Traditional Banks At Risk Due to Digital Disruption

According to two recent reports from Accenture, 35 percent of banks' market share in North America could be in play by 2020 as traditional branch banking gives way to new digital players. The research also indicates that 15 to 25 percent of today's roughly 7,000 North American financial institutions could be gone as a result of consolidation before 2020.

To combat this shift, Accenture recommends that traditional providers take a radically new approach to distribution, combining a simpler yet more comprehensive branch offering with integrated digital services.

"Digital technology and rapid changes in customer preferences are threatening full-service banks that do business primarily through branches," said Wayne Busch, managing director of Accenture's North America banking practice and author of the report, A Critical Balancing Act: Retail Banking in the Digital Era. "Given the scale of these disruptions, traditional full-service banks, as a group, could lose significant market share by 2020 -- to banks that reorient around digital technologies and to new entrants from the retail and technology sectors."

Digital Disruption

New digital technologies, emerging digital competitors and the extremely rapid changes in customer preferences are threatening to dramatically impact those full-service banks that limit themselves to products and services that get distributed primarily through physical branch channels. The outside disruptors tend to be more agile and more innovative, while traditional banks are weighed down by unprofitable branches, legacy back offices and inefficient silos. 

Business as usual is no longer an option in an industry that could see up to 25 percent of U.S. banks disappear completely.

In conducting online interviews with more than 2,000 US retail banking customers of the 15 leading retail banks in the U.S., Accenture found that 71 percent said they were “satisfied” with their bank and 68 percent said they would be “extremely likely” to recommend their primary bank to a friend, family member or colleague. In addition, only 9 percent of those surveyed switched institutions over the past year.

This loyalty is fragile, however, since more than a quarter (26 percent) of bank customers who remain with their primary provider do so simply because they consider switching to be a hassle, while about half said they haven't seen a competing offer that was attractive enough to make them move. The survey also found that two-thirds of bank customers would consider a branch closure as inconvenient and nearly half would switch banks as a result.

Source: 2013 Accenture Retail Banking Survey

This not only exposes the tenuous relationship banks have with their customers. It also confirms that the right offering and approach can induce them to switch. "The core challenge for banks: how to build a seamless digital customer experience -- and optimize its power with a better and more cost-effective complimentary offering in the branches that customers find so attractive," concludes Accenture.

The Disruption Has Already Begun

According to Accenture, many banks have already begun losing their customers to digital disruptors. The survey showed that customers acquired 34 percent of traditional banking services such as CDs, money market accounts, personal and auto loans and even new checking and savings accounts from institutions other than their primary bank.

Source: 2013 Accenture Retail Banking Survey

While traditional players have the innate advantage of extensive branch networks that the customer still says they value (nearly 60 percent of new product sales are still closed in branches), these same players should be concerned about the the transition to an online sales environment.

The growth rates in online sales since 2012 are strong in several categories, with online auto loans growing from 11 percent to 21 percent in the past year, online sales of mortgages rising from 15 percent last year to 25 percent in 2013 and sales of personal loans through the online channels jumping from 8 percent to 24 percent in only one year.

Source: 2013 Accenture Retail Banking Survey

It is clear that the most fundamental question in the post-financial crisis environment has changed from "how do I find my future customer' to 'how do my future customers find me?" As discussed in my recent post, Is Your Bank Ready for Customer 3.0, digital shifts inside and outside the industry are rapidly changing the information flows and the way that financial firms and customers interact. It is imperative for banks to become an integral part of customers' lives with a ubiquitous presence wherever customers are.

The branch banking conundrum continues, however, since customers still use branches due to proximity. Branches continue to be the number one reason for loyalty and 78 percent believe they will use their branch as often or more often in five years' time. Conversely, with increased use of services like mobile deposit, there has been a 50 percent increase in the number of customers indicating they are using mobile banking in 2013 (32%) than in 2012 (21%).

Source: 2013 Accenture Retail Banking Survey

"The internet is now the most frequently accessed distribution channel on a monthly basis . . . well above the branch. And mobile use has soared in the past year, almost overtaking the ATM in its perceived importance to customers," says the survey.

While the migration to online and mobile channels has been somewhat additive as opposed to a complete transition of behavior, online and mobile banking will continue to weaken the branch's stronghold on the consumer as better applications and more seamless experiences are developed. This migration is imperative due to the high cost to build and maintain a branch and the misalignment between the cost and value of the branch channel.

A Path for the Future

In light of the digital disruption in the marketplace, and as expanded regulation, more onerous capital requirements, economic volatility and consolidation continues, banks need a lower cost operating model that can generate more predictable and sustainable revenues. Branch networks need to be restructured, reducing the number of large footprint offices and increasing the number of 'light' branches and kiosks.

And while some industry observers believe we are quickly moving to a 'branchless' industry, Accenture and others (myself included) believe the environment will be more of a 'less-branch' scenario, at least in the next five to ten years (Chase continues to add branch locations as do other large and mid-sized organizations). But there must be a response to the customer-centric capabilities of the digital players who can leverage big data and analytics to build a better customer experience.

Move to Digital

With inertia being the main reason current bank customers don't switch, traditional banks need to quickly mimic the new digital banking leaders. Agility and a stronger innovative culture will be required to compete effectively as our industry invests to upgrade our legacy back offices and deeper customer insights will need to be leveraged to provide real-time solutions to customer needs. 

As mentioned in my recent post, Bank Product Proliferation: Too Much of a Good Thing, banks and credit unions will also need to eliminate antiquated products, streamline offerings and build new services that leverage the new digital delivery capabilities. By using digital capabilities to track transactional and channel behavior, banks will be able to develop better services and offer new solutions in real-time. This enhances cross-sell opportunities and can increase share of wallet.

Restructure the Branch Network

According to the Accenture research, the top 25 U.S. banks spend more than $50 billion per year to maintain oversized and poorly placed branch networks. While Accenture acknowledges the importance of a branch network, they propose a less costly branch banking model that can balance the sales capability with the digital opportunity:

• 'Light' branches: Oriented primarily to sales, these offices represent less than a third of the network and are highly automated with a minimal staff and reduced real estate footprint leveraging remote advisory specialists.
  
