How America’s Newest Adults are Changing Banking

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Believe it or not, Generation Z is already dipping their toes into the banking world. Are banks ready?

With the oldest Gen Z members reaching their mid-20s, America’s newest adults are starting to generate their own forms of income, graduate from college, budget for large financial decisions and even learn the basics of money management from their favorite TikTok creators. Banks must prepare for this mass generational shift in wealth and personal financing.

For years, financial institutions have adjusted their core offerings to accommodate millennials’ financial preferences and patterns in spending behavior. These 73-million-strong tech-savvy adults have become the most populous generation in U.S. history, surpassing baby boomers.

Entering the job market during the Great Recession, which forced millennials to make more risk-averse spending decisions. With the exception of outstanding student loans, many avoid debt and prioritize spending on life experiences over material possessions to avoid regretting financial decisions down the line.

Millennials are now the largest driver of net new loan demand, according to Morgan Stanley loan forecasts and historical household information. This lending “sweet spot” falls between the ages of 25 and 40, and could persist for to a decade. But seemingly unbeknownst to the majority of banks, Gen Z is nearing — and entering — their early 20s.

It is time for banks to update their reality: America’s youngest adults – Gen Z – are about to age into that lending sweet spot. Combined, millennials and Gen Z will reach the largest generational demographic in the country: 140 million adults whose loyalty to existing financial institutions is very much in flux. This wealth shift will undoubtedly be the impetus for an industry-wise reimaging of consumer banking and lending.

Reports from Morgan Stanley’s population forecasts suggest that Gen Z will comprise of the most populous American generation ever by 2034, with an estimated peak of 78 million. By that time, this generation of “kids” are expected to have increased their aggregated borrowing levels, eventually accounting for a third of all consumer debt in the U.S.

Still thinking of them as kids? It’s understandable, but they could set the tone for how the entire banking industry evolves in the coming years — including your company. When it comes to generational and demographic shifts, there is no recipe for success, especially in banking. However, the tools needed to survive are readily available for the banks that are willing to seize them.

At a bare minimum, banks will need to redesign their legacy systems and offerings by adding digital enhancements, similar to the industry-wide digitization brought on by millennials in recent years. Though the behavioral characteristics of millennials and Gen Z overlap, don’t make the mistake of thinking that they are the same teams playing the same game.

Some Gen Zers are given a smartphone before they are even the age of 10, according to The Harris Poll. Furthermore, those children are allowed to create their own social media accounts by the age of 13, oftentimes earlier. During these formative years, Gen Z kids begin to develop their own personalities, live their own lives and form digital relationships with people, communities and brands alike.

Why does this matter? Because banks have relegated themselves to the adult world, where you must be 18 or older to open your own account. They are losing out on the most influential years of America’s youngest adults — when they begin to associate with their favorite brands and subsequently spend money to engage with them.

The same digitized offerings that banks have spent years formulating for millennials are simply not going to cut it for Gen Z. Banks will need to redefine the concept of “traditional” banking and create a “neo-normal” standard if they have any hopes of engaging this massively influential generation of young Americans. Don’t simply market differently to them. It’s time to shift the strategy – design differently for them.

Gen Z isn’t just about TikTok dance challenges and viral memes. Most of them were seeking answers to their curiosities via search engines around the same age we were reading “Curious George.” This generation is the most diverse and well educated to date, and they are very keen on being treated like adults — especially when it comes to managing their personal finances. How does your bank plan to greet them?

The Secret to Lifelong Relationships With Generation Z

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customer-12-14-18.pngGeneration Z consumers are positioned to be a significant force in the financial marketplace. This population group will soon begin graduating from college, earning disposable income, and making decisions about managing their finances.

This opportunity is of interest to many financial institutions that will compete for the loyalty of Gen Z customers for the next several years.

Banks that have been active in education lending have well-established relationships with the Gen Z market as customers already, which offers them an advantage. While being a trusted student loan provider is a start, financial institutions that wish to create lifelong customers must build on the initial relationship with technology-enabled products and individualized experiences the Gen Z consumer has come to expect.

The Gen Z Opportunity and Challenge
The impact of Gen Z on the financial services marketplace must not be underestimated. There were approximately 61 million members of Gen Z in the US in 2015, or about 19 percent of the U.S. population. This percentage is expected to grow to 25 percent by 2020.

While both the Gen Z and millennial generations have grown up in an environment shaped by technology, these groups are very different in their approach and use of financial services.

