Category Archives: Financial Services

Why Bank Branches Suck (And Why The Branch Of The Future Stuff Is Nonsense)

Chris Skinner recently published a blog post titled Banks designed for humans, not money in which he argues that:

“Branches are banks’ retail stores but were designed for money. They were designed to handle physical forms of cash and cheques, as secure transaction centres. This is the core challenge of why everyone thinks branches will disappear. Because they are not retail stores engaging the brand community but transaction centres run like some administration process.”

In imagining — in Chris’ words — “how the branch experience becomes a retail experience fit for 2013 and beyond,” he identifies a few examples:

  • Washington Mutual (Occasio) and Umpqua removed teller counters and opened the dialogue over a face-to-face table form.
  • Caja Navarro and ING Direct instigate “community engagement” (Chris’ words) by having open house sessions. Caja Navarro offered evening classes in their stores including hair styling and flower arranging, and ING Direct offered sessions where anyone could just ask questions like: “how does a mortgage work?”
  • Umpqua allows branches to be booked in the evening for cocktail parties or business meetings.

My take: These are all interesting examples of alternative (and creative) uses of branch space, but do little or nothing to prove that the branch is an economically viable (i.e., profitable) way of doing business for banks.

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In his post, Chris cites a Bloomberg article that appeared shortly after Apple launched its retail stores:

“Jobs thinks he can do a better job than experienced retailers. Problem is, the numbers don’t add up. I give them two years before they’re turning out the lights on a very painful and expensive mistake.”

Bet that guy wishes he could take those words back.

But the important point is why he was wrong. So-called “experienced retailers” were experienced at selling consumer products (clothing, jewelry, shoes) — not technology products.

At the time of Apple’s launching of retail stores, there were two frames of reference: 1) How existing retailers sold consumer products, and 2) How existing technology companies sold technology products. Apple stores didn’t fit either frame of reference, and hence, geniuses like the one at Bloomberg wrote them off.

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Apple reinvented the way technology products were sold. (It took a couple of tweaks, they didn’t get it right on the first try). What Apple has got right, regarding the sale of technology products, is creating a retail experience that is:

  1. Visual. People want to see the product.
  2. Tactile. People want to touch and use the product.
  3. Informative. People want to talk to store reps who know about the products.
  4. Advocative (I made that word up). People want reps who will recommend products that are right for the customer, not just for the store.
  5. Lean. The buying process if fast, with a minimal number of steps. No waiting in cash register lines. Fast and lean.

Apple stores are successful because — for the most part — they succeed at accomplishing these five things. And it doesn’t hurt that the products Apple sells are products that consumers consider to be very important in their personal lives.

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This is why bank branches suck: They don’t accomplish these five objectives (yeah, I know, if I flip-flopped #2 and #3 we could say that branches aren’t VITAL. I hate stupid acronyms).

Granted, banks are handicapped here.

It’s tough to “see” and “touch” most financial products and services. You used to be able to touch a checking account — i.e., your checkbook — but nobody does that anymore, and you didn’t get that until days after opening your account anyway.

And, for the vast majority of consumers (at least here in the US), although money is really really important to us, our choice of financial products and providers isn’t. We spend more time figuring out what restaurant to eat out at on a Saturday night than we do which bank we do business with.

There is, however, no excuse for why banks don’t meet the informative and advocative hurdles.

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This is also why the various “branch of the future” concepts fall short: They don’t do anything to reinvent the way financial products are sold.

The branchlet concept is great — as are the hair styling, flower arranging, yoga classes, and cocktail party ideas. But they only address the efficiency (cost) side of the coin, not the effectiveness (sales) side.

Chris was spot on in describing the branch as a “transaction centre run like some administration process.” Hair styling and flower arranging classes, however, is just lipstick on a pig. 

Chris was also spot on in suggesting that banks should “combine the two worlds: the retail store and the remote experience.” But I’ve yet to see a “branch of the future” concept that does that. Most BOTF concepts bring more technology into the branch, but few (if any) do anything to integrate the branch experience with the remote experience.

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Banks (and credit unions) have two huge hurdles to overcome in order to make branches profitable:

1. Redefining how financial products are sold. Sitting down at a desk with someone who may or may not be well informed about the products, asking me personal questions about my finances that I have no interest in sharing, talking about they may or may not be right for me….it’s a crappy experience.

2. Getting more people engaged in the management of their financial lives. Chris talks about “using stores as a method of building a sense of community around your brand.” It works for Apple because people really care a lot about their choice of smartphones, PCs, and music devices. You don’t get brand engagement without product category engagement.

There’s a chicken-and-egg situation with this last point. If I’m not engaged in the management of my financial life, why would I go into a branch to learn how a mortgage works? (Unless, of course, there was a free meal there. Free drinks, even better. Offer Macallan 18yo Scotch and I’ll even come in for the hair styling and basket weaving classes).

Apple may have reinvented the way technology products are sold, but the company is successful with its retail strategy because they get people in the door. Ironically, when new products are released, there’s often a line, and people can’t get in. But you know what I mean. 