• Kiosks: Representing up to half the total network, these units include feature heavy ATMs with video, and can handle routine transaction activities.
  
• Full-service 'hubs': Similar to conventional branches (but fewer in number), these offices offer full sales and transactional support with extended hours and specialized advisors for services like mortgages, investments, business banking, etc.
  
• Flagships: A minimal number of strategically located flagships will serve as the center of service-excellence, combining a full range of capabilities including expanded self-service tools.

While many banks are already experimenting with more open and flexible branch formats, there doesn't seem to be a silver bullet yet in response to the digital disruption occurring. A bigger question may be which branches to close or reconfigure, especially with the looming eyes of the Community Investment Act (CRA) regulators looking over the industry's shoulder.

"The acceleration in consumer acceptance of digital banking in the past year -- particularly in the areas of mobile banking and online banking product sales -- foreshadows the need for a very different banking landscape in 2020," said Goodson from Accenture. "Branches remain vital to banks, but they need to be reimagined as one one aspect of a radically new approach to consumers. It is an opportunity to recover profitability, reduce costs and to establish a much more sustainable relationship with customers into the future."

The Best of Both Worlds

Given the scope of disruption impacting our industry, organizations need to start their transformation today if they want to be relevant in the year 2020 according to the complimentary Accenture report, Banking 2020: As the Storm Abates, North American Banks Must Chart a New Course to Capture Emerging Opportunities. 

The winning formula may well be to combine the advantages of the traditional bank with the benefits of the digital bank. By reducing the cost structure of branches and optimizing the products and services provided, yesterday's banks can move into the future leveraging a core strategic asset (a reconfigured branch network) complemented by an enhanced digital experience across all channels.

To succeed, traditional banks must become significantly more agile (no more three year planning cycles), embrace an innovative culture (see my post Banking Innovation: Not Made in the U.S.A.), focus on simplification and optimization while delivering an exceptional customer experience . . . in real-time. This is a very lofty ambition for an industry that historically moves at a snail's pace, but there really are no options.

More importantly, traditional full-service banks must shift their operating philosophy from being a product-oriented organization to being a customer-centric organization with the ability to engage with customers anywhere, anytime they want.

The goal is to become a bigger part of our customers' daily lives and to become integrated with other industries in a seamless manner that reduces friction. Unfortunately, organizations such as PayPal, Square, Google and others are already moving quickly down this path, assuming the role of payments facilitators, supplanting a link to merchants and consumers the banking industry once owned.

Additional Resources

A Critical Balancing Act: Retail Banking in the Digital Era - Accenture (Nov. 2013)

Banking 2020: As the Storm Abates, North American Banks Must Chart a New Course to Capture Emerging Opportunities - Accenture (Nov. 2013)

Say Hello to Customer 3.0 - Accenture (October 2013)

From Free to Fee: Monetizing Mobile Deposits

Is your mobile banking channel a cost center or a profit center?

If your answer references that your mobile channel is 'saving you money' by diverting transactions from more costly channels, then I need to ask you how much you have reduced your CSR team, your teller staff and/or closed your branches as a result of mobile banking use?

You can generate revenue from your mobile channel, however, by building new pricing models that include fees for value-added services. As part of a new monthly series, 'From Free to Fee', I will be discussing revenue opportunities from several emerging financial services beginning with today's post on mobile deposits.

I am not the first to propose that banks and credit unions take a harder look at mobile banking from a revenue perspective. In fact, in May, 2011, Jim Bruene, publisher of the Online Banking Report and the NetBanker blog and founder of Finovate, proposed that new pricing models could propel online and mobile services to the next level in his Online Banking Report entitled, 'Creating Fee-Based Online Services'. He stated, "Unlike the $35 debit card overdraft fee, there are rational and understandable reasons for charging fees for value-added online and mobile services."

In his report, not only did Jim provide an historical perspective as to why and how banks and credit unions continually end up giving away their services, he provided 33 different services that could generate a fee and offered a perspective on the acceptance level by eight different customer segments.

In my post, I am going to try to tackle the opportunity for charging a fee for mobile deposits . . . even if your institution currently does not charge for the service. I will be referencing several research reports to provide rationale, especially a recently released pricing optimization study produced by Market Rates Insight entitled, Growth and Revenue Potential of Emerging Financial Services. This 168-page study covers 13 different emerging financial services, with insights into fee optimization, targeting, institutional differences and bundling options (I reviewed this study in a recent blog post).

I will also provide implementation and marketing recommendations based on my travels across the country and my work at New Control Direct and Digital. 

Note: A audio podcast of a 'Breaking Banks' interview by Brett King of Jim Marous and Dr. Dan Geller from Market Rates Insight around how and why banks should generate revenues from value added services is available for download here.

Moving From a Cost Savings to Revenue Generation Perspective

Many banks are under substantial pressure to reconsider the economics of retail banking, especially given the decline in net interest margins and the reduced income from sources such as debit interchange and overdraft fees. While there has been a slight rebound in deposit service fees lately, many fees are associated with services on the decline (mortgage refinancing).

Net Interest Margin for Banks with Assets > $10B

Aggregate Deposit Account Service Charges for Banks with Assets >$10B

There is no doubt that cost cutting has and will play a role in the effort to offset these reductions in income. But how much more can costs be cut without an impact on customer service or falling behind in the race for advancements in innovation and technology?

Another option is to have more customers pay for services that were previously 'free' like checking accounts. This strategy has been implemented by many banks over the past few years as evidenced by the decline in institutions offering free checking today (39 percent) compared to 2009 (76 percent) according to Bankrate, Inc. Many banks have also increased their overall service charge structure as well as the requirements to avoid fees.

The strategy of increasing fees on these basic services comes at a cost, however. According to the J.D. Power and Associates' 2012 U.S. Bank Customer Switching and Acquisition Study as well as a study conducted by the Deloitte Center for Financial Services, these types of fees lead to defections. 

