Former FDIC chairman and Bank Director’s publisher, the late L. William Seidman, advocated for a strong and healthy U.S. banking market. In this panel discussion led by Bank Director CEO Al Dominick, three CEOs—Greg Carmichael of Fifth Third Bancorp, Gilles Gade of Cross River Bank and Greg Steffens of Southern Missouri Bancorp—share their views on the opportunities and threats facing banks today.
Over the past decade, regional champions have emerged as strong performers in today’s banking environment, entering new markets and gaining market share through acquisitions. In this panel discussion led by Scott Anderson and Joe Berry of Keefe Bruyette & Woods, John Asbury of Union Bankshares, Robert Sarver of Western Alliance Bancorp. and David Zalman of Prosperity Bancshares share their views on strategic growth opportunities in the marketplace, and why culture and talent reign supreme in M&A.
Customer experience in banking used to be about simply offering the best digital banking experience. But today, customer experience (CX) is a competitive battleground. Consumers aren’t just comparing their experience at your bank to other financial institutions, but to successful online retailers like Amazon and Zappos, as well.
Fortunately, building a differentiated customer experience is well within the reach of traditional banks and contrary to popular belief, getting there doesn’t require a major overhaul to existing processes, or even waiting until the entire digital or CX strategy is mapped out. It just requires bank leaders to rewrite one rule: Instead of waiting for customers to come to you for self-service, go to them with proactive service.
Improving customer experience in banking means making engagement proactive and personal.
A great customer experience can mean different things to different people, but there’s one common thread: ease. Ask your customers to name the most important thing you can do to win their loyalty, and you’ll probably hear, “make it easy for me” as the most common answer.
While simple in concept, this is at odds with how most companies serve their customers. If you take a look at your bank’s current CX model, chances are you’ll find it relies heavily on self-service and one-to-many messages. Mobile apps, customer portals, community forums and chatbots are great tools for customers seeking answers, but customers still have to do the work in reaching out to the bank and asking the right questions. Even then, customers have to sort through tons of information to find content that’s relevant to them.
As easy experiences become a baseline expectation for customer loyalty, companies must make the switch to guiding customers with proactive CX. Unlike self-service, proactive service takes the weight off of customers by eliminating the need to search for answers. Instead, it predicts the information that customers will need based on where they are in their journey. Then, it delivers this content as personalized experiences, directing customers to the information they need before they have to ask.
The content for a better banking customer experience is there—it just needs the right timing.
So where should banks start? The best way to begin is to identify the moments in the customer lifecycle that are causing the most friction. This can be accomplished by looking at call logs, the bank’s more popular web pages, common chatbot questions and FAQs. (Relay has provided a step-by-step guide on how businesses can do this well.)
Map out these interactions and reduce any unnecessary complications. Then, guide customers through each step by delivering the right content at the right time, with the right context. By focusing on problems that are common to all users, your bank can automate proactive, individualized service that empowers customers.
As an example, $152 billion asset Citizens Financial Group, headquartered in Providence, Rhode Island, struggled with high drop-off rates in its student loan application process. The forms required a lot of back-and-forth to collect necessary information from each applicant, creating a negative customer experience. Citizens needed to improve its student loan application pull-through with automated and proactive mobile messages that knew where customers were in the application process. An automated process that delivers relevant information and proactive, timely reminders has resulted in a 10 percent increase in loan completions, and the process is now 40 percent faster.
The process for home equity lines of credit (HELOC) is another area where banks could improve the experience. Customers are often stumped during the application process, which can lead to costly outbound calls to the customer to help them through. Once approved, customers usually have a number of questions: What are the benefits? What can I use the line of credit for? How do I draw down? As a result, lines of credit are underutilized. Instead of relying on the customer to seek out these answers, banks can educate and engage customers at every stage in the process.
The banking experience can’t abandon self-service—but proactive service will preempt it.
In order to succeed in this new era of heightened CX expectations, banks need to invest in channels that enable relevant, personalized and proactive engagement with customers. By making it easy for customers to get exactly what they need through their preferred channels, your bank could be one that customers are eager to use.