Flower arranging classes don’t count as a way of “getting people in the door.” Banks don’t have the luxury of having a “cool” product that, when announced, will drive flocks of people to line up at the door. 

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The recent consumer research I’ve done (not yet published) suggests to me people are increasingly engaged with their financial lives. Younger consumers are more engaged with their financial lives than older consumers, and certainly more so than older consumers were when they were in their 20s and early 30s.

But the financial services industry has a long way to go before it can talk about branches as a place that fosters a sense of “ownership, belonging, and loyalty.”

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The Most Useless Research Stat: Consumer Channel Preferences

Quick two-question survey:

  1. Do you think that banks and credit unions should continue to increase their investment in the mobile channel? (Y/N)
  2. Do you think the “voice of the customer” is important for bank and credit unions to pay attention to?  (Y/N)

If you said YES to both questions, you have a small problem (if you didn’t say YES to both questions, you have a big problem, and should leave this blog now and seek immediate help).

I can’t imagine that you would say NO to Q1. I can imagine, however, that you might hedge on Q2 and say there are times when the voice of the customer is more important than at other times.

Quit picking nits.

The problem is that there is very credible consumer research that — taken at face value — suggests that the mobile channel is not very important to financial services customers.

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Gallup recently surveyed consumers and asked about their channel preferences for 14 different types of banking interactions.

Before we take a look at the data, let me just say that the fact that Gallup asked about preferences for specific types of interactions makes their study head and shoulders better than most other studies, which don’t capture this level of detail.

Here’s what Gallup found:

Source: Gallup Business Journal, How Consumers Interact With Their Banks

There are a number of conclusions you might draw from this:

1. Consumers want to open accounts in a branch. After all, eight in ten consumers said they prefer to open accounts there.

2. Many consumers want to get in a car and drive to their bank every time they have a problem. Well, half of the consumers surveyed did say that they prefer to report a problem or annoyance in person or at a branch.

3. The mobile channel is the second-least important banking channel. Least important honors goes to online chat — not a single respondent listed it as their preferred channel for any of the interactions. But the mobile channel didn’t fare much better. The interaction type that the mobile channel got the most votes for was receiving alerts, but the 3% who preferred mobile pales in comparison to the 29% who want alerts to come to them 3-5 days later from the US Postal Service (for chrissakes, these idiots could walk down to their bank and get the news sooner).

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This is what the data says. It’s the “voice of the customer.” Can’t argue with it.

Sorry, @brettking, branches aren’t dead. People prefer to open accounts there. Sorry, @jimmarous, but all those studies you tweet and blog about that show that consumers prefer direct mail to other channels are wrong — it’s only true for receiving statements.

And for all you bankers and creditunionistas who keep investing in mobile banking capabilities, apparently you’re wasting your money. Nobody (except for a less-than-handful of weirdos) prefers the mobile channel for anything.

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Further analysis from Gallup (to find out what that analysis is, you’ll have to read the article for yourself — it’s not the job of this blog to save your lazy ass from doing a little work) led them to conclude:

‘Migrating customers from channels they prefer to use to channels they don’t may lower their engagement with their bank. Consequent declines in satisfaction and engagement could result in loss of revenue, profitability, and customer retention.”

My take: That’s a bit of a leap.

Forcing customers to use certain channels, preventing customers from using certain channels, and poor experiences in non-preferred channels may all lead to problems and issues.

But the term “migration” implies — at least to me –that there is a process, logic, and/or business rationale behind it. Paying customers (in the form of rewards, higher rates, or lower fees) shouldn’t lead to loss of profitability if the amount paid is less than the cost savings realized.

In addition, consumers who have never tried to complete a particular interaction in a particular channel is never going to say that channel is preferred — until they try it and find out that it really is a better channel for them. 

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Bottom line: Consumer channel preference is the most useless research stat out there. 

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Related posts:

Ignore Consumers’ Channel Preferences

The Truth About Bank Channel Preferences

Channel Preferences Don’t Matter

Bank Customers Want A Seamless Experience (My Foot)

Foot wasn’t exactly the first body part that came to mind, but I’m trying hard to keep it family-friendly here.

Yet another consumer survey from yet another technology company finds that bank customers want…..wait for it….a seamless and personalized customer experience. And that consumers are even willing to share personal information with the bank in order to get that personalized experience!

Only problem here…well, actually, it’s one of a number of problems here…is that this really doesn’t hold water.

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Before I explain what the main problem is here, I should come clean and give you the self-psychoanalysis of what’s bugging me here.

It’s not simply a claim that doesn’t hold water.

It’s two other things: 1) the Questionable Chain, and 2) the potential revenue loss.

Here’s the Questionable Chain:

  1. A technology company commissions a consumer research study which asks consumers questionable questions…
  2. …which produces a bunch of questionable conclusions….
  3. …which finds their way into a questionable press release…
  4. …which provides a questionable argument for why said technology company’s technology should be purchased.

Here’s the potential revenue loss: They didn’t pay ME (or my firm) to do the study for them.

So yes, I have some dishonorable (questionable?) reasons for bashing the research. But that doesn’t mean that what I’m going to say about it is wrong.

