What banks can learn from airlines

What banks can learn from airlines
Celent thinks that banks can learn a lot from other industries.  Since I spend a lot of time on planes, I’ve gotten to thinking about the similarities between banks and airlines.  They have a lot in common when we think about the way that they interact with their customers.  They are both: 1. A means to an end. Just as no one says, “Let’s go to the bank for fun today,” no one says “let’s pack ourselves onto a metal tube with a bunch of strangers for several hours” (frequent flyers making year-end mileage runs notwithstanding). People bank so that they can have a safe place to store their money, pay for things, and borrow. Similarly, people subject themselves to flying in order to get somewhere a lot more fun than the airport. 2. Typically not held in high esteem by their customers. While this is certainly strongly related to the point above, it’s also the case that even when banks and airlines perform perfectly, customers aren’t excited.  “How was your trip?” “Oh, fine” meaning that the airline did what it committed to do.  Rarely does someone who hasn’t been bumped up unexpectedly say, “That was a fantastic flying experience.” Rather, it’s a case of, “That was uneventful,” or “that was as good as can be expected.” Banks, too, suffer from the curse of being unappreciated (as do, for that matter, utilities).  Only when something goes wrong do people pay attention. 3. Involved with their customers in a very intimate way. Banks know many details of their customers’ personal finances. Airlines put travelers in very close proximity to perfect strangers for hours at a time. This intimacy engenders strong feelings in customers and lays the groundwork for strong feelings to flow. Despite how much worse the US airline experience has gotten for most customers, airlines are nevertheless returning to profitability. Bankers may want to mull some of the tactics that airlines have used, if not for outright emulation, than at least for lessons that they might provide in a banking context. Five key areas come to mind: 1. Pricing fairly 2. Being human 3. Setting expectations and being transparent 4. Recognizing valuable customers 5. Providing value-added services 1. Pricing fairly Unbundling products and services is one element of pricing fairly. Charging fees for baggage is the most prominent example of unbundling a service that used to be included in the price of a ticket. Customers squawked, and behavior changed in ways anticipated and not (have you ever squabbled about overhead bin space?), but they adapted and paid up, opening up an annual revenue stream counted in the billions of dollars. Even as the typical airline seat shrinks, airlines have added rows of more comfortable seats that they either give to their frequent fliers or sell on a variable-priced basis. Airlines are segmenting their frequent fliers and letting other customers self-select with respect to what they’re willing to pay for extra comfort. The lesson: demonstrate the value in the services that you provide, then charge customer segments appropriately. 2. Being human Because of the intimacy I mentioned above, it’s critical that firms let their employees act as people rather than automatons or faceless bureaucrats. Three key areas help ease the pain of a long flight or a mistake on an account. Foster personalities and connections: Having a person-to-person conversation, rather than focusing only on the business at hand, can drastically change the tone of an interaction. A simple “are you heading to or from home?” from a flight attendant makes me feel better about the flight, and the feeling is a critical part of the customer experience. Thank people for their loyalty: When an airline actually thanks me, it again helps with the good feelings. Similarly, the airlines send me coupons that I can give to staff who’ve performed exceptionally – the corporation has given me the opportunity to be human, too. Develop a brand personality: Airlines are required to give a safety briefing at the beginning of the flight. Some personnel simply read their manual in an incredibly bored (and boring) tone; others personalize it and manage to make it sound interesting. Some, like Delta, even have genuinely funny video briefings (see a YouTube version here: http://youtu.be/eduNjwNvcH4). 3. Setting expectations and being transparent It really helps to makes rules and expectations (in both directions) clear and easy to understand.  Once those mutual obligations are set, then the firm has to stick to them – think about boarding by rows. When someone in group 4 tries to board with group 2, gate attendants who politely ask them to wait are reinforcing the mutual obligations that everyone on the flight has assumed. And you’ve got to be transparent about what’s going on; airlines still have some ways to go, but they’re making some progress in explaining why, for example, a flight is delayed. 4. Recognizing valuable customers Banks have recently begun doing a better job of segmenting their customers, but they can still learn a lot from the ongoing refinements that airlines continue to make. Airlines give passengers goals (elite status levels), keep them apprised of their progress, and have devised ways to monetize the desire to achieve those goals.  “Mileage runs” are a topic of discussion on frequent flier community sites, and some airlines have dispensed with that and will simply sell miles at the end of the year to allow people to achieve their desired status. Providing differentiated service to valued customers is very basic, but airlines do it transparently and consistently while laying out the benefits different elite segments stand to reap. Incidentally, this isn’t to say that banks aren’t doing some of these things now, but if and when they are, it’s not necessarily widespread. 5. Providing Value-Added Services The basic function of an airline – getting a passenger from one airport to another – is pretty commoditized. Airlines try to differentiate on all the elements that we’ve just discussed, but they also try to make themselves stand out by offering a variety of value-added services.  These are often driven by a web of partnerships that the airline has developed. Some of the most basic include:
  • Building a network of partners (e.g., Delta and Starwood) whose members enjoy reciprocal benefits
  • Booking hotels or renting cars through the airline site
  • Redeeming miles for a variety of goods or services offered through the airlines network of partners
  • Describing the weather at the destination (easy to do, not necessarily a huge value, but a nice touch)
There are a host of other value-added services that airlines offer. Rather than going into an exhaustive list, I’d simply point out that banks should examine what kind of additional value they can offer to their customers on top of the increasingly commoditized product suite on offer today. There are undoubtedly other salient comparisons that I’ve missed – please comment on what other areas airlines (or other industries) can provide lessons for banks.  