Gen Z has never known a world without smartphones, social media, or on-demand delivery of products and services. Adobe, Inc. has estimated that nearly half of Gen Z consumers are connected online for 10 or more hours per day and their preferences are strongly influenced by social media.

They are likely to conduct many of their daily activities on mobile devices. Also, while Gen Z members reportedly recognize that large financial institutions can offer products and services using advanced technology, they are less trusting of traditional banks than older customers. Approximately 75 percent of the Gen Z population surveyed said they trust traditional banks (as compared with digital payment solutions) – still a strong preference, but less than the 92 percent reported by baby boomers.

How To Win Gen Z Consumers
To win the loyalty of Gen Z, banks should focus on the following areas:

Invest in digital products and a best-in-class user experience. Gen Z consumers are accustomed to conducting business via mobile devices. So any services you offer—credit and savings products, investment services, or access to account information—it must be available online 24/7.

Some day, chatbots based on artificial intelligence (AI) will likely be an important way to connect with Gen Z consumers.

Focus on the right products. Understand which financial products and services resonate with Gen Z consumers. Research by Javelin, a strategy and consulting firm, shows 51 percent of Gen Z-ers do not plan to apply for a credit card, but they do start thinking early about retirement, according to a 2017 study by the Center for Generational Kinetics. For these reasons, your institution may make more headway by cross-selling savings accounts or retirement programs to your student loan customers.

Use social media. Gen Z members rely heavily on social media, so target your digital marketing to genuine influencers on those platforms like Twitter, Instagram, Snapchat, etc.

Foster a spirit of community. Research shows Gen Z members seek community. Being involved in your community through philanthropy, hosting career fairs and educational events are ways banks can appeal to Gen Z consumers.

Market in an age-appropriate manner. Make sure your marketing campaigns are designed and written in a way that will resonate with the Gen Z audience. Since Gen Z values experiences, one idea to consider is a travel rewards program layered on a promotion for a savings account or debit card.

Credit unions, banks and other financial institutions have originated approximately $90 billion in private student loans. That represents a lot of potential for Gen Z borrowers to become life-long customers if you build on those relationships with the right products and services, technology, social media and marketing.

Facing Up to the Financial Technology Challenge

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technology-5-18-17.pngOf all the most difficult issues that bank boards must deal with, technology may be at the top of the list. Banks have long been reliant on technology (think IBM mainframes and ATMs) to run their operations, but in recent years technology has become a primary driver of retail and small business banking strategy. This change can be tied to the growing ubiquity of digital commerce, the integration of the mobile phone into the fabric of our everyday lives, the birth of social media and its adoption as an important business and commercial channel, and the ascendency of the millennial cohort as a major factor in our economy. Technology is everywhere, it’s in everything, and that trend is only going to become more pronounced in the future.

Why do bank directors as a group struggle so much with technology? Are they just a bunch of Luddites? In all fairness, most directors are not career technologists and therefore bring only limited professional knowledge of technology to the task of board governance. But demographics are clearly a factor as well. The average age for most bank boards ranges between the early 60s to the mid-70s, and baby boomers often find themselves overwhelmed by all of the technology-driven changes they see occurring around them. And while there may be an understandable tendency to resist adapting to new technologies in their personal lives, bank directors simply must understand how technology is changing their industry, and how it is impacting their institutions.

Christa Steele is the former president and CEO of Mechanics Bank, a $3.4 billion asset bank in Richmond, California, and more recently the founder and CEO of Boardroom Consulting LLC in San Francisco, where she works closely with bank CEOs and their boards. Steele doesn’t mince words—directors must educate themselves about the changes in financial technology that are transforming their industry—and she offers some suggestions about how this can be done. The following interview has been edited for length and clarity.

BD: Why do most directors at community banks struggle so much with the topic of technology?
Scope of knowledge and lack of diversity in the boardroom. This diversity does not stop at gender, age and ethnicity. Typically, community bank boardrooms are filled with childhood friends and family. This served a purpose early on, especially when those banks were formed. However, as a bank grows and evolves, it’s important to bring in new perspectives. It’s no secret that the majority of community bank revenue models are derived from the net interest margin. Fee revenue is virtually obsolete relative to the overall operating income for most of these institutions.

So how does a bank make up for this shortfall of diversified revenue streams? Management teams and their bank boards need to take a serious look at their digital strategy and internal infrastructure. If they do not assimilate to the changes occurring in what I call this vortex of technology, they’re going to get left behind.