Banks are discovering that the stronghold they once held on payment processing, a thriving revenue-generating machine for their industry, is beginning to slip away. Corporations are finding fintech companies, a community of organizations built upon entrepreneurial business models, disruptive technologies and agile methodologies, can serve their payment needs better. Unlike organizations in any other industry, financial service organizations are enduring exploding information technology costs at a time when major leaps in technology seem to occur daily. This increasing pressure on banks comes at a time when client expectations and behaviors continually shift to the latest modernized convenient options with no expected cost to them, all while regulators pile on new rules. Banking organizations are under considerable stress, and lack the strategic bandwidth to modernize their core payments infrastructure.
Banking’s legacy infrastructure is built on check-dependent data structures that achieve scale by volume. They are managed by outdated operating models and designed on the physical movement of payments. However, payment volume is no longer the basis for achieving economies of scale. Fintechs build smart technologies deployed in nimble fashion to right size applications, architected to streamline information capture and transform simple data into actionable intelligence.
The legacy core platform has seen its share of changes in technology, products and regulations. Generations of bankers have tried to reinvent their legacy core platforms for decades. Yet the systems survived each generation, unrecognizable from their original state and containing endless numbers of integrations pinned to it. Like a massive spider with hundreds of legs, the core has spun a web so complex that even the brightest banking IT professionals have been tangled up by its beautiful complexity. As the payments industry evolved, it began to do so in singular fashion, feature by feature, product by product. What remains is a core littered with integrations that at the time were modern, but today just difficult to support and expensive to manage.
Increases in regional, national and sector-specific regulatory scrutiny and oversight create major obstacles due to the lack of available insight of legacy core technology. Much of the allocated working capital at financial institutions is dedicated to compliance-related initiatives rather than put to use on modernizing or transforming payment-related infrastructures and platforms. The legacy payment silos of the past provide little to no data insight capabilities resulting in constant reactive work efforts to acclimate products to the fluid nature of consumer and corporate payment behaviors.
Many banks are on defense in the payments arena, late to market, missing premium-pricing periods, and struggling to gain market share. The community of companies in the financial technology space has been quick to step in, developing new products in old arenas, introducing easier to manage data exchange protocols and adding robust business intelligence; stripping some of the market from traditional bank participants. The arduous task of replacing or repairing the core payment platform is beyond reach for most banks. Many banks are looking to the fintech community, once thought of as augmented service providers, to become strategic partners charged with overhauling and replacing the legacy core. This is not a retreat from payment processing but rather the recognition that financial technology companies are better positioned to respond quickly to change. Even better for the banking system, fintechs are no longer at odds with banks and today’s fintechs are collaborating at every opportunity with banks.
Bankers can no longer turn their heads and wish the problem away. The core platform is holding the organization back. Replacing or repairing it are no longer viable options in today’s dynamic payments industry. Replacing the core with an elusive payments hub is not only impractical but also nearly impossible, unless the bank has a lot of money to spend and access to a lot of talent. However, all is not lost. The answer is an overhaul of your payments strategy. That strategy should be realistic in that payment processing has become an ancillary service for most banks and the bank would be better positioned focusing on its core competencies. As payment behaviors continue to shift, those that look to strategically source their payment services may fare the best. Demands from regulators, costly compliance operations and stricter evolving information security protocols are only going to continue and ultimately render the payment infrastructure obsolete. Not processing payments on your core platform is smart business.
Banks need to be more agile to face the challenges in today’s marketplace, and boards and management teams need to focus on strategy more frequently. Brian Stephens of KPMG outlines the strategic issues impacting banks and how they should be addressed by bank leaders.
Financial technology, or fintech, is creating a dynamic range of new services and products for banks. Much of the initial discussion about fintech focused on disruption and replacement of traditional banking products and services.
Now, fintech is evolving and is creating new opportunities for banks to expand their products and services, as well as creating various non-interest revenue possibilities through partnering and joint venturing with fintech entities.
