Bank Product Proliferation: Too Much of a Good Thing

When someone walks into your bank or credit union branch or visits online to open a new account, how many options are available to choose from? More importantly, how many different legacy products exist that are no longer offered, but still need customized maintenance, specialized communication and integration with your new digital offerings?

Has our desire to provide the best products for everyone resulted in product clutter, complexity, confusion, and additional costs? Now, there's new evidence that customers will reward us for reducing choice and for helping them move to the right product.

Beyond just reducing the current number of products we promote, it is also important to close the books on outdated product portfolios, consolidating legacy products into a more refined, less complex set of offerings. By doing so, your institution will reduce costs, generate new revenue, simplify your customers' lives and provide the foundation for future growth.

In a recent research paper from A.T. Kearney entitled, Reducing Complexity in Retail Banking: Simple Wins Every Time, it was found that the origin of banking's product proliferation challenge is the industry’s product-centric view and the lack of a traditional product lifecycle. By remaining siloed and focusing on the impact of individual products, there had been little internal incentive to reduce complexity for the customer’s benefit.

And unlike other industries, where customers are proactively shifted to the next generation of products when a new product is introduced and an old product is retired (i.e. Apple), A.T. Kearney found that most financial institutions maintain retired product portfolios forever, avoiding the risks and challenges of product migration. As a result, they found that some of their clients had more than 500 products, with two-thirds representing outdated offerings.

"One of our clients had more than 15 different savings products, with just three accounting for 90 percent of new product sales," states Torsten Eistert, partner at A.T. Kearney and co-author of the report. "Some products were being used by no more than 200 customers."

Beyond ongoing new product introduction, the product proliferation challenge is amplified by the impact of mergers, short duration specialty products, multiple branding, etc. This doesn't even take into account the impact of different behind-the-scene pricing algorithms or customer level customization (waivers, bonus rates, etc.) that is commonplace in banking.

As an industry, we can no longer equate variety of offerings with customer centricity. While customers say they want a variety of products and services, recent research by Filene Research Institute entitled, The Psychology of Choice Overload: Implications for Retail Financial Services found that the assumption that consumers always benefit from more options does not always hold, and in some cases, the consumers (and the bank) benefits from fewer, rather than more, options.

Simplicity Can Reduce Costs

Beyond the potential for improving sales, service and transparency with a simplified portfolio, reducing the number of legacy and current products can reduce costs. On the front line alone, broad product lines mean tellers and platform personnel need more training and time to understand (and explain to customers) a confusing array of alternatives. Each product has unique rules, regulations, rates, fees and transaction parameters that, even for a product no longer offered, may need to be referenced on an ongoing basis.

Imagine trying to know where to look for details about dozens or even hundreds of products on a moment's notice. Just because the technology supporting these products may be able to provide the answer in a relatively low cost doesn't mean the ultimate cost isn't significant.

According to the A.T. Kearney study, 75 percent of processing costs in branch-focused banks comes from the front office, where product confusion can also impact service and time available to sell. The cost that usually can't be calculated is the cost of a frustrated customer who expects flawless treatment. As mentioned in the Filene study, "When a vast array of confusing options are presented, a 'no decision' may be the sales outcome."

Obviously, complex product portfolios and legacy services also impact the back office, where maintaining an extensive portfolio for an undetermined period impacts personnel and IT costs. According to Eistert, "It is not uncommon for banks to keep certain legacy systems running because they host a large portfolio of legacy loans or deposits and they prefer not to have to contact clients in the event of system migration issues."

Simplicity Can Increase Revenues

As mentioned above, a simplified product line can positively impact the amount of time that can be dedicated to selling and can make it easier for a customer to make a decision. In addition, consumers often find it easier to deal with smaller assortments since they need to make fewer choices, leaving time to consider add-on services that may be valuable from a revenue perspective to the bank or credit union.

Interestingly, the revenue opportunity extends beyond current portfolio offerings into the vast legacy portfolio of products that have been mothballed but still held by the majority of an institution's customers. While a difficult endeavor, biting the bullet and migrating outdated product sets to a newer, narrower product line can increase sales, balances, share of wallet and customer satisfaction.

Several years ago, I was involved in a massive checking product migration project with CIBC in Canada. The goal of the project was to move every checking customer in the bank to a 'best fit' product line that included only 5 types of accounts. In other words, to proactively move more than 30 different legacy account types to 5 simpler options.

