How One Large Bank Fosters Innovation

9-11-14-FinTech.jpgFrom left, Declan Denehan, managing director of strategic growth initiatives at BNY Mellon; Bank Director Publisher Kelsey Weaver; President Al Dominick; and Olivia Bajaio, BNY Mellon vice president of strategic growth initiatives, in New York City earlier this week.

Editor’s note: This article has been corrected from an earlier version.

Conventional wisdom holds that banks are not very good at innovation—and large banks, with their entrenched bureaucracies and clumsy legacy systems, are probably worst of all. It might then come as a surprise that Bank of New York Mellon Corp. has run a highly successful innovation program that has made a meaningful contribution to the bank’s profitability, and also manages to get most of the company’s 50,000 employees involved in the process.

Declan Denehan, BNY Mellon’s managing director for strategy and innovation, offered a look into the unusual program during the inaugural FinTech Day sponsored jointly by Bank Director and NASDAQ OMX. The event was held at NASDAQ’s MarketSite in New York’s Times Square and attracted over 40 participants from 30 financial technology companies.

Headquartered in New York, BNY Mellon is the 5th largest U.S. bank with approximately $370 billion in assets. Unlike most banks, however, it does relatively little lending but instead focuses on two core businesses: investment management, with $1.7 trillion assets under management, which makes it one of the 10 largest managers in the world; and investor services, a broad category that includes a variety of back office functions that banks, insurance companies and investment managers rely on to handle their customers’ accounts.

9-11-14-FinTech-2.jpgBNY Mellon’s innovation program began in 2009 when the bank’s senior leadership decided they wanted to encourage creativity and out-of-the-box thinking among the bank’s employees, Denehen said on-stage during an interview with Bank Director President Al Dominick. BNY Mellon places tremendous importance on the use of technology in all of its investment management and servicing businesses and is constantly looking for ideas that will lead to improvements in efficiency, profitability and the customer experience. After spending some time talking with senior managers in BNY Mellon’s six major business units to get their thoughts on innovation, Denehan established a pilot program to review ideas submitted by approximately 10,000 employees throughout the company.

“We found out that there was a pent up desire in those employees to get their voices heard,” he said.

The pilot generated a lot of suggestions that weren’t necessarily aimed at improving the company’s profitability, so Denehan realized pretty quickly that going forward he would have to provide the bank’s employees with more guidance in terms of what he was looking for. “You know the old saying that’s there’s no such thing as a bad idea? Not true!” he laughed. Denehan ended up receiving some 1,000 ideas and it took some time to review them all and select those with merit. The program found enough winners that it generated about $165 million in pretax profit for the bank that first year.

The innovation program has expanded steadily since the 2009—all BNY Mellon employees are encouraged to participate—and looks for ideas that are capable of becoming large scale projects and make a significant contribution to the bank’s bottom line. It culminates in an eight-week contest called “ACE” that proceeds throughout several elimination rounds, with the finalists giving a five minute pitch to a panel of judges in New York. The winning team is selected at this final judging and its members receive what Denehan described as a substantial cash award and are given the opportunity to leave their current positions and join a company-run incubator where they will develop their idea and make it operational. The program also provides for feedback so employees who do not win will not lose motivation to participate. Since its inception in 2009, the program has generated over 13,000 innovation ideas.

Denehan cautioned the audience that the search for innovation in a corporate setting is an evolutionary process. To be successful, it requires the engagement of senior management so that everyone understands that the undertaking is important. The ideas also need to be things that fit comfortably with the culture of your company, which is why it’s so important the ideas come from employees who understand that culture and have been shaped by it. And whatever process you establish to foster innovation in your company has to respect that imperative.

“You have to build [a process] that can create ideas that can survive in the DNA of your organization,” said Denehan. “You have to build for your culture. Culture is everything.”

Embracing a Mobile Mentality

mobile-mentality.pngInnovation in mobile banking can be big and bold, transforming customer activities into completely novel experiences. Or its scope can be narrow, aimed simply at automating tedious manual tasks. Either way, the effect is powerful. “Mobile features are definitely disrupting our user base and the industry,” says Jim Simpson, senior vice president and chief information officer at City Bank of Texas, a $2-billion asset bank based in Lubbock, Texas.

Under the category of big and bold is a mobile payment service currently in pilot at Minneapolis-based U.S. Bank, a unit of $371-billion asset U.S. Bancorp. Designed to eliminate even the smallest barriers to online shopping, the new service, called Peri, alters how consumers interact with print, radio and TV ads. Through QR codes as well as digital and audio watermarking, which embeds digital information into audio, digital and printed materials, consumers can simply point and click their phones at ads, leading them directly to a mobile web page where they can purchase the product. Customer and credit card information is preloaded, so customers don’t even have to enter their data. The time from when a consumer sees an ad for a product and then purchases it is practically nil.