Increasingly, fintech entities such as online lenders and payment systems are turning towards partnering and joint venturing with banks for a simple reason they need banks. They need banks because banks can hold federally insured deposits and have the experience and track record of existing and prospering under various federal and state regulatory regimes. However, working with a fintech is not necessarily a voyage into uncharted waters while regulators may adapt with new technologies, banks are comfortable working in the existing banking regulatory ecosystem.
Some existing examples of fintech entities working with banks include:
licensing online lending platforms
licensing online customer interface platforms
using banks as insured depository support for payment systems
developing cryptocurrencies
developing digital tools that allow banks to mine and harness data for more efficient operations
State and federal regulators are expanding their ever-advancing regulatory agenda to cover fintech’s unique aspects. Indeed, the Office of the Comptroller of the Currency recently announced plans to start issuing Special Purpose National Bank charters to fintech entities, which the state regulators are heavily criticizing. Fintech entities are debating whether they will seek a federal charter in its proposed form.
Nevertheless, if your bank is considering working with a fintech entity, you should consider the following issues:
Strategic Plan: The first, and primary issue that your bank should consider is whether the fintech opportunity fits your bank’s strategic vision and innovation plan. If the opportunity does not, the relationship may not only be not successful, but ultimately detrimental to your bank’s efforts in this area.
Vendor Management: Vendor management is an especially critical area because most banks will choose to work with a fintech entity that owns, develops and services the technology. The key for banks in this area is know their fintech partner and understand the deal. Fintech partners can range from early-stage start-ups to mature entities. Many of these fintech entities have little bank regulatory experience and may be learning as they develop and deploy their products without the legacy regulatory experience. They may also propose contract terms that expose banks to unnecessary risks. The challenge for banks is to conduct thorough due diligence on their fintech partner and understand the agreement.
Cybersecurity: Because essentially all fintech-based products and services are online, cybersecurity is a significant consideration. Additionally, most fintech accumulates and evaluates customer data, which is very attractive to cybercriminals. The critical issue for banks is the ability to ensure that their fintech partners are employing best-of-class cybersecurity practices, not simply regulatory compliant cybersecurity, because the cybercriminals are almost always one step ahead of their targets, as well as the regulators. This will also help the bank protect itself in the event of a data breach or an attack.
Data Privacy: If your bank is working with a fintech, banks should ensure that there are provisions to protect your customer’s data so that it is not used or disseminated in a way that violates the law, as well as provide adequate disclosures to your customers about how their data is used.
Consumer Banking Laws and Regulations: If a bank is working with a fintech entity in providing any type of consumer services, federal and state consumer lending laws and regulations will likely apply to that activity. The combination of new technologies and a fintech entity without a great deal of regulatory experience could spell trouble for a bank partner.
Bank Secrecy Act/Know Your Customer/Anti-Money Laundering: BSA/KYC/AML issues remain critically important for regulators and fintech entities working with banks need to be fully versed in them.
Even considering the regulatory and related issues, working with a fintech is not a voyage into uncharted waters. The tide is also changing, and fintech can provide your bank potentially great opportunities to grow and develop as technology evolves and as fintech entities mature in this sector.
Nichols shares how CenterState interviewed 200 randomly selected potential customers about what they thought about the bank’s pricing and value of its checking accounts. The pricing ranges from a fee of $5.95 to $9.95 per month with a variety of ways to avoid this monthly fee (balance waivers, minimum transactions, etc.) The accounts also have the typical features included—online banking and bill pay, mobile banking and an expanded ATM network. It was also noted that this pricing was lower than competing banks and within the range of 75 percent of banks nationwide. Therefore, the pricing was reasonable and the features, while undifferentiated, were comprehensive.
The feedback from these consumers was that 34 percent of them had negative comments about CenterState’s checking line-up. Clearly, this is a number with lots of room for improvement.
Nichols didn’t go into much detail about the negative comments, but the essence of those comments are similar to StrategyCorps’ own consumer market research about consumers’ attitudes about checking account products.
Fees on Checking Accounts
First, almost unanimously, consumers don’t like to have requirements with a penalty fee structure for not meeting these requirements to access to their own money, especially when those requirements are not fully and clearly disclosed. Very few consumers have a basic understanding of the banking business model, thus don’t understand the business need for these requirements. Even those who do understand banking don’t like these requirements. The reason is the same, they don’t like to pay for access to their own money.
