Why Banks Are Slow to Embrace P2P Payments


P2P-7-3-17.pngMost banks have been reluctant to offer person-to-person (P2P) payments services, although the market—which the research firm Aite Group estimates has at least $1.2 trillion in annual payments volume in the United States alone—probably deserves a closer look.

Writing in a May 2017 research report, Talie Baker, a senior analyst in Aite’s retail banking and payments practice, argues that a P2P payments capability could be a “competitive differentiator” for financial institutions as they fight for market share in a crowded mobile banking market. And it’s a market that could be heating up as both traditional banks and fintech companies with their own payments offerings jockey for competitive advantage. “The P2P payments market is seeing growth in the adoption of digital payments, and both bank and nonbank providers, including tech giants such as Facebook and Google, are looking for ways to secure a piece of the P2P payments pie,” she wrote.

Most financial institutions offer a P2P option either through the Zelle Network (formerly clearXchange), which is owned by a consortium of banks and launched its new P2P service in June, or Popmoney, which is owned by Fiserv, the largest provider of core technology services to the industry. A total of 34 institutions currently offer Zelle, including the country’s four largest banks—J.P. Morgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup. Alternative providers include Facebook Messenger, Google Wallet, Square, PayPal through either its PayPal.me or Venmo services, and Dublin, Ireland-based Circle.

With 83 percent of the digital P2P market share in the U.S., compared just 17 percent for the alternative providers, banks are clearly in command of the space. Some of that advantage is attributable to the industry’s large installed base of mobile customers. “They have a captive audience to start with … and that gives them a one-up on, for example, a Venmo or a Square that don’t have a captive customer base and have to go out and build their business through referrals,” says Baker. However, the banks need to be careful that their big market share advantage doesn’t result in complacency. “Alternative providers are catching up from a popularity perspective and are doing more volume, and banks probably need to step up their game a little bit from a marketing perspective to keep their market share,” Baker says.

Why hasn’t the P2P market grown faster than it has until now? For one thing, P2P providers generally will have a difficult time charging for the service since consumer adoption has been slow. “Checks are free today, it’s free to get money from an ATM, so if [the services] are not free, I don’t know if they’re going to be popular for the long haul,” Baker says.

Another obstacle is the enduring popularity—and utility—of cash. Baker says that many potential users are still comfortable using cash or checks to settle small debts with friends and family—which is still the primary use case for P2P services. “I love being able to make electronic payments personally, I just have found that my peer group is not as up on it,” says Baker, who did not give her age but said she was older than a millennial.

The biggest impediment to the market’s growth, however, is the lack of what Baker calls “ubiquity,” which simply means “being available everywhere, all the time.” Cash and checks are widely accepted mediums of exchange, while most P2P services run on proprietary networks. “All of them are lacking in interoperability, so if we want to exchange money and I am using Venmo and you are using Square, we can’t,” Baker says. Baker points out that this is not unlike how things worked when email was becoming popular in the early days of the internet, where you could only exchange emails with people who shared the same service provider. Of course, a common protocol eventually emerged for emails and Baker expects the same evolution to eventually occur in the P2P space.

Why should banks care about a free service like P2P payments? Baker says that based on her conversations, many smaller institutions “don’t seem to understand that P2P helps drive consumer engagement. I think that P2P services keep them right at the center of a consumer’s life and keeps driving engagement with the banking brand.”

Stop Trying to Talk Your Customers Into Liking Your Checking Accounts


Recently I was reading an article from Chris Nichols, chief strategy officer of Winter Haven, Florida-based CenterState Bank, entitled Public Perception of the Cost of Checking.

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.

Speeding Up the Account Opening Process



Many banks aren’t meeting customers’ digital expectations, and could be losing accounts as a result. Kimberlee Mineo of Bottomline Technologies explains why consumers abandon the account opening process and how financial institutions can improve the experience.

  • Why Customers Abandon Digital Account Applications
  • Tips to Streamline the Account Opening Process

Making Sense of Fintech Lending Models



What type of fintech lending solution should your bank pursue? Mike Dillon of Akouba outlines what management teams and boards need to know about these lending models, and how each can benefit the bank.