Fixing this starts with succession planning for the institution. We have a lot of community banks where the management teams are close to or at retirement age. Many of these leaders do not want to make necessary changes because of the threat of internal disruption, time commitment, costs and maintaining a short-term horizon. Boards are similar. Most bank boards are tired. I feel boards in general have done an exceptional job getting their arms around compliance and safety and soundness issues in the last 10 years. However, they’ve taken their eye off of the ball when it comes to marketing, digital strategy and technology initiatives. I remember hearing about a Bank Director survey a few years ago in which board members were polled and asked how many of them used their cell phones to transact. It was staggering to learn that nearly half of the respondents didn’t use their bank’s mobile channel. How are these board members supposed to understand technology trends and its impact on the financial sector and their own banks?

BD: What can directors do to become more comfortable with technology?
Get educated beyond compliance training. Attend Bank Director conferences, ask questions, talk to folks involved in financial technology, follow automation. Pay attention to what’s trending. Get connected to social media. Join LinkedIn and gain perspective on what’s going on in the United States and abroad pertaining to technology in the financial sector. See what other people are doing outside of your own market.

Change up the boardroom. Board appointment should be strategic in nature and no longer be about bringing your childhood friend or local jeweler down the street on your board. Bring in a fresh perspective. Evaluate board terms and board limits. A board that is a strategic asset to its bank should consist of expertise in marketing, cybersecurity, digital/e-commerce, financial and risk. Each of these appointments should be from outside your institution. Do not be opposed to bringing in someone younger in their 30s or 40s. By bringing in somebody younger, you bring in someone who is engaged in social media. Social media is where it’s at. We have banks that are interacting and partnering with Facebook. Bank of America just started letting customers transact through a universal login with Facebook where their customers can pay their mortgage payments, they can transfer money between accounts, they can do a variety of things through Facebook. The remainder of your director appointments should be former or current CEOs who provide a macro-level mindset to the ongoing challenges facing the institution.

BD: What are some of the barriers to innovation, particularly in the community bank space, around financial technology?
Lack of understanding the competitive landscape (it’s no longer just the community bank down the street), time, cost and willingness to embark upon a digital transformation. It’s a lot of heavy lifting for management, and oftentimes the board does not understand the complexities and costs associated with this endeavor. Many banks do not fully understand the technology contracts they have in place with their core providers and other technology vendors. Those contracts have them locked in for a duration of time, typically three to seven years. That is the number one barrier to making any changes. It is costly to exit existing contracts.

Many community banks are under utilizing the capability of their existing vendors. At Mechanics Bank, we went through and evaluated every vendor contract. We cut $3.5 million dollars out of our budget in a single calendar year through renegotiating, exiting and forming new relationships with vendors. We found we were paying for services we did not need and paying for services we weren’t using but should be using. This is the first step in embarking upon a new digital strategy.

I highly encourage bank boards to have a refresher course on how a bank operates using a bank simulation model. Each board member picks a role of CEO, CFO, senior credit officer, etc. and has to manage a bank’s funding, pricing, growth, capital requirements, loan loss provisions and so on. This is not only a great team-building exercise and will provide for a greater appreciation of the day-to-day management team of the bank, it will also set a solid foundation for discussing what is needed in the way of technology innovation to run the bank going forward.

Evaluate what you have, get educated on what’s trending, then decide what you need. Do not be the retailer that gets eaten alive by Amazon Prime. Be proactive instead of reactive to the changing needs of your customer base.

BD: Are the major cores an impediment to innovation?
I wouldn’t say impediment. There is no doubt that the big three core technology providers have a stronghold. But they are looking to innovate as well. Their biggest attribute is size and scale. Their biggest downfall is they are a slow-moving ship coming in and out of port. The long and the short of it is, you’re not going to get rid of your core provider. I feel it’s become increasingly important to be better partners with your core. When banks push for some kind of innovation, the cores typically say they’re planning on doing that two years from now. That is when the banks get irritated and push for needing it now but do not want to have to pay for a custom project. That is the frustrating part for the bankers, but the bankers need to help the core understand their needs. I am a firm believer in more outsourcing and in banks becoming nimble. This takes time but is achievable and necessary in this day and age.

BD: When we think about the technology challenges that banks face today and how the board should engage in finding solutions, does it really boil down to a people issue?
Yes, it is that simple. There are a lot of community banks that just refuse to think that financial technology innovation is impacting them. CEOs and directors need to have an open mind and be willing to learn something new. If you understand your digital strategy, you understand your technology strategy and you understand what’s going on around you—guess what, all of the sudden your board is engaged, and it’s going to make your company perform better.

