Technology has always been integral to banking, bringing both speed and efficiency to a transaction-intensive business. But in recent years, technology has stepped onto center stage as a prime component in every bank’s growth and distribution strategy. Technology has, in effect, gone from being a way to save money (a crucial function that it still fulfills) to a way to make money. Much of this activity is being driven by the continued growth of mobile and online banking.
In an effort to highlight the importance of technology and the evolving partnership between banks and their financial technology providers, Bank Director held its second annual FinTech Day today at the Nasdaq MarketSite in New York. The event brought together senior executives from banks, technology companies and investment firms to create a dialogue between these important groups, encourage cross-fertilization and build a foundation for collaboration.
This year’s event also featured Bank Director’s inaugural Best of FinXTech Awards, which recognizes examples of innovation and collaboration between banks and their financial technology providers. The awards have been given to five banks and their technology partners, chosen by Bank Director from among 10 finalists.
The five winners are:
Univest Bank and Trust Co. in Souderton, Pennsylvania, and nCino in Wilmington, North Carolina. The project: Developed a cloud-based, end-to-end small business loan origination system that enabled Univest to meet the challenge of aggressive alternative lenders that are pushing into that important lending market.
CNLBank in Orlando, Florida, and CheckAlt in Los Angeles, California. The project: Jointly developed a new solution for remittance processing that greatly reduced the volume of payment exceptions, resulting in reduced costs and improved commercial client retention. In December 2015, CNLBank was acquired by Wayne, New Jersey-based Valley National Bancorp.
Somerset Trust Co. in Somerset, Pennsylvania, and Malauzai Software, Inc. in Austin, Texas. The project: Developed a mobile banking solution that allows Somerset retail banking customers to securely check balances, use picture bill pay and remotely deposit checks from any location of device.
Metro Bank in Harrisburg, Pennsylvania, and BizEquity in Wayne, Pennsylvania. The project: Developed a private label version of BizEquity’s online business valuation service, available through Metro’s website, that is used as a tool to bring prospective business customers into the bank’s branches. In August 2015, Metro was acquired by Pittsburgh-based F.N.B. Corp.
City National Bank in Los Angeles, California, and MineralTree in Cambridge, Massachusetts. The project: Developed an online business-to-business, invoice-to-pay solution that enabled the bank to differentiate itself from its competitors and attract new corporate customers. In June 2015, City National was acquired by Royal Bank of Canada.
The five winners were honored today at FinTech Day in New York. The other five finalists were USAA and Daon Inc., Seattle Metropolitan Credit Union and D+H, First Financial Bank and StrategyCorps, Central Bancompany and Ignite Sales, and Metro Bank and Zopa, both located in the United Kingdom.
Is it time for banks to start using Facebook profiles to offer a loan? Or a person’s Gmail account to verify an identity? A growing number of fintech start-up companies say so.
Banks have traditionally relied on credit bureaus to supply information not only about a person’s FICO score, but also to verify identity with data such as addresses. But sometimes, these data sources come up short. Tommy Nicholas, one of the founders of New York-based startup Alloy, says he has a few banks trying out his company’s platform, which basically allows a la carte access to a variety of traditional and nontraditional data sources to verify a customer’s identity, including credit bureaus as well as services that scan social media profiles or email accounts.
The idea is to make it easier for a bank to verify someone’s identity when traditional sources fall short, for instance, the person moved recently and the new address isn’t showing up on the credit report. “You end up asking half your customers to go find a phone bill and send it to you, not to mention you have all this manual work to do,’’ Nicholas says. “It adds a lot of friction.”
Alloy is trying to get traditional commercial banks interested in the technology for verification purposes, although its use to approve loans may be a ways off. Nonbank lenders already are using a host of online and offline data to make credit decisions, especially micro-finance lenders in developing countries that lack functioning credit bureaus. Some lenders are going so far as to analyze behavioral data to make credit decisions. Smartphone data, for example, can tell a lender that you regularly use a gambling app, which could be a black mark on your alternative credit score. Customers have to agree to provide lenders with the smartphone and social media data before they can be approved for credit. Facebook recently applied for a patent to use data on its users for loan underwriting—if your friends’ average credit score met a minimum, that could be a sign that you were a good credit as well, because you associate with people who have good credit.
Lenddo, which typically works with banks in emerging markets but recently began offering its service to U.S. financial institutions, has an algorithm that assigns a non-traditional credit score based on a variety of data to predict your willingness to pay back your loan. It also verifies identity using non-traditional data, such as Facebook profiles and email accounts. Socure uses what it calls social biometrics, where it pulls data from sources such as email, phone and social media accounts to create a risk score for fraud detection. Customers have to opt in to share their data. Other companies, such as Puddle, allow people to build a trust network online to give small dollar loans to each other. Everyone contributes something to the pool, and the more people you add to your trust network, the more you are able to borrow. Paying back your loan on time increases your trustworthiness.