Bank IT Spending and Trends: 2014 Forecasts & Predictions

Bank IT Spending and Trends: 2014 Forecasts & Predictions
The new year brings lots of questions, planning and decision making. IT spending is tied directly to these elements, and as in past years, we have been receiving a truckload of IT spending questions. Celent predicts that 2014 will build on the positive investment momentum and growth experienced in 2013. IT spending growth rates will of course vary by region (4.5% growth in North America, 5.8% in Asia Pacific, and a flat 2.9% in Europe). There is a lot more detail available in the reports and an explanation as to why the European figures have started to rebound. Here is a quick snippet from, IT Spending in Banking: A Global Perspective (published earlier this week):
Total bank IT spending across North America, Europe, and Asia-Pacific will grow to US$188.0 billion in 2014, an increase of approximately 4.4% over 2013. This upward trend is an encouraging sign and indicative of the emphasis being placed on technology investments.
We have published a series reports that are relevant to all organizations: Several more trends reports are forthcoming so stay tuned and happy reading!

2013’s most popular banking reports (Innovation rules!)

2013’s most popular banking reports (Innovation rules!)
I looked at 2013 to see what the readers of Celent’s banking reports were most interested in. Here are the top 10, ranked by the number of downloads, and the date they were published. Innovation is clearly of interest to our subscribers, as are top trends. What do you think will be hottest in 2014? We’ll be giving you our perspectives shortly.
10/25/2013 What’s Next: The Search for Disruptive Innovation
03/4/2013 Banking Presentations from Innovation & Insight Day
12/13/2012 Top Trends in Retail Banking 2013
02/27/2013 Model Bank 2013: Case Studies of Effective Technology Usage in Banking
01/7/2013 Top Trends in Retail Payments: A Year in Review
02/18/2013 Big Data: A Guide to Where You Should Be, Even If You Don’t Know Where You Are
01/8/2013 IT Spending in Banking: A North American Perspective
04/8/2013 Mobile Banking Vendor Solutions
01/22/2013 IT Spending in Banking: A Global Perspective
01/29/2013 Mobile Banking Trends in China