By evaluating historical balances, transaction volume, channel use and other behavioral data, the bank was able to determine the best product from the revised product line to place each customer. It was up to my firm to build the marketing plan to effectively communicate these changes to the customer with the least amount of disruption (as measured by negative branch impact and call center volume). 

The impact of the migration was far different than we anticipated at the time. Instead of a huge uptick in  call center volume with questions and complaints, the volume of calls remained relatively consistent with pre-conversion metrics. More interestingly, when measured over time, the balance in the accounts increased, ancillary product sales increased, revenue from both the new checking accounts and additional services opened increased and customer satisfaction scores improved. 

Over the years, the positive revenue impact of successful product line reduction efforts has been replicated by several institutions in the marketplace. A recent case study from Fifth Third Bank is included below.

Simplicity, Compliance, Risk and Transparency

New regulations require banks and credit unions to report on customer relationships at a much more granular level. The more types of products an institution has in their portfolio, the more variations that need to be included in risk management systems, CFPB reporting, etc. which impacts IT costs. In addition, with complaints being monitored more closely than ever by government units, a simplified product line can reduce the potential for compliance issues down the road.

Beyond regulatory issues, there is more and more focus on increasing the transparency of products to make them easier to understand and compare with competing services. Customers want uncomplicated offerings that can be compared and eventually used with no surprises. The focus on simplicity of offers can best be seen with new entrants such as Moven, Simple (naturally), Bluebird and GoBank that are mobile-first offerings with historically simple functionality.

Three Steps to Product Portfolio Simplification

Based on all of the reasons stated above (I am sure there are more), there is a greater need than ever to reduce the complexity of both legacy and current product portfolios. The three-step process recommended by A.T. Kearney includes:

1. Clean out the attic: Much like trying to cure a hoarder of bad habits, financial institutions need to analyze products in light of customers impacted, revenue potential and costs to serve. Make deep cuts until it hurts. According to A.T. Kearney, reductions of less than 30 percent aren't enough.
2. Build products like automakers build cars: Instead of each product being built from scratch, it is better to build with a modular design, where the platforms are similar, but the components can be assembled in a variety of ways to meet individual needs. This provides economies of scale, choice and potential for growth in the future. Examples of banks using this concept include Union Bank (Banking by Design) and BBVA Compass (ClearChoice Checking), where customers create an account that fits their needs, choosing only the features they want.
   
   
   
   
   
3. Match products with customer preferences: While few would argue against banking moving from a product-centric to a customer-centric view, it is easier said than done, especially for existing product portfolios. Beyond matching existing products to a new product set, the process of product migration needs to include revenue optimization modeling as well as a deep analysis of customer balance, transaction and channel use history. And since customer financial behavior changes over time, a future perspective of where the customer is going financially is needed to determine the best new product to move the customer to.

Case Study: Fifth Third Product Line Simplification

In a recent presentation at the ABA Marketing Conference entitled, Using Multichannel Engagement to Effectively Convert Customers, Bob Wojtowicz, vice president of 1:1 marketing for Fifth Third Bank illustrated the power of product line simplification. Saddled with a product line that included 25 checking accounts and 17 savings accounts, the bank's goals were to:

• Increase value across segments
• Increase the appeal of higher end products
• Reinforce the 5/3 brand and value proposition
• Grow total share of wallet

More specifically, the bank wanted to exit from Free Checking, which for years had been the backbone of aggressive acquisition efforts, become less reliant on overdraft and debit card interchange and provide incentives to customers for consolidated and expanded relationships.

From 42 to 8 Deposit Services

Rather than introducing a new set of products and 'grandfathering' the existing portfolio, Fifth Third migrated their entire customer base to a new checking and savings product line-up that reduced the number of checking accounts from 25 to 5 and the number of savings options from 17 to 3. As part of this migration, fee structures were simplified and made more transparent, making the entire conversion and future selling processes easier.

As with my CIBC example above, Fifth Third had the following concerns:

• What happens if customers don't like the new products and leave?
• Can the elimination of the traditional Free Checking create a PR problem?
• Could the changes provide an advantage to the competition?
• Are the revenue projections realistic?
• How do we position the changes as a benefit to the customers?

