An Interview With Chris Skinner on Building a Digital Bank

It is becoming more and more difficult for traditional banks to compete in an increasingly digital marketplace. With most bank systems stuck in the last century, the conversion of legacy technologies to new platforms with total reliability, security and resilience is a massive challenge.


How can today's banks evolve to a new model of servicing and processing, where the mobile internet allows consumers to bank wherever and whenever they want using an increasing array of devices? How can banks leverage their existing foundation to compete with new and nimble mobile-first competitors?

I had a chance to speak to Chris Skinner recently about his perspective on the evolution of banking, the emergence of new competition, winning the mindshare of an increasingly connected consumer and on the release of his newest book, Digital Bank: Strategies to Succeed as a Digital Bank (available on Amazon for $9.99 for the Kindle version or $17.99 in paperback).

Best known as an independent commentator on banking and the financial markets through the Financial Services Club blog and Chair of the networking forum The Financial Services Club, Chis is the author of several previous books covering everything from emerging regulations to innovation and new currencies. He is also Chief Executive of Balatro Ltd, a research company and a regular commentator on BBC News, Sky News and Bloomberg on banking issues.

In reading an advance copy of Digital Bank, I found that Chris provides a great overview of the digital revolution in banking from channels to systems to emerging currencies. He also provides in-depth analysis of the how incumbent banks such as Barclays to new start-ups such as Metro Bank in the UK, Alior Bank in Poland and FIDOR Bank in Germany are building for a digital future.

As several noted fintech followers mention in online reviews of this book, Digital Bank is the most recent must-have for anyone wanting to help their organization stay relevent in banking or for businesses wanting to better understand the impact of digitalization on the marketplace. 

What inspired you to write this newest book?

I've been blogging daily since the start of 2007 at the finanser.com. With the blog, I would write a series of four or five posts on a particular subject, like why branches were the wrong focus, how data is becoming the new banking battleground, why existing banks have challenges, what organizations are innovating in unique ways, etc. These posts were never edited or placed in any sequence, but provided a great foundation for potential chapters in a book. So, I finally got around to taking all of that experience and all those thoughts and personally editing them into a readable, digestible, logical book. 

What do you hope readers take away from your writing?

The overarching theme of Digital Bank is that banks are being fundamentally restructured and challenged by the Digital Age. From physical services through physical branches, we have rapidly become a business that provides digital products through digital relationships. That leap is not happening fast enough, however, as most banks are tied to their traditional operational, technological and physical structures. This book provides a roadmap to take that old bank into the new world, how it can be achieved, proof points as to why it is needed and lessons of what to do and not do. Anyone dealing with digital bank distribution through the mobile, social internet will find it useful.

What is the biggest challenge traditional banks face in their move to become a 'digital bank'?

We talk about a Digital Divide between the Haves and the Have-nots, and the same divide exists within banks between the Believers and the Non-Believers. Some bankers believe the future is all digital, some believe it is just another channel added to the existing branch-based network. It is the Non-Believers who are the challenge, as many of them will dismiss and hold back change. 

By way of example, those that built the bank do not want to destroy the bank they built, so they will do all they can to defend it. If they built a branch-based bank, building a digital bank that destroys much of the reason for the branch-based bank's existence is unnerving. So, they will block all efforts to digitise the relationship. That is the core challenge . . . how to convert the traditionalist decision makers to really commit to digital. Once you have that commitment, it's still not easy, but no bank will succeed if the management team is not truly committed to the program.

What institution(s) globally have made the greatest strides to embrace the future? Why?

There are quite a few stand-outs for me, from some of the major banks who are investing heavily in innovation projects, such as Citi, to regional banks who have reinvented their technologies, such as Commonwealth Bank of Australia (CBA), to smaller banks who are changing the rulebook, such as BRE Bank in Poland. The common theme in all of these banks is that they are truly commited to change. 

