The financial technology boom of the past few years will ultimately lead to opportunities for the banks willing to take advantage of them—either through partnership or acquisition. In November, 145 bank senior executives and board members shared their views on the fintech boom. The poll was conducted at Bank Director’s annual Bank Executive & Board Compensation Conference in Chicago. Additional respondents participated online. We’ve tabulated the results, which we share along with insights from leaders in the fintech space.
“The responsibility for properly overseeing outsourced relationships lies with the institution’s board of directors and senior management. Although the technology needed to support business objectives is often a critical factor in deciding to outsource, managing such relationships is more than just a technology issue; it is an enterprise-wide corporate management issue.”
Target corporation had 40 million credit card numbers exposed and eventually settled with Visa for $67 million. In 2014, we saw bigger companies in the headlines such as Home Depot and Sony fall victim to the same fate.
Target’s breach came through an HVAC vendor that had access to the retailer’s internal network. That means the bad guys only had to figure out how to sneak by the HVAC company’s security, not Target’s. This was a perfect example of how more robust vendor management practices could have prevented unauthorized access.
Think about all the people who need access to your building, systems, network, hardware, telephone lines, lighting, security, and so forth. How diligent are those other businesses about security?
If it’s time to ask your vendors for their annual SOC reports, reports that deal with organizational controls related to security and process integrity, insurance documents and financials, and you’re just checking boxes to satisfy an audit requirement, then you are doing it wrong.
Follow these seven steps to reinvent and strengthen your vendor management process.
Step 1: Obtain Executive Sponsorship Vendor management should start at the top. You will need someone leading the charge and who has access to your bank’s board leaders.
Step 2: Create a Vendor Management Committee These people should be from different departments and have different backgrounds, such as IT, legal, compliance, finance and senior leadership. Diversity here is crucial; everyone sees threat differently.
Step 3: Create a Centralized Vendor Management program No single person can possibly be responsible for the entire program. It’s imperative that it becomes a collaborative effort.
Step 4: Gain Buy-In Involving the staff creates a sense of ownership. It’s no longer just IT’s problem; it’s everyone’s responsibility.
Step 5: Create a Vendor Inventory Make sure you know who your vendors are. Do you have multiple vendors doing the same function? Work with accounts payable to determine active vendors. The normal time span is 12 to 24 months.
Step 6: Categorize All Vendors Does this vendor have access to customer data? Do they have facilities access? What is our risk if this vendor is compromised? This is where you identify critical and high-risk vendors.
Step 7: Remove the Silo Save the documents to a shared resource. Everyone involved should have access.
How Would These Steps Prevent the Target Scenario? Step six says to categorize all vendors and identify the risk. The HVAC vendor seems like it would be a low risk vendor, but when you dive into the level of access it had, you would quickly discover the HVAC should be a high risk vendor. The HVAC vendor was allowed access to the internal network which gave the hackers a way in. Although the HVAC didn’t have access to the customer data, they did have the keys to open the door.
One way to look at Kabbage is that it’s a company of mostly millennials who are helping to recreate finance in their own image. Formed in February 2009 during the waning months of the Great Recession, when many commercial banks had curtailed their lending and some were taking capital from the federal government to strengthen their balance sheets, Kabbage provides unsecured consumer and small business loans through its online platform. It is one of the leading players in the emerging fintech sector, and to date has made over $550 million in loans.
Neither Chief Executive Officer Rob Frohwein nor the rest of his leadership team are millennials (the company does have a sense of humor, playfully describing the team on its website as the “heads of Kabbage”), but there are plenty of them working at the company. And if you’re going to hire millennials to work at a fintech company, you’ve got to offer them cool stuff like daily catered lunches and snacks, on-site yoga, top-of-the-line Macs and 27” Thunderbolt displays. And of course, you need to give them stock options for the day when the privately-held company either goes public or is acquired. The irony of the company’s name is that many millennials probably wouldn’t know, unless it was pointed out to them by their baby boomer parents, that “cabbage” is slang for money.
The financial services industry is experiencing a wave of innovation where several upstarts like Kabbage are taking an old product—money lending in some form has been around for more than two millennia—and using technology to create a 21st Century delivery and customer experience.The company provides small business lines of credit from $2,000 to $100,000, and more recently began offering consumer loans from $5,000 to $35,000, with repayment terms of either three or five years. Unlike most banks, which base their underwriting decisions primarily on the credit scores of the borrower, Kabbage takes a diverse range of information into consideration, and because the process is fully automated, the applicant receives an immediate decision.