Advocates of the use of alternative data, like Daniel Castro, the director of the Center for Data Innovation in Washington, D.C., say the plethora of online and offline data on each person is actually making it easier to detect fraud because it’s very difficult to sustain a fake identity online that will pass scrutiny. For example, if you worked somewhere for years, you probably have LinkedIn contacts who worked at that same employer. According to Castro, it’s extremely hard to fake your connections to multiple legitimate people. “More data can be useful,’’ he says. “Long term, every bank will be integrating more data sources. It will just be malpractice on their part not to, because it will reduce risk. It will just take awhile before they figure out the best way to do that.”
John ReVeal, an attorney at Bryan Cave, says the new technologies raise questions about complying with existing banking laws. For example, the Fair Credit Reporting Act applies both to credit and deposit accounts, and consumers have a right to know why they were rejected for either type of account. That could turn some of the new data providers into de-facto credit reporting agencies, he says. Additionally, banks may have to answer questions from their regulators about how they use alternative data to make credit decisions, and ensure such decision-making doesn’t violate anti-discrimination laws.
Will the new technologies provide a better way to analyze credit and approve accounts? That remains to be seen. For now, banks and alternative providers are experimenting with the possibility of augmenting traditional sources, rather than replacing them.
Small and midsized banks should continue to outperform the market, but “challenger banks” are positioned to take on even more market share. Tom Michaud, president and CEO of Keefe, Bruyette & Woods, identifies these “challenger banks,” which include innovators such as Silicon Valley Bank and Opus Bank, growing due to a focus on technology and niche expertise, and strong performers such as Bank of the Ozarks and Pinnacle Financial Partners, more traditional models with strong cultures that attract talent. Speaking to the audience at Bank Director’s 2016 Acquire or Be Acquired Conference, Michaud outlines expectations for the industry in 2016, including exposure to commercial real estate, a receptive IPO market and whether we’ll see more partnerships between banks and fintech companies.
Within the past 18 months, two of the industry’s more innovative banks have made some seemingly odd acquisitions. McLean, Virginia-based Capital One Financial Corp., in October 2014, acquired Adaptive Path. The Spanish-based BBVA (Banco Bilbao Vizcaya Argentaria) acquired Spring Studio in April 2015. The common thread between these acquisitions? Both are San Francisco-based user experience and design firms.
Banks are seeing a critical need to improve customer experience, says Norm DeLuca, managing director of digital banking at Bottomline Technologies, a technology provider for commercial banks. He believes that changing consumer expectations and competition both within the industry and from fintech startups are contributing to a heightened focus on user experience. “One of the biggest differentiators that fintechs and new innovators lead with is a much simpler and [more] attractive user experience,” he says.
Customers increasingly identify their financial institution through their online experiences more than personal interactions, says Simon Mathews, chief strategy officer at San Francisco-based Extractable, a digital design agency. He believes that Capital One and BBVA found a way to more quickly improve the digital experience at their institutions. It’s a relatively new field, and good user experience designers aren’t easy to find. “What’s the quickest way to build a team? Go buy one,” says Mathews.
Design is only one piece of the puzzle. “Great design is important, but it really is only the tip of the iceberg on user experience,” says DeLuca.
A bank can’t expect to place a great design on top of outdated technology and create a good user experience, says Mathews. Data plays a key role. Customers with multiple accounts want to see their total relationship with the bank in one spot. That requires good, clean data, says Mathews.
The products and services offered by a financial institution need to be integrated. Can the customer easily manage and access separate products, such as loans and deposit accounts? Often, the process can be disjointed, and it’s a competitive disadvantage for the bank. “You might as well be buying from separate providers, if the experiences are separate,” says DeLuca.
Data analytics can also help banks personalize products and services for the customer, says Stephen Greer, an analyst with the research firm Celent. The industry is spending a lot on data analytics, “largely to craft that perfect customer experience,” he says.
While technology can be updated, organizational challenges are more difficult to overcome. Banks tend to operate within silos–deposit accounts in one area, wealth management in another and that doesn’t align with the needs of the consumer. “They don’t think, necessarily, about the total experience the user has,” says Mathews. “Users move fluidly between [delivery] channels.”
Great user experience requires “a really deep understanding of customer’s lives, and the environment they’re in, and what they’re trying to do and why,” says Jimmy Stead, executive vice president of e-commerce at Frost Bank, based in San Antonio, Texas, with $28 billion in assets.
Many banks rely on vendors for their technology needs, but “if the user experience relies on the vendors that they’re working with, and those vendors have solutions that are not customizable, then it’s really hard for them to address the customer experience,” says Alex Jimenez, a consultant and formerly senior vice president of digital and payments innovation at $7.1 billion asset Rockland Trust Co., based in Rockland, Massachusetts.
According to a June 2015 poll of banks and credit unions conducted by Celent, more than one-third rely on the user experience supplied by the bank’s vendor for online banking, mobile and tablet applications, with minimal customization. Realizing the increasing importance of the online channel, Frost Bank decided to build its own online banking platform internally in 2000, and continues to manage its user experience in-house. The bank still works with vendors, but is picky when it comes to those relationships. “How can we integrate them seamlessly into our experience?” Stead says he asks of vendors.