Citi has invested millions in innovation centers and proejcts across the world, as well as ripping open much of their processing to offer transaction banking as an API, for example. CBA has placed most of their core processing infrastructure in the cloud. Even though the internal management was pretty reticent about this change initially, once the CIO got the regulators endorsement and they moved forward, it made them far more agile as well as saving 35% of their cost base year-on-year for systems support. 

Finally, BRE Bank was being massively challenged by a new entrant called Alior Bank in Poland, a fully mobile-social networked bank. In response, BRE decided to reinvent the bank. They invested in a new core system, installed it over 14 months and, once completed, threw away the old bank and now call themselves mBank. You heard me . . . they shut down the old bank and replaced it with one fit for the Digital Age. I'm not saying everyone has to be so bold or brash, but when faced with bank competition fit for the Digital Age, you've got to do something fundamental to compete or your organization will no longer be relevant.

Are newer organizations (as opposed to traditional banks) better positioned for the future?

Yes and no. From a technology standpoint, newer organizations are obviously better fit for the future as they start from a clean operation. There's no legacy systems and there's no previous installs of branch networks, contact centers or online banking. So, they can really push the boat out for creating the right infrastructure and process for customer engagement at the outset. That's what Moven and Simple are doing in the USA, and we see other examples like FIDOR in Germany and Alior in Poland that are doing the same. 

However, new banks do not have the same bank relationships, branding, governance or knowledge of risk, compliance and audit that traditional banks have in their blood. That's why it took Metro Bank twice as long to launch in the UK as they wanted. They had to get the right management team, endorsed by the regulators, to open their doors. Then they had to get the capital to cover the guarantees of funds that the regulators demand for those customers they onboarded.

None of that is easy, and it takes deep pockets to get a bank licence and the guarantees that go with this. But, here's what stands out for Metro Bank . . . the fact that they were fit for the future with technology meant that they reinvented their digital bank services within three years of launch. They are on their second generation internet banking platform already. That's down to having the right technology operations from the get-go, to be able to be that nimble and quick. So, I would say that new players are fit for the future from a technology standpoint, but they need to be fit for the rules from a bank standpoint before they can really play.

If a bank wants to be positioned for the future, where should they start?

That is the question all banks are asking. Where to begin. I would rather start with 'where do you want to end up'?  Then build the transition path between here and there. Where's your vision for the future of your bank?  How radical is that as a departure from the bank you have today? What will be involved to get from here to there? Who is going to make it happen and by when?

That's all simple management change program thinking, but the hardest part is to build the vision because often we will be hampered by the thinking of where we are today. We have branches, we have contact centers, we have an online bank. You have to just dump that thinking from the start, when building your vision, or you will fail. That means bringing in fresh thinking, which will not be dogmaed by internal constraints or history.

Ideally, create a new team with a leader from outside the bank who can look over everything with a fresh pair of eyes and create the future without constraint. The hard part is then taking that team's thinking back into the bank, as it usually means cannibalising or destroying parts of the old bank to build the new bank. But it can be done. Again, it all goes back to how committed the CEO is to the process. If the CEO is committed, then anything can be achieved.

What is the biggest change we are going to see in banking in the next 5 years?

The biggest change is from a number of perspectives. From a regulatory point of view, there's the dull stuff about banks withholding more capital for a rainy day, better management of risk (especially liquidity risk), increasing competition and transparency, and financial inclusion (open banking for all). 

From a customer point of view, the beat towards mobility will continue. All banks are focused upon delivering killer financial apps for corporate and consumers today, and that will pan out into a digital wallet fight. Then it gets interesting, as banks will soon drop the focus upon the device - the cellphone - and move on to focus upon the customer experience. This is because the world is rapidly moving into digitizing everything. Putting chips inside a pair of glasses or a watch so that Google Glass or Samsung Galaxy Gear Watch can replace the laptop or the phone. Then we will start to put chips into walls, floors, ceilings, gutters, handbags, clothes, jewellery and lightbulbs (We already are doing this, in case you hadn't noticed). 