Although conventional wisdom would argue that Kabbage is a threat to traditional banks, particularly in the consumer lending space where much of its activity is focused on consolidation of credit card-related debt, Frohwein says that he wants to work with banks and would rather be seen as collaborator than a competitor. Kabbage’s principal offering is an unsecured business line of credit. Most banks won’t provide that kind of funding without some form of collateral, and they can take weeks to make a decision. Prior to this issue going to press, the company was expected to announce agreements to work with two international banks, and Frohwein was hopeful that similar conversations with U.S. banks would also bear fruit.
Like all fintech companies, Kabbage has benefited from growing consumer comfort with doing financial transactions online. According to Frohwein, 95 percent of Kabbage’s customers never interact with a human at any point in the process. And many of them seem to like it that way. Kabbage might be a company with a culture that has been influenced by the many millennials who work there, but it has created a product that is finding acceptance among borrowers of all generations, and that adds up to a lot of cabbage. Frohwein spoke recently with Bank Director Editor Jack Milligan
Let’s talk about why there is a Kabbage.
There is a Kabbage because you can actually access data from online sources on a real-time basis allowing you to do a couple of different things.
First, you can permit a customer to have a very elegant online experience. The customer lands on the Kabbage website, which provides access to information relating to their entire business, and receives a decision within just a handful of minutes.
Because Kabbage gains access to these data sources through the customer’s authorization, we have ongoing access to data. As a result, we understand how that small business operates, not just today—at the time of qualification—but how they’re operating today and any point in between. It gives us a very rich understanding of that small business.
When we started the company, we believed this information would better reflect how a business was going to perform as a customer rather than relying on the personal credit score of the small business owner. The whole premise of the company was based on data access and technology. Our DNA is technology and data access and how that access can provide us with unique insights and customers with better experiences. I think that’s probably what separates us from some of the other players that are in this space who continue to have a lot of manual processes residing within their customer experience even though most have adopted the “data and technology” marketing speak.
When the company formed, did you feel as though you were stepping in and filling a void that was out there for small business borrowers? In 2009, obviously, we were just coming out of the financial crisis. The banking industry had closed up like a clam in terms of lending, and there was a real credit crunch, especially for smaller companies.
For sure. Despite being responsible for most of the growth in our economy, small businesses have historically been treated as the redheaded stepchild of the financial services industry. They’ve been largely ignored over the years. Though we serve all small businesses now, when we started, we focused on online retailers. Traditional lenders are reluctant to provide an online retailer with a loan. It’s not that they’re not good customers, but they’re hard-to-reach and they often have limited operating histories. They don’t have a physical presence so you can’t walk into the store and hear the cash register ringing, and see the smiles on the customers’ faces. If you can serve that audience as Kabbage has, then you can serve all small businesses, because you start with the most challenging segment of businesses.
Explain the products that you provide.
We provide a working capital line credit for small businesses. In the fourth quarter of last year we also launched a personal loan product. We have both a small business direct product and a consumer direct product.
We also started licensing our platform to third parties, which allows them to start lending in the small business and personal consumer lending space. We announced the first deal with Kikka Capital, out of Australia, a couple months ago.
Have you also had conversations with domestic banks about the possibility of working with you under a licensing arrangement?
Yes. In the U.S., we are working currently with two banks. Those discussions are in a slightly earlier stage, but we believe we will execute agreements with both of them. One relationship will center on a small business product and the other is on the consumer side.
The reaction from U.S. banks has been very positive, but it’s a difficult regulatory environment, and there’s a lot of caution that goes into that decision. It’s a process of working with the financial institution and getting them to the point where they really understand how we operate, how this compares favorably to their existing approach and how this grows their core business.
Do you see banks as competitors, or do you see them as potential partners? Or both?
I don’t think I see them as competitors, I actually see them as partners. I try to help them recognize that this is a market they can serve, it’s not a market they should ignore, and there’s a legitimate partnership opportunity here. They don’t need to take a competitive stance with us. We think we can actually work with all the banks.
How about in the consumer space? Or do banks not really focus on the size of personal loans you provide?
In the consumer space, our loans average about $15,000 and many of our customers are consolidating credit card debt so this is a segment in which banks are interested. Although banks may or may not see that as competitive, they should see what we are doing as important and core to them. However, again, banks do not need to look at us as competitive. We are working with a large U.S. bank right now to help them enter this space directly.