A better option may be to build a new fee structure around emerging financial services that bring added value to the customer. Similar to options available when you purchase a car, these new fees could be singular line items and/or could be bundled into 'value packages' that the customer could select. The key is for financial institutions to no longer race to the 'free' finish line, but to assess a logical cost for benefits that bring a value to the consumer.

So, how big is the opportunity for generating additional revenue from mobile RDC?

Mobile Deposit Marketplace Potential

According to recent research by Mitek Systems, more than 12 million mobile users have made deposits exceeding $40 billion using their mobile device. In fact, four of the top banks in the country have reported extraordinary volumes of mobile deposits when considering the relative infancy of this service.

• Bank of America: 1M/Week
• JP Morgan Chase: >3M in May
• Wells Fargo: 1.4M in May
• PNC Bank: 450K/Month

The percentage of the largest financial institutions offering mobile remote deposit capture has almost tripled in the past two years, with 64 percent of the top 25 retail banks offering mobile deposit in 2013, up from 48 percent in 2012 and 22 percent in 2011, according to Javelin Strategy & Research. 

In addition, according to research from community bank mobile app provider, Malauzai Software, Inc., the usage of mobile deposit varies from organization to organization. Best-in-class financial institutions have approximately 20% of their active mobile banking end-users making deposits monthly and the average bank or credit union has 10% of active end-users making mobile deposits monthly. Average usage increases to 15%-17% of active end-users when looking at activity over a longer, 90-day period. 

The growth in mobile deposit use is not expected to subside any time soon either. In a June 2013 Celent survey of US internet active consumers, mobile deposit was the second most highly valued capability surveyed, with two-thirds of smartphone users ranking the capability “highly valuable” (6 or 7 on a 7-point scale). Among those surveyed, mRDC was more highly valued than person-to-person payments (54%) and the emerging capability to enroll a new bill payee using the phone’s camera (46%) which a handful of banks offer.

“Mobile deposit, the ability for consumers to quickly and easily deposit checks using their smartphone or tablet cameras has become a must have for banks as consumers increasingly adopt a mobile lifestyle,” said James DeBello, CEO of Mitek, San Diego.

Mobile Deposit Customer Profile

According to the Spring 2013 Raddon Financial Group National Consumer Research, mobile deposit is currently done by 7 percent of households, with 21 percent of Gen Y households using the service and 30 percent of higher income (>$50,000) Gen Y households using mobile deposit.

Indexing the age, income, balances and behavior of the mobile deposit user against all households (index=100), a mobile deposit user is younger (by 14 years), has a higher income and loan balance, has an average checking balance, and provides interchange income that is higher than the norm. Not shown is the fact that these households have average mortgage, equity and credit card balances.

  

Mobile deposit users, as expected, index significantly higher than the average household as to their likelihood of opening a new checking account online, and are more likely to use mobile payments, apply for a loan online, use a prepaid card and even make a payment through social media.

Bottom line, mobile deposit users are heavy users of all mobile services . . . or heavy users of mobile services and heavy mobile deposit users. The research also found that these customers use the branch at a rate that is 66 percent of the average customer.

Mobile Deposit Revenue Opportunity

One of the selling points of mobile banking has been the reduced costs of delivery of the channel. Estimated cost of in-person or call center delivery is quoted as roughly $4.00, with the cost of a mobile transaction being quoted as $.19. Even if we assume that these are accurate estimates of the fully loaded costs of each channel, an assumption that there is a 1:1 offset of transactions is definitely faulty.

Taking these assumptions one step further, if we assume one transaction per month, some quote a cost savings of close to $50 per mobile customer per year. This is highly unlikely (as presented by Bob Meara, senior analyst from Celent in a recent blog post).

While it is definitely easier to assume the cost savings above and to simply sell 'free', this leaves a great deal of potential revenue on the table based on recent research from Market Rates Insight. In the report, Growth and Revenue Potential of Emerging Financial Services, executive vice president and author of the report, Dr. Dan Geller, provides evidence of the willingness of consumers to accept 'value-added fees. In other words, while increasing fees on traditional services such as checking accounts will be seen as punitive and met with resistance (and potential defection), there is an opportunity to sell emerging financial services such as mobile deposit either singularly or as part of an enhanced service bundle.

In the study, both the importance of mobile deposit and perceived value of the service were measured. In the case of mobile deposit (13 emerging services were evaluated in the study), this evaluation was able to illustrate that more could be charged for a premium level of service (such as same day availability) while a lower fee could be charged for slower availability.

According to the study, 56 percent of consumers who did not already have the service found mobile deposit important to some degree. The average value consumers place on this service is $2.63 per month, while the 3.5 percent who found the service extremely important would pay $5.60 per month as shown below.

Mobile Deposit - Level of Importance (MRI, 2013)

Mobile Deposit - Distribution of Monthly Value (MRI, 2013)

The MRI Study also provided these distributions for different types of institutions (national, regional, local and credit unions).

Demographic Variances

From the perspective of demographics, it was interesting that the importance of mobile deposit was stronger for females (72.8%) than for males (64.9%) but that males were willing to pay significantly more on average for mobile deposit per month ($3.89) than their female counterparts ($1.82).

In addition, as would be expected based on the Raddon Financial Group research noted above, the importance of mobile deposit as well as the willingness to pay for the convenience decreased with age, while the importance and willingness to pay increased with income (specific details of these values are available in the report).

Potential for Bundling

Market Rates Insight (MRI) also developed revenue optimization scenarios for 26 different bundles of emerging financial services. Of the 26 bundles, four included mobile deposit as part of the service combination. These bundles included:

• Mobile Deposit with P2P Payments (optimal value of $8.38/mth)
• Mobile Deposit with Credit Score Reporting (optimal value of $8.57/mth)
• Mobile Deposit with Billpay, Low Balance Alerts and Prepaid (optimal value of $10.04/mth)
• Mobile Deposit with Payment Protection (optimal value of $9.23/mth)

While the development of optimal bundles would differ by customer composition, type of institution and competitive scenario, an analysis such as the one below combining mobile deposit with P2P payments illustrates how the analysis was performed for each bundle. As can be seen, while total revenue could increase with the addition of more services, the incremental revenue would actually decrease due to cost of offering and lower customer acceptance of an expanded bundle.