Omni-Channel Roundtable in Toronto — the Summary

Omni-Channel Roundtable in Toronto — the Summary
We recently held a banks-only roundtable at our offices in Toronto to discuss “New Imperatives for Omni-Channel Delivery.” With representation from Canadian and US financial institutions, we had a robust conversation around the movement from “multi-channel” (old and siloed) to “omni-channel” (integrated and mutually reinforcing). Some of the attendees had interesting – and fairly recent – titles: “Director, Multi-Channel Experience” and “Director, Multi-Channel Strategy” were two that were particularly noticeable, while two others had “Channels” in their title.  Taking an integrated view of the channels portfolio appears to be catching on in Canada! Some interesting observations surfaced.
  1. Banks are rolling out channels and touchpoints without necessarily teaching the customer how to best use them.  When ATMs (or ABMs, north of the border) first came out, bank personnel would walk customers over to them and give them a basic tutorial. There is precious little analogous activity in our new digital channels; we simply assume that customers will pick up on how to use them.  Apple has trained us to think that really good experiences need no tutorial, but that’s not necessarily the case in banking, particularly when it comes to security concerns.
  2. The session didn’t address Personal Financial Management (PFM) directly, but when we touched on it, the group took off on a twenty-minute tangent!  There’s clearly a lot of interest in PFM despite anecdotal adoption rates that continue to hover around 10%.
  3. Piggybacking off existing infrastructure, e.g., the AppStore ratings engine and comments section, is a great way to garner customer feedback. The key, obviously, is to listen and act on the comments that customers provide, and at least one bank watches its ratings assiduously and uses the feature requests and complaints as a key driver of release improvements.
  4. As in the U.S., the fate of the branch network is an important strategic issue. One component that will have some bearing on this is video banking, whether through hardpoints or consumer devices (laptops or tablets). Bankers are clearly keen to determine how video can supplement other channel experiences.
  5. A sneak peek of a Celent survey of Canadian banking customers showed their behavior to be remarkably similar to Americans’.  While there were a couple of exceptions (to be detailed soon in an upcoming report), there were no huge disconnects.  Despite some of the differences in the structure of our two banking systems (oligopolistic vs. fragmented, and cooperative on infrastructure vs. wildly independent), our consumers tend to view and use their banks similarly.
We’re looking forward to additional roundtables in 2014.  If you’ve got specific topics you’d like to see addressed, or cities you’d like us to visit, please let us know!

The demise of Blockbuster and the rise of the new independent video rental store

The demise of Blockbuster and the rise of the new independent video rental store
Earlier this year, Celent released a report, Branch Boom Gone Bust: Predicting a Steep Decline in US Branch Density, which made comparisons between the decline of brick-and-mortar video rental stores, like Blockbuster, and branch banking in the US.  Celent argued that the decline of Blockbuster at the hands of digital alternatives is a cautionary tale for banks that still value a traditional branch network. As I’m sure no surprise to most, Blockbuster recently announced that they would be shutting down all remaining retail locations—around 300—effectively ending operations.
“This is not an easy decision, yet consumer demand is clearly moving to digital distribution of video entertainment,” said Joseph P. Clayton, DISH president and chief executive officer. “Despite our closing of the physical distribution elements of the business, we continue to see value in the Blockbuster brand, and we expect to leverage that brand as we continue to expand our digital offerings.”
From the chart below, taken from the above Celent report, its clear that this has been in store for a while.