  • The Three Fintech Lending Models
  • How Each Model Can Meet a Bank’s Strategic Needs
  • Benefits of Technology-Enabled Loans

Rebuilding Trust Through Technology


technology.png

After many years in banking, we have heard every kind of criticism leveled at banks by angry consumers and politically inspired public servants. Most recently, Wells Fargo & Co.’s cross-sell scandal threw another log on the fire of contempt that many consumers have for banks. Despite a few very bad ethical lapses, it is always shocking how many banks get painted as bad actors when consumers and communities benefit directly from their business models. This benefit is not limited to the beloved stories of the community bank setting up a scholarship fund or a day of caring painting crew, or even the billions of dollars committed to Community Reinvestment Act activities by the industry. As noble as those efforts are, they pale in comparison to what banks really do.

Millions of consumers use the banking payments rails for free. Keeping a very small amount of money in a checking account can allow a consumer to reap the benefits of direct payroll deposit, free bill pay, free remote deposit capture and free ATM access in their bank’s network. Amazingly, should the consumer face a loss of funds due to hacking, the bank (which is not being paid for this service) often makes the consumer whole. The day-to-day systems that most consumers use are remarkably affordable.

Still most Americans do not trust banks. The most frequent complaints tend to fall in one of three areas: a lack of transparency; slow and difficult user experiences; and the promotion of products that do not fit the need of that particular individual. There are ways technology can combat these common complaints and even help ameliorate the ethical lapses that have tarnished banking.

Paperless application and smart data technology can make the application easier and more convenient for consumers and businesses alike. They can also speed up the time that is required for approval. It is often the credit activities that get banks tarred and feathered. It is understood that consumers and businesses turned down for requested credit will feel the sting of that rejection—particularly when the banks takes an inordinate amount of time to deliver its decision. More prompt decision making is helpful for all consumers.

Sophisticated data and AI systems could be built into the technology that would guide bankers to a right-sized product offering in real time. They can even enable online comparisons of products that gives the consumer a better idea of the available options and how well they fit with the consumers’ long-term goals. A few rogue bank models worked better for the bank if the customer failed than if they succeeded have given consumers the right to question if the advice that is offered by their bank is in their best interest. Recently a bank CEO, off the record, compared that experience of some bank customers to his experience buying a cellular data plan for his family. “I kept on wondering it the plan [the salesman] was touting was the best for the phone company or for his commission or actually for me. Banking can’t be like that; we have to make this better.” Fortunately, there is technology that is already making it easier for banks to understand what their customers need and to serve that need more transparently.

Transparency is going to be key. Having a customer click the “I have read this box” will not work in the long term. Online tools including the use of video, chatbots and embedded quizzes can make disclosure easier for consumers.

Regulatory technology is just developing, but there is the possibility that regtech will lower compliance costs and streamline disclosure. Some of the new technologies will provide internal bumpers that can help prevent rogue behavior from an employee. What a bank has for its regulators it will also have for its internal risk management team. Detecting ethical breaches before they become systematic or catastrophic will be more possible.

Several banks are going a step further towards building consumer trust. They are using their online platforms to support their customers financial health. Bank of America Corp. just rolled out a spending aggregation tool that allows consumers to see where their money goes and budget for the future. It even allows consumers to add data from non-Bank of America accounts. It is a smart way for Bank of America to get a better understanding of their customers while providing a useful tool that requires no effort to use.

It is easy to see fintech providers as competitors. Looking at online lenders and digital investing platforms as the enemy because they compete directly with banks is a common perspective. It is also possible to think of these companies as innovators that will help us rethink how to make our customers trust us again. Many of these fintech innovators are eager to work with banks that want to provide better banking experiences. These innovations may be the way banks return to delighting their customers and building loyalty.

A Quicker Way to Get Debit and Credit Cards to Your Customers


credit-cards-11-30-16.pngAs consumers continue to embrace online and mobile banking channels, financial institutions are reevaluating the branch’s role in modern banking. Historically, branches have served at the forefront of the financial institution and customer relationship. Even though digital account solutions provide new levels of convenience and flexibility, the branch remains a vital channel facilitating interpersonal interactions between financial institution and customer, and fosters greater in-depth communication between the two.

Instant issuance is establishing itself as a proven program to attract more customers to the branch. Instant issuance systems allow financial institutions to print credit and debit cards on-demand inside the branch, for new customers or when an existing customer needs a replacement card. When branches enable on-demand printing of credit and debit cards, both issuers and customers win. Banks that take the additional step in providing permanent payment cards on the spot realize a much stronger return on investment in terms of customer acquisition, satisfaction and loyalty.