Overall Monthly Fees from Mobile Deposit/P2P Bundle + Add'l Services

Incremental Fees from Mobile Deposit/P2P Bundle + Add'l Services

"One of the most revealing and significant findings from our latest study on emerging financial services is that the principle of diminishing return applies to the bundling of financial services," states, Dr. Dan Geller, the author of the report.

Competitive Overview

Of the top five banks in the US, only U.S. Bank charges a fee ($.50) for each mobile deposit. Fees have been collected since 2010 by U.S. Bank, and while not currently supporting the Blackberry platform, mobile deposits are possible via an iPhone, iPad and Android devices. As with most programs, there are daily and weekly deposit limits.

Regions Bank is the other larger bank that currently charges for mobile deposits. Unlike the flat transaction fee charged by U.S. Bank, Regions has a sliding fee scale based on availability of funds. Immediate availability has a fee 1%-5% of the check amount with a minimum of $5. Overnight availability is $3 and 'standard processing' (two business days) is only $.50 per check. The 'standard' processing is actually faster than any of the 'neobanks' (Moven, Simple, GoBank) at this time. 

"Obviously, customers aren't going to be happy with any kind of cost you throw out there," stated Greg Melville, product owner of mobile products and payments for Regions Bank. "But if you offer a value-added service, such as immediate access to their funds, they have shown that it's something they are more than willing to accept." There was also some negative feedback initially, especially on social media, but very few of the complaints resulted in customers actually leaving the bank.


"FedEx pioneered the concept of higher fees for greater expediency and now consumers are expecting the same option from their financial institutions especially when it comes to mobile deposits," states Dr. Geller.

Jim Bruene, who was one of the first to write a study on the potential for fee revenue from mobile services applauded Regions Bank on their decision to charge a fee, but still believed it would have been better to include mobile deposit as part of a larger bundle with a monthly subscription fee. He also believed the fee structure is overly complicated.

Dave Kaminsky, a senior analyst at Mercator Advisory Group, a research firm focused on the payments industry, explained that users perceive mobile banking's offerings as worth the cost. "Customers tend to look at remote deposit capture or expedited processing as an additional value, so they're willing to pay for it—at least for now."

Many of the other large banks do not currently charge a fee, citing that the value of the mobile deposit customer is higher than average (as shown above), that they are less likely to leave the bank because of this 'sticky' service, that mobile deposits reduce their costs (somewhat debatable) and that there are more transactions that generate interchange income. While each of these arguments may be true to varying degrees, I still believe needed revenue is being left on the table.

The Process of Transitioning from Free to Fee

Despite all of the logic above around the why a  bank or credit union should charge for mobile deposits, the real challenge is in answering the how question without alienating your customers, frustrating your sales teams or negatively impacting the growth potential of mobile deposits. If there is a question around moving from a free to fee strategy, then research your customer base, competitive position, internal capabilities and institutional priorities. If there is not enough rationale around making this transition, maybe now is not the time.

According to James "Alex" Alexander, founder of Alexander Consulting, there are four options available when trying to implement fees when the market (or your current strategy) may be giving services away for free.

1. Don't Do It: With the potential challenges to moving to a fee-based structure, maybe it is better to wait until all impacted parties buy-in. Selling 'free' is easy. Selling 'fees' is hard.
2. Just Do It: This strategy is based on picking a date and letting customers and all employees know that there will be fees from the selected day forward. The upside is that this strategy is simple. The downside is that phones will ring and you need a very strong constitution to decipher the customer (or employee) threats from the reality. The key here is to not make exceptions, because exceptions quickly escalate into more and more fee waivers. If your entire team understands and believes the value proposition, they should be in a position to help stem attrition (there will be some).
3. Grandfather Existing Customers: Under this strategy, current customers who have used mobile deposit will not be charged, while any customers who use the service for the first time after the transition date will be charged a fee. The challenge is that customers (and employees) talk, potentially undermining this strategy.
4. Productize the Old and Sell the New: The challenge with any of the above strategies is that they can trigger a powerful, negative psychological response -- people don't like to have something taken away from them or to have differential treatment for a segment of the customer base. In this scenario, mobile deposit continues to be given away, but in a lower value manner. For the majority of organization, this approach is far superior to the others since the customer is given a choice of services and fee options.
• Productize the old: With 'basic' mobile deposit, this can be done by extending the period for funds to clear. Similar to what Regions Bank has done, change basic mobile deposit to a 7-10 day clearing period.
• Sell the new: For 'premier' mobile deposit, the clearing time can be reduced to 3 days or even shorter. When given the option, most customers will willingly opt for the faster clearing of deposit and will pay the fee. Another option is to include 'premier' mobile deposit in a bundle of mobile benefits as discussed above, with the option of charging an even higher fee.