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I’m not going to provide a link to the research or name the company. You can Google it and figure it out. I’m deluding myself into thinking that if I don’t mention the firm’s name, I can avoid pissing them off.

The headline of the press release reads as follows: “Consumers want a more seamless and personalized customer experience from their bank.”

My take: No they don’t.

Consumers want things to work. Period. But if you must elaborate, they want things to work the way they expect those things to work, when they use them, and where they use them.

And consumers don’t want to have to think about any of it. They just want it to happen. If you really think about it, what they really want is for banks to be invisible.

“Seamless” is a term that implies that there are seams that need to be hidden or sewn together. I don’t want “seamless” pants, I don’t think my wife wants a “seamless” dress. We want clothes that fit and look good.

Same mentality applies to banking. Consumers don’t think in terms of “seams.” It’s true that there are interactions that require handoffs between channels or people within the bank, and yes, customers don’t want things falling through the cracks or to have repeating their problem five times.

But those interactions are really few and far between for most customers. Most customers don’t start checking their account balance in one channel, and finishing it another. Or starting to pay a bill online and then completing the payment on their smartphone.

The concept of channel integration or consistency in banking is misused and overrated.

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The other problem with the press release headline is something that is very common among the customer experience transformists: There is no such thing as “the” customer experience.

Interactions between a bank and its customers run the gamut of many different types of transactions and interactions. There is no single “experience.” Washing over the differences in the types, qualities, and importance of the various types of transactions/interactions is fool’s work.

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A third problem with the press release: When asking consumers if they would provide more personal information in order to get more “personalization,” what does that really mean?

What are we talking about when we say “personalized” experience and what information is really needed to provide it?

Asking “would you be willing to provide personal information for a more personalized experience” — without getting into more specifics — is simply poor research. It makes for a nice headline, but it’s completely useless, and very misleading.

Let’s explore this for a moment.

How about I personalize your experience on this blog if you provide me with some personal information. OK?

So….why don’t you tell me your sexual fantasies, and the next time you access my site, I will show you pictures of people engaging in those sexual activities.

A “personalized” experience based on your personal information.

OK, sorry. Back to reality.

What exactly is a bank going to do to “personalize” customers’ transactions and interactions? (I’m trying to avoid using “experience”).

There have been lots of attempts to do this already: Use the customer’s name online or at the ATM, customize a dollar amount to be withdrawn at the ATM or the amount to be transferred between accounts, based on previous transaction history.

But those didn’t require additional “personal” information.

I simply don’t understand what personal information I’m supposed to be giving up in order to get a more “personalized” experience that I can’t visualize.

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The release also quotes a company exec as saying “Retail banks that succeed in providing a seamless customer experience across all channels to market- branch, mobile, online, contact center- will be the winners of the future. Superior customer experience will be the only long term sustainable differentiator.”

Nonsense. 

A corporate competency to continuously design, develop, and deploy superior products and services can be a sustainable differentiator. And as I mentioned before, customers don’t use every channel for every transaction/interaction, so this concept of seamlessness just doesn’t hold water. 

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The rationale for publishing research like this comes down to some combination of two reasons as I see it: 1) To generate publicity, or 2) To align or tie the company’s products to the concept of customer experience.

It may have succeeded on the first point, but I think it does little to accomplish the second. 

Credit Unions: Reinvent P2P Lending

Some university professors recently researched the effect of personal relationships on P2P lending platforms. They discovered three “effects”:

  • Pipe effect. Friends of a borrower, especially close and off-line friends, act as financial “pipes” by lending money to the borrower.
  • Social herding effect. When friends of a potential lender, especially close friends, place a bid, a “social herding” effect occurs as the potential lender is likely to follow with a bid.
  • Prism effect. A friend’s endorsements via partially funding a loan reflects negatively (i.e., becomes a “prism”) on the value of the loan to a third party.

What the study shows is that the volume and patterns of lending and borrowing are influenced by, and strengthened by, the extent of the relationship between participating borrowers and lenders.

My take: Credit unions (and community banks) should interpret these findings to find ways of introducing P2P lending-type practices into their lending processes.

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The 2013 Financial Brand survey of marketers found that — not surprisingly — lending is at the top of the list of marketing priorities for the near future.

How are credit unions and community unions going to compete for the borrowing business that’s out there? If it’s going to be by berating big banks, pointing to the results of bogus customer experience surveys, and going on and on about how great their customer service is…then I’m not sure the results will be all that much better than they’ve been in the past.

Which is to say, not very successful.

What the results of the academic study suggests to me is that a credit union or community bank could improve its market share of the lending business in an area by creating a community of lenders and borrowers to redirect and/or insulate the flow of funds away from other sources and destinations to the CU or community bank.

I’m not suggesting that a credit union or community bank try to recreate a Prosper or Lending Club. Those firms have gone through a regulatory rigamaroll that no CU or bank wants to go through.

But I can’t help but think that are ways to avoid that regulatory nightmare and still achieve some of the feel of the P2P lending platform.

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On a P2P platform like Prosper, a lender (or multiple lenders) — OK, wait. Let’s call them for what they really are: Investors. On a P2P platform, an investor or investors lend(s) money to a borrower. The platform isn’t really an intermediary, it’s simply an enabler — i.e., enabling two or more parties to find each other and execute a transaction.