According to Wojtowicz, the key to success was a ton of pre-planning, listening to customer concerns, leveraging all possible communication channels (frequently), developing an effective customer migration mapping analysis and providing the customer multiple ways to engage with the bank.

Also stressed was the importance of top management support, strong conversion team leadership and extensive customer, intradepartmental and strategic partner communication. 

Multichannel Communication

To facilitate the product migration process, customer segments were established based on the depth and current value of the customer relationship. Each segment had a different contact strategy as well as messaging theme based on the account they were migrating from and the potential impact of the migration. More importantly, each individual household was mapped to determine the best post-migration product.

While the change in account structure would be 'business as usual' for some households, others would need more personalized engagement to understand the impact and potential opportunity of the new accounts available. The channels used by Fifth Third prior to the conversion included:

• Direct Mail: What's changing (and not changing), 'you have a choice' and how/when to respond (there were multiple direct mail touches with greater degrees of urgency as conversion approached)
• Email: Multi-touch reinforcement of each direct mail touch with the ability to download a copy of the original letter and take action electronically
• Online: Home page awareness banners and product page messaging with conversion landing page links to online wizard decisioning tools
• Internet Banking: Interrupt screens and integrated messaging served as reminders to online banking customers
• Social: Online monitoring of voice of customer (VOC) with active bank participation and response to negative sentiment
• Outbound Calls: The majority of the consumer bank base was called to set up 1:1 branch interactions to discuss changes in person
• ATM Messaging: Reminder communication on the screen, on facade banners and on receipts

Conversion Results

As a result of the exceptional pre-planning, effective mapping of household level communication, top management and employee support and ongoing monitoring of results on a daily basis, the impact of the massive conversion by Fifth Third was an unqualified success. Based on publicly shared results, the success of the product simplification process included:

• Increased revenue per household
• Increased cross-sell ratios
• Increase in average checking balance
• Increase in average savings balance
• Decrease in single service households
• Increase in new account generation

More specifically, Hendrix says Fifth Third has converted 2.1 million customers to its new products while, in the space of just one year, increasing deposits by almost $3 billion, and the cross-sell ratio to 5.2 products per-customer from 4.6.

For me, the most impressive numbers shared were that 40% of the customer base visited a branch office and sat down with a Fifth Third representative to discuss the best way to structure their bank relationship in the future. This provided the bank team the opportunity to not only make sure the customer was placed in the best product going forward, but also the opportunity to cross-sell additional services. In a conversation with Mark Hendrix, senior vice president and head of strategic marketing at Fifth Third, he says everything went so well, the branches want to find a way to connect with customers again.

When it comes to migrating new and existing product assortments, offering more variety is usually not the best option and may only perpetuate an historical paradox. Empirical research in the domain of retailing, consumer packaged goods and financial services shows that, in many cases, large assortments can lead to confusion, higher costs, lower revenue, lower purchase likelihood and a worse overall customer (and employee) experience. 

As we move quickly into the digital banking world, complexity is not rewarded. People want to make their live's easier and their financial institution choices will be based on which organizations serve their needs best. The best way for banks and credit unions to be prepared for this future is to clean out the product attic and move forward with a much cleaner slate. As in the case of Fifth Third Bank, this adjustment may also lead to more sales and an increased share of wallet.

Additional Resources

Reducing Complexity in Retail Banking: Simplicity Wins Every Time - A.T. Kearney (June 2013)

The Psychology of Choice Overload: Implications for Retail Financial Services - Filene Research Institute (2011)

Keep it Simple: How Banks Can Do Less and Deliver More - Booz (2009)

A New Dawn? Product Simplification: Winning Customers, Reducing Costs - Accenture (2012)

Simplification in Banking - KPMG (2012)

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Bank Marketing Strategy Named A Top Financial Marketing Blog

For the second consecutive year, Bank Marketing Strategy was named a top 5 financial marketing blog by The Financial Brand. 

With the intent of providing a list of valuable resources for bank and credit union marketers to reference, this year's honor was bestowed on blogs that met a defined set of weighted criteria including relevancy, quality, originality, frequency, longevity and design.