Five Keys to Marketing a Fee-Based Mobile Deposit Program

To fully benefit from the a fee-based mobile deposit program, the solution must be marketed to customers. For those who have used the service, it is extremely simple and time saving. For those who haven't, it could be considered confusing and even scary from a perceived security and risk perspective. Similar to making a deposit at an ATM, until a customer tries the process and realizes it works, there can be barriers to acceptance and use. Here are five quick ideas to stimulate mobile deposit usage:

1. Free Trial: When you buy a new car, many come with satellite radio already installed and ready for use. In my case, I would never have taken this option at the time of sale, but would have most likely waited or never turned on the service. With the free trial (and very complete up-front training), I not only enjoyed the service . . . I now pay for it on a monthly basis. For mobile deposit, make a huge deal about this service an its benefits. Educate the customer up front and get them 'hooked' on the 'premium' mobile deposit service. After the trial, penetration of the service will be much greater and the opt-in rate for a faster clearing (and the fee) will be greater.
2. Incent Your Team: Don't compensate on sales volume alone, compensate on profitability (or at least reaching a minimum 'premium'/bundle penetration benchmark). By providing incentives, your front line will spend more time educating customers and will emphasize the benefits of your 'premium' mobile deposit service or bundle. Make sure your expectations are that all new customers will begin to use mobile deposit immediately.
3. Don't Accept Deposits: O.K., maybe a bit radical, but when a customer wants to deposit a check into their account in a branch, use this transaction as a customer education opportunity. Either arm your tellers with a tablet device used exclusively for mobile deposits (and other training) or use another available terminal in the office.
4. Build an Educational Video: a short educational video serves several purposes including being a landing page for online and mobile banking customers, providing a location for linking email communication, and providing a tool that can be used in the branch when a customer opens an account or wants to deposit a check.
5. Leverage Digital Communications: Don't be afraid to regularly email customers about the benefits of mobile depost. If you have implemented either a 'premier' or bundled mobile deposit product, each email will more than pay for itself. In addition, monitor customers who continue to deposit checks in your branches. Remind these customers (through email, direct mail, online banners, digital retargeting, mobile banners, etc.) that they can save time by taking advantage of mobile deposit.

The key to success in generating revenue from mobile deposit programs is to 1) communicate the value of the service, 2) provide customers the option of not having to pay (or use the service), 3) reinforce the importance of 100% acceptance of the process to all internal teams through education, mandate and incentives, 4) continuously market the service, 5) build a segmentation strategy and 6) measure results.

"Amid the growing proliferation of digital channels and rapidly evolving consumer behavior, retail banks can no longer afford to adopt a one-size-fits-all approach in devising and enhancing their mobile strategies," says Vin Malhotra, consulting partner for Banking and Financial Services with Cognizant Business Consulting, Cognizant's consulting practice. "Providing innovative and personalized mobile services based on consumer segmentation will enable banks to not only run better by maximizing their investments, but also run differently by strengthening customer engagement and driving greater adoption of mobile banking for competitive differentiation." 

If properly positioned, packaged, sold and reinforced, not only will your employees and customers understand the rational of moving from free to fee, but the service will serve as a retention tool as customers become more comfortable with the benefits and value the fee options. 

And mobile deposit will become one of several new revenue engines within your institution.

Coming Next Month: How to Generate Revenue from Mobile Bill Payments

Additional Resources 

Growth and Revenue Potential of Emerging Financial Services - Market Rates Insight (2013)

Study on Emerging Lifestyle Financial Services - Market Rates Insight (2012)

The Mobile RDC Cost-Savings Myth - Bob Meara on the Celent blog (August 2013)

The US Mobile App Landscape: An Annual Evaluation of Mobile Banking at Top US Banks: Celent (June 2013)

Leveraging an Omnichannel Approach to Drive $1.5B in Mobile Banking Cost Savings - Javelin Strategy and Research (July 2013)

Creating Fee-Based Online Services - Online Banking Report (May 2011)

Retail Bank Pricing: Resetting Customer Expectations - Deloitte (April, 2013)

Three Things You Need to Know About Mobile Deposit - The Raddon Report (August 2013)

The State of Consumer RDC 2011 - Celent (November 2011)

2011 Mobile Remote Deposit Capture: Creating a Compelling Business Case for Mobile Servicing - Javelin Strategy and Research (May 2011)

The ath Power Mobile Banking Study - ath Power Consulting (2013)

Mobile Deposit: Why Now . . . and How - Mitek Systems (2012)

Mobile RDC: Changing How Consumers Bank and Banks Compete - AlixPartners (October 2011)

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What it takes to be Carnac the Magnificent.

As marketers, we are always looking into our crystal ball, reading the tealeaves and flipping the tarots. 

Whatever it takes to be the industry's Carnac the Magnificent.

"Who needs our product?  Who will buy?  What will they buy?  When?"  

As we discussed on August 12, a great deal of focus in the magical, mystical world behind the marketing curtain is spent in segmentation. The scientific and not-quite-so-scientific methods of running human being's through a filter to better manage our time and monitory resources.

Recent blogs have yakked about segmentation from topics like: 8 life stages that you should market to and Mirror Modeling and Birds of a Feather methodologies. These are all great ways to plan for today and the near future. (And they're absolutely brilliant prose!)

But how can you look a bit further out? Elementary, my dear Marketer ... watch the schools.

The 2004 NEA research paper, K–12 Education inThe U.S. Economy: Its Impact on Economic Development,Earnings, and Housing Values, discussed these findings:

"With regard to effects on economic development, one statistical study found that cutting statewide public K–12 expenditures by $1 per $1,000 of state personal income would reduce the state’s personal income by about 0.3 percent in the short run and by 3.2 percent in the long run. They also note that another study found that such a cut would reduce the state’s manufacturing investment in the long run by 0.9 percent and manufacturing employment by 0.4 percent. Similarly, another researcher found that a decline in educational quality, as measured by a 10 percent drop in standardized test scores, would lead to a 2 to 10 percent reduction in home values.They also cite a study that found a 10 percent reduction in school expenditures could yield, in the long run, to a 1 to 2 percent drop in post school annual earnings."

My simplistic, "If-Then" interpretation: When schools are managed poorly and/or necessary levies are routinely voted down - the level of education suffers. When the education suffers - people choose to move other places. When people move other places - so do business. When businesses move - so do jobs ... then the community truly can't afford the levies to fix the schools and the snowball gets bigger.

So, when you're trying to decide where to build a branch, or what region of your footprint should demand your attention, or where the future opportunity is ... of course, look at the current demographics, employment and economy ... but also look at the schools. They hold the key to every city's future.

We bring these marketing philosophies to credit unions and community banks nationwide, and would love to bring them to your institution too. Contact us to see how.