Though very focused on the consumer lending space for many years, small business lending has been another story for them. It’s been traditionally difficult for banks to make profitable, and that’s because there’s typically high acquisition costs, and also there’s a lot of operational inefficiencies. Banks apply the same requirements and invest the same resources for a $30,000 loan as they do for a $3 million loan. It’s just not reasonable to expect small business owners to go through that hassle for that amount of money.
Explain a little bit more about your underwriting process. It sounds like it’s a very sophisticated approach, and one that’s a little bit different than what most banks employ.
When a bank underwrites a small business loan they will have a checklist of many items they need to collect: three years of financial statements, FICO score, an asset list, whatever it might be. A bank would expect every small business lending applicant to come to the table with the exact same set of documents and information. We take a different approach.
Kabbage must meet the small business owner where that small business owner is. That means if they have a specific set of relationships with accounting companies, or credit card transaction processing systems, or social networks, or shipping companies or whatever it might be, that’s the data we need to collect and decision on. The data helps us determine the capacity, character and consistency of small and medium-sized businesses, or SMBs, just as the items the bank collects attempt to determine.
We’ve had to figure out a way to basically say, “Give us access to any number of data sources.” Without getting too technical, it’s an API, or application programming interface, approach where we’re given automated access on these electronic accounts for specified information. We don’t have the ability to write to the account, so we can’t manipulate anything within it. It does give us the right to read the information that’s contained within the accounts.
As you would imagine, it also provides us with a lot of historical information. It doesn’t just relate to the most recent period, it oftentimes goes back many months or many years in the past so we can see how these customers have performed over time.
The real key to what we do is a couple of different things. One is we are able to take all that information and make it relatable. If somebody gives us access to their credit card transaction processing information and shipping information, and another person gives us access to their marketplace information, personal credit score and social data, we’ve got to figure out, “Okay, how do I make a decision on both of those customers, and make a decision that is consistent and fair across the board?” We have developed that capability over time, and we did that through a lot of trial and error, to be frank, where we made educated decisions as to how we were going to view information. Until you get repayment information back and see the customer’s actual behavior, you really don’t know how well correlated that information is to actual performance. We’ve gone through that process over the last several years.
The nice thing about the way our product works is once somebody takes cash from our line, they pay it back within, on average, less than four months. Therefore, we are able to determine how effective our models are very rapidly.
How do you find your customers?
SMB owners do not congregate in a single place. There’s not a hall where SMB owners meet each evening and you can advertise there. They’re everywhere the population is. Therefore, we have had to become experts at locating them.
We have a blended approach. We do both traditional and digital marketing. If you log on to Kabbage.com, we’ll probably follow you for a long time online, and you’ll see more ads from us in the future. On the traditional side, we do radio and direct mail. If you watch TV, you’ll be seeing ads in the fall.
We also have a pretty robust business development arm where we enter into relationships with other businesses that have a lot of small business customers. It can be those that are offering phone systems to small businesses, or packaging for small businesses, or selling accounting software to them or whatever it might be. We try to work with the folks that work closely with small business owners.
When you look at the personal demographics of who your customers are, is there anything that’s distinctive from a generational perspective? What do you find interesting about your customer base?
We work with SMB owners that are super young and we work with folks who are much older. However, they all embrace technology at least in some manner. Although we started with online retailers, over the last couple of years, we’ve grown to include all small businesses, so you get your restaurants, your dry cleaners and your professional service firms, and everybody in-between. We see a much broader demographic than we did in the past in terms of their technology savviness.
You’d be amazed, 95 percent of our customers have a 100 percent fully automated experience. Not only do they not have to interact with anybody specifically at Kabbage, we don’t have a person on the backend specifically reviewing that file. It’s all done through our system. You’d be amazed at how many of our customers are comfortable just interacting with our system. That didn’t happen overnight; we had to figure that out the hard way. We made a lot of mistakes, and we created some bad experiences, and we worked hard to make it as comprehensible as possible. That’s what we’ve really focused on over the last five years. Now it seems easy, but we had many sleepless nights on the road to getting there.
Here’s a topic almost assuredly off the radar for many bank boards: real time payments. Don’t fall asleep yet. This will be of increasing importance in the years ahead.
Commercial customers are definitely in need of such a solution. For business customers, getting paid quickly is far more important than for most consumers. For both business customers and their vendors, checks introduce unpredictable cash flow: slower payments for the vendor, and uncontrolled float for the payer. Businesses are constantly dealing with cash flow management. It often takes 60 or 90 days to get paid after sending an invoice. Some suppliers need to drop tens of thousands of dollars of equipment or supplies off at a customer’s doorstop. Why can’t they be paid right away, instead of waiting around with their valuable goods on someone else’s property? Why do businesses have to preload deposit accounts or prepaid cards to make sure their employees get paid in a timely manner, on payday?