The top five blogs recognized this year were:

1. Snarketing 2.0 - Ron Shevlin, Senior Analyst from Aite Group
2. Acton Financial Marketing Insights - Steve Topper, Joe Swatek
3. Bank Marketing Strategy - Jim Marous, SVP of New Control Direct and Digital
4. Visible Banking - Christoph Langlois, Social Media Planner and Speaker
5. The Gallop Blog - Various authors

A description of each of the top 20 blogs, as well as a list of blogs receiving honorable mention are provided in The Financial Brand Top 20 announcement post.

In ranking Bank Marketing Strategy number three in 2013, Jeffry Pilcher, the publisher of the Financial Brand wrote:

"Of all the banking blogs out there, Jim’s is most similar to The Financial Brand. Jim regularly discusses the design of retail banking products/services, pricing, marketing and the customer experience. Jim’s posts will also frequently gravitate towards new/emerging technologies and channel integration, with a slant towards mobile. Some financial marketers will struggle putting the insights in some of these posts to use, but they will always find the material interesting and engaging."

This is the second year in a row Bank Marketing Strategy has been recognized as a top blog for bank and credit union marketers. Last year, Bank Marketing Strategy won both the Reader's Choice (#4) and Editor's Choice distinction from The Financial Brand (last year's winners).

It is an honor to be named in a list that includes so many blogs that I enjoy reading, learn so much from and provide such great insights. I consider the authors and publishers of these great resources both my professional and personal friends.

Thanks also to Jeffry Pilcher for setting such a high standard for each of us with his Financial Brand publication. His insatiable appetite for financial marketing news and ability to publish such a massive amount of invaluable insight daily makes his digital publication the 'go to' resource first thing each morning.

9 Steps to Improving Bank Cross-Sell Performance

With an increasing need for banks to increase revenues and decrease costs, optimizing every marketing contact has never been more important. In addition to leveraging multiple channels to generate a steady stream of new customers, one of the easiest and most steady sources of new businesses and related revenue is to reach out to current customers for additional business.

With the cost of acquiring new retail, small business or commercial customers being five to ten times the cost of retaining an existing one, and with the average spend of a repeat customer being 50-100% more than a new one, bank marketers need to remember that the most efficient investment of marketing funds is to market to customers that already bank with you.

Here are 9 time-tested, common sense techniques that many bank marketers sometimes forget: 

1. Ask questions: Consultative selling has been discussed the focus of the banking industry for decades. In a nutshell, the process begins by clearly analyzing a customer’s situation before presenting services or products. From the outset, a failure to cross-sell a brand new customer is a failure to develop a consultative relationship and a failure to ask the right questions.
   
   Without these questions (which are close to impossible to ask later), the opportunity to open the right services initially or later in the relationship is made more difficult. In addition, as opposed to going through a long set of questions that make the banker (and customer) feel uncomfortable, the dialogue should be free flowing and natural. Another option is to engage the customer with tools that can be used to complete the profile easily such as a tablet device.
   
   
2.  Start with the lowest hanging fruit: The easiest sales that can be made to current customers are engagement services that help a customer use an account they already own. These 'sticky services' include a debit card, online banking, direct deposit, bill pay, automatic savings transfer, personal line of credit and security solutions such as privacy protection. These services help to ensure the customer will use the products they own more frequently, will significantly improve retention and will help to improve the overall customer experience.
3. Stay connected: I have opened a number of accounts over the past year (sometimes as a ‘secret shopper’) and am always very impressed with how much love the bank gives me when I opened my accounts. I am amazed, however, that I rarely heard from them again except to tell me about new fees or a regulatory change. This is despite the fact that each bank got my home address, my email address, my cell phone number and my home phone number. Nothing but crickets except for GoBank, that did a great job of informing me of next steps.
   
   
   While some banks have very successful onboarding programs to help stay connected with new customers, a surprising number of banks still rely on the customer to onboard themselves. And unless the customer either opens a number of accounts initially or is successfully onboarded soon after they open a new account, their bank may never include them in a model-driven cross-sell program. This is because model-driven marketing programs usually focus on customers with broader relationships.
4. Continually evaluate upsell opportunities: Rather than using product-driven programs that are done seasonally, consider funding more customer-focused programs that evaluate each customer's propensity to open one or more of the products and services you offer. With some of my clients, we evaluate each customer's transactional, product ownership and even behavioral characteristics to determine what would be the most likely next purchase and whether the propensity to purchase is high enough to make an offer.
   