Why Community Banks Need to Embrace Social Media

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social-media-3-10-17.pngSocial media allows banks to appeal and engage with millennials, who constitute a quarter of the U.S. population.

Banks are actively stepping into the social media game by creating Facebook pages, Twitter accounts and YouTube channels to reach the masses with company updates, money management tips and education. IBM suggests that banks need to use social media not only for outreach—but customer service as well. The tech giant notes that millennials are more apt to air their grievances via social media than call a bank directly and wait on hold. Banks can use their twitter accounts as a customer sounding board and to address issues directly?thus, keeping customers happy and their money in the bank.

Social Media Data for Underwriting
It is projected that in 2015, there were 26 million credit invisible consumers in the United States alone. About 8 percent of the adult population in the country have credit records that can’t be scored based on a widely used credit scoring model. Those records are almost evenly split between the 9.9 million that have an insufficient credit history and the 9.6 million that lack a recent credit history.

While large financial institutions are heavily focused on serving the credit-eligible population across the country, community banks play a critical role in the welfare of those left beyond the borders of eligibility. The opportunity to expand access to financial services in communities with an ineligible population is a critical step towards financial inclusion in those communities.

Social media channels are gaining an important role as alternative sources of data on credit eligibility. Who you know matters (especially in defined communities), and companies like Lenddo, FriendlyScore, ModernLend and credit scoring solution providers are leveraging this idea with the use of non-traditional sources of data to provide credit scoring and verification along with basic financial services. Social media also gives lenders an insight into how an applicant spends their time, which can be used as an alternative way to indicate someone’s financial trustworthiness, expanding opportunities for banks to reach new categories of customers.

While loan officers at megabanks apply impersonal qualification criteria without regard to individual circumstances, community banks are initially better positioned to benefit from the use of social media channels to get to know their customers even closer than they already do.

As emphasized by the team at Let’s Talk Payments, a source of information and research online about emerging financial services and payments, the following are some of the tangible opportunities for banks embracing social media data for creditworthiness assessment:

  • The opportunity to capture a new customer segment
  • Differentiated customer experience
  • Strengthening the existing underwriting process
  • Enhanced fraud prevention
  • Stronger engagement with the community

Given the scale of credit invisibility in the country, an innovative approach to potential customer profiling in communities where banks operate could serve as a competitive edge for those banks. Social media data can be used to extend loans to previously ignored groups in the population, improving household resilience and building stronger ties between community banks and their immediate communities.

Social Media is About Relevancy and Accessibility
There are two elements to relevancy and accessibility: an opportunity to gather feedback to improve products and services and the opportunity to increase accessibility and transparency to customers.

“Customer feedback is indispensable for any business that wants to grow, and the same holds true of community banks. Social media interactions are your doorway to customer conversations and feedback, which can help you fine tune your business. Tapping into online conversations on social media should shed light on customer problem points, helping resolve issues before they escalate,” said Jay Majumdar, vice president of sales at ICUC, a social media management services company.

Ignoring conversations about your bank on social media is a dangerous path—it removes control over the message and brand image, and it damages your reputation as a customer-centric business. It’s especially damaging for community banks that are dependent on community loyalty and long-standing relationships with customers. Jill Castilla, president and CEO of Citizens Bank of Edmond, echoes this point, saying that “social media is not about putting a message out there and leaving it. It’s a conversation.” She also emphasizes that “social media is about relevancy and the accessibility that you expect from your hometown community bank. It’s a tangible way that our community can see we’re living up to be the community bank you used to think about. That’s what social media allows us to achieve.”

Three Ways Fintech is Riding the Social Commerce Wave

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Consider two of the most prevalent digital trends over the last decade or so: social media and e-commerce. A growing number of users are interacting with companies on social media platforms such as Facebook, Pinterest and Instagram. An increasing number of people are also turning to the internet and e-commerce to purchase virtually any item, for any occasion. For these reasons, the emerging “social commerce” trend makes a lot of sense.

Social commerce is roughly defined as the intersection of social media and e-commerce. For example, Facebook has added a “buy” button, so consumers can make purchases directly without ever leaving the social network. In many ways, 2016 was the “Year of Social Commerce.” Worldwide, revenue earned directly through e-commerce using social media totaled $20 billion dollars in 2014, according to the software provider ReadyCloud.