Today, expectations are shaped by Apple and Amazon, companies that have done a great job of defining the consumer experience. While more innovative banks like BBVA and Capital One are making user experience a priority, many financial institutions don’t provide a cohesive digital experience, or let their website and mobile app lag behind consumer expectations.
“We can’t fall too much in love with what we have today,” says Stead. “Technology moves so fast.”
The financial technology boom of the past few years will ultimately lead to opportunities for the banks willing to take advantage of them—either through partnership or acquisition. In November, 145 bank senior executives and board members shared their views on the fintech boom. The poll was conducted at Bank Director’s annual Bank Executive & Board Compensation Conference in Chicago. Additional respondents participated online. We’ve tabulated the results, which we share along with insights from leaders in the fintech space.
Questions about our Research? Contact Emily McCormick, director of research, at [email protected].
It’s no secret that what has been happening in the fintech space is attracting more attention from the world of banking. It’s hard to ignore the fact that venture capital invested $10 billion in fintech startups in 2014, compared to just $3 billion in 2013, according to an Accenture analysis of CB Insights data.
But watching M&A in the fintech space shows that these startups are much more likely to pair with others or get acquired by incumbents than they are to go public with an initial public offering, as noted by bank analyst Tai DiMaio in a KBW podcast recently.
“Together, through partnerships, acquisitions or direct investments, you can really have a situation where both parties benefit [the fintech company and the established player],’’ he says.
That may lend credence to my initial suspicions that there are more opportunities in fintech for banks than threats to established players and that these startups really need to pair up to be successful.
Take BlackRock’s announcement in August that it will acquire FutureAdvisor, a leading digital wealth management platform with technology-enabled investment advice capabilities (a so-called “robo advisor.”) With some $4.7 trillion in assets under management, BlackRock offers investment management, risk management and advisory services to institutional and retail clients worldwide—so this deal certainly caught my attention.
According to FT Partners, the investment bank that served as exclusive advisor to BlackRock, the combination of FutureAdvisor’s tech-enabled advice capabilities with Blackrock’s investment and risk management solutions “empowers partners to meet the growing demand among consumers to engage with technology to gain insights on their investment portfolios.” This should be seen as a competitive move to traditional institutions, as demand for such information “is particularly strong among the mass-affluent, who account for ~30 percent of investable assets in the U.S.”
Likewise, I am constantly impressed with Capital One Financial Corp., an institution that has very publicly shared its goal of being more of a technology company than a bank. To leapfrog the competition, Capital One is quite upfront in their desire to to deliver new tech-based features faster then any other bank. As our industry changes, the chief financial officer, Rob Alexander, opines that the winners will be the ones that become technology-focused businesses—and not remain old school banking companies. This attitude explains why Capital One was the top performing bank in Bank Director’s Bank Performance Scorecard this year.
Case-in-point, Capital One acquired money management app Level Money earlier this year to help consumers keep track of their spendable cash and savings. Prior to that, it acquired San Francisco-based design firm Adaptive Path “to further improve its user experience with digital.” Over the past three years, the company has also added e-commerce platform AmeriCommerce, digital marketing agency PushPoint, spending tracker Bundle and mobile startup BankOns. Heck, just last summer, one of Google’s “Wildest Designers” left the tech giant to join the bank.
When they aren’t being bought by banks, some tech companies are combining forces instead. Envestnet, a Chicago-based provider of online investment tools, acquired a provider of personal finance tools to banks, Yodlee, in a cash-and-stock transaction that valued Yodlee at about $590 million. By combining wealth management products with personal financial management tools, you see how non-banks are taking steps to stay competitive and gain scale.
Against this backdrop, Prosper Marketplace’s tie up with BillGuard really struck me as compelling. As a leading online marketplace for consumer credit that connects borrowers with investors, Prosper’s acquisition of BillGuard marked the first time an alternative lender is merging with a personal financial management service provider. While the combination of strong lending and financial management services by a non-bank institution is rare, I suspect we will see more deals like this one struck between non-traditional financial players.
There is a pattern I’m seeing when it comes to M&A in the financial space. Banks may get bought for potential earnings and cost savings, in addition to their contributions to the scale of a business. Fintech companies also are bought for scale, but they are mostly bringing in new and innovative ways to meet customers’ needs, as well as top-notch technology platforms. They often offer a more simple and intuitive approach to customer problems. And that is why it’s important to keep an eye on M&A in the fintech space. There may be more opportunity there than threat.
I was sitting in a group discussion at Bank Director’s Chairman/CEO Peer Exchange earlier this year when the subject of the fast growing financial technology sector came up. That morning, we had all heard a presentation by Halle Benett, a managing director at the investment bank Keefe, Bruyette & Woods in New York. The gist of Benett’s remarks was that conventional banks such as those in attendance had better pay attention to the swarm of fintech companies that are targeting some of their traditional product sectors like small business and debt consolidation loans.