With more than 255,000 visits worldwide, we hope that you enjoy this blog.  If you find it helpful, please share it with your colleagues. Also, check out our YouTube Channel for short video blogs about financial marketing.  

MarketMatch is also a nationally and internationally requested speaker. Contact us to bring our marketing ideas to your next conference.

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Banking Leaders Discuss 2014 Strategic Planning Priorities

As we enter the planning season with a marginally better economy than last year, banks and credit unions are faced with margin compression, high operating expenses, new competitors and channel disruption that challenge even the most efficiently run organizations. Therefore, it has never been more important for institutions to formulate a successful strategic plan.

To assist with this process, I asked some of the foremost global leaders in the banking and credit union industry to provide thoughts on what they believe are the 2014 strategic planning priorities. This blog post is a companion to the post done at the beginning of the year regarding trends expected in 2013.

Understanding that each financial institution and market is different, it was interesting the uniformity of priorities offered to bank and credit union management by the more than 30 industry leaders I interviewed for this post. And while the ability to execute against these strategic priorities may be impacted by size of organization and other dynamics, there was a consensus among those who I spoke with that 2014 may be one of the most important planning cycles ever.

Enhance the Customer Experience

Improving the customer experience was the foundation of almost all of the responses I received around 2014 strategic priorities. Whether we are talking about branch reconfiguration, mobile banking applications, back office operations, etc. banking industry leaders believe an improved customer experience is the key to growth. 

As was said by Mary Beth Sullivan and the team from Capital Performance Group in their May/June Newsletter, "Many banks have a long way to go to get the basics right, so banks and credit unions should focus first on the basics. Once the basics are humming, ask yourselves: What can we do to be sure that our customers are better off banking with us than with our competition? What will make our customers lives better? How can we help them solve specific problems they are dealing with? Answers to these questions will define the experience you seek to create."

Beyond 'the basics', other specific strategic initiatives were recommended by Steven J. Ramirez, CEO of Beyond the Arc. "Developing a proactive complain management process that goes beyond regulatory requirements can drive new customer experience projects", says Ramirez. He also believes financial institutions need to determine how they can be a finger swipe away from providing guidance and support through mobile devices.

Financial industry futurist and blogger Scott Bales believes bankers need to get out of the office and talk to real customers, developing empathy for their problems, behaviors and desires if they want to develop offerings that align with the needs of the market. According to Bales, "The goal is to build experiences, not products".

Sankar Krishnan from Sutherland Global sees customer experience as the 'X factor' across all channels and interactions the customer has with their financial institution. Comparing what banks need to strive for with customer experience leaders Apple, Amazon and Quicken Loans, Krishman believes banks need to excel at aligning people, process and technology. 

Sam Maule from Carlisle & Gallagher Consulting Group believes that recent start-upssuch as Moven and Simple (and perennial cx leader USAA) are the best at visual engagement and customer experience. He quoted one of his banking clients as saying, "I would pay $500K for ONE great user experience designer. FSI's are horrible at this. We have massive data systems, huge BI tools, and more, but none of that means jack for consumers if there isn't an amazing user experience."

Finally, best selling author and acclaimed management advisor Joe Pine believes banks and credit unions must go beyond providing just checking accounts and loans.

Define Mobile Positioning

In response to the growth in smartphone adoption and customer demand, most financial institutions offer basic mobile services. But those are just table stakes. Going forward, banks and credit unions now need to determine how to position this channel for the future. 

Senior Aite analyst and Snarketing 2.0 blogger Ron Shevlin states, "The most important strategic question banks and credit unions need to address is how will the mobile channel help FIs add more value to the customer relationship, help differentiate the institution, and create a strategic advantage". He adds, "If the 2014 strategic planning process can answer these questions, it will drive decisions regarding pricing, product offerings and customer segmentation."

Noted technologist Bradley Leimer from Mechanics Bank agrees that banks need to move beyond 'mobile banking 1.0' and adopt a mobile-first mindset in regard to application development, marketing, service and transactional functionality. According to Leimer, "Banks need to build simplified journeys similar to those offered by Moven, Simple, Bluebird, GoBank and USAA." (Leimer expands on his strategic planning thoughts on his Discerning Technologist blog here). 

Senior marketing professional, Lori Philo-Cook from InnovoMarketing believes that financial institutions also need to improve the marketing of the mobile channel to customers, including enhanced training of employees and one-on-one demonstrations to customers. "The key is to better understand the needs of customers and provide personal demonstrations on how mobile banking can meet these needs", says Philo-Cook.

Multimedia and special projects editor of Finextra, Elizabeth Lumley believes it is time for banks to go beyond just mobile banking improvements and to place their bets on mobile payment partnerships. While the winners in payments have not been determined, she believes waiting is not an option.

Integrate Delivery Channels

As noted by Capital Performance Group in their May/June newsletter strategic planning article, everyone is talking about the future of branches because there is so much fixed cost tied up in this channel where fewer and fewer transactions are taking place. The challenge is not the opening or closing of a branch, however. It is the ability to integrate capabilities and information across channels, delivering an consistent experience.

Dominic Venturo, chief innovation officer at U.S. Bank believes banks and credit unions need to quickly adjust to the disruption in financial delivery channels. "Now that the majority of consumers in the US are carrying a smart-phone of some type and the technology has been used to eliminate the need to visit a branch for many activities (opening account, depositing a check, paying a bill, sending a gift card, etc) how will the delivery model of your institution change to remain relevant?", says Venturo. He adds, "The mobile wave started just a few short years ago and has already changed how we do business. Planning for the future of delivery should have already started, but if it hasn't, now is a good time."

Another retail banking executive at a top 5 financial institution believes FIs need to move to omnichannel banking which maximizes cross-channel consistency and provides a seamless user experience where and when the customers desires. This includes scenarios where the customer may begin their transaction using one channel and finish it with another.