Online bill pay is no solution, says Bob Roth, a managing director with Cornerstone Advisors, a consulting firm in Scottsdale, Arizona. Twenty percent of payments through online bill pay end up as checks anyway, because the bank has no electronic information on the receiver of the payment. That means a payment can take six days or more to arrive by mail. Eighty percent end up as ACH (Automated Clearing House) transfers, but that can take 12 to 36 hours as well, Roth says. MineralTree founder BC Krishna said he tried to open an ACH account at a bank once, but the bank charged $250 for the application, $50 per month for the account, $20 per ACH file transmitted to the bank, 15 cents per transaction and required him to fill out a credit application. Not surprisingly, this pricing and process is geared towards larger businesses with a higher payment volume. Prepaid credit cards are fast, but they’re also expensive.
If businesses can find something easier and cheaper, they probably will. Seventy-five percent of business owners told the Federal Reserve in a 2013 survey they would prefer their payments be made instantly or within one hour. With thousands of financial technology companies popping up on the landscape trying to reinvent the financial system, there could be a few disrupters in the bunch offering a quicker payment solution. Person-to-person payment networks such as Dwolla and bank-owned ClearXchange already are offering faster (and cheaper) solutions, but they are mostly concentrated on the consumer and small business side of the equation.
In bigger businesses, there are multiple people who have to sign off on an invoice, so emailed invoices often get printed out anyway and the entire payments process is fairly complex, says Rick Hall, an analyst at Mercator Advisory Group in Maynard, Massachusetts. “Businesses have really been looking for ways to not only streamline the process but find the best alternatives,’’ he says.
It may be years before a truly speedy and cheaper alternative exists for commercial businesses trying to make payments. Krishna is a member of the Remittance Coalition, a 240-member group of public and private interests, including members of the Federal Reserve, trying to address some of the obstacles that keep businesses from using electronic alternatives to paper checks. The Federal Reserve is pushing for faster payments, but there are so many different players and legacy systems communicating with each other that a unified set of strategies is hard to implement. The core processing companies FIS, Fiserv and ACI, which each have hundreds or thousands of bank customers that could communicate with each other, are all working on their own real time payment solutions as well, according to Hall. NACHA, The Electronic Payments Association, which administers ACH, also is working on its own solution called Same Day ACH, which was recently approved by its membership. Under NACHA’s plan, same day ACH transfers begin in phases starting in September of 2016.
But in the meantime, someone may come up with an even better, faster, cheaper and ubiquitous solution. Person-to-person payments are all very exciting, but the consumer side of the equation is a fraction of the payments being made between businesses every day. “The real opportunity is going to lay on the business side,” Hall says. And business customers really are the focus of a great many community banks’ business plans. It will be important not to lose sight of their needs.
Braden More Executive Vice President and Head of Enterprise Payment Strategy
Wells Fargo & Co. is playing venture capitalist with its Startup Accelerator program. It’s a much friendlier version of ABC’s popular reality show Shark Tank, making investments in early stage tech companies and providing business line managers to mentor and offer help in the form of a real-world customer, Wells Fargo, who might use the technology.
The San Francisco-based, $1.7 trillion asset bank holding company recently announced the second round of companies accepted into the six-month program, which provides as much as half a million dollars each for development. Three companies received the funding: one that interprets and predicts mobile application behavior using sensor data on your mobile phone, called Context360; another that provides affordable communication software for the deaf, called MotionSavvy; and a third that uses the public cloud to run enterprise applications, called Bracket Computing.
In an interview with Bank Director Managing Editor Naomi Snyder, Braden More, Wells Fargo’s executive vice president and head of enterprise payment strategy, describes how the company wants to foster innovation, find great ideas, and share those ideas with the rest of the banking world.
What was the genesis of the Startup Accelerator? We realized we were doing a lot of outreach to innovative companies but we were missing a lot of ideas that were flowing like a river out there. We wanted to come up with a program that allowed us to connect, and provide a single doorway.
How is your Accelerator different from Silicon Valley venture capital labs? [We’re like] a friendly customer mentoring you for six months. We’re giving you access to a real world customer for six months. It’s not that they have 45 minutes to pitch their stuff. We sit down with them. We want to know how they can help us, maybe help us with our deaf customers, or help us detect fraud through all the information you can get off the sensors in your phone. A lot of times, we’re not quite sure how this is all going to come together, but we like the fundamental idea and we like having the conversation. Our goal is not to outsmart the entrepreneur and take control of their business, like some [venture capital firms]. We are cooperative. We are not driving the investments, or putting the screws to the investors.