The people in the room with me were mostly bank CEOs and non-executive board chairmen at community banks that had approximately $1 billion in assets, give or take a hundred million dollars. And I would sum up their reaction as something like this: “What, me worry?”
In one sense I could understand where they were coming from. Most of the participants represented banks that are focused on a core set of customers who look and act a lot like them, which is to say small business owners and professionals in their late forties, fifties and sixties. The great majority of community banks have branches, which means they also have retail customers, but their meat and potatoes are small business loans, often secured by commercial real estate, and real estate development and construction loans. I suspect there’s a common dynamic here that is shared across the community banking sector, where baby boomer and older Gen X bankers are doing business with other boomers and Gen X’ers, and for the most part they relate to each other pretty well.
There are two trends today that bear watching by every bank board, beginning with the emergence of financial technology companies in both the payments and lending spaces. The latter is the subject of an extensive special section in the current issue of Bank Director magazine. I believe the fintech trend is being driven in part by a growing acceptance—if not an outright preference—for doing business with companies—including banks and nonbank financial companies—in digital and mobile space. The fintech upstarts do business with their customers almost exclusively through a technical interface. There is no warm and fuzzy, face-to-face human interaction. Today, good customer service is as likely to be defined by smoothly functioning technology as by a smiling face on the other side of the counter.
The other trend that all banks need to pay attention to is the entry of millennials—those people who were born roughly between the early 1980s and early 2000s—into the economy. Millennials can be characterized by a number of characteristics and behaviors: they are ethnically diverse, burdened with school debt, late bloomers from a career/marriage/home ownership perspective and they generally are social media junkies. They are also digital natives who grew up with technology at the center of so many of their life experiences and are therefore quite comfortable with it. In fact, they may very well have a preference for digital and mobile channels over branches and ATMs. Although digital and mobile commerce have found widespread acceptance across a wide demographic spectrum, I would expect that the digital instincts of millennials will accelerate their popularity like the afterburner on a jet fighter.
Although they now outnumber boomers in the U.S. population, millennials are not yet a significant customer segment for most community banks. And the universe of fintech lenders is still too small to pose a serious market share threat to the banking industry. But both of these trends bear watching, especially as they become more intertwined in the future. The youngest boomers are in their early fifties. The cohort that follows, the Gen X’ers, is much smaller. Who will bankers be doing business with 10 years from now? Millennials, you say? But will millennials want to do business with bankers then if an increasing number of them are developing relationships with a wide variety of fintech companies now?
A board of directors has an obligation to govern its company not only for today, but for tomorrow as well. And these two trends, particularly in combination, have the potential to greatly impact the banking industry. Learning how to market to millennials today by focusing on their financial needs, and studying the fintech companies to see how community banks can adapt their technological advancements, is one way to prepare for a future that is already beginning to arrive.
You can visit a lot of banks and never see one that looks like this.
Located in Portland, Oregon’s trendy Pearl District, Simple is one of the leading firms at the intersection of banking and technology.
The design is consciously industrial. Bike racks crowd every nook and cranny. There’s a piano. A sunroom. A large meeting room stocked with healthy snacks. The atmosphere is casual, yet charged with energy. The employees wear t-shirts and jeans, roughly a third of them work at standing desks, and you can count the number of non-millennials on one hand.
It’s too early to predict how the fintech revolution will play out, but there’s no doubt that this is the front lines of finance. And as in any commercial battle, it’s first and foremost about capturing the hearts and minds of consumers.
A growing cast of companies has emerged to meet millennials where finance and technology converge.
Simple, which teamed up with Spanish banking giant Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) at the beginning of 2014, offers a personal checking account accessible online and through its mobile app that’s designed to help people save. It does so by giving customers the ability to create compartmentalized savings goals.
Let’s say you need $50,000 for a down payment on a house in 24 months. By entering this goal into your Simple account, it will automatically deduct $68.50 ($50,000 divided by 730 days) each day from your “Safe to Spend” figure, which is essentially a person’s checking account balance less previously earmarked money.
Another technology-driven financial firm, Moven, offers a similar service. Described as the “debit account that tracks your money for you,” its home screen shows how much a person has spent during a month compared to previous months. If you typically spend $2,000 by the middle of a month, but are currently at $2,250, Moven’s app lets you know with each successive transaction.
“We create value by helping people build better money habits,” Moven’s president and managing director Alex Sion says.
A third player in the rapidly expanding fintech space, Betterment, builds customer relationships from a different angle. It offers an automated investing service. Give it your money, tell it your goals, and Betterment’s algorithms implement a strategy tailored to your financial objectives.
According to Joe Ziemer, Betterment’s business development and communications lead, it began the year with $1 billion in assets under management and now has $2.1 billion from 85,000 customers.
Finally, a growing number of Internet-based lending marketplaces connect yield-hungry investors with people and businesses in need of funding.
The best known of the group, Lending Club, offers personal loans of up to $35,000 to consolidate debt, pay off credit card balances, and make home improvements. Businesses can borrow up to $300,000 in 1- to 5-year term loans.
