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)

Is Your Bank Ready For Customer 3.0

The banking industry is in the midst of a significant shift in customer behavior fueled by new channels, new competitors and new shopping behaviors. Today's customer is hyper-connected, highly informed and demanding a highly personalized approach with regards to communication, product development and customer service.

These customers cannot be defined by a specific age or income category or geographic parameter, but by their ability (and desire) to adopt and apply new technologies to meet their banking needs.

Say "Hello" to Customer 3.0.

Customer 3.0 begins their bank and credit union product shopping experience at their desk, in their car or on their couch, relying on friends and family reviews and published reviews across social media channels. Instead of walking into a local branch office and sitting down to open an account during banking hours, these customers purchase their banking services much like they purchase music, books or other products . . . online, 24/7.

As Brett King highlighted in his book, Bank 3.0, the new customer doesn't 'go to' their bank or credit union or rely on a physical distribution network. Banks and credit unions need to find and effectively engage customers who are mobile-first and have vast choices and a 'want it now' attitude. This paradigm shift in the balance of power between banks and the customer positions Customer 3.0 as a power player who is firmly in charge of their personal buying process.

To find and engage with Customer 3.0, financial institutions need to transform their back office and delivery networks and begin to think like the new customer. They need to understand that the competition is not just other traditional banks or even the digital-first 'neobanks'. Instead, we are competing across all of the touchpoints used by Customer 3.0, where experiences are shaped by the latest in retail, gaming, search and mobile technologies.

In a just released research report, Say Hello to Customer 3.0, Accenture discusses the transformation of the banking customer over time and the need to move from being a financial facilitator to becoming a part of the ecosystem where Customer 3.0 interacts. The report also discusses the need to move from mass marketing techniques to a highly personalized approach that takes advantage of both structured and unstructured data to improve the overarching customer experience.

Defining Customer 3.0

Unlike the customer of the past, Customer 3.0 is not defined by traditional demographics like age, income, geographics or gender. Instead, they are defined by the way they leverage new technologies to meet their individual needs. Digitally astute, mobile-first and socially connected, Accenture found Customer 3.0 to have some generally common attributes. I provide my take on what these attibutes mean to bank product managers and marketers:

• Highly Informed: Customer 3.0 leverages the information available on the internet more than any previous generation. They use comparison sites and associated apps to gather insight about the banks and products they want to purchase before a bank even knows they are shopping.
  
  The change in bank shopping behavior was discussed in my previous post, Digital Shopping Has Transformed the Bank Purchase Funnel, and more generally in the Accenture report, Energizing Global Growth: Understanding the Changing Consumer. Customer 3.0 starts (and sometimes finishes) their bank shopping experience in the digital world.
  
  My Take: Traditional media is no longer enough for acquiring or cross-selling the new customer. The importance of digital marketing tools, such as retargeting, must become part of ever bank and credit union marketers tool kit.

• Price Sensitive: Saving money and/or 'getting a deal' is more important to Customer 3.0, who places an emphasis on a fair value exchange as opposed to simply buying on brand name or convenience alone.
  
  My Take: While Customer 3.0 is price sensitive, they will pay for a product that saves time and/or money in the long run. Banks and credit unions should not view this attribute as a message that 'free is better', but as an opportunity to build services that can be differentiated. This also bodes well for merchant-funded rewards if the offers are targeted and easy to use.
• Socially Connected: Today's social networks provide a double edged sword for financial institutions. While serving as a platform for sales, social media also is a platform for bad news, poor reviews and complaints to travel faster than ever to more people than ever before.
  
  My Take: Banks and credit unions need to be highly responsive to customers who use social media to air their grievances. It is usually best to respond publicly using the same channel the customer used to provide public closure.
  
  From a sales perspective, using social media for 'likes' and 'friending' is not enough. Social media should be leveraged for proactive and measurable sales efforts when possible (see Financial Brand's review of Navy Federal Credit Union's Facebook $200 million selling effort here). Channels like YouTube have also been used successfully to promote, educate and reinforce positive customer experiences.
• Trust Their Peers: Customer 3.0 is not shy. They are very comfortable receiving and sharing reviews on social networks and within apps wherever possible. Sites like BankRate, My Bank Tracker, Find a Better Bank, in addition to Facebook and Twitter provide the online platform to provide reviews, advice and opinions instantaneously. Recent research reinforces this trend with 14 percent of customers trusting advertisements while 78 percent trust peer recommendations.
  