What does a bank/CU do? It finds depositors, takes their money, and promises something in return (where that something may or may not be financial). It then takes those deposits and lends some portion of it out to borrowers it deems worthy of receiving those funds.

The bank/CU is an intermediary. Depositors have no idea who gets the money, nor do they have any say in who gets the money or at what rate. There is no relationship or connection between depositors and borrowers.

But what if there was a relationship or connection? The academic study implies that the “platform” — in this case, the bank or CU — would benefit because lenders (in this case, depositors) and borrowers would be more likely to transact with each other.

In other words, one way for credit unions and community banks to gain market share in the lending market is to create a mechanism for depositors (lenders) and borrowers to create and strengthen a relationship.

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That “relationship” doesn’t necessarily have to be a one-to-one, named connection. A bank or CU depositor could provide input into determining who receives their deposits (or some percentage of it) by some dimension that characterized a borrower. For example, the depositor could indicate that they would like their funds lent to someone buying their first home, or to a small business owner who needs funds to grow their business, or to someone looking to pay off debts. They wouldn’t necessarily get to direct 100% of their deposits, but by giving depositors an ability to direct some percentage of the funds, it would approximate what’s happening on a P2P lending platform.

By making the elections of funds deployment public, other community members would see where their peers are looking to direct funds, and — as the study implies — become more likely to elect that their funds go to the same places. With publicly available information about where depositors would like to direct their funds, potential borrowers who fit the description(s) would become more likely to turn to the bank/CU for a loan, knowing that the FI is looking for borrowers like them. 

The deposit nature of the relationship wouldn’t be changed — that is, the deposits would not become investments in the sense that they are on a P2P lending platform. The bank/CU is still an intermediary determining the creditworthiness of a borrower and the rate at which that borrower qualifies for a loan. But the depositor gets to provide some input into who gets the money (or some percentage of it).

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I realize I haven’t thought through this completely, and, for all I know, there’s  some regulatory issue that stops this in its tracks. I’m just thinking about how smaller FIs are going to compete with the big ones for the coveted lending market.

An Open Letter To Justin Bieber (re: Prepaid Debit Card)

Yo J-Man:

You don’t know me from Jack, but I’ve got some advice for you regarding your newly announced prepaid debit card, so I hope you’ll hear me out.

I may be a lot older than you, but we have a couple of things in common:

1. We’re both great singers. Of course, you sound great on a stage in front of tens of thousands of people. I, on the other hand, only sound good singing in the shower, with the water running. Naked.

2. Females scream when they see us. With you, they’re screaming out of some kind teen adulation and idolatry. They scream at me because I’ve done something wrong, or because I was singing. Naked.

Despite our similarities, there’s one big difference between us: I understand the world of financial services. And I’m betting you don’t.

Your prepaid debit card isn’t going to succeed and — out of the goodness of my heart — I’m going to tell you why, and offer you some advice on what you could do differently to improve the odds of the card’s success.

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First off, I really can’t blame you for getting into the prepaid debit card business. Piece of cake, isn’t it? You lend your name and image…and other people do the rest of the work. $3.75 million for 14 months of doing nothing must make Joe Biden really jealous. He only earned $375k in the past 14 months for doing nothing.

You don’t happen to know Kim, Khloe, and Klueless Kardashian, do you? You might want to take a look at their botched prepaid debit card initiative.

The overwhelming reason why your card won’t succeed is that you don’t understand who buys prepaid debit cards. It’s not the 13 year-olds with whom your brand name and draw is strong.

Four types of people drive the prepaid debit card market: 1) People can’t get checking accounts; 2) People who can get checking accounts but don’t want to (the Debanked); 3) People with a checking account who use prepaid debit cards as a tool to help them control their spending; and 4) Parents who want to give their kids a payment mechanism.

In markets like the cereal and toy markets, kids heavily influence their parents’ choice of products. Not so in the prepaid debit card market.

In other words, no one who actually gets a prepaid debit card cares that a card is sponsored by you, J-Dude. Oh sure, there are parents who will evaluate your card, but when they see the fees associated, they’ll probably turn somewhere else. Lots of cheaper alternatives on the market, and coming on the market. In other words, your star power won’t be enough to overcome the weaknesses of the offering.

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The CEO of the card company was quoted as saying that the card gives teens “freedom and independence while also teaching them the fundamentals of financial responsibility.”

As the father of a teenager, about-to-be teenager, and a former teenager, giving teens more “freedom and independence” isn’t a goal I’m particularly fond of.

But the need for better financial education, literacy — and even more importantly — discipline, is real. I would be a big fan of a card that can deliver that. But I really don’t see how your card does that. Your quip about watching one’s spending whether one has $100 or $100 million is nice, but are you really planning to provide any ongoing financial education around the card? Yeah, I didn’t think so.