Funding Circle does much the same thing, though it focuses solely on small businesses. “There’s a perception out there that everyone is efficiently banked,” says Funding Circle’s Albert Periu, “but that isn’t true.”
Beyond using technology to refine the banking experience, a common set of objectives motivates these companies. The first is their missionary-like zeal for the customer experience. Their vision is to seamlessly integrate financial services into people’s lives, to proactively help them spend less, save more, invest for retirement and acquire financing.
“We created a product that allows customers to take control of their financial lives,” says Simple’s Krista Berlincourt.
This is done using elegantly designed mobile and online products that simplify and reduce friction in the relationship between a financial services provider and its customers.
To this end, a universal obsession in the industry revolves around the onboarding experience. “The onboarding experience is the moment of truth,” says Alan Steinborn, CEO of online personal finance forum Real Money.
Lending Club claims you can “apply in under five minutes” and “get funded in a few days.” Betterment’s Ziemer says that it takes less than half the time to set up an account with Betterment than it does at a traditional brokerage.
Finally, these firms compete vigorously on cost, with many forgoing account and overdraft fees entirely. In this way, they’re not only driving down the price of financial products, they’re also more closely aligning their own incentives with those of their customers.
Fueling the fintech revolution is the fact those millennials—people born between 1981 and 2000—now make up the largest living generation in the United States labor force.
Millennials see things differently. They “use technology, collaboration and entrepreneurship to create, transform and reconstruct entire industries,” explains The Millennial Disruption Index, a survey of over 10,000 members of the generation. “As consumers, their expectations are radically different than any generation before them.”
To millennials, banks come across as inefficient and antiquated. Two years ago, 48 percent of the people surveyed for Accenture’s “North America Consumer Digital Banking Survey” said they would switch banks if their closest branch closed. Today, less than 20 percent of respondents said they would do so.
This doesn’t mean that millennials will render in-person branch banking obsolete. A 2014 survey by TD Bank found that while they bank more frequently online and on their mobile devices, 52 percent still visited a branch as frequently as they did in 2013, mostly to deposit or withdraw money. “Those who do their banking in a branch feel it is more secure and enjoy the in-person service,” the survey concluded.
Wells Fargo’s recently appointed chief data officer, A. Charles Thomas, makes a similar point, citing a Harvard Business Review study that identified “customer intimacy” as one of three “value disciplines” exhibited by long-time industry-leading companies.
The net result is that the personal element of branch banking, while still relevant and necessary to build and maintain customer relationships, is nevertheless taking a back seat to digital channels. For the first time in Accenture’s research, the firm found that “consumers rank good online banking services (38 percent) as the number one reason that they stay with their bank, ahead of branch locations and low fees, both at 28 percent.”
It’s for these reasons that many observers believe the banking industry is prone to disruption. According to The Millennial Disruption Index, in fact, banking is at the highest risk of disruption of the 15 industries examined by Viacom Media Networks for the survey.
Of the millennials queried, it found that:
Sixty-eight percent believe the way we access money will be totally different five years from now.
Nearly half think tech startups will overhaul the way banks work.
And 73 percent would be more excited about a new offering in financial services from companies like Google, Amazon and Apple, among others, than from their own bank.
This isn’t to say that younger Americans don’t trust banks. In fact, just the opposite is true. According to Accenture, “86 percent of consumers trust their bank over all other institutions to securely manage their personal data.”
It boils down instead to the simple reality that millennials are “genuinely digital first,” says Forrester Research Senior Analyst Peter Wannemacher.
More than 85 percent of America’s 77 million millennials own smartphones according to Nielsen. An estimated 72 percent have used mobile banking services within the past year, says Accenture. And, based on the latter’s research, approximately 94 percent of millennials are active users of online banking.
Banks need to think about the customer experience differently. Millennials, and increasingly people in older generations, want more than physical branches to deposit money and get a loan. They want digitally tailored solutions for their financial lives.
The era of big data has arrived, and few industries are better positioned to benefit from it than banking and financial services.
Thanks to the proliferation of smartphones and the growing use of online social networks, IBM estimates that we create 2.5 quintillion bytes of data every day. In an average minute, Yelp users post 26,380 reviews, Twitter users send 277,000 tweets, Facebook users share 2.5 million pieces of content and Google receives over four million search queries.
Just as importantly, data centers have slashed the cost of storing information, computers have become more powerful than ever and recently developed statistical models now allow decision makers to simultaneously analyze hundreds of variables as opposed to dozens.
But while fintech upstarts like Simple, Square and Betterment are at the forefront of harnessing data to tailor the customer experience in their respective niches, no companies know their customers better than traditional financial service providers. The latter know where their customers shop, when they have babies and their favorite places to go on vacation, to mention only a few of the insights that can be gleaned from proprietary transactional data.
When it comes to big data, in turn, banks have a potent competitive advantage given their ability to couple vast internal data repositories with external information from social networks, Internet usage and the geolocation of smartphone users. In the opinion of Simon Yoo, the founder and managing partner of Green Visor Capital, a venture capital firm focused on the fintech industry, the first company to successfully merge the two could realize “billions of dollars in untapped revenue.”