  My Take: Monitoring recommendation and review sites should be part of the job of marketing and the customer experience areas of the bank. In addition, much like restaurants and retailers, banks and credit unions should seek positive online reviews from satisfied customers as part of daily social interactions.
• Self-Promotion: Aligned with the above attribute, Customer 3.0 will publish and promote themselves, their opinions and their decisions through social channels (myself included) while many other customer groups are much more shy about their daily activities.
  
  My Take: Some banks are proactively monitoring the social network activities of their customers not only to gauge satisfaction and to build a more robust profile but also to determine who may have the strongest 'social clout'. Moven may have the most public social monitoring feature with their CredScore. With a close eye on privacy issues, the ability to determine a customer's social influence can be a powerful marketing tool going forward.
• Instant Gratification: Influenced by the impact of online books by Kindle, music via iTunes and simple bank account opening by GoBank, Simple, Moven and PNC's Virtual Wallet, Customer 3.0 can be accurately described as the 'now' generation. They want to be able to open accounts, transact business, talk to customer service and view their financial position quickly, easily and in real time.
  
  My Take: Innovation in the eyes of Customer 2.0 may not be in the form of more features and functions, but simplified capabilities that occur seamlessly. From simple account openings to seeing balances without needing multilayer authentication (GoBank Balance Bar), to instant mobile receipts (Moven), banks and credit unions need to remove complexity from everyday banking, allowing customers to bank where, when and how they want.
  
  The recent innovations by Mitek Systems using the camera functionality on a phone for mobile deposits, mobile billpay, mobile account opening and most recently, mobile balance transfer exemplifies the importance of instant gratification.
• Security Unconscious: Despite all of the talk about public discourse around privacy and security, Customer 3.0 does not seem to be nearly as concerned about viruses, spam or phishing attacks, uploading and downloading more digital information than any other group. This comfort extends to their confidence in doing banking transactions online or on a mobile device.
  
  My Take: For Customer 2.0, the need to emphasize safety and security is less of an issue when wanting them to try new online and/or mobile services. That said, this security could be short lived if a major breach occurs within the banking industry. In addition, the comfort with sharing personal information allows financial marketers greater access to insight that can be used for improved targeting, product development and communication.

Engaging Customer 3.0

To better engage Customer 3.0, Accenture recommends that financial institution become ubiquitous, melding into the digital ecosystem where Customer 3.0 already interacts. This is a 'pull' as opposed to 'push' environment, where banking develops products, services and content the customer seeks as opposed to being sold.

The expectations are not being set by historical banking organizations, processes and products but by other more progressive industries that have already embraced digital real-time transactions, robust 'big data' insight, geolocational capabilities and new ways to communicate through offline, online and social channels. 

The retail industry has set the bar high for developing a single customer view and removing product silos. They also have made the customer aware of the new 1:1 marketing potential and the ability to listen and interact with customers on their terms, providing products and services that add value and enhance daily life.

Below is a great narrative on the expectations of Customer 3.0 and the interrelationship between what they expect from banking compared to what they are already receiving from other companies they like and admire.

To improve engagement with Customer 3.0, there are seven barriers that must be addressed that are inextricably linked to the banking industry's current operating model:

1. Trust: While progress has been made to build trust within the industry, Customer 3.0 doesn't differ from other customers when it comes to making choices between different banks and credit unions. They turn to friends, family and their extended virtual community. Banks that avoid customer 'surprises' and improve transparency will benefit.
   
   
2. Advice: Progressive Insurance exemplifies the way a financial institution can provide an unbiased perspective with their comparison shopping tool. Likewise, banks can provide tools that are unbiased as well as content that can help educate customers. American Express does this well with their Open Forum and many banks have developed educational blogs around financial planning, etc.
   
   
3. Location: Financial institutions need to find more ways for the digital experience to provide many of the benefits of the physical experience. Customer 3.0 is reluctant to visit branches except for the most complex purposes, so the development of significantly better tablet applications that are tactile and more robust is a great place to start.
   
   
4. Loyalty: Loyalty is harder than ever to secure since most banks are followers as opposed to leaders and have become more of a commodity or utility as opposed to being differentiated. To build stronger loyalty, innovation will become more valued and the ability to provide services beyond traditional banking will be rewarded.
   
   
5. Price: Customer 3.0 is very aware that it is less costly to serve digitally than through a physical location, but is willing to share the benefits of this lower cost delivery. Unfortunately, serving digitally is not always less expensive, so improved customer education and the ability to generate fees from value-added services will be important in the future.
   
