an effect on a bank’s dedicated mobile app. In this environment, the mobile app will need to evolve to become something different; non-transactional.
Chatbots will only further fragment the customer journey, requiring an even clearer understanding of how consumers are choosing to handle their finances and make transactions. Banks need to start thinking about how chat bots and AI fit into a long-term digital channels strategy, one that doesn’t handcuff the institution into a no-win proposition of competitive disadvantage versus wilful disruption.
A couple weeks ago I attended the Mobile Banking and Payments Summit in NYC for the first time. There was an impressive list of experts from institutions such as JPMC, Barclays, Citibank, BNP Paribas, the Federal Reserve, USAA, Capital One, BBVA, and Moven, among others. I was only able to attend the final day, but it didn’t disappoint. The day focused mostly on mobile wallets, with a few main points shared below:
Mobile wallets have been challenged by industry barriers: The old rule of thumb with a payments scheme is that it needs to please three parties: the merchant, the bank, and the consumer. These products and solutions have traditionally fallen short of one or more of these objectives, essentially stalling a lot of the progress.
- There’s still plenty of fragmentation in the market: Android is an open system utilizing Host Card Emulation (HCE), while Apple is a closed system using a secure element. There are others beyond that, but it’s largely contributed to a lack of standardization and unimpressive overall adoption. We know this is largely understood by banks and merchants, and many are willing to play along for the time being.
- Consumers can misunderstand mobile wallets: Many users of Apple Pay, for example, have a poor understanding of how the system actually works, with many assuming Apple is in control of their card details. While the system is safer than traditional cards, the perception that it’s less safe is keeping many users from adopting it.
- Getting the marketing right is tough: Often, the mobile wallet really isn’t about the payment so much as the experience around the payment. It might be easier or there might be a whole host of incentives like rewards wrapped around it. The potential is there, but until recently the market hasn’t been.
- But many barriers are beginning to fall away, and there’s hope for adoption: For years, the industry has been declaring that FINALLY this year will be the year mobile wallets take off. The industry has been crying wolf for a long time, but there are some promising developments that hope to make mobile wallets a larger share of the payments universe. Currently in the US, 55% of merchants have updated their payment terminals, and 70% of consumers have chip cards. The chip card does a lot for security, but the argument is that it adds friction to the checkout experience. With the card dip taking away from the user experience, the expectation is that mobile wallets will finally offer enough UX improvement over traditional cards that consumers might opt for them during payment. It’s also reported that more than 50% of millennials have already used a mobile wallet at least once. This includes Apple Pay, Android Pay, or Samsung Pay. The growth in adoption with younger consumers is a good sign that broader adoption might not be too far behind.
My colleague Zil Bareisis has written about this quite a bit, and agrees that adoption could be driven by the emergence of EMV as well as an increase in handsets that support wallet payments.Wallets are also striking partnerships to add value, including introducing merchant loyalty, coupons, etc.The launch of Walmart Pay is a great example of a retailer applying these concepts internally, facilitating even greater adoption. For more information see any of the number of reports Zil has written on the topic.
Midsize institutions have a few paths to follow implementing a mobile wallet: Banks want to be a part of the adoption, but have so far taken a wait and see approach, unsure about the potential of existing wallets, and still trying to figure out what it means for them as the issuing bank. There are three primary ways a midsize or smaller bank can try to launch a wallet:
- Building an internal wallet: This provides the most control, customization, flexibility of functionality, and control over the release schedule. The drawbacks are that it can be a complicated task, a large investment is required, the institution needs sufficient subject matter expertise in-house, and there would be no Apple NFC support.
- Buying a turnkey white label wallet: A turnkey solution would have the benefit of being plug-and-play, there would be some customization options, functionality would be built in, fewer resources would be involved, and the vendor would provide some subject matter expertise. There would, however, be less control over the product, the wallet could be processor dependant, and the roadmap wouldn’t be controlled by the institution.
- Participating in an existing wallet: For many this is the road that will result in the largest adoption. The options are fairly universal, with Samsung, Apple, and Android offering networks here. Its plug and play, easy to get traction, includes a lot of choice, and frictionless. The drawbacks are mainly the lack of customization options or control over the direction of the wallet.
We often say that we go to these conferences so that our subscribers don’t have to. This is just a short summary of the day, and obviously there was much more detail shared. We encourage all of our readers to attend these events, but will be there in case they can’t make it.