Few financial companies have been as proactive as U.S. Bancorp at embracing this opportunity. Using Adobe Systems Inc.’s cloud computing services, the nation’s fifth-largest commercial bank “integrates data from offline as well as online channels, resulting in a truly global understanding of its customers and how they interact with the bank at multiple touch points,” says an Adobe case study.
By feeding cross-channel data into its customer relationship management platform, U.S. Bancorp is able to supply its call centers with more targeted leads than ever before. The net result, according to Adobe, is that the Minneapolis-based regional lender has doubled the conversion rate from its inbound and outbound call centers thanks to more personalized, targeted experiences compared to traditional lead management programs.
Along similar lines, a leading European bank studied by Capgemini Consulting employed an analogous strategy to increase its conversion rates by “as much as seven times.” It did so by shifting from a lead generation model that relied solely on internal customer data, to one that merged internal and external data and then applied advanced analytics techniques, notes Capgemini’s report “Big Data Alchemy: How Can Big Banks Maximize the Value of Their Customer Data?”
Another European bank discussed in the report generated even more impressive results with a statistical model that gauges whether specific customers will invest in savings products. The pilot branches where the model was tested saw a tenfold increase in sales and a 200 percent boost to their conversion rate relative to a control group. It’s this type of progress that led Zhiwei Jiang, Global Head of Insights and Data at Capgemini, to predict that a “killer app” will emerge within the next 18 months that will change the game for cross-selling financial products.
The promise of big data resides not just in the ability of financial companies to sell additional products, but also in the ability to encourage customers to use existing products and services more. This is particularly true in the context of credit cards.
“In a mature market, such as the U.S., Europe or Canada, where credit is a mature industry, it is naïve for a bank to believe that the way it is going to grow revenue is simply by issuing more credit cards,” notes a 2014 white paper by NGDATA, a self-described big data analytics firm. “The issue for a bank is not to increase the amount of credit cards, but to ask: How do we get the user to use our card?”
The answer to this question is card-linked marketing, an emerging genre of data analytics that empowers banks to provide personalized offers, savings and coupons based on cardholders’ current locations and transactional histories.
The venture capital-backed startup edo Interactive does so by partnering with banks and retailers to provide card users with weekly deals and incentives informed by past spending patterns. Its technology “uses geographical data to identify offers and deals from nearby merchants that become active as soon as the customer swipes their debit or credit card at said merchant,” explains software firm SAP’s head of banking, Falk Rieker.
Founded in 2007, edo has already enrolled over 200 banks in its network, including three of the nation’s top six financial institutions, and boasts a total reach of 200 million cards.
Poland’s mBank offers a similar service through its mDeals mobile app, which couples the main functions of its online banking platform with the company’s rewards program. “What makes this program so innovative is its ability to present customers with only the most relevant offers based on their location and then to automatically redeem discounts at the time of payment,” notes Piercarlo Gera, the global managing director of banking strategy at Accenture.
A third, though still unproven, opportunity that big data seems to offer involves the use of alternative data sources to assess credit risk.
The Consumer Financial Protection Bureau estimates that as many as 45 million Americans, or roughly 20 percent of the country’s adult population, don’t have a credit score and thereby can’t access mainstream sources of credit. The theory, in turn, is that the use of additional data sources could expand the accessibility of reasonably priced credit to a broader population.
One answer is so-called mainstream alternative data, such as utility payments and monthly rent. This is the approach taken by the VantageScore, which purports to combine “better-performing analytics with more granular data from the three national credit reporting companies to generate more predictive and consistent credit scores for more people than ever.”
Another is to incorporate so-called fringe alternative data derived from people’s shopping habits, social media activity and government records, among other things. Multiple fintech companies including ZestFinance, LendUp and Lenddo already apply variations of this approach. ZestFinance Vice President for Communications and Public Affairs Jenny Galitz McTighe says the company has found a close correlation between default rates and the amount of time prospective borrowers spend on a lender’s website prior to and during the loan application process.
“By using hundreds of data points, our approach to underwriting expands the availability of credit to people who otherwise wouldn’t be able to borrow because they don’t have credit histories,” says McTighe, pointing specifically to millennials and recent immigrants to the United States.
While this remains a speculative application of external data by, in certain cases, inexperienced and overconfident risk managers, there is still a growing chorus of support that such uses, once refined, could someday make their way into the traditional underwriting process.
This list of big data’s potential to improve the customer experience and boost sales at financial service providers is by no means exhaustive. “It’s ultimately about demonstrating the art of the possible,” said Wells Fargo’s chief data officer, A. Charles Thomas, noting that big data could one day help the San Francisco-based bank reduce employee turnover, measure the effectiveness of internal working groups and identify more efficient uses of office space.
It’s for these reasons that big data seems here to stay. Whether it will usher in a change akin to the extinction of dinosaurs, as Green Visor’s Yoo suggests, remains to be seen. But even if it doesn’t, there is little doubt that the possibilities offered by the burgeoning field are vast.