Yet as countless blogs and news articles praise or nostalgically lament the once-great video giant’s downfall, an old question is being explored once again: what will happen to the independent video rental store?  Put simply, they’re evolving. Faced with years of low business and an ever shrinking cult customer-base, many small video retailers are innovating in an attempt to draw business back into stores, adding value in areas un-served by Netflix or Redbox. From the an article by Indiewire.com:
“Videology in Brooklyn put a bar in front and a big video screen in back, where customers can sit at tables and drink while watching free screenings. It doesn’t even look like a rental outlet anymore — it moved all the discs aside from the new releases off the floor and put in computer kiosks for customers to browse the inventory. Vidiots in Santa Monica, supported by its community and patrons from the Hollywood film community, raised money to open a screening room and a non-profit foundation that holds workshops, classes, and outreach programs. It’s redefining its sense of purpose.”
Is this an example for banks?  Sure it is.  Similar to what’s happening in retail, banks can add value to a branch-based experience. Consider this line from the above quote: “[The video store] doesn’t even look like a rental outlet anymore.”  Small video retailers are refreshing the idea of what a video store is, and what it could be.  Smaller banks like Umpqua Bank have already explored this idea years ago, and even megabanks like Wells Fargo are exploring the possibility of compact “boutique” branches. The rise of digital The other day I came across a cool chart from Horace Dediu that does a good job at visualizing the change in consumer behavior that drove Blockbuster underwater, and is driving younger generations toward less branch engagement.  A larger version can be found here.   The adoption of smartphones and tablets, even in relation to internet and mobile phones, sit in stark contrast to the group.  The second part of the graph shows the duration of growth from 10% adoption to 90% adoption in years. For smartphones and tablets (estimated), these numbers are in the single digits. The result is a substantial decrease in the development life-cycle of innovation, early adoption, and late adoption. For branches, this means a dramatic and rapid shift in the way consumers interact with their financial institutions. Blockbuster trailed both Netflix and Redbox by almost five years before releasing competing products.  The company not only failed to react to shifting demand, they arguably contributed to it. The founder of Netflix started the company after he paid $40 for a late video rental.  Blockbuster continued to remain unmoved by customer complaints over late fees, eventually settling a series of lawsuits over the matter.  Customers in turn, looked to innovative start-ups (i.e. Redbox and Netflix) to fill the void.  Blockbuster failed to adapt. The path forward is a mix of early adoption and, like independent video stores, a rethink of traditional business practices.  Let’s be clear, branches won’t die, but it’s difficult to make the case that significant redesign won’t happen. Will banking bloggers someday down the road, sitting in an independent video rental coffee shop, write about the nostalgia of traditional branch banking?  Probably.

Recapping Future of the Bank Account Roundtable

Recapping Future of the Bank Account Roundtable
We just assembled a group of UK retail bankers for a discussion on The Future of the Bank Account. Against the backdrop of the month-old implementation of the directive that bank switching be seamlessly completed in seven days , banks were keen to understand the implications of changing consumer needs and behaviors, evolving regulations, and new competitors. Celent see a consumer’s bank account serving three main purposes:
  • Receiving funds (money in)
  • Storing and Managing funds
  • Paying funds (money out)
We were interested in exploring how these key functions might evolve and what banks need to do to respond. The group crystallized three key notions central to making tomorrow’s bank account a success:
  1. Trust
  2. Perceived fairness
  3. Value added services
Customers must trust their primary account provider to keep their money safe and to do right by them.  The opportunity lies, though, in not avoiding breaches of trust, but in seizing the opportunity to do the unexpected right thing – going above and beyond to earn customer loyalty.  Trust also implies transparency: being upfront with your customers about how you’re going to deal with them, and demonstrating the value that you provide. It’s all too easy for customers to take for granted something marketed as “free.” Banks need to do a better job demonstrating that there is actually a lot of value in a “free” banking account (which is admittedly much easier said than done). The psychology of retail consumers generated a good discussion, particularly around the notion of fairness, which in the end comes down to perceived fairness.  Tied closely to trust, fairness means that consumers have to feel that they are being treated the way they deserve, not in a series of one-off transactions, but in the context of a continuing relationship. Finally, because bank accounts (and payments, the most salient feature) are, by and large, commoditized, the opportunity for differentiation comes from value added services.  Still nascent, most of these services will revolve around relationships and data (in one form or another). Banks will need to determine what their portfolio of value added services will be. In conversation there was a clear belief that proponents of the seamless switching scheme, and the potential idea that bank account numbers be make portable if not enough people start to switch banks, may fundamentally misunderstand people’s relationship with their bank. In mandating that everyone have access to a free account, regulators may have inadvertently made it harder to compare accounts on an apples-to-apples basis.  Additionally, banks face the challenge of serving these accounts in a cost-effective way, no small task. Inertia is an extraordinarily powerful force in personal financial services; getting people to change banks or the way they do things with their bank is hard.  However, the right value added services might be enough to persuade consumers to switch banks, although the jury is still out.  The challenge that many new payments schemes face is, “why is this different than simply tapping your card.” There was some belief that success and failure will be determined at the bricks and mortar side of the bank, rather than through digital channels. Many would dispute that notion; they next few quarters will give us an indication of whether that’s true. Clients who’d like to explore this further can read Zil Bareisis’ report, The Rise of the New Bank Account?