As social commerce grows, so will the demand for products and services to manage the flow of payments from social networks to vendors and institutions on the back end. Fintech startups and banks are coming up with new ways to meet these demands. Here are three examples.

Social Gifting
There’s something inherently social about gift giving. Over the years, gift cards have become popular among both consumers and brands of all shapes and sizes. While gift cards might seem tailor-made for social commerce on a surface level, for the most part, people are still buying physical gift cards at retail locations and gifting them to friends and family, who then have to keep them in their wallet with countless others, which can be inconvenient.

That’s the problem that Texas social commerce startup Swych is aiming to solve. Swych has created a digital platform where consumers can send, manage and redeem their gift cards all in one place. Currently, Swych is available as an iOS app for U.S. consumers, and major retailers such as Amazon, REI and Sephora offer gift cards through the platform. Swych users can eliminate their physical gift cards by uploading them into the application if the retailer is on Swych. The company also introduced “Swychable” gift cards that can be redeemed with any retailer within the Swych ecosystem.

Swych aims to transform the gift card market from obsolete technology and a clunky user experience to a convenient and connected social future. Users can view friends’ profiles on Swych, see what brands they prefer and give a gift card that closely matches those preferences. Swych is tackling an outdated industry and making the experience better for both consumers and retailers.

Social Banking Apps
Many banks are wrestling with exactly how to adopt new technologies to capitalize on the social commerce phenomenon. Rather than spending the resources to develop social commerce technologies in-house, many banks are turning to white-label solutions. Urban FT helps banks integrate social commerce features into their online and mobile banking applications.

Specifically, Urban FT helps banks build social payment capabilities into the banks’ own apps, similar to what Venmo accomplishes. Moreover, banks can use Urban FT to provide retail customers with Yelp-style reviews, geolocation, coupons and other social features that people would typically find in third-party apps such as Foursquare or Groupon. Users can even make restaurant reservations or purchase gifts through banking apps that utilize Urban FT’s social commerce technology. Banks partnering with Urban FT realize that if they can offer these services within their own online and mobile banking ecosystem, they’ll be able to increase the lifetime value of those customers and learn more about their social commerce preferences.

Shopify Gets Social
Shopify is one of the largest players in back-end merchant e-commerce services. Anyone who wants to set up an online store, sell goods or services and collect payments recognizes that Shopify is probably the most comprehensive solution available. So it’s no surprise that Shopify is now introducing technologies that will make buying and selling on social media easy for everyday people. The company has developed a free app-based platform called Sello that allows anyone to easily set up an online store, share products on social networks and allow people to purchase these products on their mobile devices.

Sello exemplifies a broader movement within social commerce, which is the democratization of buying and selling, as social media has also done for content creation. Anyone can start a blog and share what they’ve written quickly and easily, so shouldn’t setting up a shop in order to sell something you’ve made be just as simple? Unlike online retailers like Etsy, Shopify has built Sello with social commerce at its core. The most direct purchase path of the future will be creating products, sharing them on social media and enabling a direct purchase from that point. In the future, Shopify hopes that novice Sello users become successful enough to start their own e-commerce business and migrate onto the full Shopify business platform.

Social media may be mature, but social commerce is still in a stage of growth and experimentation. The challenges of the future will be to make purchasing even more frictionless and leveraging social networks to better personalize product offerings. With innovations like social gifting and white label in-app social commerce for banks, it’s clear that our experiences on social media will likely involve much more buying and selling in the near future.

How Black Lives Matter Became Black Banks Matter

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community-banks-8-12-16.pngWhat happens when a small community bank becomes the focus of a grassroots movement? How does the bank sustain and develop the welcome—but unexpected—growth?

In an early July radio interview, Michael Render—better known as Killer Mike, a hip-hop artist who has spoken frequently in support of moving dollars to local black banks—was asked how communities could respond amid frustration that charges were dropped against officers in the Baltimore Police Department. They had been accused in the April 2015 death of Freddie Gray. “You can go to your bank tomorrow and you can say ‘Until you as a corporation start to speak on our behalf, I want all my money. And I’m taking all my money to Citizens Trust,'” said Render. Based in Atlanta, $404 million asset Citizens Trust Bank gained 8,000 new accounts in a five-day period following Render’s plea.