One way to look at Kabbage is that it’s a company of mostly millennials who are helping to recreate finance in their own image. Formed in February 2009 during the waning months of the Great Recession, when many commercial banks had curtailed their lending and some were taking capital from the federal government to strengthen their balance sheets, Kabbage provides unsecured consumer and small business loans through its online platform. It is one of the leading players in the emerging fintech sector, and to date has made over $550 million in loans.
Neither Chief Executive Officer Rob Frohwein nor the rest of his leadership team are millennials (the company does have a sense of humor, playfully describing the team on its website as the “heads of Kabbage”), but there are plenty of them working at the company. And if you’re going to hire millennials to work at a fintech company, you’ve got to offer them cool stuff like daily catered lunches and snacks, on-site yoga, top-of-the-line Macs and 27” Thunderbolt displays. And of course, you need to give them stock options for the day when the privately-held company either goes public or is acquired. The irony of the company’s name is that many millennials probably wouldn’t know, unless it was pointed out to them by their baby boomer parents, that “cabbage” is slang for money.
The financial services industry is experiencing a wave of innovation where several upstarts like Kabbage are taking an old product—money lending in some form has been around for more than two millennia—and using technology to create a 21st Century delivery and customer experience.The company provides small business lines of credit from $2,000 to $100,000, and more recently began offering consumer loans from $5,000 to $35,000, with repayment terms of either three or five years. Unlike most banks, which base their underwriting decisions primarily on the credit scores of the borrower, Kabbage takes a diverse range of information into consideration, and because the process is fully automated, the applicant receives an immediate decision.
Although conventional wisdom would argue that Kabbage is a threat to traditional banks, particularly in the consumer lending space where much of its activity is focused on consolidation of credit card-related debt, Frohwein says that he wants to work with banks and would rather be seen as collaborator than a competitor. Kabbage’s principal offering is an unsecured business line of credit. Most banks won’t provide that kind of funding without some form of collateral, and they can take weeks to make a decision. Prior to this issue going to press, the company was expected to announce agreements to work with two international banks, and Frohwein was hopeful that similar conversations with U.S. banks would also bear fruit.
Like all fintech companies, Kabbage has benefited from growing consumer comfort with doing financial transactions online. According to Frohwein, 95 percent of Kabbage’s customers never interact with a human at any point in the process. And many of them seem to like it that way. Kabbage might be a company with a culture that has been influenced by the many millennials who work there, but it has created a product that is finding acceptance among borrowers of all generations, and that adds up to a lot of cabbage. Frohwein spoke recently with Bank Director Editor Jack Milligan
Let’s talk about why there is a Kabbage.
There is a Kabbage because you can actually access data from online sources on a real-time basis allowing you to do a couple of different things.
First, you can permit a customer to have a very elegant online experience. The customer lands on the Kabbage website, which provides access to information relating to their entire business, and receives a decision within just a handful of minutes.
Because Kabbage gains access to these data sources through the customer’s authorization, we have ongoing access to data. As a result, we understand how that small business operates, not just today—at the time of qualification—but how they’re operating today and any point in between. It gives us a very rich understanding of that small business.
When we started the company, we believed this information would better reflect how a business was going to perform as a customer rather than relying on the personal credit score of the small business owner. The whole premise of the company was based on data access and technology. Our DNA is technology and data access and how that access can provide us with unique insights and customers with better experiences. I think that’s probably what separates us from some of the other players that are in this space who continue to have a lot of manual processes residing within their customer experience even though most have adopted the “data and technology” marketing speak.
When the company formed, did you feel as though you were stepping in and filling a void that was out there for small business borrowers? In 2009, obviously, we were just coming out of the financial crisis. The banking industry had closed up like a clam in terms of lending, and there was a real credit crunch, especially for smaller companies.
For sure. Despite being responsible for most of the growth in our economy, small businesses have historically been treated as the redheaded stepchild of the financial services industry. They’ve been largely ignored over the years. Though we serve all small businesses now, when we started, we focused on online retailers. Traditional lenders are reluctant to provide an online retailer with a loan. It’s not that they’re not good customers, but they’re hard-to-reach and they often have limited operating histories. They don’t have a physical presence so you can’t walk into the store and hear the cash register ringing, and see the smiles on the customers’ faces. If you can serve that audience as Kabbage has, then you can serve all small businesses, because you start with the most challenging segment of businesses.
Explain the products that you provide.
We provide a working capital line credit for small businesses. In the fourth quarter of last year we also launched a personal loan product. We have both a small business direct product and a consumer direct product.
We also started licensing our platform to third parties, which allows them to start lending in the small business and personal consumer lending space. We announced the first deal with Kikka Capital, out of Australia, a couple months ago.
Have you also had conversations with domestic banks about the possibility of working with you under a licensing arrangement?
Yes. In the U.S., we are working currently with two banks. Those discussions are in a slightly earlier stage, but we believe we will execute agreements with both of them. One relationship will center on a small business product and the other is on the consumer side.