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So here’s my advice to you. Do one of the two following things:

1) Pull a “mea culpa” and back out of the deal. Make a public statement that you’re pulling out. Blame it on your advisors, your agent, your parents, whoever, for getting you into a deal that capitalizes on your name at the expense of families who can’t afford the fees associated with the card. Yes, I know that the CEO of the card company said that “most fees are avoidable” but did you ask what percentage of existing cardholders are able to earn their way out of fees? Just because other fees charge an inactivity fee doesn’t mean your card should.

2) Really commit to being a spokesman…er, spokesboy…for teen financial literacy. What often passes as “financial education” is sorely lacking. Static web pages and brochures that lecture people about spending too much isn’t effective. Simplistic advice about “foregoing Starbucks once a week” and how it will save hundreds of dollars a year isn’t what’s needed by most teens (as well as adults). Teens need hands-on tools and real-life experience managing money in order to develop financial literacy. If you’re really committed to doing this, then revamp your card’s fee structure, make sure that the tools (online access, PFM, receipt management, etc.) are either in place or will be developed by your partner, and get out there and sell this thing. 

It’s your call Jay Bee. But thanks for hearing me out. 

p.s. Can I get an autographed picture of you? It’s for my daughter. Really.

In Defense Of Bank Branches

I got this from a CNBC article on bank branches:

“Mobile transactions are easier for customers and cheaper for banks to service, according to Diebold, a company which specializes in ATM and branch transaction services. In the company’s 2010 investor presentation, it estimated a $4.25 per transaction expense at a bank branch versus only 8 cents through mobile banking. A 2013 Deloitte study found 40 percent of consumers were willing to pay more for the ease of mobile banking, too.”

My take: There’s so much wrong with that paragraph — both stated and implied — it’s hard to know where to begin.

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So let’s begin with the first sentence. Why would mobile transactions be “easier” for customers? Because they don’t have to go to into a branch to conduct the transaction? What if the transaction (or interaction) requires some discussion or involves some level of complexity?

If we’re talking about checking the balance on a account, or transferring funds between accounts, then sure, a mobile transaction may be easier for a customer to do than doing it other channels or through other methods. But the blanket statement “mobile transactions are easier for customers” doesn’t hold water. Unless, of course, you assume that the only transactions that exist are those that more easily done through a mobile device.

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The implication of the second sentence — which states that branch transactions cost an average of $4.25 per transaction vs. $0.08 per transaction for mobile transactions — is that shifting transaction volume out of branches and into the mobile channel will result in huge cost savings for banks and credit unions.

Won’t happen. Not unless you shut down a large number of branches, which is a whole lot easier said than done. In addition, these cost estimates are terribly misleading. They are not variable costs. The branch does not start the day with $0.00 in costs and add $4.25 (on average) every time someone comes in to conduct a transaction.

The CNBC article quotes Brett King as saying “Customers, on average, visit a branch 85% less than they did in 1995.” Assuming that the branch transaction volume declined by 85%, then a driver of the supposedly high transaction costs in a branch is the fact that the volume of transactions in insufficient relative to the cost of operating the channel.

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And if you do shut down branches, there might be negative side effects. Again, from the CNBC article:

“Even in the face of real estate and transaction costs, bank branches are a critical tool to attract new customers—if only serving as expensive billboards for the company in a choice-heavy world. ”It’s going to be very difficult to convince people…that you’re a major presence in a market and you’re here to serve them if you don’t have any physical presence,” said Jonathan Larsen, Citigroup’s global head of retail banking.”

This really gets to the problem of the channel costs that people throw around. The $0.08 mobile channel transaction likely produces no revenue, while the $4.25 transaction might.

It’s akin to why I want to slap people who think direct mail is dead upside their heads. It’s about ROI. If a <1% response rate produces $1 million in revenue for a $10k investment in direct mail, and a 10% response rate in another channel (e.g., social media) produces $10k in revenue for a $1k investment, the larger response rate doesn’t matter. Sure, the social media campaign cost less, but the direct mail campaign produced more revenue.

It’s the same with channel costs. Looking at average transaction costs ignores the composition of those transactions. Smart managers don’t ignore the transaction composition.

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My guess is that Apple could save a lot of money by cramming its products into much smaller stores, and locate those stores in the seedy sections of the cities where they do business. In fact, they could just shut down those stores, and take all product orders online. I’m sure the company could develop a mobile app to merchandise products and take orders.

Yet it doesn’t, and everybody with a Twitter account falls over each other to tell the world how great their Apple store experience was.

Nobody brags about their bank branch experiences, though (except for my dad).

The real problem with bank branches isn’t a higher cost per transaction. It’s a two-fold problem: 1) transaction composition is (still) skewed too much towards service (vs. sales) transactions, and 2) those sales transactions suck.

OK, that last point (#2) was unfair and unsubstantiated.

But the fact of the matter is that many of the sales-related transactions that occur in branches are conducted by employees unqualified to help consumers make smart decisions about their financial lives. And the information that the employers — banks and credit unions — provide to those employees to help conduct those sales transactions is woefully lacking.

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There are industry participants and observers who think that branches will become places where consumers will go to discuss their financial needs and lives, and become more sales-oriented than service-oriented. Others think branches are dead (or rapidly dying) and have no shortage of data to prove their point. 

