What Can Banks Learn From Zelle?


P2P-10-13-17.pngThe banking industry saw one of the biggest technological developments of the year in June with the introduction of Zelle, a peer-to-peer (P2P) payments app now offered by over 30 of the leading U.S. financial institutions. Participating are some of the biggest names in banking, such as JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp., Citigroup and Capital One Financial Corp., as well as many smaller banks through partnerships with leading payment processors.

The ability to make quick and easy peer-to-peer payments across banks has existed for a few years now, although most banks haven’t had this capability. In fact, PayPal’s Venmo has overwhelmingly dominated the peer-to-peer payments space. The introduction of Zelle marks the first bank-backed response to Venmo, and thus, the banking industry’s most significant attempt to capture some P2P market share from third-party technology providers.

It’s only been a few months and already Zelle has had a clear influence on the industry. Bank of America recently reported around 11 million P2P transfers made in 2Q2017, reflecting an 89 percent increase from 2016. Overall P2P payments users have also increased by 39.5 percent from the start of this year, likely in part due to Zelle.

It remains to be seen whether Zelle will be able to trump Venmo’s popularity, but in either case, its launch can teach banks a few valuable lessons about their own service offerings.

The Appeal of Venmo
Venmo was launched independently in 2009 and later acquired by PayPal in 2013 after gaining considerable traction, especially among millennials. Perhaps one of the reasons it saw so much popularity with this demographic is the built-in social elements that appeal to millennials’ desire to connect with friends online and to “see and be seen.” Users can view friends’ transactions through a newsfeed, send personalized transaction messages and even integrate with Facebook so it’s easier to locate friends.

Another major reason for Venmo’s popularity is its ease of use. The app now supports text and voice control integration, seamlessly aligning with how users are already using their phones by allowing them to send or request payments simply by sending a text or dictating the command to their phone.

The Introduction of Zelle
With the wild popularity of Venmo, many banks realized they were being blown out of the water when it came to peer-to-peer payments. In response, Bank of America, Wells Fargo, and JPMorgan Chase teamed up with payments technology company Early Warning to begin developing their own app that could facilitate payments between their customers.

While Zelle has the disadvantage of its network being limited to participating banks, the app introduces a few compelling benefits that make it a true contender for Venmo. Primarily, there’s a feeling of security that comes with an app associated with the bank itself, since users won’t have to submit sensitive data into a third-party platform.

With transfer between banks using Zelle, users will also be able to receive money instantly instead of having to wait a few days for the transaction to process through Venmo. They’ll also enjoy a more seamless banking experience as Zelle is accessed through the host bank’s existing mobile banking app so customers making P2P transactions can also complete other banking tasks within the same platform.

What Banks Can Learn
Ultimately, the launch of Zelle isn’t just a lesson for banks to offer innovative technology. More importantly, it’s a reminder for them to keep an eye on technology companies and the way they’ve influenced bank customers, or else they may be missing out on valuable business opportunities.

So why did banks wait so long to present a competitive solution to Venmo? Even though many noted the popularity of Venmo years ago, they might have waited because there was no straightforward way to generate profit in the P2P space.

However, providing a relevant, convenient and user-friendly experience is of the utmost importance for banks, as that’s what continues to attract and drive business—and ultimately, does generate a profit. Given how prevalent technology has become to consumers’ daily lives, building technology into this experience is not only essential but expected.

Regardless of whether or not Zelle comes out on top, its launch is only a positive for banks. The innovations Venmo and similar companies have introduced have forced banks to reprioritize and modernize their services, focusing more on building deeper, more valuable relationships with their customers than simply on profits. And with those relationships, profits will come.

A Case of Self-Disruption


disruption-6-16-16.pngAnyone who thinks that community banks won’t be able to adapt to an evolving marketplace where digital and mobile channels are becoming increasingly important probably hasn’t heard of Radius Bank. In 2014, the management team and board at Boston-based Radius made the transformational decision to close all of its branches save one, as required by federal law, and adopt a digital-only consumer banking platform.

While it might have seemed as though $790 million asset Radius was making a bold bet on a strategy that most banks are embracing far more cautiously, President and Chief Executive Officer Michael A. Butler doesn’t see it that way. “I’d rather be where the future is than the past, and I’d rather take a chance on trying to build the organization for what I thought the future was going to be like,” Butler says. From his perspective, important financial decisions, like getting a car loan or home mortgage, are increasingly being executed in digital space. “I am not that technologically savvy, but if I want a car loan, I am going to the internet,” Butler says. “If I want a mortgage loan, I am going to the internet. That’s where clients are shopping, right?”