Does Wells Fargo take a minority stake in the company? Yes. These are very small stakes. There are Bank Holding Act restrictions that suggest we are always taking a less than 5 percent voting stake. If we put Wells Fargo capital into a company, it feels like a special relationship and companies that are small really like the commitment from Wells Fargo.
Are you bringing people into a physical “lab?” No. The relationship is really based on wherever the buyer/mentor is. If you have a wealth management concept, you might find yourself in St. Louis with our wealth management team, for example. We’re trying to connect people with the real buyers or real customers, and not necessarily have everyone coming to San Francisco.
What has been the reaction of business line managers? A lot of them have been tickled. I provide the infrastructure and the funding. It becomes a tool they can use. If they and their teams see an idea they want to bring in, they can do that. That happened with MotionSavvy. Someone in a line of business saw them and said, ‘This is an interesting idea, and you should apply into the Accelerator.’ Context360 knew about our Accelerator and submitted an application, which we then read and brought back to a line of business, and said, ‘If you are interested, please step forward as a sponsor.’ I want to make sure [these companies] have someone [at Wells Fargo] who believes in them and buys into the fact that they are going to be a mentor for the next six months. We have lines of business that have made it part of their core DNA to be innovative—they have innovation labs and they have people who have innovation in their titles, and there are other lines of business who are just warming up to this.
You are not going to hold a patent to any of these technologies, right? Their intellectual property is their business. We recognize they are developing their products. Our suggestions and improvements are becoming their technology. A lot of incubators are chasing future returns, the Facebooks of the world, the big whales. They are looking to do something exclusive. For us, we are trying to be open to the best ideas. We recognize that an entrepreneur with a fantastic idea that is going to change financial services is never going to enter an Accelerator where they can only take the idea to one bank, because there are thousands of banks. As a banker, we have a lot of common problems, such as fraud and security. If, as an industry, we can lower fraud levels for our customers, we think that’s a win for everyone.
What has been the reaction to the program so far? We are thrilled with the response to date. This semester, we are expanding and taking a global look. We are looking for great ideas globally. We have been very pleased. I wouldn’t say there is a cultural change for the whole company, but for those people who are responsible inside their lines of business for being the champions and evangelists for innovation, we are starting to connect those people inside Wells Fargo. They have a shared platform to do innovation and engage with these outside companies and be challenged by these ideas.
Having the world at your fingertips—that’s been a common description for the advent of the Internet. But now there’s talk of technology taking on a different part of the hand: the wrist. The growing popularity of wearable technology is causing some banks and other financial companies to try on systems for this twist on the ticker. How far banks ultimately go will be tested by time.
Modern wearables have been on the market for at least a couple years in forms such as glasses and fitness bands, but analysts are crediting more recent interest from banks and other companies to the introduction of the Apple Watch. Apple officially announced prototypes last September, and the product released into the market on Friday, April 24. It has been reported that more than 1 million of the devices were pre-ordered, and some models are on back order until June. As noted in a March 2015 article in The Economist on the wearables trend, Apple has a history of popularizing existing technologies: first with the Macintosh computer in 1984, then the iPod in 2001, the iPhone in 2007 and the iPad in 2010. And it may very well do the same for wearable technology.
Not surprisingly, much of the banking foray into wrist wearables so far—which is still small but growing daily—has involved partnering with software companies or labs to create banking apps compatible with the Apple Watch. In March, New York-based Citigroup was the first banking company to announce an Apple Watch app, Citi Mobile Lite. On the day the Apple Watch released, TD Bank Group in Toronto, Canada, publicized the launch of an Apple Watch app that will be an extension of its current iPhone app. But it’s not just national banks participating. The Greater TEXAS Federal Credit Union and the Alabama Teachers Credit Union are among the early launchers of “SmartwearApps” for the Apple Watch.
Banks and other financial companies also are branching out beyond Apple Watch. Notably, Wright-Patt Credit Union in Beavercreek, Ohio, has developed an Android Wear app that will automatically sync a user’s device with the latest version of its existing banking app. Further, American Express in New York is teaming up with Jawbone, a consumer technology and wearable-device company, to give U.S. customers the ability to tap to pay with a Jawbone fitness tracker.