   In some of most successful programs, this evaluation of opportunities is done monthly, with smaller mailing universes, but much higher response rates. As the ability to use 'big data' increases, the movement from sales 'programs' to sales 'processes' becomes a necessity.
   
   The goal is to offer the right product, at the right time, to the right customer through the right channel. This takes customer data analytics.
5. Personalize your communications: A recent report from Gallup revealed that 66 percent of the most engaged customers at banks believed the marketing communication they are receiving was 'general in nature' and not at all personalized. Worse yet, 53 percent of the households surveyed said that the offer received was for a product they already owned.
   
   With consumers becoming aware of the ability for all companies to micro target, they are expecting their financial institution to be one of the best due to the insight organizations have. Therefore, now more than ever, banks need to build segmentation programs that reflect customer needs as well as current product ownership and use this insight to drive communication.
6. Empower your customer contact teams: For most customer-facing employees of your bank, their primary responsibility revolves around efficient processing of transactions and/or customer service. To leverage the thousands of customer engagements these employees have each year, you need to provide easy ways for them to extend their conversations to include relationship expansion opportunities. Many banks provide prompts on their employee's computer screen around recent sales communications received by the customer, most likely products that may interest the customer and even special offers that can be made as part of their transaction or service conversation.
   
   The best programs don't stop there, but include tools for the customer to take advantage of the offer. This may be an immediately generated custom printed sales document, a follow-up email or sales call or a referral form.
7. Ask for referrals: One of the easiest ways to generate new business and increase loyalty of current retail or business customers is to ask (and possibly incent) for referrals. If a customer is happy with the way they are treated at your organization, they usually want others to know. This is especially true with satisfied small businesses, private banking customers and with retail customers that are part of a bank-at-work program. And it doesn't hurt if you provide an incentive to your current customer.
   
   At a time when new customer acquisition offers often exceed $100 and when the overall cost of acquisition is more than $250, offering a 'bounty' of $50 would be less expensive and would most likely generate a more loyal customer.
8. Leverage all channels: Never assume that customers understand all that your organization offers or absorb communication the same through all channels. Remind your customers continuously that you know who they are, understand their needs, are looking out for them and that you are willing to reward them for their loyalty.
   
   And use as many direct channels as possible to reach out to your current customer base, including email, direct mail, statement inserts, banner ads on your website, ATM messaging, outbound calling efforts, etc. Digital retargeting of customers who visit your website or are part of your direct mail or email programs also is a highly effective and very efficient way to cross-sell customers.
   
   Finally, it is time to start building cross-selling messages within your online and mobile bank applications and to not assume customers will not want or read an SMS message if it is well targeted..
   
   

   

   
   

   Source: Novantas 2013 Multi-Channel Sales Survey (Total US Respondents = 4,813) 
   
   

9. Measure and reward what you want done: By providing ongoing measurement of the cross-selling objectives you want to achieve and paying for the achievement of these objectives, you have a much better chance of reaching your goals. This continuous reinforcement of your cross-sell mission allows your team to be focused on what's important.
   
   You can also turbocharge your results by communicating how you are assisting in their efforts. Provide opportunity reports of the customers where they may have the greatest opportunity for success. As part of these reports, it is also helpful to provide background as to why the customer is being selected for a specific offer.

Finally, remember that current customers like to be rewarded for their loyalty. One of the best ways to do this is to remember to include an offer with any cross-sell or upsell message. Without an offer, you may be perceived as simply 'pushing product' without leveraging the relationship value already in place. A strong offer will not only generate a better response to your communication, but also remind the customer of the value of doing business with your organization.

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Online Banking Key To Satisfaction and Growth at Credit Unions

According to recently released research, credit unions continue to score higher than banks in six key areas that have been found to drive customer satisfaction.

Interestingly, however, while lower rates and fees are still a significant component of a positive member experience, the impact of improvements in the online/mobile channel delivery will have the greatest impact on increased customer satisfaction in the future.

CFI Group, a customer satisfaction technology and analytics firm, in an inaugural study entitled "2013 Credit Union Satisfaction Index," measured six primary drivers of customer satisfaction on a 0-100 point scale and found that credit unions consistently scored high in all categories, with each driver scoring in excess of 80 points. This score was higher than many other industries including retail banking. 