I think the debate is stupid. There’s no reason why any particular bank or credit union couldn’t go branchless. And there’s no reason why any particular bank or credit union couldn’t make their branches the equivalent of an Apple store. 

It’s not a matter of whether or not branches are a good idea (or not), or whether they’re alive or dead — it’s a matter of execution. It’s about having a commitment to making the branch work (or getting rid of them), and understanding the inconsistent and conflicting decisions that so many banks and credit unions make that undermine channel strategies.

For related posts, see:

What To Do About Bank Branches

Distorted Visions Of The Branch Of The Future

Customer Segmentation Is A Game Of Tic-Tac-Toe

Remember when you were a kid — or maybe more recently with your own kids — and played tic-tac-toe?

You started by drawing two vertical lines and two horizontal lines, which combined to create a nine-square grid. You then put your shape (X or O) in a box to claim it, alternating with your competitor to “own” the grid (and win the game) by securing three boxes in a row.

In some ways, that’s exactly what marketing is.

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A credit union contacted us recently and asked us how they could better understand the consumer landscape in their footprint to help them win more lending business. I proposed that they play tic-tac-toe. We’d start by drawing a tic-tac-toe board, and go one step further and label the rows and columns:

20130409_Tictactoe

On our board, the three rows correspond to the timing of consumers’ borrowing needs: Immediate, intermediate, and longer-term (not length of loan, but how immediate the need for a loan is). The columns correspond to consumers’ propensity to consider a credit union for their borrowing needs: Low propensity (or likelihood), moderate propensity, and high propensity.

Through consumer research, we would segment the consumer population using this tic-tac-toe board, and help the CMO organization understand:

  1. The market opportunity each segment represents by estimating the allocation of consumers to each segment.
  2. The demographics, channel behaviors, and financial services-related attitudes of consumers who belong to each segment.
  3. The marketing challenges each segment represents (e.g., what holds consumers back from considering a credit union).
  4. The marketing tactics required to capture the borrowing-related business from consumers in each segment.

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Generalizing the board a bit, another firm might not capture “propensity to borrow from a credit union” but “propensity to consider XYZ.”

But much as a tic-tac-toe player must weigh the consequences of capturing a particular cell on the board, marketers must determine the costs, benefits, and competitive consequences of going after consumers in any particular segment.

If the majority of consumers are in the upper right hand bucket, you might want head down to the bar for an early beer. If the majority of consumers are in the lower left hand bucket, you might get sent down to the bar for an early beer.

If the majority of consumers are in the seven other buckets, you’ve got some marketing decisions to make.

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The art is in determining how to allocate consumers to segments.

It’s not enough to just ask consumers “will you consider XYZ for your next purchase?” but to derive the likelihood by looking at past behavior. Same with product timing. A consumer may say that she or he has a longer-term need for a product, but good predictive modeling may indicate that certain behaviors, attitudes, and purchases indicate that the need may be more immediate than the consumer thinks or is willing to say.

Do You Need A Minty Fresh PFM?

Intuit announced that it would offer banks and credit unions the opportunity to implement Mint as a PFM platform integrated with the FIs’ online banking platforms. As usual, NetBanker was all over this with it’s equally as typical excellent analysis. Jim Bruene’s list of pros and cons for FIs to consider regarding implementing Mint is spot on.

Well, mostly spot on.

There are a few points I’d quibble with. Jim writes:

“Many of Intuit’s 1,100 online banking clients (500 of which use Intuit’s FinanceWorks PFM) will jump at the chance to integrate Mint. Non-customers will be considerably more wary.”

Jump is not the right word.

For the 500 FinanceWorks users, switching to Mint will be a difficult decision. Mint.com may be the gold standard in PFM, but forcing users to change something they use (and may actually like) should not be taken lightly. I also find it difficult to believe that the other 600 clients have been holding off from deploying PFM because they’ve been waiting for Mint.

Jim also points out the potential for brand confusion:

“Adding another brand to your service is always a tough call. And if other banks offer the same Mint-branded PFM, have you lost the potential for competitive advantage? Furthermore, does driving your customer into Mint actually make you more vulnerable if Intuit or someone else releases a “conversion kit” to move all your account history to Mint.com or another bank’s Mint service?”

I don’t think of deploying Mint as adding “another” brand to the online banking service. What other brands are there? Geezeo and Money Desktop are industry, not consumer brands. Popmoney is not a strong consumer brand. There are no strong consumer brands in the world of remote deposit capture. Checkfree for bill pay? It’s not the Checkfree brand that draws consumers to use online bill pay.

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NetBanker’s list of pros and cons are excellent, but it my simplistic way of looking at the world, there’s one overarching question banks and credit unions need to answer here:

Economically-speaking, what are we going to get out of implementing Mint?

According to the nearly 500 credit union executives surveyed by Filene Research last fall, 6% of credit union members use PFM tools provided by their credit union. In other words, the 12 million users that Mint has (or so it claims) is more than double the number of PFM users the total credit union industry has (you can do the math).

1. Will integrating Mint into the online banking platform jump start PFM adoption in a way that other platforms have been unable to?

Geezeo and Money Desktop may have some stories to share about how their clients have seen better than 6% adoption of PFM.