Second, despite the intrinsic value of a consumer checking account—the fact that it’s insured, customers have zero liability debit cards and a myriad of choices on how to bank, including online, mobile, ATM, and in branch, just to name a few—consumers feel it should be “fee-less” to have all this. Why? In short, financial institutions intentionally “sold out” this intrinsic value with free checking. Why pay for these things when they can be had at another financial institution in most cases, literally down the street? Selling out and totally diminishing this intrinsic value was the ante to get to the extremely lucrative source of nonsufficient funds and overdraft (NSF/OD) revenue. While it was the financially right thing to do at the time, the free checking hangover continues to plague financial institutions as they try to get customers to accept monthly recurring account fees to replace declining NSF/OD fees.
How does a financial institution restore the underlying value of a checking account in the eyes of consumers to warrant a more positive perception? At StrategyCorps, what we’ve seen work is NOT to spend time, money and marketing dollars trying to persuade customers that the checking account with traditional bank benefits is worth paying for. Trying to persuade consumers that traditional checking is valuable enough to pay for it, when it has been free for nearly two decades, is a tough proposition.
Instead, spend time, money and marketing on offering new product benefits that consumers will view positively. Which benefits are these? In general, these benefits have to be ones that are already proven in the marketplace that consumers view positively and are willingly and gladly paying for. Examples of these new types of benefits are cell phone insurance, roadside assistance and mobile merchant discounts. Nearly two of every three consumers already view these types of benefits positively enough to pay for them every month (think Verizon, AAA and Amazon Prime). These new product benefits either save consumers money when they have to spend it (effectively making them money) and/or provide protection to everyday items or situations.
So, stop trying to talk your customers into liking your traditional checking account with undifferentiated, traditional benefits they don’t appreciate despite the inherent value of the account. Rather, modernize your checking accounts by adding some new product benefits that are already viewed as valuable.
To see more of our consumer research videos including a variety of topics in banking, mobile apps and more, visit strategycorps.com/shape-your-story.
Shop for a new car, a cell phone plan, a cable TV package or a major appliance these days and you’ll find one consistent and very successful product strategy–Good/Better/Best (GBB).
GBB is a three-tiered strategy conceptually defined as follows:
Good: A basic level of value for price sensitive customers. Good offers a minimal amount of added value to differentiate yourself from your competitors and/or to marginally satisfy comparison shoppers. For example, coach class airline tickets would fit in this category.
Better: An in-between level of value for customers who appreciate some level of value and are willing to pay a certain price to receive it, because they are still a bit price sensitive. The amount of value added above Good depends on the product type and marketplace, but the incremental level of value must be noticeable. For example, business class airline tickets would be better than coach but not as expensive as first class.
Best: An advanced level of value for those customers who are actively looking for maximum added value. Price sensitivity is not a priority. The amount of value added above Better has to be all that is economically possible to add and still maintain acceptable profit margins or strategic goals. First class airline tickets would be a Best option when flying.
Every successful GBB design works when the product offerings build on each other. Your Good product is fundamental. Better is Good plus more. Best is Better plus more. GBB provides choices by comparison, easily showing how the price changes when different features are added or subtracted. As a result, buyers will be content that they decided to buy only as much as they needed. The power behind GBB is simplicity and familiarity.
While buyers appreciate choice, too many choices are counterproductive. The paradox of choice theory holds that too many options discourages rather than encourages buyers to buy. Why? Because it increases the effort that goes into making a buying decision. So buyers decide not to decide and don’t buy your product. Or if they do buy, the effort to make the decision often diminishes from the enjoyment derived from the product. In short, buyers do not respond well to choice overload and GBB keeps it simple. It’s very familiar to think in terms of three when buying things. Popular use of GBB product design by retailers for commonly purchased items has conditioned the typical buyer to be at ease with this product design.
GBB simplicity also works well for the sellers of the product. There are only three options to understand and communicate to a buyer. Plus, sellers feel credible as GBB appeals to a wider market, providing something for everyone without requiring everyone to just buy the premium option.