The more things (in core) change, the more they remain the same…

The more things (in core) change, the more they remain the same…
On September 10 Forbes contributor Tom Groenfeldt wrote an interesting piece titled “Core Banking Replacement Remains Locked in the Future.” http://www.forbes.com/sites/tomgroenfeldt/2013/09/10/core-banking-replacement-remains-locked-in-the-future The article started by citing a 2003 Celent report, Core Banking Replacement Strategies: The Time Has Come. In the intervening 10 years, there have been only a handful of successful Tier I core replacements. Tom’s point wasn’t to make Celent look foolish – he could have picked any number of analysts who’ve been delivering the same message over the last decade – but instead to highlight the slow pace of core migration. We stand by our rationale of ten years ago – the need for flexibility, customer-centricity, real time, and efficiency, together with the added demands of mobile, all point to the need for banks to upgrade their antiquated core systems.  The big difference is that today a wholesale rip and replace effort isn’t the only game in town.  Progressive migration, middleware additions, and even starting new banks to serve, in part, as a migration destination are all strategies to defer (not avoid) an eventual core replacement. In Celent’s most recent core report, Global Core Banking: Steady But Unspectacular Growth, we highlighted the challenges, both technological and cultural, that large banks face in making the decision. Very few large U.S. banks will act in the very near term: banking systems are complex, change is costly and time-consuming, and for many, the competitive push has yet to materialize.  It’s no accident that Australia has seen two Tier I core replacements – once one firm goes, particularly in a concentrated market, it raises the cost of inaction for its competitors. Further, as is the case with many cases of change and innovation, the downside is huge and the upside is limited. Core replacement is going to be much more realistic for smaller banks in the near future. Until large banks have role models of successful pioneers to follow, they’ll be reluctant to act.  In our conversations with banks around the world, however, we hear that the pressure’s building to tackle the core, rather than tinker around the edges.    

Striking consensus at the NetFinance conference

Striking consensus at the NetFinance conference
I spoke recently during the mobile track at the annual NetFinance conference in Arizona.  My slot at the end of the first day meant that by the time my turn rolled around, I was faced with good news and bad news.  It was good that there was so much agreement among all the participants, and that the messages that I’d prepared were consistent with those of other presenters.  The bad news was that few of my messages were new, and I didn’t want to bore my audience by repeating what they’d already heard.  So I started by recapping the threads that kept appearing over the course of a stimulating day. Key takeaways on what was important:
  1. Mobile: Critically important; the change from just a year ago is stunning
  2. Location:  Especially as a distinguishing feature of mobile
  3. Customer experience: You’re competing against expectations set by non-financial firms. It’s not just mobile, it’s not even just digital, it’s the unified customer experience, across the bank.  And that’s not easily quantifiable
  4. Business case:   Those in the room agree it’s a little squishy, but make-able, but it’s critically important to executive leadership. Many of the exhibitors and speakers are working toward providing solutions that will make capturing that data easier
  5. Data: Capturing insights and measuring / analyzing results is critical; it’s best to build in these capabilities at the beginning; experiments are even better so that the causality / correlation puzzle can more easily be solved
  6. Regulation: Serving customers digitally is harder for banks than, say, retailers, but that’s no excuse – customers still expect a great and valuable service
  7. Customer: The number of banks who touted putting the customer first was extraordinary.  Now we have to see whether their actions follow through on these encouraging words.  Is mobile a chance to teach them new habits?
The degree of consensus around the importance of mobile was striking.  The challenge for the bankers attending, and for the vendors helping them, is to move from preaching to the choir who attended NetFinance to bringing new members into a broader congregation.  Business cases coupled with compelling anecdotes, examples and case studies will help with this. Before embarking on any new digital strategy today, firms should embrace experimentation and data analysis. Here’s the NetFinance link: http://www.wbresearch.com/netfinanceusa/home.aspx