“The community reached a point of frustration,” says Michael Grant, president at the National Bankers Association, a trade association for minority and women-owned banks in Washington, D.C. “It’s time for the African American community to pull together, to look inward and say ‘wait a second. What can we do to strengthen ourselves economically? What can we do to lift ourselves up?’”

The Bank Black movement dates back decades, with roots in the civil rights movement, but recent support is tied to concerns raised by Black Lives Matter. It encourages African Americans to move money into black-owned banks, which in turn support urban communities. There are 24 black-owned depository institutions, according to the Federal Deposit Insurance Corp.

Moving money to black-owned banks, and supporting black businesses, is seen as a positive way to empower local communities. “If we can support these institutions en masse, then these institutions will have a greater capital base, and these institutions will then be able to provide more financing to businesses, to people who need mortgages, to help build wealth,” says Blondel Pinnock, chief lending officer at Carver Federal Savings Bank, a $743 million asset black-managed, publicly traded bank which gained $3.9 million in deposits in July.

OneUnited Bank, which has five branches in low and moderate-income communities in Boston, Miami and Los Angeles, has stepped up its promotional efforts in response to the recent attention to the Bank Black movement. Online visitors are encouraged to take the #BankBlack Challenge by opening a $100 savings account and challenging friends to do the same. The bank has also hosted events in Miami and Los Angeles. OneUnited drives both its online and in-person efforts through the bank’s Facebook, Twitter and Instagram channels.

“A lot of banks are, to some degree, questioning the value of [social media], but it actually can drive traffic into your branch, as well as online traffic, so we’re seeing that it’s worth the investment,” says Teri Williams, president of the Boston-headquartered bank, which has $622 million assets.

In early August, OneUnited reported via social media that the bank had gained $10 million in deposits in July. This windfall in accounts taxed bank staff. “We’re opening up 1,000 accounts a day. We used to open 10 or 20 accounts a day,” says Williams. Tablets within the branch allowed customers to sign up for an account online, with staff available for assistance. But despite increasing staff, customers still experienced long lines in branches.

Williams says OneUnited will continue to use social media and hold events to sustain growth driven by the Bank Black movement. The bank is also adding a call center in Miami, in addition to a current call center in Los Angeles, to handle the increased volume.

Can banks like OneUnited continue this level of growth? There’s always the risk that customers won’t like the technology that small banks provide, especially if they are coming from a large bank. “The proof is in what you do next, and how you sustain it,” says Chris Lorence, executive vice president and chief marketing officer at the Independent Community Bankers of America (ICBA). A well-planned marketing campaign is critical to gaining and retaining customers in the long run, even when tied to a social movement. Banks will also want to create a deeper, stickier relationship with new customers through other products and services. “Were you prepared organizationally to take the next step?”

Should Banks Use Facebook to Offer Credit?

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data-source-2-26-16.pngIs 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.

Using Social Media to Engage Your Shareholders: What Community Banks Should Know

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11-3-14-OTC.jpgLast year, the Securities and Exchange Commission (SEC) issued a report stating companies could use social media such as Facebook and Twitter to announce key news and information in compliance with Regulation Fair Disclosure (Reg FD)—so long as investors are informed in advance which services will be used to disseminate information. The Federal Financial Institutions Examination Council (FFEIC) later released its own guidance to financial institutions on crafting their social media programs and managing risk in the social media landscape.

Social media presents an enormous—and unique—opportunity for community banks when it comes to shareholder communications as many community bank shareholders are also depositors or have a lending relationship with the bank. This opportunity will only grow as older, baby boomer depositors are replaced by technology savvy, young customers who seek to connect with their financial institutions in new ways.

Yet, sharing material news and financial information on social media is not without its pitfalls. In this article, we outline some of the Dos and Don’ts if your company is considering incorporating social media into your shareholder communications program.

Dos

  • Do disclose to shareholders which social media channels you will use to share news and other material information. A good place to do this is in your annual report or on the investor relations section of your website. Check out the investor relations page on OTC Markets Group’s website for an example.
  • Do use social media to share more than just your corporate and financial news. Include photos and links to video broadcasts from investor conferences, links to industry news and media coverage as well as analyst reports and trade information.
  • Do proactively engage your followers with direct questions to stimulate discussions. Consider soliciting questions from investors during shareholder conference calls or annual meetings to let them know you’re listening.
  • Do use active shortened hyperlinks (using an online service such as Bitly) to link to press releases and other documents that can’t be included in full social media posts (e.g. Twitter is limited to 140 characters). The SEC stated earlier this year that if a communication is limited by the number of characters or amount of text that can be included, an “active hyperlink” will satisfy Reg FD compliance rules.
  • Do include your “cashtag”; the dollar sign and your stock symbol (ex. $OTCM) in tweets, so investors can easily track conversations about your stock in Twitter.
  • Do consider a social media management tool like Hootsuite to manage your social accounts, schedule messages and measure the return on investment of your social programs.