   
6. Time: Finding ways to serve Customer 3.0 at a time that suits them is not difficult for many transactions, but finding a way to serve this segment when interaction is needed is not as easy. Live customer support through digital channels will become an important differentiator.
   
   
7. Relevance: The collaboration with non-financial providers to stay relevant will become more important since Customer 3.0 wants their financial provider to be inextricably linked to their everyday lives. Location-based rewards, improved P2P capabilities, etc. are the foundation for this needed relevance.

Attracting and Retaining Customer 3.0

To attract and retain Customer 3.0, banks need to come to the realization that change is needed. They need to embrace the need to innovate and undergo a overhaul of the way they do business as Brett King highlighted in his book, Bank 3.0 and is done by Chris Skinner in his newest book, Digital Bank: Strategies to Succeed as a Digital Bank (interview with Chris Skinner here).

According to Accenture, banks need to engage with Customer 3.0 on their terms by:

• Redefining their business model
• Engaging whenever, wherever Customer 3.0 desires
• Changing the way products are created
• Utilizing technology to gain greater insight into customer behaviors
• Delivering innovative experiences
• Rewarding loyalty

In other words, to defend share of wallet from organizations like PayPal, Walmart, Visa, MasterCard, Google, Apple . . . , banks will need to collaborate with the customer in a way that assists with new product development, service and channel experience. In short, banks need to move from being a financial facilitator to becoming part of the digital ecosystem where the customer interacts.

The question becomes, can traditional banks and credit unions remake themselves for an environment where the customer has all of the power?

Additional Resources

Say Hello to Customer 3.0 - Accenture (2013)

Digital Shopping Has Transformed the Bank Purchase Funnel - Bank Marketing Strategy (2013)

Bank 3.0: Why Banking is No Longer Somewhere You Go But Something You Do - Brett King (2012)

Enhancing the Banking Customer Value Proposition Through Technology-Led Innovation - Accenture (2011)

Digital Bank: Strategies to Succeed as a Digital Bank - Chris Skinner (2013)

Energizing Global Growth: Understanding the Changing Consumer - Accenture (2013)

It's Time for Banks & Credit Unions to Embrace Change

As I travel across the country, visiting financial institutions in the midst of their annual planning cycle, it is like a trip down memory lane. While the technology and distribution channels have changed, banks and credit unions are still faced with the many of the same strategic challenges we talked about 20 years ago.

As a long time banker and friend, Michael Bencic said, "Improving the customer experience, embracing change, deriving value from data, building strategic partnerships, leveraging technology, ensuring privacy and security, cutting costs and generating fees is like deja vu all over again."

I agree. While the details behind these goals have changed, why have the overarching themes stayed the same? Is it because the planning process usually begins with broad financial requirements and many involved in the process simple dust off last year's plan and hit the restart button? Or is it because, despite a lot of talk around embracing change, the industry (and the regulators) frown upon the potential risk associated with innovation and doing things differently?

In a new report just published by KPMG entitled, Reshaping Banking in a Dynamic Business and Regulatory Climate, the author emphasizes the importance of getting out of 'survival mode' and embracing change, creating new strategies, crafting new infrastructures and focusing on the customer. While there is no denying the importance of each of these issues, this report is not much different than similar reports I read in the 1990's. The primary difference is that the risk of ignoring these issues has far greater implications.

Dusting off last year's planning document and making small alterations is not enough. It will take more than simply finding ways to 'do more with less', cost-cutting and operational improvement. According to Brian Stephens, national leader of KPMG's banking and capital markets practice and author of the report, "There must be acceptance among the entire leadership team that the rapid, unpredictable, and profound change we are witnessing is structural -- not cyclical." He continues, "The debate in not about the need for change, but what changes should be made."

As in the past, the issues that must be addressed are many. The difference is that today, while the issues may look similar to the past, the issues are more interconnected than ever before and the environment where these changes need to be made is evolving at breakneck speed.

The KPMG report provides a perspective into the following critical areas as banks and credit unions plan for 2014 and beyond:

• Culture of embracing change – In today's environment, change is constant, so banks must be nimble and innovative. "Banking leaders must choose to adapt and evolve, or risk irrelevance," says KPMG. "In the future, when banks look back on this time of change, an organization's resilience will not be measured by how much adversity it endured throughout the financial crisis and this period of recovery; rather, it will be measured by how well it adapted to it." The challenge is a tradition of rigid internal resistance to change and a consequent inability to execute. The change in culture must come from the top, starting with the board and senior leadership. And it must me more than just words.
   