To this end, Nicole Sturgill, research director for retail banking at CEB TowerGroup recommends, "Adjust channel strategy from ‘all transactions in all channels’ to ‘seamless integration across channels’. Our research shows that consumers prefer reduced effort over choice. They’d rather know which channels will be fastest and work best than try a channel that doesn’t work for what they’re trying to achieve. Instead banks and credit unions should focus efforts on ensuring that customers can move easily from one channel to another without degrading the experience."

Industry recognized innovator Matthew Wilcox also believes 2014 should be the year of breaking down internal channel silos and to determine how banks and credit unions can leverage channels to not just allow the client to self-serve, but to provide a positive full-service experience regardless of the channel.

Unfortunately, the back office of many financial institutions makes it difficult to break down silos that have been in place for years says Fred Hagerman, chief marketing officer of Firstmark Credit Union. He still believes that a disconnected experience has risks.

Both Virginia-based chief marketing officer of Geezeo, Bryan Clagett, and Market Insights' senior strategist Jim Perry from Chicago agree that financials should get out of their branch-based comfort zone.

London-based mobile/digital consultant for Keatan and publisher of The Bold War blog, Michael Nuciforo may state it best when he says that banks must move from a perspective of self-service (getting customers to do hated tasks themselves) to selfless service (where we focus on how the customer wants to interact). "New technology and changing customer behaviors mean that there are widening gaps between the processes of the past and the expectations of the new", says Nuciforo.

Reduce Enterprise Costs

It is no surprise to financial institutions of all sizes and in all countries that costs must be reduced as revenues have decreased and margins remain low. Many banks and credit unions have made cost reduction a perennial foundation of their strategic planning process, but more needs to be done in 2014.

"Banks must manage the cost base of the physical infrastructure and staff costs in branches to ensure that overhead of traditional operations are minimized while effectiveness of such operations are maximized", offers the Chairman of the London-based Financial Services Club, Chris Skinner. 

Bob Palmer, global financial services marketing lead at IBM agrees that there needs to be a continuation of the enterprise cost reduction strategies that are already in place. He believes these initiatives need to include a more aggressive reduction in workforce with a correlated reconfiguration/reduction of branch networks.

Melanie Friedrichs, analyst at Andera feels automation of core banking services also needs to occur. "For most institutions, I think that cost cutting through the better application of existing technology is the easiest path to a better margin", stated Friedrichs. Specific examples she provided include: increasing the percentage of deposit accounts and loans originated online, creating incentives to use online or mobile banking over branches and call centers, and investing in technology, perhaps even branch automation technology, to improve staff efficiency.

Author, 2012 American Banker Innovator of the Year, 'Breaking Banks' radio host and founder of Moven Brett King believes that banks need to dig even deeper for cost reductions. In his normal disruptive style, he challenges traditional financial organizations to make a significant paradigm shift.

Fellow disruptive thinker Deva Annamalai from Zions Bank agrees that banks need to identify processes that are outdated and archaic and get rid of them. "There is nothing more dangerous than sticking to things that we have done in the past because we are too lazy to change them," says Annamalai. "Your customers' tolerance for unneeded traditions like signature cards and other long and costly processes is wearing thin. Competitors who provide simplified, frictionless banking are ready to serve these customers."

Optirate CEO, Serge Milman adds that the future of banking may require additional scale. "Scale is needed to diversify 'concentration risk' (customer, geographic and product), attain lower funding costs, reduce unit costs, absorb regulatory burden and gain access to a broader base of potential customers," says Milman. "Options include organic growth and acquisitions."

Leverage Data

The discussion of 'big data' permeates our industry trade publication, industry meetings and blogs like mine (see here, here and here). This is because most financials sit on some of the richest sources of data of any industry, yet we rarely leverage it as effectively as possible. 

Recognized top innovator Matthew Wilcox states that while investments in innovation data management are up, banks still lag behind other disruptive companies in recognizing payoffs. "Banks have a strong hold on massive amounts of customer data and understand that their data is truly a gold mine", says Wilcox. He adds, "Initially, banks should avoid major new data initiatives until they get good at using the data they already have". 

Scott Bales suggests that banks may want to look outside their organization for help. "Bankers may want to look to data scientists, who can create stories from data to derive patterns, trends, insights and add context to interactions with consumers. The bank who best leverages their data best will ultimately win." 

Fred Hagerman from Firstmark Credit Union agrees. 

Understanding and processing data from various internal systems is imperative according to Zions' Deva Annamalai. "Break down data silos within the organization and facilitate information flow which will lead to a better customer experience," states Annamalai.

A strategic priority for banks should include the delivery of a mature enterprise data management structure that provides true parity based reporting between operational, performance and financial information", offers Jeff Fisher, director at Perficient. "From here, banks should build capabilities to further extend a bank’s ability to segment customer data and create a solid foundation to execute on a strategy to monetize customer data".

Sam Maule from Carlisle & Gallagher Consulting Group agrees and adds, "We all must be better at drilling into the contextual data that matters for customer engagement and not on creating executive dashboards for PowerPoint decks. Data analytics must lead to actual application and engagement with consumers, from customer acquisition to origination, marketing, education, collections, fraud, etc."

Nicole Sturgill from CEB TowerGroup believes that channel preference would be a great starting place for many financial institutions. "Know a customer’s preferred channels, both individually and in the aggregate. At the individual level, understanding how a customer wants to bank can drive how they are served, what products are offered, and how they are offered. At the macro level, understanding the channel preferences of the customer base can drive strategic decisions on channel investments as well as management structure."

Improve Marketing and Sales Effectiveness

As I discussed last month in my blog, the consumer purchasing funnel has changed forever, with the majority of consumers beginning their purchase process using online channels and less and less frequently preferring to visit a branch to open a new account. This new paradigm requires a shift in marketing emphasis from 'push' marketing, where mass media would bombard a consumer with messages, to 'pull' marketing, where time, place, offer and channel become much more important. 

This significant change in the purchase process requires a rethinking of strategic priorities for bank marketers in 2014 and beyond. 