Don’ts

  • Don’t restrict access to your company’s social media site. Disclosing material information on a password-protected or otherwise restricted website will likely not be considered Reg FD compliant.
  • Don’t share only positive news. Best practice in investor relations is to share your good news as well as your bad. If you share your earnings results on Twitter, don’t only share your results when they’re positive. The same with analyst reports. Don’t only share your upgrades.
  • Don’t ignore social media altogether. With so many new technologies to consider, it may be tempting for community bank boards and management teams to stick their heads in the sand. But they do that at their peril. The motto for social media is the same for traditional media: if you don’t own the conversation, it will own you. So, even if your bank isn’t using social media to engage with shareholders, create social media accounts so you can monitor what is being said about your company, your peers and the industry.

If you’re still stumped on how to start, check out some of your larger public banking peers who are proficient on social media such as JP Morgan Chase ($JPM) and Bank of America ($BAC). Happy tweeting!

When Was the Last Time You Really Listened to Your Customers?

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5-5-14-sutherland.pngE-commerce pioneers like Amazon and Zappos have trained customers to expect all of their providers, including their banks, to wow them at every point of contact. Channel usage, whether you are talking about branch, mobile or online banking, is one of the hottest and most debated topics in the banking community.

Is it possible to provide all the latest digital platforms yet still fall short in customer care? Yes. In fact, many banking experts argue that call center usage will increase as customers lean on contact centers as a digital help desk. Are there times when a customer needs a real person to listen to and resolve his problem? Absolutely—even if it means personally visiting a branch.

Findings from Gallup’s latest U.S. Retail Banking study underscore this point. Querying customers on their channel usage, one of the key themes that emerged was that the BRATMO trifecta—branches, ATMs and online banking—still defines the core of day-to-day banking.

Consider the credit-card customer who, concerned about recent massive security breaches at retail outlets, decided to get her card reissued with a new number. She tried ordering a new card online but couldn’t find the tools to complete the task. A live chat window opened, and the customer learned that getting a new card would take about a week. Anxious about being without her primary card for that long, however, she stopped by her local branch and talked to a live person, who sent her a card by express mail — it arrived in two days. The happy customer, in turn, raved about her positive experience on Facebook.

What did it cost that card issuer to provide the empathetic agent who had the authority to immediately spring for the express-mail cost? And what did the issuer gain in the loyalty not only of that customer but also the positive social media buzz she generated? Research continues to find that people trust peer recommendation far more than they trust advertising.

Listening to Customers
Anticipating and responding empathetically to customer needs can take many forms. Consider the following approaches:

  1. Instill a culture of customer service. At Zappos, customer service isn’t a silo; it’s the mission of every employee. The company backs that pledge by providing every employee with at least a month of customer-service training. Empower your contact center agents with the ability to provide inquiry resolution that’s quick, accurate and easy to access.

  2. Tune in to social media. More banks are monitoring social media posts to respond directly to customers and to gain valuable insight into their own and competitors’ strengths, weaknesses and opportunities for innovation. The best social media outlet is the one the bank commits to supporting 24/7, says Joseph J. Buggy, senior vice president and chief strategist at Sutherland Global Services. “If the bank has a Facebook page, you’d better staff it. If you have a Twitter account, it better be active and quick. If you’re not as responsive as your competitor, the customer who asked the question will move on,” Buggy explains.

  3. Conduct surveys and other market research. To ensure alignment, customer-centric banks engage in ongoing market research at all levels. And while surveys have their place, don’t stop there; qualitative research and user forums provide insight into how you can do a better job.

  4. Offer incentives for customers to suggest new products and services or to help beta-test them. Everybody loves free samples, and customers who feel part of your innovation team will be quick to tweet about their experiences. Initiatives like MyStarbucksIdea, where Starbucks takes suggestions and comments from customers online and through social media, shows that your organization can gain unvarnished feedback and access to your best customers’ social networks for little cost.
  5. Complaints? Bring ‘em on! A customer who takes the time to express her dissatisfaction possesses a wealth of market intelligence. Promote multiple channels that make it easy for disgruntled customers to talk to you versus publicly griping about the issue on Facebook. Whether it’s a live agent or a live chat online, explore all the options for swiftly escalating problem calls to the next level. Follow up with customers to ensure a satisfactory resolution.