U.S. Bank plans to roll out Peri this fall as a white-labeled product with one or more partners, and expects fashion retailers to be particularly interested. A product of the bank’s merchant processing unit, Peri will likely be embedded into other consumer shopping apps, say for purchasing fashion, with the goal of winning over new merchant customers and boosting processing volumes. Though the U.S. Bank name will not appear front and center with customers, the Peri app definitely pushes the bank into aspects of payments that go well beyond the usual back-end processing. “It’s a broader way of thinking about things,” says Dominic Venturo, chief innovation payment officer for payment services at U.S. Bank. “It’s different from where payment companies and banks have been involved before.”

Venturing into new areas and redefining the role of the bank is different from the approach taken by City Bank of Texas, where the more modest goal is to move simple, everyday processes onto mobile devices. “We’re not going to solve the payments equation,” Simpson says. “In the short term, we’re focused on everyday features.”

City Bank’s straightforward goal has not prevented it from introducing several leading-edge mobile applications. Simpson says City Bank was the first to let customers deactivate their debit cards via mobile. For customers who fear their card may be lost or somehow compromised, the turn-off feature offers immediate peace of mind. Once the card has been located or replaced, it can be turned back on again. “We’ve had a ton of success with that,” Simpson says. Similarly, users who are traveling can block or enable foreign card transactions. Another new City Bank service is the ability to re-order checks via mobile, rather than have to go to a branch or online.

Perhaps the biggest feather in City Bank’s cap is its early entry into mobile photo bill pay. Similar to the increasingly popular mobile check deposit, mobile bill pay lets users snap a picture of a bill to initiate payment. The data captured on the picture serves to set up the payee, eliminating the slow, frustrating process of typing in a name, address, account number and other information on a mobile phone. “There’s no manual set-up,” Simpson says. “That’s the magic of it.”

Easy set-up has a lubricating effect on bill pay usage. Ralph E. Marcuccilli, president of Fort Wayne, Indiana-based Allied Payment Network, which offers a mobile photo bill pay solution known as Picture Pay to 25 institutions so far, notes that users are more apt to pay one-off bills like doctor and dentist visits if they can simply take a picture of the bill, rather than do a manual set-up.

The hassle of incorporating bills, especially irregular ones, into online bill-paying routines has caused online bill payment usage to stagnate. Despite its long history, online and mobile bill payments executed through financial institutions account for only about 25 percent of all payments, according to Marcuccilli. He expects that number will expand to 40 percent within five years, as people warm to the idea of using photos to facilitate bill payments, and also come to appreciate the value of having all their bills stored and executed at a bank-owned site.

City Bank of Texas, which uses Allied Payment Network’s Picture Pay, has seen “tremendous growth” in the service after one year, Simpson says. Many customers are “just abandoning” the traditional online bill payment service for the mobile one—at a nearly double-digit percentage rate month over month, he says. New customers are also flocking. “We’ve documented case after case of customers who have come to us based on the mobile app,” he says, without revealing numbers. “We feel it’s an extreme competitive advantage.”

Mobile banking at City Bank has advanced so far, it has outpaced what the bank can offer through its traditional online services. As a result, the bank recently signed an agreement to use the extensive online banking system of Austin, Texas-based Q2 Holdings Inc., a provider of virtual banking solutions, which will allow it to deliver its new mobile-based services, like the on-off debit card switch, through the online channel, something its previous online banking provider was not able to fulfill.

U.S. Bank is similarly devoted to mobile. It is so taken by the power of mobile imaging to improve the customer experience that it has introduced a family of mobile-photo based services under the umbrella, Photo Banking. Photo bill pay, introduced in March 2013, is one of three related services available so far, along with photo check deposit and photo balance transfer. The photo-based services are part of a larger effort to inject more sizzle into banking. “We need to build amazing customer experiences,” says Niti Badarinath, senior vice president and head of mobile banking and payments. “So why not use imaging as a really powerful way for customers to get information into accounts?”

Improving the customer experience has led to hard and soft benefits, including more engaged customers and higher retention rates, Badarinath says. Clearly, the service has caught customers’ attention; transaction volumes for photo bill pay are expanding at a rate of 300 percent annually, although from a small base. In addition to strengthening current relationships, photo bill pay has unexpectedly come to serve as a switch kit for new customers, as they discover how easy it is to enter all their biller information. Even without a kit, mobile in and of itself is a good enough reason for many customers to switch banks, making U.S. Bank determined to stay ahead of the curve. “The better we get at cool innovations, the more we think we’ll be the bank of choice,” Badarinath says.

Topping U.S. Bank’s agenda for 2014 is photo account opening. As it has with all its photo banking efforts, U.S. Bank will work with San Diego, California-based Mitek, which provides mobile imaging to banks, to allow customers to open bank accounts using photos of driver’s licenses or other documents that are stored in their phones. In addition to imaging, the new app will likely take advantage of other features specific to mobile devices and tablets, such as the ability to touch, swipe and incorporate voice.