The reaction from U.S. banks has been very positive, but it’s a difficult regulatory environment, and there’s a lot of caution that goes into that decision. It’s a process of working with the financial institution and getting them to the point where they really understand how we operate, how this compares favorably to their existing approach and how this grows their core business.
Do you see banks as competitors, or do you see them as potential partners? Or both?
I don’t think I see them as competitors, I actually see them as partners. I try to help them recognize that this is a market they can serve, it’s not a market they should ignore, and there’s a legitimate partnership opportunity here. They don’t need to take a competitive stance with us. We think we can actually work with all the banks.
How about in the consumer space? Or do banks not really focus on the size of personal loans you provide?
In the consumer space, our loans average about $15,000 and many of our customers are consolidating credit card debt so this is a segment in which banks are interested. Although banks may or may not see that as competitive, they should see what we are doing as important and core to them. However, again, banks do not need to look at us as competitive. We are working with a large U.S. bank right now to help them enter this space directly.
Though very focused on the consumer lending space for many years, small business lending has been another story for them. It’s been traditionally difficult for banks to make profitable, and that’s because there’s typically high acquisition costs, and also there’s a lot of operational inefficiencies. Banks apply the same requirements and invest the same resources for a $30,000 loan as they do for a $3 million loan. It’s just not reasonable to expect small business owners to go through that hassle for that amount of money.
Explain a little bit more about your underwriting process. It sounds like it’s a very sophisticated approach, and one that’s a little bit different than what most banks employ.
When a bank underwrites a small business loan they will have a checklist of many items they need to collect: three years of financial statements, FICO score, an asset list, whatever it might be. A bank would expect every small business lending applicant to come to the table with the exact same set of documents and information. We take a different approach.
Kabbage must meet the small business owner where that small business owner is. That means if they have a specific set of relationships with accounting companies, or credit card transaction processing systems, or social networks, or shipping companies or whatever it might be, that’s the data we need to collect and decision on. The data helps us determine the capacity, character and consistency of small and medium-sized businesses, or SMBs, just as the items the bank collects attempt to determine.
We’ve had to figure out a way to basically say, “Give us access to any number of data sources.” Without getting too technical, it’s an API, or application programming interface, approach where we’re given automated access on these electronic accounts for specified information. We don’t have the ability to write to the account, so we can’t manipulate anything within it. It does give us the right to read the information that’s contained within the accounts.
As you would imagine, it also provides us with a lot of historical information. It doesn’t just relate to the most recent period, it oftentimes goes back many months or many years in the past so we can see how these customers have performed over time.
The real key to what we do is a couple of different things. One is we are able to take all that information and make it relatable. If somebody gives us access to their credit card transaction processing information and shipping information, and another person gives us access to their marketplace information, personal credit score and social data, we’ve got to figure out, “Okay, how do I make a decision on both of those customers, and make a decision that is consistent and fair across the board?” We have developed that capability over time, and we did that through a lot of trial and error, to be frank, where we made educated decisions as to how we were going to view information. Until you get repayment information back and see the customer’s actual behavior, you really don’t know how well correlated that information is to actual performance. We’ve gone through that process over the last several years.
The nice thing about the way our product works is once somebody takes cash from our line, they pay it back within, on average, less than four months. Therefore, we are able to determine how effective our models are very rapidly.
How do you find your customers?
SMB owners do not congregate in a single place. There’s not a hall where SMB owners meet each evening and you can advertise there. They’re everywhere the population is. Therefore, we have had to become experts at locating them.
We have a blended approach. We do both traditional and digital marketing. If you log on to Kabbage.com, we’ll probably follow you for a long time online, and you’ll see more ads from us in the future. On the traditional side, we do radio and direct mail. If you watch TV, you’ll be seeing ads in the fall.
We also have a pretty robust business development arm where we enter into relationships with other businesses that have a lot of small business customers. It can be those that are offering phone systems to small businesses, or packaging for small businesses, or selling accounting software to them or whatever it might be. We try to work with the folks that work closely with small business owners.
When you look at the personal demographics of who your customers are, is there anything that’s distinctive from a generational perspective? What do you find interesting about your customer base?
We work with SMB owners that are super young and we work with folks who are much older. However, they all embrace technology at least in some manner. Although we started with online retailers, over the last couple of years, we’ve grown to include all small businesses, so you get your restaurants, your dry cleaners and your professional service firms, and everybody in-between. We see a much broader demographic than we did in the past in terms of their technology savviness.
You’d be amazed, 95 percent of our customers have a 100 percent fully automated experience. Not only do they not have to interact with anybody specifically at Kabbage, we don’t have a person on the backend specifically reviewing that file. It’s all done through our system. You’d be amazed at how many of our customers are comfortable just interacting with our system. That didn’t happen overnight; we had to figure that out the hard way. We made a lot of mistakes, and we created some bad experiences, and we worked hard to make it as comprehensible as possible. That’s what we’ve really focused on over the last five years. Now it seems easy, but we had many sleepless nights on the road to getting there.