Banks introducing wearables generally have given similar reasons for entering the market, such as:
Customer Convenience. Wearables give consumers quick, easier access to some of their most-used banking features, including the ability to check balances and transaction history, receive payments alerts and locate branches. Some apps even have voice-recognition technology. There are banks that see smartwatch apps enhancing customer loyalty, particularly among millennials, who are expected to use wearables more.
Increased Profits. This month Fortune Magazine noted that the growth of mobile payments is good for banks and credit card companies because they encourage spending, citing a CNBC study that mobile payments could result in spending increases of 12 to 18 percent. Smartwatch apps may be a key part of the wave.
Fraud Reduction. Wearable devices like the Apple Watch are equipped with near-field communication (NFC) payments technology, touted as a secure payments system less vulnerable to attack. As wearable technology also is being noted as a means for consumers to track personal data, banks potentially accessing the collected data to verify customer identity in transactions has been cited as a possible benefit.
But the very reasons banks are giving wearables a try are among the ones that may prevent them from catching on in the industry large scale: despite the convenience of smart watches, for example, customers may not see a value long term in a device that, at least at this point, does only some of what the ubiquitous smartphone already can do. Twenty percent of Americans currently own some form of wearable device, PricewaterhouseCoopers noted in connection with its report, The Wearable Future, released in October 2014. Although this number is expected to rise, it is not yet clear by how much. The level of popularity of products such as the Apple Watch and Android Wear likely will determine if more banks invest in wearables. Moreover, if the payments technology associated with the devices proves not to be as secure as expected, banks may be less inclined to see a value in wearables. These are all indicators to watch for.
There are five services via the smartphone that the top five banks in the country all offer: mobile banking, mobile bill pay, mobile check deposit, person-to-person payments, and ATM/branch locator. Does your bank have all five?
The question was posed at Bank Director’s Bank Board Growth and Innovation Conference in New Orleans on Wednesday. With more than 150 bank directors and officers in the room, only a handful raised their hands.
The speaker, Dave DeFazio, a partner at StrategyCorps, which provides deposit account and mobile phone products to banks, said all of these services are necessary. The nation’s population is increasingly in love with smartphones. If people lose their phone, they feel out of sorts, disconnected. It’s the first thing many people touch in the morning when they wake up. They use their smartphones when they’re driving (not a good idea). They check Facebook at work.
The end result is that banks that don’t provide easy-to-use, indispensable mobile apps will increasingly find themselves losing the battle for market share in the years ahead, DeFazio said.
Mobile service vendors are not the only ones who think mobile matters. There are now more mobile phones than landline phones in the United States. Sixty percent of smartphone or tablet owners who switched financial institutions said mobile played an important or very important role in their decision to switch, according to a survey by the consulting firm AlixPartners.
It’s important not to confuse mobile services with online services for a laptop or desktop. Young people use their phones, and less frequently, their laptops. Your customers shouldn’t have to sign up for mobile banking services using an online portal for a laptop or desktop, he said.
“I have young people in my house who barely touch their laptops anymore,’’ DeFazio said. “Make it your mission to have an app people can’t live without.”
Millennials, the generation that tends to be in their late teens through early 30s, are distrustful of the biggest banks, but a greater percentage of them switch to big banks than older generations, according to the survey by AlixPartners. The reason? Millennials want digital services that are convenient and easy-to-use, and small banks don’t provide the same level of mobile services that big banks do, in general. Millennials aren’t as interested in going into a branch and speaking to a banker face to face as older generations are.
Not everyone in the crowd at the Bank Board Growth and Innovation Conference was impressed. One attendee questioned whether his bank should want to attract millennials. He pointed out that most of the more successful banks profiled at the conference focus on commercial customers. DeFazio answered that whatever its audience, a bank should pay attention to its mobile offerings.
“There are as many digital baby boomers as digital millennials,’’ he said. There are other reasons as well. Those most interested in using mobile services from their banks are the young and those with higher incomes. People who use mobile banking services tend to get a higher number of banking products from their bank than the average customer, according to AlixPartners.
Smaller banks may not have as many offerings as large banks, but some of them have leaders who don’t want their banks to fall behind. Brian Unruh, president and CEO of $600 million asset National Bank of Kansas City, in Overland Park, Kansas, says it’s almost overwhelming how many different technology companies are out there offering services to banks. But his bank is committed to offering mobile banking services. It recently switched Internet banking providers, and went with Austin, Texas-based Q2 Software, a smaller and more nimble company, he said. His bank recently hired a software developer and may hire a second, to develop mobile apps in-house.