New programs, like instant issuance, draw customers, especially millennials, because it reduces the wait time in receiving access to their funds. Contrary to common perception, cash is a large draw for millennials. According to a GoBanking Rates survey released in 2016, 60 percent of millennials still prefer to be paid in cash, which means the millennial reliance on debit cards will remain strong, presenting a natural opportunity to actively engage millennials more effectively in their branches.

While millennials may appear to operate much differently than prior generations, their core expectations are much the same. They seek convenience and want their financial institutions to provide new and innovative technologies that keep pace with the technologically driven world in which they live.

In today’s world, where bank customers are subject to card data breaches with alarming regularity, protecting customer data is paramount to the success of any financial institution initiative. Instant issuance provides an opportunity for financial institutions to lead the conversation around EMV® integration and security. EMV provides heightened security by embedding microprocessors inside debit and credit cards, replacing the magnetic stripe card.

Financial institutions that implement scalable, cost-effective solutions that are EMV-enabled are better able to educate customers on changes to the transaction process. As EMV adoption has been a source of uncertainty and concern for financial institutions, retailers and consumers alike, instant issuance provides a convenient method for providing much-needed knowledge around the shift.

Instant issuance proves to be a secure and affordable way for financial institutions to realize the value of their branch investment. By drawing customers into the branch and getting credit and debit cards to market quicker, issuers are keeping payment cards top-of-wallet and increasing interchange revenue.

As the branch continues to reassert itself as a strategically important banking channel, financial institutions that leverage instant issuance as a strategic differentiator and recognize its role in driving customer activity within their branches will be better positioned to exceed customer expectations.

To learn more about millennial payment trends, download the whitepaper, “What Small-to-Midsize Financial Institutions Can Learn From Millennials.”

EMV® is a registered trademark or trademark of EMVCo LLC in the United States and other countries.

One Bank’s Digital Transformation Journey


transformation-1.png

Last week Chris Skinner, a FinXTech advisor and fellow contributor, talked about the difficulties of banks shifting to digital, and shared the following: “It is radically different thinking, and is a cultural outlook, rather than a tech project.”

As the head of Radius Bank’s Virtual Bank, I work with a team that has been through the digital transformation process. And I can attest to the above statement: The shift to digital is far more than a project. It’s a total reconstruction of a bank’s culture, organization and systems. It is no easy task but the upside opportunity is big.

Digital transformation is perhaps the most important challenge facing banks at the moment. The penetration of the financial services industry by financial technology and the proliferation of alternative banking solutions presents the stalwarts with a choice: change, or else. Banks are realizing that the adoption of sophisticated, personalized technologies is no longer a “nice to have,” but rather a “need to have.” Never before has the customer experience been more critical to a bank’s success than it is today. I feel lucky that the Radius Bank team understood this early on, and set on a course aligned with this new way of banking.

When I first joined Radius Bank at the end of 2008, we were a small, commercial-focused community bank with six branches in Boston and New York. Mike Butler, the Bank’s CEO and president (and a member of the FinXTech Advisory Board), asked me to join him to help build the virtual bank. We recognized that the traditional model wouldn’t be able to address changing consumer demands. In light of that, we set out to build a bank focused on the future rather than the past.

Over the past several years, our Virtual Bank has actually become our primary retail banking strategy. While we’ve maintained one flagship financial center in Boston, our focus on customer experience, product development and technology offerings all starts with and focuses on the digital channel. We’ve made significant investments in technology to build a forward-thinking and responsive virtual banking platform that has allowed us to onboard and serve many new customers from across the country without the need to visit a branch.

We also realized a while back the importance of fintech partnerships. Let’s face it: Consumers today have more choices in terms of managing their finances than ever before, and many of them are choosing to put their trust in nonbanks. For us it has been about finding the right fintech firms to work with, and over the last three-plus years we’ve launched strategic partnerships with fintechs in areas such as mobile payments, investment management, student loans and alternative lending.

We’re proud of what we’ve been able to accomplish, but the transformation to a digital bank is a journey that’s never complete. It requires ongoing support from top leadership, including our board of directors and management team, and a creative, nimble team that brings marketing, sales, risk and IT together to build an infrastructure focused on security and scalability.