I subscribe to Marcus & Milichap’s research blog. Getting my head out of banking from time to time is refreshing and provides useful perspective. A recent blog post commented on the changing make up of commercial property construction as a result of the continued growth in digital commerce. The completion rate of new construction (measured in millions of square feet) has been roughly a third of its pre-2008 boom. Dramatic indeed!
No big mystery, however. As retailers close stores (Macy’s is a recent example), property developers must re-adjust their development to sustain revenue growth. As large merchants exit, they’re being replaced with smaller service providers – restaurants, medical practices, financial planners and grocery stores – mostly services that are less likely to migrate online. Digital plays a role in my healthcare, for example, but I’m still going to see the doctor next week for an annual physical. It helps to do that indoors.
That got me thinking. Three years ago, Celent predicted a steep decline in US branch density based on an analysis of branch dynamics in other developed markets and changes in store densities in other retail categories. In part, we argued that reductions in store densities have been non-uniform across retail categories for a reason. In the final analysis, as commerce becomes more digital, fewer brick and mortar stores will be needed to fulfill the same level of demand. We argued that two variables play an important role: the susceptibility to digital self-service and the degree of product differentiation. Arguably, retail banking is highly susceptible. Loan rates are easily compared online, but you may want to try on a new pair of pants before buying.
So, why is the reduction in US branch density occurring more slowly than other retail categories? In part, because industrywide retail banking sales mix lags other retail categories in its migration to digital. How do we know this? Through June 2016, digital commerce accounted for 13% of all US core retail sales. How does that compare to retail banking? According to a survey of Celent’s Branch Transformation and Digital Banking research panels, US banks and credit unions lag considerably, with roughly 90% of sales occurring in the branch or contact center.
Here’s one reason I think this is so (see below).
Banks have invested heavily in migrating transactions to self-service (the “use” part of financial services) with polished transactional capabilities in the digital channel, but have paid comparatively less attention to making shopping for and buying financial services digitally frictionless. That’s now a high priority for a rapidly growing number of institutions at present. Good thing!
As banks do so, they will be rewarded with rapidly growing digital sales. In the past 12-months ending in June, total non-store retailer sales grew 14.2% YOY according to the U.S. Census Bureau and Marcus & Millichap Research Services. Over the same time period Bank of America’s digital sales grew 12% YOY, representing 18% of total sales according to its July financial results presentation.
So, will banks eventually lead in retail digital sales growth? Absolutely – Bank of America is already there!
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".
Pretty far I'd say!
- The gap between hype and reality for fingerprint authentication is big, but shrinking;
- Banks don’t have to be large to do this; and
- More banks should be offering fingerprint authentication.
- Tablets have low replacement cycles: Tablets aren´t being recycled at nearly the rate of phones. Partially this has to do with wear and tear—tablets typically sit at home, aren´t charged as often, and aren´t dropped nearly as much—but likely a bigger reason is the lack of major advancements in hardware. There simply hasn’t been a new tablet feature in the last couple years for which consumers are choosing to shell out another $400-600 (or more).
- Phablets have taken over as the preferred device: consumers are increasingly going for phones that can provide the screen space of a tablet with the mobility of a smartphone. Phones have been steadily growing in size to meet this need. Phablets can provide the processing power to accommodate the needs of consumers for less.
- Tablets haven´t carved out a distinct enough use case: It´s still unclear to what extent tablets are devices of leisure, business, lifestyle, etc. There´s the Surface 4 and others that are starting to seriously go after the laptop market with a full operating system and keyboard, but the best-selling tablets on amazon are all those with small screens and cheap price tags.
- Use responsive design: A bank may have been able to manage native apps when there were only a handful of devices, but that´s no longer the case. Responsive design has evolved to the point of being able to provide the same look and feel through an experience automatically tailored to the user´s device.
- Think about the consumer-facing branch tablet: This could be roaming personnel in the branch, tablet-like ATMs and kiosks, or as a way to streamline the on-boarding process. The characteristics of tablet interfaces should influence design in other channels.
- Design the right app if large tablets are going to continue to be a priority: As the form and function of smartphones and tablets begin to move closer together, institutions will have to reassess where the full tablet experience sits within its strategic digital priorities. The consumer-facing tablet experience may need to reflect the evolving use case.
- Maintain the consumer facing side of the business by letting customers access these service through your platform
- Increase cross-selling and marketing opportunities
- Preserve a convenient and frictionless experience by reducing the fragmentation of unbundling