How your bank listens to customers may be the single most important factor in your capacity to gain ambassadors and champions for life.

For more information on this topic, see Sutherland’s white paper “The New Age in Customer Service.”

Transforming Customers into Lifelong Champions—as Quickly as Possible

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3-28-14-Sutherland.pngThanks to e-commerce stars like Amazon and Zappos, consumers expect exceptional, real-time customer service every time—whether they’re buying books, boots or a mortgage.

Do it right and your customers will come back again and again, even trumpet you on social media. Disappoint them or move too slowly, and they’ll rant about you to their 10,000 Twitter followers. Even if they like you, they can be quick to abandon you to sample your competitor’s cool new app.

How can you respond to customer needs at both ends of the urgency spectrum: instantly, with transactions conducted 24/7 on mobile devices, and over the long haul, ready to respond as a customer moves from college, to home buying to retirement?

Creating Loyalty for Life
Keeping customers engaged for years and less susceptible to competitors’ pitches means offering products that sync with key milestones. Those include savings and checking accounts, student loans, debit and credit cards, auto loans, mortgages, insurance, home-equity loans, child-focused savings plans for their kids, college savings plans and retirement planning.

Consider the loyalty created with first-time homebuyer programs. One example is the First Home ClubSM, a matched savings program administered by the Federal Home Loan Bank of New York. For every dollar a pre-qualified customer saves over a 10- to 24-month period, participating lenders match $4 for a one-time payment of up to $7,500 in matching funds that may be applied toward the down payment or closing costs on a home.

Technology-Driven Competitiveness
But technology is forcing banks to do much more. Those lifestyle-sensitive products must be personalized and delivered quickly and easily, says Joseph J. Buggy, senior vice president and chief strategist at Sutherland Global Services.

Witness digital-wallet and virtual-currency solutions like Isis, Bitcoin, Square, PayPal and Google Wallet. Tech-savvy young people are quicker to snap a smartphone photo of a paper check for deposit than to visit a branch.

Banks are struggling to embrace customer expectations for mobile self-help solutions, Buggy says. And yet they must move quickly, with customers adopting mobile banking five times faster than they adopted online banking back in the 1980s.

Customers want the same experience when accessing their bank, whether via personal computer or smartphone, Buggy says, and the technology is there to allow banks to offer that. Many banks, though, immersed in replacing core systems, have hesitated to invest in syncing Internet- and mobile-based platforms into a single interaction channel.

Leveraging Social Media
With Facebook boasting a billion users and Twitter many millions, engaging with new and existing customers means moving into those spaces effectively. Banks large and small are using social media to promote services, respond to customers, recruit employees and even supplement crediting decisions. Soon, customers may check balances and conduct bank transactions via social media.

Buggy advises banks to take a clear position on social media and commit only to the channel(s) the bank can staff 24/7. A static account with outbound-only communication, where you are promoting your bank but not interacting with customers, is worse than none, he says.

“It’s more forgivable, from the customer’s perspective,” Buggy adds, “to not have a Twitter handle at all than to have one and not respond quickly to it.” Particularly with Twitter, “the demographic using it expects the interaction to be close to real-time.”

Must-Have Customer Service Qualities
Banks have little choice but to meet customer demand for:

  1. 24/7 mobile access
    Banks not “open” around the clock will lose market share to whatever entities allow customers to transact business from their devices at 3 a.m.
  2. Single dashboard/single login interfaces that show the breadth of a customer’s interactions
    Credit cards, mortgages and insurance may be separate operations inside your organization, but the customer doesn’t care. She wants to reach all of her accounts from one screen.
  3. Inquiry resolution that’s quick, accurate and painless
    When communicating with you, do your customers prefer live chat, mobile apps, online self-help or social media? Are you using traditional interactive voice response (IVR), which requires the customer to type in lots of numbers when calling you on the phone, or have you moved to voice-enabled IVR, which is easier on the customer? How do your customers prefer to have complex questions or complaints resolved? Do snail mail and personal visits still have a place in your customer service strategy?

In a follow-up article, we’ll focus on finding the best ways to listen to your customers to ensure you’re serving them expertly—both in the moment and over the long term. For more information on this topic, see Sutherland’s white paper “The New Age in Customer Service.”