Eventually, everything everywhere will be communicating. From you to intelligent systems and services all around you, in the air, all day long. Like the Minority Report, everything will be intellisensing everything, and service will be augmented to be relevant at the point of your customer's context. This means that banks will move from device to wallet to understanding how to be a proactive, predictive enabler of commerce at the point of relevance to the customer. That battle is going to be a tough one for banks stuck with branches, as that's a digital data war. And that's what the book is all about, how to win customer mindshare as your audience interacts digitally with everything.

About Chris Skinner

Chris Skinner is best known as an independent commentator on the financial markets through the Finanser (www.thefinanser.com) and Chair of the European networking forum the Financial Services Club, which he founded in 2004. The Financial Services Club is a network for financial professionals, and focuses on the future of financial services through the delivery of research, analysis, commentary and debate and has regular meetings in London, Edinburgh, Dublin and Vienna. 

He is the author of nine books covering everything from European regulations in banking through the credit crisis to the future of banking and is a regular commentator on BBC News, Sky News and Bloomberg about banking issues.

More can be discovered about Chris here: http://thefinanser.co.uk/fsclub/chris-skinner/

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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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Rethinking the Multichannel Banking Experience

In response to customer demands, banks continue to invest in increased multichannel functionality and set a goal of delivering a consistent customer experience across all channels. The result is an environment where consumers have little incentive to choose one channel over another and where banks have are faced with increasing complexity and costs.

A better solution may be for banks and credit unions to limit the functionality of all channels and to instead simplify the process of moving a customer from their preferred channel to the 'best' channel for different needs, thereby improving the overall customer experience.

As I visit banks across the country, the majority are seeking to stem attrition and maintain customer satisfaction by providing consistent, integrated services across all channels and encouraging customers to self-select channels according to personal preference. In fact, nearly two-thirds of executives interviewed by CEB TowerGroup agreed that delivering a functionally consistent customer experience across all channels was a priority.

With over 60 percent of multichannel experience customers reporting that both web and branch service offerings were consistent, it seems early efforts are paying off. However, this accomplishment has come at a price: trying to develop an 'omnichannel' experience is causing customer preferences to converge and overall transactions to increase, further increasing the complexity of channel maintenance, resulting in higher costs and amplified risks without the customer experience benefits desired.

Growing revenue, reducing costs, and improving customer loyalty demands that retail bank executives consider a more strategic and nuanced approach to multichannel development according to recent research from CEB TowerGroup, entitled "Rethinking Multichannel Strategy: Improve the Customer Experience Through Channel Differentiation and Proactive Guidance'. The research recommends three steps that bank and credit union executives should take to improve their multichannel strategy:

1. Differentiate channel functionality
2. Proactively guide consumer's choice of channels
3. Formalize the process of evaluating channel performance

The Omnichannel Dilemma

Consumer interest in online and mobile banking has gone unabated for several years now, with digital channel use increasing significantly. As consumers manage their finances in the context of new technology such as smartphones and tablets in conjunction with online banking, branch and ATMs expectations have also increased, requiring banks to provide custom applications and improved service through all channels.

Unfortunately, the increased volume of digital transactions has not resulted in comparable reductions in use of traditional channels or the promised cost savings. Instead, banks and credit unions are adding layers of complexity and costs while trying to maintain a high level of customer service.

Source: CEB TowerGroup

Interestingly, according to the research from CEB TowerGroup, while the transaction volumes continue to increase for digital channels, consumers still say they prefer a human touch to their banking which could lead to an even distribution of channel use, making it difficult to please everyone. In addition, as financial organizations monitor customer preferences, consumers tend to 'want it all' since there is little financial incentive to differentiate what they 'want' from they 'need'.

Providing more choice and total functionality across channels increases both cost and complexity as shown below.

Despite functionally consistent offerings across channels, the CEB TowerGroup research also found that technology-focused customers gave lower marks for communication and service, indicating possible confusion on the part of the customer due to this underlying complexity.

Differentiating Channel Functionality

Instead of trying to make all channels consistent in their capabilities and functionality, CEB TowerGroup recommends building a differentiated functionality for each channel that is consistent with the customer experience strength of the channel. This is required as an interim step towards a process that helps guide the consumer to the best channel for any interaction with the institution as shown below.