2. If existing Mint users are happy using Mint at Mint.com, will they switch to using it at their bank’s or credit union’s site?

Yes, I too have consumer research showing that consumers would prefer to use PFM at their FI’s site — but those aren’t the existing Mint users.

The future Mint user experience confuses me. Intuit told me that they would not deploy the offers functionality of their dot-com platform in their FI platform. But couldn’t a consumer who uses Mint on their FI’s platform just go over to Mint.com to see these competing offers? If they’re already a Mint.com user, I have to believe the answer is yes. 

3. If we implement Mint, and our customers/members use it, what’s really the bottom-line impact to us (the FI)?

And that’s the question that few (if any) FIs can answer with any degree of certainty.

The research I’ve done shows that — according to consumers’ own perceptions — a minority of PFM users (~20%) deepen their relationship with their bank or credit union as a result of using PFM.

So if you’re a credit union with 6% PFM adoption, and deploying Mint would double that –no, hell, let’s make it triple that to 18%, and only one in five of those members will deepen their relationship from using the tools, the question is:

Is it worth deploying Mint to grow the relationship with 3.6% of our members?

There’s no simple way to answer that question. Who are those 3.6%? How will they grow the relationship? How much do we really need to invest in order to get that relationship growth? Could we be doing some differently with PFM to make the 20% impact rate expand to 40% of PFM users?

Bottom line: Deciding whether or not to implement Mint is not an easy decision. If your FI is willing to make a serious commitment — to PFM, not just Mint — as a tool and platform for nurturing and growing customer/member relationships, then you should do the hard work of figuring out if this is the right platform for your organization. If you’re not willing to make a serious commitment to PFM…

Future Trend In Banking: Gold Labeling

The practice of white-labeling — offering products developed by a third-party, but branded under the distributor’s name — is common in banking.

No, I’m not talking about this:

Although, come to think of it, that might be more common in banking than I realize.

PFM providers like Geezeo and Money Desktop “white label” their offerings through banks and credit unions. White-labeled mobile banking, P2P solutions and remote deposit capture capabilities are all commonly found in the world of banking.

The next few years will see the emergence of a new trend in banking: Gold-labeling. Banks and credit unions offering already branded products and services.

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The popularity of white-labeling isn’t hard to understand. On one hand, it takes a fortune to create a nationally recognized consumer brand. And the other hand, most banks and credit unions are hard pressed to find the funds to develop new products, services, and technology solutions that are speculative in nature.

The PFM market is a great example. Geezeo and Wesabe both started life with the intention of becoming a direct-t0-consumer brand. Both ran into the brick wall called reality. Geezeo made the transition to white-labeling early enough, Wesabe didn’t.

Not only did banks and credit unions not have the funds (patience, or insight) to develop PFM on their own, but the core apps providers didn’t either, and partnered with the Geezeos, Money Desktops, and Lodos of the world. Similar story on the mobile banking side with mFoundry and M-Com.

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The core premise underlying white-labeling is that the distributor’s brand is stronger than the manufacturer’s.

In the world of banking, this is changing.

The branding power of start-ups and newcomers in the world of financial services will create opportunities for banks and credit unions to flip the white-labeling model on its head and create the opposite: Gold-labeling.

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There are two current examples of Gold-labeling, an emerging one, and one further out in the horizon:

1) Kasasa. The notion of a checking account created by a third-party non-bank entity, but offered by a bank or credit union seems antithetical to the mindsets of most traditional bankers. But that’s exactly what Kasasa is. And it’s proving to be highly successful for the community banks and credit unions that offer it — even though some of them are in similar geographies. It’s not just the brand power of Kasasa (the product) that helps bring in new customers to the FIs that offer it. It’s the underlying marketing competencies that BancVue, the company that developed Kasasa, brings to the table — marketing competencies that many community banks and credit unions could never develop on their own.

2) Mint. When Intuit acquired Mint in 2009, I (as I imagine many of my fellow analysts) believed that the firm would gradually phase FinanceWorks out and offer Mint to FIs as its PFM offering. That didn’t happen. Yesterday, however, Intuit announced that it would offer Mint to FIs (not just those running their online banking platform) as an integrated part of FIs’ online banking offering. Many banks and credit unions now have an important question to address: Can the branding power that Mint has help drive PFM adoption, deepen relationships, and/or even bring in new customers?

3) Mobile apps. There’s no question that mobile apps are big. Piper Jaffray estimates that iPad/iPhone app sales will reach $14 billion by 2015, and that about 8% of those sales are for finance-related apps. Firms like PageOnce are quietly building greater consumer awareness recognition, while some mobile wallet providers are doing it more noisily (although perhaps will less success than a PageOnce). As mobile app providers build brand awareness and affinity, it’s conceivable that banks and credit unions will benefit by becoming distributors of those apps, integrating them with their core banking offerings.

4) Ne0Checking. Firms like Simple and Moven who provide a new type of account — not quite a checking account, but similar — may find some success in developing their brand and acquiring Gen Y customers. They may still find it worthwhile, however, to ratchet up their reach by distributing their products through established banks and credit unions looking for an entry-level product strategy.