As one might expect, adopting a digital-only consumer banking strategy was a controversial decision inside the organization. “It wasn’t easy,” Butler says. “We had a board of directors that wasn’t necessarily on board. We had old school retail banking people who thought that branches were the way to go and that we should build new stores.” But that’s not the future the 57-year-old Butler, a baby boomer whose career experience is firmly grounded in a very traditional approach to banking, had in mind.

We really believe that the organization we are building is going to be a blueprint for the future of community banking,” he says.

Let’s begin with some background on how Radius came to be in the position of essentially reinventing itself in the first place. Formed in 1987 as First Trade Union Bancorp, the federally chartered thrift was originally owned by two union pension funds. First Trade ended up running afoul of the Dodd-Frank Act’s Volcker Rule, which barred the institution from proprietary trading. The bank changed its name to Radius in 2014 as it was beginning to execute its strategic makeover, and its acquisition in 2015 by a group of private equity investors solved the regulatory issue.

Today, Radius’ product lineup includes Radius Hybrid, which pays up to 1 percent interest on balances of $2,500 and above and includes free ATM usage worldwide. The bank also offers a high yield savings account that pays up to 1 percent interest on balances of $2,500 or greater; online and mobile banking capabilities with bill pay; and three personal payments apps including Apple Pay and a person-to-person payments option called Radius Pay A Friend. (The bank has said it will roll out Samsung Pay and Android Pay later this year.)

Butler says that his team has worked hard to elevate the customer experience at Radius, which includes giving customers the products they want—and products that work well. A good example is the ability to open a Radius checking account online without ever touching a piece of paper. Butler wanted a process that was fully automated and could be accomplished quickly and easily. “Our products are good, but we have to make it easy for people to do business with us,” he says.

One of the frustrations that community bank executives often voice about adding a new digital product to their consumer lineup is the poor support they sometimes receive from their core processor. When Radius decided it wanted to offer a mobile payments app developed by a third-party technology company, Butler went to the bank’s core processor and asked for its technical support. “They came back and said, ‘Well, we don’t have the resources to dedicate to it. Oh, by the way, we are going to have a mobile payment product, too. We would like you to just wait for ours to roll out.’ We hung up the phone and said, ‘Well, that was crummy customer service.’” That conversation occurred in 2012 and according to Butler, the core processor in question still hasn’t released the mobile payments product that it asked Radius to wait for. Radius, on the other hand, released its Radius Pay mobile app—which uses an app developed by the Boston-based technology firm LevelUp—in 2013.

Rather than try to create its own development shop, Radius has learned how to work closely with third-party developers like LevelUp. “We agreed that we cannot be the victim of a larger vendor’s decision on how to work with us, but at the same we also agreed that we couldn’t have a thousand programmers running around here,” Butler says. Radius spends a lot of time on due diligence before it agrees to work with a small vendor. In the case of LevelUp, “We made sure we were culturally aligned,” Butler explains. In addition to LevelUp, Radius works with Bottomline Technologies on its digital account opening process, Q2 Holdings on its online and mobile banking capabilities, and Apple on its payments product.

While Radius hasn’t tried to build its own development staff, Butler still has had to surround himself with people who understand the digital world—and most of them are much younger than he is. “If you’re going to build a bank that’s based on a virtual platform, you’ve got to have people who are aligned with that,” Butler says. “You can’t have a [virtual] technology strategy with a bunch of old school bankers. You have to bring in the right people.”

Even though it is just a few years removed from being a very traditional brick-and-mortar thrift that focused on the Boston market, Radius now pursues a national strategy in terms on retail client acquisition and deposit gathering through its virtual channel. The largest number of Radius retail customers are located in Boston because “this is where we’ve been for 28 years, but we have pockets of customers in all parts of the country,” says Chris Tremont, executive vice president for virtual banking. “We don’t look at [customer demographics] just by age and location and income. We take more of a psychographic approach around attracting people who are interested in banking virtually.”

Three years ago, the bank also stopped marketing through traditional channels like billboards, newspaper ads and direct marketing via the postal service. “We are bigger fans of what I would call conversion marketing than brand marketing,” says Butler. “We want to make sure that we are out there measuring the effects of our marketing. We shifted from that concept into the direct to consumer side and that’s where we work with companies like Google Analytics and we use digital marketing to try and put our brand in places where consumers are shopping.”