Differentiating the channels requires assessing the customer's channel preferences and aligning these preferences against the best capabilities of a channel, the incremental costs to deliver, usage patterns and the potential for a positive customer experience.

Contrary to what many bankers may think, customers don’t demand a wide range of choice of channel according to the research. Rather, customers are often confused by the increased choice and prefer whichever channel requires the least amount of effort. In other words, customers who demand the ability to do any banking function in the channel of their choice are in the minority.

According to Nicole Surgill, research director of retail banking at CEB TowerGroup, "You have to define what the customer cares about and realize that isn’t the same as what we care about. 'I want to deposit a check when I want' or 'I want to get a loan for a house when I want' or 'what is the easiest and most understandable way for me to do that?'"

Implementing a new, simpler process for the customer doesn’t always equate to cost savings for the bank. But we still need to make this experience better or the process better. The challenge is defining what makes the customer experience better and then tying it to reducing attrition and increasing the customer’s willingness to buy more.

Internal capabilities and development costs of different channels are invisible to the customer, so banks and credit unions should determine best-fit channel functionality for each customer need. By simplifying service offerings and tailoring each channel to serve specific customer needs, organizations can limit and specialize channel functionality, reducing costs and complexity and improving the overall customer experience.

We also need consistency in the channels where customers are most likely to CROSS channels. For example, Sturgill emphasizes, "Opening a new account or seeking advice on a product or service or trying to resolve a problem – that’s where a customer may start in one channel and finish in another. We need to focus on where customers will cross channels and simplify the transition from those channels, instead of focusing on doing it all in every channel."

Proactively Guiding Choice of Channels

As stated above, customers don’t demand choice of channel. Rather than encouraging customers to select the channel of their choice, the CEB TowerGroup research recommends that retail banks should proactively guide customers to the channel(s) that will enable them to accomplish each task with minimum effort. Done well, the process will guide the customer to the lowest effort channel while still satisfying the customer's desire for choice.

However, there are two main obstacles to effective guidance – the first is a lack of experience with non-branch channels. This prevents many customers from choosing the best-fit channel for their needs. Secondly, when customers have chosen a channel, they are reluctant to switch even if another channel promises easier resolution. In other words, old habits may be hard to break.

In order to overcome these obstacles, banks should identify common service triggers and step in at these points to preemptively guide customers to the best-fit channel. The goal is to provide a better path for the customer to follow and to avoid customer disengagement as they are served through different, more effective and efficient channels.

One of the most effective ways to preempt channel use that is not best for the customer (or the bank) is through either an immediate event-based email or an SMS message that provides links to the appropriate channel. During this communication, FAQs are very effective at proactively answering the potential questions a customer may have.

Evaluate Channel Performance

Following the first two steps of channel differentiation and customer guidance, banks and credit unions should create a formalized process to evaluate the results. To motivate channel migration, institutions could employ branch interactions to drive selection of online channels, proactively guiding the customer to the best fit channel. An exit survey would then be a good assessment of customer satisfaction with new channel experiences.

The purpose of this measurement process is to continually reassess and improve channel functionality that will lead to reduced costs and duplication of efforts as well as a better customer experience. This will also reduce process abandonment which is one of the 'silent killers' of new account opening, cross-sell, increased engagement and retention.

Overall, the goal is to create a multichannel experience that optimizes both the efficiency and effectiveness of each individual channel or group of channels for any specific purpose as opposed to trying to be all things to all people. This reduces redundancy and improves the ability for each bank and credit union to provide the level of service desired by the customer at any touchpoint.

A discussion with Nicole Sturgill, Research Director, Retail Banking at CEB TowerGroup on improving the customer experience in a multichannel banking environment. 

Additional Resources

Rethinking Multichannel Strategy: Improve the Customer Experience Through Channel Differentiation and Proactive Guidance - CEB TowerGroup (April 2013)

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