So how does this all relate to your consumer checking line-up strategy? Actually, it’s very natural, because you can align your GBB checking products with the three types of checking account buyers:
A fee averse buyer wants free checking if it’s available or the cheapest account you offer.
A value buyer is most focused on account benefits and is willing to pay for the account if there’s a perceived fair exchange of value.
An interest buyer demands some yield on their deposits and also expects to be rewarded for being a productive or loyal customer.
In addition, nearly all three checking products under a GBB structure generate enough average annual revenue to cover the annual costs to service a typical checking account relationship, except for totally free checking.
Here’s how that breaks down, along with the comparative average annual revenue from each GBB checking product type and typical distribution of these accounts in a checking portfolio:
Product Strategy
Buyer Type
Checking Product Type
Average Annual Revenue
Percentage Range of Total Accounts
Good
Fee Averse
Totally Free or Conditionally Free (minimal requirement to avoid fees)
$308
$390
30%-50%
Better
Value
Flat Monthly Fee
$563
25%-40%
Best
Interest
Interest
$636
10%-15%
Source: StrategyCorps’ Brain database tracking the financial performance of nearly 5 million checking accounts. Average annual revenue is the total of all checking related fees (including debit interchange) per respective account type and the allocated net interest income from the account type’s respective annual average DDA balance.
So what does a GBB-based checking line-up look like for a financial institution like yours? Here’s a sample GBB checking line-up in action as shown on sales/marketing materials.
As your financial institution works to have a more successful checking line-up that’s modern, customer engaging, competitively different and optimally financially productive, learn from the successful product design strategy of GBB. Don’t overthink it, over complicate it or, in general, overdo it. Your customers will be happier and your bottom line will be healthier.
After a period of rapid growth, the fintech sector has reached, if not full maturity, at least the end of its adolescence. With customer acquisition growth rates slowing among digital wealth management services, otherwise known as robo-advisors, a number of industry participants have adjusted their strategies in response. One development reflecting this process is the increasing tendency among large banks and other financial institutions (FIs) to enter the sector by purchasing some of the earliest and most successful innovators in the field.
This marks a change from the approach more commonly seen early in the fintech revolution, when large FIs were more likely to take positions as minority shareholders in promising fintechs than to buy them out. Fintech buyouts hit an all-time high in 2015 as banks rushed to stake their claim in this disruptive market, with KPMG and CB Insights showing fintech investments growing from $3 billion in 2011 to $19 billion in 2015. A CNBC.com report on the sector sees no signs of this trend abating in 2016, with big banks expected to continue to favor outright purchases of technology innovators in the sector over investing in startups.
Other banks and FIs have chosen to pursue different strategies, either forming partnerships with leading fintech firms or, in the case of some of the largest FIs such as Fidelity and Schwab, electing to build their own digital wealth management platforms. Fintech firms, in the meantime, continue to rely on product innovation to attempt to set themselves apart from their competitors. As sector growth moderates and truly disruptive innovations become more difficult (and expensive) to develop, these startups must make difficult decisions about whether to attempt to go it alone or to merge or partner with existing financial industry players.
Outside of a few companies willing to devote the tremendous resources necessary to build their own platforms, the majority of FIs entering the fintech space have done so via purchases or partnerships. While partnerships can be a viable method for entering the sector, some banks and other FIs prefer to own the technology their customers use to access their financial information. For these firms, purchasing an existing fintech company offers the advantage of speeding time to market and gaining the expertise of the tech-savvy founders or operators of the acquisition, in addition to controlling the use and development of the acquired technology.
In an interview for this article, Charlie Haims, vice president of marketing at cloud-based portfolio management service MyVest, expanded on this idea: “The larger FIs historically choose to build a new innovation in-house to tightly integrate it with the rest of the company. But now we are seeing an increase in acquisitions, like BBVA with Holvi, Groupe BPCE with Fidor, Silicon Valley Bank with Standard Treasury and many in wealth management like BlackRock with FutureAdvisor, Invesco with JemStep, and Northwestern Mutual with LearnVest.” Haims attributes this trend to sizable VC investment in fintech startups a few years back, leading to the recent buyouts of VC-backed startups whose success in the field attracted suitors.