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Yesterday’s announcement that Intuit will offer Mint to FIs is big news. But it’s a kickstart to a potentially bigger trend: Gold-labeling.

Why Don’t Banks Innovate?

There appears to be no shortage of opinions that banks don’t innovate (see here and here  and here  and…you can find the other 17 million references yourself). 

Rather than arguing whether or not this assertion is true, let’s assume for a moment that it is. The key question, then, is: Why don’t banks innovate (or why haven’t banks innovated)?

Is it because:

a) They’re too stupid to innovate

b) They don’t know how to innovate

c) They’re too risk averse to innovate

d) There’s been no need to innovate

If I were to take a poll, I’d bet that the majority of respondents would answer B, followed by C — even though many of you would like to select A.

I think the answer is D.

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When the Innovation Snobs talk about innovation I think what they’re really looking for is large-scale change in the industry. After all, there have been plenty of technology “innovations” in the industry like ATMs, online banking, online bill pay, PFM, mobile banking, remote deposit capture, etc., but none of these “innovations” seem to satisfy those that call for more innovation.

Despite these innovations, the industry has changed little in terms of power structure and business model (as it applies to the retail sector, that is). Even the sadly misguided Mashable article Can the Internet Replace Big Banks? recognizes this. 

So why haven’t we seen large-scale, transformational change — or innovation — in the industry, despite the advent of the Internet, the Web, and more recently, mobile technologies?

Because — until recently — there has been no need for the industry to change.

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For large scale change to happen in retail banking, three elements need to be in place: technology change, demographic change, and economic imperative.

There’s no formula, but if one of these elements isn’t sufficiently present, change isn’t going to happen. 

Since the mid-90s, the emergence of Internet technologies has created the technology change required to cause industry innovation or transformation. With the advent of mobile technologies, even more technological change is pushing the industry to change. 

Many Innovation Snobs think that this is sufficient to cause change, but it isn’t. And one reason why the technology change wasn’t enough was because we didn’t have sufficient demographic change. 

Ten, even five, years ago, Boomers and Seniors dominated the generational composition of the US population. While we were willing to try technologies like online banking and bill pay, and even willing to open online savings accounts with a firm like ING Direct, we still did our banking business the old-fashioned way: We opened up checking accounts with the same old providers we did 20 or 30 years ago (although many of them merged along the way, of course).

It’s only been more recently that the demographic shifts required to effect industry change have come about. The emergence of Gen Yers as a significant percentage of the US population is a recent phenomenon. What’s different about this generation (from a financial services perspective) is their willingness (or desire) to find an alternative to checking accounts. When Seniors, Boomers, and even Gen Xers became adults, we automatically opened up a checking account. Not so with Gen Yers.

Without this demographic shift, the simple development of online banking, bill pay, etc. was insufficient to bring about large-scale industry change.

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But even the demographic shift by itself isn’t — and hasn’t — been enough. There’s another reason why innovation hasn’t occurred, and I think the Innovation Snobs really miss this point: There has been (until recently) no economic imperative to change. 

Ten years ago I did some consumer research about the drivers of customer loyalty in banking. I went out to my bank clients to tell them the findings, and tell them what they had to do differently to improve customer loyalty. Their response was pretty underwhelming: “Why should we do anything differently when we’re making money hand over fist?”

They had a point. The chart below shows industry ROE from 1998 through 2009. From about 1993 through 2007, industry ROE fluctuated in a narrow band of about 13% to 15%, before falling off the cliff in 2008. 

20130325_ROE

With those kinds of returns, who’s got an incentive to change?

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This is why we haven’t seen the innovation that the snobs have called for. The elements of change haven’t sufficiently been in place. 

But with advent of mobile technologies, the shift in demographics, and the economic issues facing the industry, we might actually be on the cusp of some bigger change. 

Despite the rebound in industry profits since the worst of the financial crisis in 2009, ROE has not come back as fast, and is only at about half of the historical levels of 13%-15%. 

McKinsey did an analysis and estimated that industry profits could reach $154 billion by 2015, up 27% from its 2010 level. But for the industry to reach 12% ROE in 2015, profits would have to be roughly twice that amount — about $312 billion. 

How is the industry going to get there? For that, we can turn to another leading consulting firm, BCG. For the industry to reach historical levels of ROE, cost reduction could put 3 to 4 percentage points on the ROE level (that’s not 3%-4% cost reduction, you know). BCG believes another 2 to 4 points could come from pricing and growth.

20130325_BCG

With all the regulatory changes that have occurred in the past few years, I don’t see how price manipulation is going to help. The banks have been limited in their ability to alter interest rates and fees every step of the way. 

The demographic shift may help to fulfill the growth imperative as a new way of Gen Yers need mortgages and car loans. But the shift away from checking accounts (and the inability of banks to generate significant revenue and profits from these accounts) may inhibit the banks’ ability to put that 1 or 2 percentage points onto ROE through growth.

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So we may actually see some innovation in the industry over the next few years. It’s not like the banks are too stupid or don’t how to innovate. They haven’t had the economic imperative to innovate. Until now.