Mobile services are definitely necessary, he said. “You have to get it to attract new customers,’’ he said.
Facebook isn’t just satisfied with having more users than any other social media in the world. They’re craving their piece of the future of mobile payments. With the recent announcement to offer peer-to-peer payments through its Messenger app, Facebook is seeking to establish a deeper connection to users’ finances and to take a bite out of traditional financial transactions.
Facebook Payments is completely free and will first be available via Messenger to users in the U.S. only. The feature can be used on the desktop or within the Facebook Messenger app, which launched last year as a companion to the Facebook app. Once a Visa or MasterCard debit card is linked to the Facebook account, users can open a chat with a friend, tap the dollar sign icon, type in the dollar amount and press send. That money is deposited to the friend’s bank account within a few days.
It’s a similar process to the already extremely popular peer-to-peer payments app Venmo, owned by PayPal, which was one of the first apps to take a social network approach to mobile finance. With Venmo though, you see payment interactions between all of your friends in the app. It doesn’t show dollar amounts, but the captions, comments and likes between users tell a story of what those people are up to and spending money on, and with whom, which is a lot like what you discover scrolling through a Facebook News Feed.
The move to make Messenger a separate app from Facebook, disassociating it with the News Feed and adding more privacy, was strategic though. Rather than mixing your payments with everything else you find on Facebook — pictures and posts from friends, games, location check-ins, advertisements — it may make handing over your payment information more appetizing if it’s in a separate app within a private message.
Steve Davis, product manager of Facebook Payments, said in a TechCrunch interview that “conversations about money are already happening on Messenger,” such as people chatting about splitting the check for dinner, travel plans or purchasing concert tickets. “What we want to do is make it easy to finish the conversation in the same place you started. You don’t have to switch to another app,” says Davis.
Introducing peer-to-peer payments into its Messenger app was rumored for months before being officially announced in early March, one of the earliest signs being the hiring of the past PayPal president David Marcus to lead Messenger. That Facebook Payments announcement was soon followed by the Facebook F8 developer conference, where Business on Messenger was also unveiled, a feature that will soon allow customers to chat with merchants directly through Messenger about orders and shipping updates. Plus, Facebook announced software tools that make it easy for third party developers to integrate with Messenger—a move that eventually may lead to accepting payments from users via the Messenger app.
While Facebook may not be charging fees for payments in the beginning, there is potential to generate additional advertising revenue in the future, which already brought in over $3.5 billion during the fourth quarter of 2014. When Facebook gains access to users’ payment details and is able to track what people are buying, it’s likely they can also deliver even more highly targeted advertising.
Facebook Advertising started out small and inexpensive but has spent years nipping away at traditional advertising, until it’s now one of the most sought after methods of targeted advertising, and it is only gaining more traction. So while Facebook may be taking small bites of payments now, it has the potential to be one of the biggest financial disruptors yet, simply because of its reach to 1.19 billion mobile monthly active users, about half of those in the U.S., and already 500 million people using Messenger.
Who knows how Facebook’s introduction to finances will settle with people, but if peer-to-peer payments is only its first course, Facebook has a lot more to devour along its way to disrupting traditional financial relationships.
In this highly competitive and data-driven environment, financial institutions are looking for innovative new ways to drive sales in the finance sector.
For banks, one of the most exciting technologies to explore is the artificial intelligence and natural language generation (NLG) space. NLG is a technology that can write like a human and turn big data into narrative and easy-to-understand content. It serves big data analytics, customer service and sales.
Three Ways to Drive Sales Artificial intelligence-powered NLG software allows banks to understand unprecedented levels of client data, enhance customer service and ensure regulatory compliance.
Make Sense of Big Data Banks need tools that explain what their big data means, what to do about it and why—in plain English (or the language of their choice) and in real time. The challenge is there is too much data, too few data experts and too little time to transform volumes of data into insight. But AI-powered NLG technology can turn data into written financial reports, executive summaries or portfolio analysis, for example, and explain how and why a conclusion is reached.
Provide the Highest Level of Customer Service Banks are competing to deliver expert customer service—on the phone, online and in the branch. AI-powered NLG systems, often called “smart machines,” can be programmed with the expertise of your bank, can connect to client data and serve as an interactive expert to guide customer service teams through interactions. These systems can turn customer service agents into top tier sales people. They can even be deployed online to replicate the in-store banking experience and help make selling complex products and services easy.