While owning your own fintech platform may seem attractive to banks and other FIs looking to enter the space, the truth is that the cost of this approach, whether via purchasing an existing startup or building your own platform, is by no means trivial. A price tag upwards of $100 million to build a comprehensive digital wealth management platform is not unknown. For many banks interested in entering the field, finding a technology partner is perhaps a more practical way of gaining access to the industry. Haims agrees: “For smaller FIs, the best approach is often partnering with leading service providers or startups to quickly adopt the best-of-breed for a given fintech innovation, and this still seems to be the case today.”
MyVest offers its enterprise wealth management software platform to FIs such as banks, broker-dealers, RIAs and service providers. Haims cites banks as being particularly well-suited to use the company’s service to “help them bridge silos across their trust, brokerage and RIA divisions, so they can run a smoother operation and provide a holistic customer experience on a single, unified platform.” The company also has channel partnerships with Genpact Open Wealth and Thomson Reuters Wealth Management “to offer a combination of wealth management technology and services to FIs.”
In addition to digital wealth management, banks have formed partnerships across a variety of other fintech platforms, including startups in the crowdfunding and direct-to-consumer loan sectors. In the former category, BNP Paribas has inked a partnership deal with SmartAngels, which provides a platform for investing in crowdfunding deals; in the latter category is JPMorgan Chase’s partnership with On Deck Capital, which provides online small business loans.
As the industry matures, the competition among fintech sector participants has become increasingly fierce. In the digital wealth management field, independent robo-advisors now face the challenge of competing with large FIs such as Vanguard and Schwab, which have attracted the bulk of new robo-advisor assets since entering the space.
One prominent robo-advisor, Personal Capital, has engaged a private equity firm to help it consider its financial options, leading some to speculate that the firm is seeking a buyer. Other digital wealth management platforms, such as Wealthfront and Betterment, have stressed their dedication to innovation as a major factor in helping them stay competitive. Industry expert Craig Iskowitz has outlined the challenges facing such firms as their growth slows in an article on his Wealth Management Today blog. In the article he suggests that, rather than going head-to-head with industry behemoths for assets, a hybrid model of “selling to consumers as well as advisors, along with the B2B model, will soon be seen as the best way to succeed in this market.”
Among digital wealth management advisory services continuing to pursue the direct-to-consumer model, Iskowitz cites the Acorns robo-advisor platform as notable for experiencing robust growth by pursuing a millennial-friendly strategy. The company’s mobile app allows users to link their bank or credit card accounts to the firm’s platform and automatically invest the spare change gained from rounding up transactions to the nearest dollar in an electronically traded fund, or ETF, which is a diversified portfolio of securities that can be valued and traded at any time during the trading day instead of after market close like a mutual fund.
Customer experience in banking used to be about simply offering the best digital banking experience. But today, customer experience (CX) is a competitive battleground. Consumers aren’t just comparing their experience at your bank to other financial institutions, but to successful online retailers like Amazon and Zappos, as well.
Banks are discovering that the stronghold they once held on payment processing, a thriving revenue-generating machine for their industry, is beginning to slip away. Corporations are finding fintech companies, a community of organizations built upon entrepreneurial business models, disruptive technologies and agile methodologies, can serve their payment needs better. Unlike organizations in any other industry, financial service organizations are enduring exploding information technology costs at a time when major leaps in technology seem to occur daily. This increasing pressure on banks comes at a time when client expectations and behaviors continually shift to the latest modernized convenient options with no expected cost to them, all while regulators pile on new rules. Banking organizations are under considerable stress, and lack the strategic bandwidth to modernize their core payments infrastructure.
Financial technology, or fintech, is creating a dynamic range of new services and products for banks. Much of the initial discussion about fintech focused on disruption and replacement of traditional banking products and services.
Shop for a new car, a cell phone plan, a cable TV package or a major appliance these days and you’ll find one consistent and very successful product strategy–Good/Better/Best (GBB).