I recently spent several days in New York speaking to a host of clients, both technology providers and banks, many of whom are focused on driving adoption of new technologies.  I was struck by the consistent increased focus on simplicity in the customer experience. Why is this important?  I contend that in human behavior generally, and financial services specifically, the most powerful force is inertia: a body in motion tends to stay in motion.  To get people to do something differently, you’ve got to make it worth their while to change.  There are two components to this equation: the size of the potential benefit, and the effort required to reap the benefit. As the perceived value decreases, so too must the effort to achieve it.  Because in financial services the perceived benefit is so often uncertain, reducing the effort required to achieve it is critical. Let’s look at the Apple music ecosystem (iTunes, iPod, iPhone, iPad, etc.).  The iPod wasn’t the first mP3 player to hit the market.  Wikipedia says that the first commercial players arrived in 1998.  But they were very clunky to use, requiring several steps to transfer music from a digital library on a computer to the player.  And while it was easier than recording a vinyl album to a cassette tape (to date myself), it was nevertheless a cumbersome process. Enter the iPod in 2001.  Moving music onto it was fairly seamless, requiring only a couple of steps.  Organizing music was easy, and the whole system just plain worked.  Simplicity (achieved consciously and with a great deal of hard work behind the scenes) played a critical role in the meteoric rise of iTunes. Now apply that same kind of thinking to banking, particularly the mobile and tablet experiences.  Reducing a process from 10 steps to five isn’t going to change much behavior; moving from five steps to two will. Your task is to make new processes simple enough for the average consumer to be convinced that she should start doing something new.  How can you eliminate those crucial last few steps to get to something elegantly simple?

Why don’t banks pay me for going paperless?

Why don’t banks pay me for going paperless?
I recently stayed at a Sheraton in London. On arrival I was intrigued by a card that offered me 500 points for not having my room cleaned.  This was a different approach than the old, and not particularly effective, exhortation to hang my towel if I wanted to save water – in that scenario, there was nothing in it for me but the potential for some vague good feeling.  But this – this was real, this gave me something that I valued.  So I opted to go without my room being made up for two nights, was 1000 points the richer, and the hotel saved on labor, detergent, water, and the like.  It was a true win-win situation.  When I remarked on it when checking out, the clerk said that the initiative was only a couple of weeks old, but had received very favorable responses.  Count me as a fan! What’s the analog for banks and other senders of paper statements?  The plea to go paperless.  We’re told it’s green, and might reduce the risk of identity theft.  But I know that the bank will save a lot of money by not sticking that statement in the mail (in round numbers, 50 cents per customer per month).  So why not just offer to split that (relatively small) amount with me, or offer some other incentive?  When added to those other worthy reasons, it might be enough to tip certain customers over the edge of going paperless.  The goodwill it generates will certainly help from a marketing perspective.  And finally, it’s a great example of a win-win for the bank and its customers. I love to ponder why we do what we do.  The rapidly evolving world of behavioral economics is particularly relevant to financial services, and I’ll be exploring on an ongoing basis some of the lessons that banks can draw from this emerging field.  If you’ve got your own interesting examples of changing behavior, let us know.