I’m eager to share some of the knowledge I’ve gained throughout our digital transformation process. I’m also eager to learn from my peers in banking and fintech about what’s next. FinXTech asked me to participate to represent the banking perspective, but as I’ve outlined above we’re not your traditional community bank. We sit at the intersection of financial institutions and technology companies—an increasingly productive cradle of innovation and disruption.

I look forward to engaging in these important conversations with you.

Use Good/Better/Best for Checking Success


checking-accounts-10-28-16.pngShop 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:

  1. 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.
  2. 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.
  3. 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:

  1. A fee averse buyer wants free checking if it’s available or the cheapest account you offer.
  2. 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.
  3. 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.

Five Predictions About Banking’s Future


techonology-10-7-16.pngWhat does the future hold? As I referenced in an earlier article, I gave a presentation about the future of banking at Bank Director’s third annual Bank Board Training Forum in Chicago Sept. 29-30, and promised that I would share some of my thoughts with you after the conference. I might end up being completely wrong, of course, but here are my predictions and I’m sticking with them.

Technology
Going forward, I think we will begin to see the ascendancy of digital distribution channels in retail banking. Driving this change will be the continued digitalization across the entire economy, combined with the integration of millennials into the world of work, mortgages and parenthood at an accelerating rate. We occasionally refer to millennials as “digital natives” since they grew up on video games, cell phones and the Internet, and banks will have to provide a robust digital option if they want to keep them as customers. The bank branch isn’t dead, but I see it becoming increasingly less important over the next decade.

Disruption
The long-term future of the website lenders is unclear to me since they rely primarily on private equity investors and the capital markets for their funding, which is much less reliable over the course of an entire economic cycle than bank deposits. The question for them is whether they can take an economic punch in a recession. The payments competitors are here to stay because what they really want isn’t a banking relationship with customers so much as access to their data, including their financial data, because it enables them to bombard those customers with highly differentiated and customized offers on merchandise. And much of the technology of web site lenders and payments competitors will eventually be adopted by the banking industry. This is certainly true in the mobile space, but also in areas like commercial loan underwriting, which remains a laborious, people-intensive process. In this sense, the future of traditional banking is fintech.

Economy
This is probably one of the safer predictions that I made: There will be at least one recession between now and 2026. We are now in the seventh year of an economic expansion which, believe it or not, is the fourth longest going back to 1945. Nothing in this world lasts forever, and the current expansion won’t either.

Consolidation
This is probably my boldest (or craziest) prediction: There will be 4,558 banks as of December 30, 2026. Here’s how I got to that number. The annual consolidation rate over the last couple of years has been approximately 3 percent. There are a little over 6,000 banks today, and if you assume the industry will continue to consolidate at that rate for the rest of the decade, you get close to that 4,558 number. However, I factored in one more variable—one year in which a recession resulted in a consolidation rate closer to 5 percent to account for a spike on bank failures, assisted transactions through the Federal Deposit Insurance Corp. and relatively healthy banks hedging their bets by pairing up with a stronger merger partner. I’m sure I will be wrong about the exact number for banks in 2026, but there’s no question that there will be significantly fewer of them.

Demographics
By 2026, the last of the baby boomers will be heading towards retirement, most of the banks will have Gen X CEOs (the oldest of whom will be in their late 50s to very early 60s) and millennials will be moving into senior management positions. Gen X’ers and millennials are much more intuitive when it comes to digitalization issues generally, and I expect that their ascendance will only accelerate the digitalization of banking and personal finance. And of course, millennials will also be the single largest consumer demographic by 2026, so they will be eating their own cooking when it comes to digital banking.

Finally, I anticipate that something no one expects to occur (and therefore won’t predict) will end up having a huge impact on the industry. We had already seen the emergence of smart phones in 2006, but the ubiquitous iPhone wouldn’t be introduced until 2007, and 10 years ago how many people expected the mobile phone to revolutionize banking?

What do you think the next big thing will be?

What Makes Umpqua Branches Unique


Umpqua Bank has one of the top branch designs in the nation, according to a recent ranking by Bank Director. Umpqua Bank’s Brian Read, executive vice president for retail banking, talks to Bank Director Editor Naomi Snyder about the company’s unique vision for its branches, which the company calls “stores.”

This video includes a discussion on:

  • What Makes the Stores Unique
  • What a Universal Banker Does
  • Whether Bank Branches Have a Future in a Digital Age