The one area where Radius does not rely on a virtual strategy is the asset side of the balance sheet. The bank originates C&I and commercial real estate loans through its own relationship management team that focuses primarily on Massachusetts and other parts of New England. It is also an active Small Business Administration lender and announced in May that it had recruited a team to spearhead a national push into that sector. And it has developed a niche in the yacht financing market. Radius does not originate consumer loans, although it has partnered with the marketplace lender Prosper to offer loans from $2,000 to $35,000.

“We are predominately a virtual retail bank on a deposit gathering side, but we are not in a place where we believe we can deliver a superior [digital] product on the loan side,” says Butler. “We will partner with companies like Prosper for referrals but we are not doing any balance sheet lending in the virtual space at this point. We really don’t believe that any consumer loan product is efficient for a community bank to deliver.”

Still, by adopting a virtual strategy for its retail banking business, Radius has placed itself among the forefront of institutions in an era when branch distribution is giving way to the online and mobile channels. All it took was a can-do attitude and a determination, says Butler, “to think more like Apple and less like Bank of America.”

The Big Banks’ Latest Trends in Mobile Banking


mobile-banking-9-10-15.pngBig banks have been committed to working out their mobile strategies over the past two years and are now unveiling the dramatic results they’ve achieved. According to AlixPartners, big banks controlled 67 percent of the primary banking relationships by the second quarter of 2014, while credit unions had 14 percent. Mid-size banks controlled 11 percent, community banks 4 percent and all others at 4 percent. Plus, 78 percent of people who switched accounts went to a big bank, while only 8 percent went to a credit union and the remaining 14 percent to a community bank, mid-size bank or other. It’s an even bigger gap with young people—82 percent of these switchers went to a big bank, while only 7 percent switched to a credit union, and 11 percent to a community bank, mid-size bank or other. The study also shows that in 2014, 65 percent of the people who switched accounts said that mobile played a role in their decision to switch.

Chase Bank, for example, is one of the biggest retail banks in the country and has seen massive gains in retention and customer engagement, along with a steady loss in attrition and branch expense. Over a four-year period, the number of products and services per household has gone up, and attrition rates have fallen to an astonishing 9 percent this year. According to Chase, mobile app users have increased by 20 percent in the past year, mobile QuickDeposit by 25 percent, mobile QuickPay by 80 percent and mobile bill pay by 30 percent.

Not only are these great things for retention, but they are also business strategies that are saving the bank money. Today at Chase, 10 percent of all deposits are made via mobile. Over a seven-year period, teller transactions have been cut in half, driving a tremendous cost reduction. Since 2010, Chase has cut out over $3 billion in costs.

For the past two years, Chase, as well as other top big banks, including Bank of America, Citi, Wells Fargo and U.S. Bank, have been offering the top five mobile services—mobile banking, mobile bill pay, mobile deposits, ATM/branch locator and P2P payments. The list is growing, as three new services have recently become a standard for all of these banks—Apple Pay, pre-login balances and mobile-friendly websites.

Apple Pay
By January of 2015, 300 financial institutions had been approved for Apple Pay, and in April, that number jumped to 2,500. Today there are about 375 active financial institutions using Apple Pay, 250 of which are credit unions.

Mobile payments have a slow usage growth though—only 0.5 percent of people in 2014 with near-field communication (NFC) equipped phones were doing mobile payments regularly, meaning they did at least one mobile transaction per month. According to Deloitte, that number is forecasted to jump to 5 percent by the end of 2015.

Pre-login Balances
All five of the top big banks now offer the ability to check your balance without logging into mobile banking, and it’s a feature that is proving to be one more way to drive engagement and remove a barrier to mobile usage. Customers using Citi’s Snapshot, for example, sign in to mobile banking three times as often as those who don’t.

Mobile-Friendly Websites
Google announced in May of this year that there are now more Google searches on mobile than there are on desktop computers, a trend that greatly influences how people are making decisions to buy products.

In about six out of 10 cases, when people are shopping for bank products, they’re doing online comparisons, meaning banks now have to anticipate the growing percentage of website traffic coming from mobile. Currently, about 15% of banks’ website traffic is coming from mobile, which will only continue to grow.

Not only did Google announce the state of mobile search, but also starting in April, they’ve put a requirement in place that if your website is not mobile friendly, they’ll move the placement down on Google’s search results.

Of the top 10 banks, every single one has a mobile friendly website. Four out of the top 10 credit unions have passed the mobile friendly test.

As customers are flocking to digital services, the big banks are growing stronger. Credit unions and community banks can stay competitive, though, by continuously training their team to have a mobile mission and being disciplined enough to innovate constantly.