• Focus on customers, not products – To increase revenue, banks must determine the appropriate customers to target and how best to package the products and services for which they are willing to pay. The challenge, related to the first issue above, is that banks have a legacy of talking to the masses and giving services away for free. Without better segmentation and an understanding of what customers will pay for, the impression of any revenue initiative will be negative. Alternatively, bundling services such as mobile bill pay, alerts, ID protection, payment services, etc. using a customer-centric perspective can results in a win-win.
   
• Deriving value from data – Banks and credit unions that can extract more value from all available data sources to develop a better understanding of customer needs can serve customers more effectively and profitably, while developing a competitive advantage and staving off threats posed by new market entrants. The challenge is that all internal product-centric data silos (retail deposit, credit card, small business, mortgage, commercial, etc.) must be integrated to provide a single customer view. Once data is integrated, the customer insights need to be leveraged for better product development, new cross-sell and revenue opportunities and reduced risk.
   
• M&A/Alliances – Despite many predictions around increased M&A activity in the past that have not come to fruition, the environment today is prime for consolidation due desires for geographic expansion, product enhancement and cost reduction. The immediate issue is that organizations need to strategically evaluate whether they are a buyer, a seller, or neither, while also examining the possibility of developing alliances where strategic fit warrants.
   
• Technology – At a time when costs are being cut, the appetite for investment in technology is usually tainted by the memories of previous IT upgrades that never met expectations. Nonetheless, the ability to effectively support the integration of new delivery channels and a customer-centric view leaves most banks no choice but to upgrade aging infrastructure. "The promise of harnessing technology advances can help banks streamline operations to reduce operating costs, connect future and existing customers across a multitude of new and emerging channels, tap new revenue streams, enhance customer loyalty, and build better defenses against cybercrime and denial-of-service attacks," says KPMG. In the end, ignoring or putting off the inevitable is a risky strategy, especially with the risk of noncompliance, losing market share or not being able to support an ever more important mobile strategy.
   
• Cybersecurity – The increasing scope, frequency, and sophistication of cyberattacks on banks means institutions need to be better prepared to address a risk with implications that both enormous and unknown. With the public's trust in banks finally recovering from the impact of the financial crisis, this trust can be shattered if life savings (or even access to funds) are at risk. In addition, there are some who believe that we are at the tipping point in the acceptance of mobile banking (and mobile payments) without greater ID protection and mobile security in place. 2014 will be a year when most of these issues need to be addressed (if not sooner).
   
• Capital & Compliance – Banks will continue to need to prepare for stress testing, while also monitoring various capital adequacy and liquidity requirements and associated staffing and compliance costs. For many banks, the issue of capital adequacy may be secondary to the ongoing costs and internal 'friction' that is associated with the added staffing associated with meeting regulations
   
• Accounting for Credit Losses – Banks will need to understand revisions to accounting for credit losses on financial assets and other rules. These changes could not only have a significant impact on an institution's reported earnings, but also on its capital ratios due to the need to carry larger loan loss reserves.

While the list of issues may not be new to any banker who has been in the business more than 6 months or more than 20 years, the risk of not proactively addressing these issues has never been greater. So, if you are in the midst of planning for 2014, make sure your team is just not listing these in a SWOT analysis without building strategies to address the risks and opportunities. If you are 'done' with the formal strategic planning process, it may make sense to review the strategies and tactics planned for 2014 to make sure some version of 'status quo' is not your plan.

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Banking Industry Taking Small Steps With Big Data

As was discussed in the first of my series on Big Data in Banking, the financial services industry has a vast reservoir of data on their customers, but is in the infancy stage of utilizing this data for financial or competitive gain. 

A new study published by the IBM Institute for Business Value confirms that while the majority of financial firms believe data can create a competitive advantage, the scope of data used and the analytic capabilities lag behind other industries.

Second in a series on Big Data and Banking

In a study published by the IBM Institute for Business Value in conjunction with the Said Business School at the University of Oxford entitled, "Analytics: The Real World Use of Big Data in Financial Services," it was found that 71 percent of banking and financial firms globally believe that the use of insight and analytics creates a competitive advantage, compared with 63 percent of cross-industry respondents. This compares with only 36% reporting this advantage in 2010, representing a 97 percent increase in just two years.

Pragmatic Customer-Centric Strategy

Not surprisingly, the IBM research found that most 'big data' strategies being implemented by the financial services industry begin by initially identifying business requirements, then leveraging existing infrastructure, data sources and analytic capabilities before incrementally expanding sources of data, technology and analytic capabilities. This 'slow to go' progression is actually on par with the global cross-industry counterparts reviewed.