James Robert Lay, president of PTP New Media and advisor to the credit union industry is a strong advocate of building a digital strategy that will lead to increased leads and sales. According to Lay, "Moving to digital channels requires banks and credit unions to stop thinking about digital as a tool that works independently of other channels and processes, but instead works together as part of a system or process." Lay continues, "Once banks and credit unions accept that the business model will need to change when dealing in a digital world, banks and credit unions need to explore how digital can align with people and products around a unified purpose."

London-based retail channel director at Misys, Alex Bray emphasizes that the future reduction in branches across the globe will require digital marketing acumen. "Banks and credit unions need to build relationships, differentiate brands and identify customer needs through digital channels instead of face to face as branches disappear," states Bray. "I think gamification and social media marketing will also play a big role here as will the importance of 'one-touch' mobile marketing."

Financial Services Club's Chris Skinner also believes that a strategic priority for 2014 will be to find ways to leverage social media and mobile for growing share of wallet through deepening customer relationships.

Finally, Elizabeth Dias, financial services and retail marketing manager at Perficient speaks for many of the banking leaders interviewed around the new strategic direction of marketing. "Successful financial services innovators will start to leverage a more integrated portfolio of technologies to be where their customers are today and identify new ways to create utility with their digital marketing strategies for tomorrow," says Dias. "There is a great opportunity for marketers to use tools like Vine, Instagram, Twitter, Facebook and Google or to develop a mobile app to solve a problem, make life easier, and of course engage with the customer as they map the digital customer journey."

Define a Differentiation Strategy

According to the list of strategic planning priorities developed by Capital Performance Group, there has never been a better (or more important) time to identify your institution's niche. How do you become the 'go to' financial provider for a specific retail or business segment? And how can you increase revenues (and potentially reduce costs) through this differentiation at a time when the consumer thinks all financial providers look pretty much the same?

According to Keatan's Michael Nuciforo, it may be as 'simple' (or difficult) as being the firm that executes the best against their plan. "The banks that are winning are the banks that are delivering," says Nuciforo. "They have refocused not on analysis paralysis, but on quality and speed of delivery." 

Serge Milman from Optirate and Melanie Friedrichs from Andera voice a similar warning around building differentiation in a crowded marketplace. While they agree that banks and credit unions need to develop strategies to set themselves apart in the marketplace, they both emphasize that there needs to be a highly focused commitment to the strategy.

Amber Farley, director of interactive services and media at Financial Marketing Solutions in Nashville, reminds us that, "Companies that usually do the best are ones that have a brand that permeates throughout the entire organization. The best companies value customer service and they make consumers want to be a part of their story". She suggests that more time and investment should be spent on internal branding initiatives by improving internal communication and energizing the organization. 

"Once each member of the entire team (from executives to the front line staff) is a brand ambassador for the bank, I think it is equally important to communicate the brand message in a consistent and aesthetically pleasing manner so that community members desire to be a part of the story. That's how life-long customers are made". 

Finally, fintech technologist Bradley Leimer emphasizes that differentiation (and innovation) do not need to be created internally or in a vacuum. Instead, he emphasizes the power of partnership with outside providers. If your firm is not able to address all of the external requirements of your customers and the marketplace, are unable to test, iterate or develop agile or lean processes that can help differentiate your organization, or simplify the customer journey and build a unique customer experience, partnering with an outside disrupter that can lead the way may be a better option. (read more about Bradley's perspective here).

Revenue, Security and Regulation

As was very profoundly offered by SourceMedia's Editor in Chief Penny Crosman, the financial services industry can't ignore the 'elephants in the room' . . . the ongoing need for revenue, the increasing importance of improved security and the reality of a heightened compliance environment. The negative impact of neglecting any of any of these strategic priorities could easily offset any benefits from the strategies discussed above.

Finding new ways to generate fees from new innovations or established products, testing new security options which will allow for greater acceptance of mobile banking and mobile payments and finding ways to improve compliance with fewer dedicated resources will be 'must haves' in 2014.

Keys to a Successful Planning Process

Whatever strategic initiatives are agreed to by a bank's or credit union's management, it should be shared and communicated with bank employees so they understand the organizations’s mission, vision, goals, and objectives and the employees’ role in achieving the objectives.

In its simplest form, a bank’s strategic planning process should answer the following four questions:

1. Where are we now?
2. Where do we want to be?
3. How do we get there?
4. How do we measure our progress?

In today's marketplace the strategic planning process must be dynamic and focused. Unfortunately, at many institutions I visit, the process becomes nothing more than an adjustment to the prior year's plan without adjustments that reflect the rapidly changing industry dynamics. In others, there is a lack of unified focus that can lead to disruption and competing priorities.

Simply going through the motions is a recipe for disaster as articulated by credit union advocate Tim McAlpine, president of Canadian-based Currency Marketing and Jeff Marsico, EVP of bank strategy at The Kafafian Group and fellow blogger.

Fintech advisor and CEO of Clientific, J.P. Nicols cautions, "Too many banks try to be all things to all people, and the universal bank model really needs significant scale to work. Bank executives should spend a a good share of their strategic planning time evaluating all of the businesses they are in (or not in) and make an honest assessment of potential growth rates and the investments and scale needed for success".  He adds, "Business lines not making the grade should be divested or closed and the investments diverted to lines where they can legitimately compete and win". 

I hope some of these suggested strategic priorities help in your 2014 planning process. Thanks to the dozens of financial service leaders that were so kind to share their thoughts.

If you have other priorities that you believe will help your fellow FI associates, I would love to have you post these in the comments section.

Additional Resources

Strategic Priorities for 2014 Planning - Capital Performance Group (June 2013)

Banking Leaders Predict Major 2013 Trends - Bank Marketing Strategy (January 2013)

Strategic Plans That Make A Difference - Mary Beth Sullivan for BAI Banking Strategies (August 2012)

Semiannual Risk Assessment: Spring 2013 - Comptroller of the Currency (June 2013)

Ten Keys to a Solid Strategic Plan For Banks - Sageworks Blog (July 2012)

Meaningful Strategic Planning Can Happen - ABA Banking Journal (May 2012)

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