Ensure Compliance and Autonomy The advice-giving space is fraught with the potential for litigation in the face of ever-growing levels of regulations. Financial advisors and bankers must protect themselves by keeping meticulous records. These records, a sort of audit trail in case of litigation, coupled with legal fees and the fear of legal action, cost businesses millions if not billions of dollars each year. But AI-powered NLG can help. Programmed with the bank’s unique regulatory and legal framework, it can ensure compliant, expert advice, as long as the system is kept up-to-date. In case of litigation, it creates what we would call in banking an “audit trail.” The software shows its decision-making process, the advice it gave and explains why (and pursuant to what rules) it gave the advice. Since the software is incapable of human error, it never forgets a rule.
Is AI-Powered NLG Ready for Your Business? NLG has been around for several decades, but NLG software has only recently been commercially viable, really since 2008. Fast forward eight years and Fortune 500 companies on both sides of the Atlantic are already using the combination of NLG and AI as a single software to make sense of big data, provide the highest level of customer service and ensure compliance and autonomy—all to drive revenue. In fact, these solutions are now fully scalable so banks can build their own applications—with no need to rely on vendors. Additionally, leading vendors of AI-powered NLG software provide configuration environments so easy to use that even non-technical users can build and update their own applications.
How can any of us bet on the function and value of technology 10 years from now? You cannot. However, vendors are doing a great job of convincing banks they need a 10-year technology contract.
Nobody except perhaps for the U.S. government should accept fixed IT cost structures and terms for 10 years. It is my opinion that proposing an eight, nine or 10-year contract is one of the biggest crimes committed upon bankers in recent years by core IT vendors. Frankly, they should be ashamed of tricking bankers into believing there is any strategic value in such an offering. How many banks offer a 10-year, fixed-rate commercial line of credit or a 10-year CD with guaranteed interest rate increases of 3 percent to 5 percent annually?
Bankers are doing their best to run their institutions, manage compliance issues, fight off margin compression and try to make a buck. I understand that some may think that a 10-year contract will lock their core IT vendor in to incredibly low pricing and favorable terms. A 10-year contract puts a check in the vendor management box and lowers bankers’ distractions, permitting focus on what bankers know best…banking. If you really knew what a 10-year deal actually does to a bank, you’d realize that you just locked yourself into a bad deal.
An eight, nine or 10-year core IT contract guarantees the vendor that no-matter-what, you are going to pay premiums for a long time, even if the cost of the technology delivery drops to near zero. The institution may grow, contract or change its mission, but the fees are going to continue growing annually as consumer price index increases chip away at your efficiency ratio.
Bankers are at a terrible disadvantage and must typically wait five to seven years to restructure these contracts. Once you complete the wait, you find very little switching leverage since a true oligopoly exists. Eighty-five percent of the market is controlled by three companies, Fiserv, FIS, and Jack Henry & Associates. Vendors know that only 4 percent of banks change vendors annually.
Your World Under a 10-Year Agreement Pretend you want to switch vendors because your provider is no longer providing quality service or was hacked by the North Koreans. Nope. You’re stuck. Maybe your bank wishes to upgrade and buy a world-class Internet banking system because the version offered by your core is no good? You’re stuck until your grand-children graduate high school in 2025.
Search the fine print in your agreement for the exclusivity clause preventing a switch of any ancillary service to a competitive offering. Consider complaining to the vendor about the service level agreement (SLA). Sure, they’ll buy you lunch, but the complaints fall on deaf ears. Their nods of empty concern are backed by the fact you’re going nowhere for at least seven more years!
Imagine you happen to meet a colleague at a bank show and he tells you his bank is paying the same vendor 40 percent less for the same services? That’s nice but you’ll have to wait to get anything changed until the next two presidential elections. Decide to sell the bank? Get your shareholders ready to choke on millions in termination fees.
High Fives at the Water Cooler I’m cynical about finding any value in a 10-year contract, because there isn’t any, unless of course you’re the vendor. In my opinion, the absolute longest term should be seven years, and even then, there better be a lot of language that begins protecting your backside in years five, six and seven. The sales guy that brings in the 10-year whale is immediately promoted to the corner office and is enshrined into the president’s club for the remainder of his career. Water cooler high-fives abound at any core IT provider that gets a bank or credit union to sign onto an eight, nine or 10-year deal. If you sign a 10-year deal and can’t find your sales rep, that’s because phones don’t work on cruise ships.
Trust your vendor, but ensure that you are getting fair market pricing and making the right decisions about business language and terms. Going into these multi-million dollar negotiations alone is like playing poker in the World Poker Tour when you only play Texas Hold’em once every five years.