It should be noted that the progress with almost any data initiative in the financial services industry is directly correlated to the size of organization due to the investment required and current infrastructure of the organization. I was reminded of this very important distinction by James Robert Lay, credit union industry thought leader and CEO of PTP New Media in a Twitter response to my big data post last week.

@jimmarous posted comment why this may be challenge - 48% of #creditunions don't have CRM in place - details matter ht.ly/lOi5r
— James Robert Lay (@jrwlay) June 7, 2013

Despite the size of organization surveyed, and reinforced by the Celent research reviewed in my previous post, customer-centric objectives dominate the focus of most data activities in the banking industry. In fact, 55 percent of active data efforts revolved around customer outcomes in the IBM study.

As mentioned in my previous post on big data and banking, focusing on the customer is increasingly important as channels for transacting and communicating continue to increase, developing new segments of customers based on the ways(s) they want to perform transactions and hear from their bank and credit union. Through this customer-centric focus, the customer experience should improve as financial institutions can better anticipate customer needs in a multichannel environment.

Second in importance for financial organization use of data was for fraud and risk mitigation and achieving regulatory and compliance objectives (23%). This focus was significantly higher than the cross-industry sample in the study.

The study also found that, while the majority of institutions surveyed said they had much of the infrastructure in place to manage the increasing flow of data (87 percent), only slightly more than half reported that their data was integrated across silos. This continues to be a challenge as customer expect their financial organization to understand their entire relationship when working with their bank or credit union. This challenge is obviously exacerbated with smaller organizations who may not even have a CRM system in place.

Focus on Internal Data Opportunities

Despite industry and solution provider hype, most early big data initiatives are focusing on analyzing the tremendous amount of untapped opportunity that still resides within most financial institutions. More than 4 out of 5 financial organizations surveyed in the IBM study are analyzing transaction and log data that has been collected for years, yet not analyzed due to system constraints.

Where banks and credit unions lag their cross-industry peers is in using more varied data that requires more sophisticated (and expensive) technology. For instance, while call centers are still very important to financial institutions, only 21% of larger banks analyze this data (compared with 38% on non-financial organizations). Financial institutions also significantly lag their cross-industry counterparts in evaluating social data (27 percent for banks compared to 43 percent for non-banks).

Analytic Capabilities Lag Non-Bank Counterparts

Consistent with my review of recent Celent research in the post entitled, "Customer Analytics is Key To Growth In Banking", data mining of structured internal data such as basic inquiries, predictive modeling, etc. is on par with other industries. There is a significant drop off in capabilities, however, when financial institutions are asked about the ability to analyze unstructured data such as voice and social streams.

While the investment in these types of analysis should lag the basic capabilities described earlier (analyzing internal, structured sources), the growth and power of advanced analytics that includes unstructured data needs to be tested by banks to determine monetization opportunities (ROI).

Go Forward Recommendations

Advancing technology in combination with vastly expanded data sources are combining to provide the foundation for tremendous advancements in the application of big data insights within the financial services industry. Despite this potential, however, even the most advanced organizations are following a very structured path of integrating data analytics and insights within the organization.

In writing and speaking on the subject of big data for more than two years globally, I have found that much of the hype surrounding 'big data' has significantly preceded the proven financial benefits of using all of the data available to banks and credit unions. Unfortunately, many organizations still believe they are required to play 'catch up' to the minority of organizations that have the resources and talent to conduct an expansive test and learn process around unstructured data.

Without regard to resource availability, here are some foundational common sense steps that the IBM study, Celent research, other studies in the financial services industry (and myself) believe should be taken before expanding capabilities around big data.

• Begin with initiatives that will have a proven financial impact of increased revenues and/or decreased costs (increased sales, lower cost delivery, enhanced service, reduced risk)
• Build a blueprint that aligns business needs with IT capabilities (and resource requirements)
• Engage all impacted parties (executive level buy-in is required)
• Start with internal data sources (logical, cost effective and with great upside potential)
• Apply a test and learn process for all initiatives with measurement applied against preset objectives

Big data provides the potential for big opportunities for banks and credit unions. But the definition and application of 'big data' should begin with small steps applied against internal data that is readily available. As successes are achieved, the financial and operational benefits and learnings can be applied towards more ambitious projects that are deemed to be financially viable.

Additional Resources

Analytics: The Real World Use of Big Data in Financial Services - IBM Institute for Business Value (May 2013)

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