CUSI Satisfaction Driver Scores

Of the six drivers of satisfaction measured, however, the 2013 CUSI found that only four play a significant role in driving member satisfaction and, therefore, should be the focus of the industry. At the top of the list for primary drivers that could impact future satisfaction were "online banking," "branch staff," "branch convenience," and "information/communications." 

The chart below illustrates the contribution of each primary driver towards increasing member satisfaction. The two missing drivers of satisfaction ("rates and fees," and 'products and services") have already 'maxed out' as a driver of additional satisfaction according to the study, thereby limiting any the impact that an improvement in these two drivers would have on future member growth.

Driver Contribution to Increasing Satisfaction

When viewed in terms of the "impact" of each satisfaction driver, the study also provides quantification of each driver's potential to improve the overall satisfaction score. For instance, for each point of improvement in the driver score (left side of chart), the overall satisfaction would increase by the value of the impact (right side of chart). Again, there is nominal impact for any improvement in either "products and services" or "rates and fees".

It should be noted that the impacts of each driver can also go either way, so a decrease in any score on the left will have a negative impact on satisfaction by the multiplier on the right.

This research supports several other industry studies that highlight the importance of a strong online and mobile banking offering. While once used by only early adapters, online and mobile banking are now 'table stakes' in the competition for members and deposits, and are becoming a point of differentiation for many organizations as they continue to roll out innovations (mobile check capture, photo bill pay, ATM locators, etc.).

Because of the importance, credit unions need to be in a position to at least keep pace with the leaders in the marketplace (including major banks), and potentially find solution partners that can provide differentiated applications for online, mobile and tablet service delivery.

In addition, at a time when financial institution branch and employee consolidation is inevitable, credit unions should be sensitive to the potential risk and opportunity for following the consolidation trend. With "branch staff" being the second most important driver of member satisfaction, the potential for cost savings through consolidation should be evaluated against the backdrop of the importance of the front office team to the perception of credit unions as being more consumer focused than their banking counterparts. 

“CUSI is an important tool for benchmarking and tracking its competitive differentiators," said CFI Group CEO Sheri Petras. "CFI Group is proud to have worked so closely with the industry to apply the proven ACSI methodology to evaluate current customer satisfaction, and how that satisfaction level will impact the ongoing success of its financial institutions."

Impact on Future Behavior

The CUSI model also measured the impact of each driver on potential future behaviors using the American Customer Satisfaction Index (ACSI) methodology. By using multiple questions around the importance of each driver and applying optimal weightings, the study was able to determine how the current overall satisfaction within the credit union industry could impact growth opportunities for the industry.

As shown below, all potential outcomes were strong, with retention of a member being most likely and the recommendation to a friend also being strong. While the score for using an additional service was also rated high, it is up to each credit union to take advantage of this future opportunity.

Relationship Growth Opportunities

In addition to analyzing member satisfaction, the CUSI research also determined product and service penetration among those surveyed. Similar to most financial institutions, the penetration of primary financial services (checking, savings, debit card) by credit unions was high across all age categories. For other product types, the penetration was lower than in the banking industry, and differs significantly across age groups (mostly caused by lifecycle needs).

Credit Union Product Penetration

Product Penetration by Age

Of more importance than product penetration, however is the purchase intent of the 400 random credit union members surveyed. Consistent with many other studies conducted for the banking industry, auto purchases are on the horizon for many households in the coming months. What may be somewhat unique to the credit union industry may be the high percentage of households that indicated a CD opening was in their future plans, possibly reflecting the older demographic mix at many credit unions.

Purchase Intent

What is important to note is that 'purchase intent' does not perfectly reflect reality, since people's financial plans and the reality of the economy, etc. can impact new account openings.

In addition, in light of the primary findings in this study, the potential for effective cross-selling can be significantly impacted by households doing more of their transactional banking through online and mobile channels. As online banking grows, interaction with branch staff will decrease.

This phenomenon will make it even more important that branch staff continue to have a strong interest in member’s well being, making sure that they (the members) are well aware of the additional products availability and the benefits of obtaining them through the credit union.

In addition to an increasing level of importance of the branch staff and all direct customer contact personnel, credit union marketers will need to find new ways to connect with members and to present product offers to members at the right stage of their buying cycle. This will require new technology tools and potentially new systems to better understand your customers and their needs.

Additional Resources

2013 Credit Union Satisfaction Index - CFI Group (May 2013)

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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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