With more than 2,200 financial institutions already using its mobile check deposit application, Mitek is continuing to push the boundaries of mobile imaging. Its mobile account-opening app became available at the end of April, and while it has yet to be rolled out at any institution, interest is high, according to Mike Strange, Mitek’s chief technology officer. Early adopters are most interested in using the app to bring the feel of an Apple store into their branches. Instead of sitting at desks and typing in codes, roving greeters could swipe screens and snap pictures, opening accounts immediately. And by using mobile check deposit, accounts could be funded right away.

A streamlined method of account opening fits in with the industry’s push toward reduced branch footprints. Banks could even take the show on the road, pushing account openings out to community events, like baseball or football games. Wherever it occurs, the high-tech account-opening process sets the tone for the rest of the relationship. “Customers are thinking mobile first,” Strange says. “Banks need to have a process that mimics what customers are looking for.”

Infusing a bank with a mobile-first mentality requires a much larger commitment than simply rolling out a few applications. Support from the very top of the management structure is vital. U.S. Bank, for example, has benefitted from the creation of a 13-person group, headed by chief innovator Venturo, that is devoted to long-term, research-driven product development. “We need permission to be able to try new things,” Venturo says. “Without the right environment, it would be really hard to get anything done.”

Personal Financial Management Tools Help Customers Help Themselves

personal-finance.pngPersonal financial management (PFM) has a dual personality these days. On one side are Quicken-like planning packages that simplify budgeting and other financial tasks, but still require a certain amount of regular care and attention from users. For years—decades even—this type of “traditional PFM” has attracted about one in five consumers. “That market is steady, though its future is dimming,” says Mark Schwanhausser, director of omni-channel financial services at San Francisco, California-based technology consulting firm Javelin Strategy & Research.

Exploding in number, on the other hand, are web and mobile apps that provide quick bursts of financial information and activity for people making on-the-go financial decisions. The apps run the gamut, helping users get rewards, avoid late fees, pay bills, save on taxes, and a whole lot more, all through the slick interfaces common to today’s mobile devices. “PFM in the future goes so far beyond what it is today,” Schwanhausser says. “We’ll see PFM thrust in front of consumers every time they log on.”

Perhaps no company better exhibits PFM’s split personality than D3 Technology Inc. of Omaha, Nebraska. Founded in 2007, it adds its PFM tool to the online banking software of various providers, most notably Jack Henry & Associates of Monett, Missouri. More than 220 banks have signed up for the popular service.

But Chief Executive Officer Mark Vipond is not overly optimistic that the software will move PFM usage much beyond the long-standing rate of 20 percent, noting that the banks are mostly deploying PFM as a separate tab from online banking, creating yet another silo to support as well as a distinct user experience, mostly for “money hawks” who want to dive into their finances. “The adoption levels mimic those we’ve seen elsewhere,” he notes.

While the company plans to continue supporting PFM as a separate add-on to online banking, hope for much higher adoption lies in a version of the software D3 has been working on for the past two and a half years. The new digital platform provides equal support for PFM and online banking (as well as money movement). Burdensome PFM tasks like budgeting and expense categorization occur automatically, based on transaction history, right within the online banking interface. Only half in jest, Vipond said he expected usage to reach 100 percent since the PFM analytics will take place as a standard part of the online banking experience, without users having to log in elsewhere or do anything to set up the PFM functionality.

Just as important, the integrated platform will give banks access to a single, comprehensive view of all customer transactions and data, allowing banks to create a personalized, Amazon-like user experience in which they can predict a user’s cash flow and recommend products and services accordingly. “This re-establishes the bank as the primary financial services provider, using the customer’s own data to personalize the experience,’’ Vipond says.

Increasingly, that experience will be far more dynamic than the spreadsheets and budget trackers of the past. Star Financial Bank of Fort Wayne, Indiana, for example, depicts expenses in the form of bubble graphs, using software from MoneyDesktop Inc., of Provo, Utah, deployed as both a mobile app and an integrated part of its online banking product. “It’s incredibly interactive,” says Kristin Marcuccilli, chief operating officer of the $1.7-billion asset bank.

Since rolling out the service in January 2013, all of Star Financial’s customers have access to the PFM functionality through online banking, and about 20 percent so far have downloaded it to their smart phones or tablets. “We’ve had customers tell our bankers that they’ve never cared about their finances before, but now they’re following their bubbles, and they’ve got it right in their pocket. The tool makes it much more fun,” says Marcuccilli.

“While PFM in the past put the onus on users to be proactive, PFM in the future will put banks in the driver’s seat, enabling them to ping customers with recommended actions,” says Wade Satterfield, the director of digital service systems at Arvest Bank. The $14-billion asset institution, based in Lowell, Arkansas, is working on a PFM system that it will roll out sometime in 2015.

Like online banking or bill payment, PFM is a service for which banks generally do not charge. So how do the investments in PFM make sense for a bank’s own budget? For Marcuccilli, the return comes from increased levels of customer engagement, leading to stronger loyalty and longevity. Satterfield says banks need to keep up with the digital experiences customers are getting from other service providers. “We really don’t have a choice.”