Following are our ten most-promising tactics for generating incremental revenues during calendar year 2005.
Author: Jim Bruene
Six Steps to the Big Idea of Effective Planning
A crucial part of the planning process is reaching deeply to find the
best ideas. Many companies already have a process in place, but if you are
looking for inspiration, consider the following six-step approach.
Six Steps to the Big Idea
1. Do Your Homework (Immersion): Study the situation, visit
competitors, read new research, talk to customers, interview employees,
attend a conference, poll your customer base, and so on.
2. Optimize the Environment: Clear away constraints to
thinking, go off site, stockpile the food and coffee, play music; do
whatever it takes to let your thoughts flow freely.
3. Rattle the Brain: Perform “thinking exercises” to
limber up the brain before tackling your specific problem (see our ideas,
left, or Jump Start Your Brain by Doug Hall for 37 more).
4. Generate Idea Nuggets (free form): Think of every
possible solution to the problem, regardless of how crazy; write them down
without judgments or justifications.
5. Assemble Idea Nuggets Into Strategies and Tactics:
Transcribe each nugget on a
3×5 card and arrange the cards into bigger concepts and ideas.
6. Be Bold: Don’t immediately dismiss strategies that seem
too big for your budget; winners
could be shopped to strategic investors or other financial institutions for
additional funding.
Source: Adapted from Jump Start Your Brain by Doug Hall, Warner
Books, 1995. A new version, Jump Start Your Business Brain was
published in Sept. 2001. Both are available in paperback from Amazon for
about $12 each.
Do Your Homework
To see potential opportunities in a new light, look beyond your normal
circle of peers, subordinates, and other industry sources.
| 1 |
Observe First-Hand: Find out how consumers really use online
financial services and observe how the services could be improved. For
example:
- Enter into a far-reaching conversation with an
important vendor, preferably in person - Arrange for a classroom of MBA students to debate the
pros and cons of online services - Attend a focus group on online financial services
- Hire a consultant for a brainstorm session
- Sponsor focus groups for branch and call center staff
to discuss serving/selling customers online - Post a short questionnaire on your website; have a
copy of each response forwarded directly to you (no staff filters) - Issue an RFP (request for proposal) for the
development of a “next-generation” service
| 2 |
Attend an industry conference: Away from the daily grind,
surrounded by the latest technology and bombarded by new ideas: a perfect
prescription for breakthrough thinking. The two biggest U.S. online banking
conferences take place in the fall, the American Banker’s just-completed
Financial Services Technology Forum and BAI’s Retail Delivery
which will be held next month in Las Vegas.
| 3 |
Dive in to third-party research: Grab a few research reports, head
to a quiet table in your favorite coffee shop, and turn off your Blackberry.
Now, really read the whole report, skipping the executive summary
until the very end. Take notes and highlight pertinent pages. At the end of
the day, create your own executive summary with a list of possible action
ideas and questions to share with your team.
| 4 |
Commission your own research: Research culled from your own
customers and in-market prospects is infinitely more believable than
national studies. If research budgets are nil, you can still post a short
survey on your Web for next to nothing and have results tomorrow. The data
won’t be applicable to your entire customer base, but it might provide a
number of good ideas and insights.
Or if you’d prefer to take a quick reading of consumer sentiment without tipping
your hand to the competition, consider tapping into the preassembled panels of
Web research companies. At InsightExpress http://www.insightexpress.com/
it’s possible to ask 200 consumers what they think of your idea for an
out-of-pocket expense of about $1,500. Questionnaires are easily
composed using online templates, and you’ll have results back within hours. All
results are stored online where you can run your own reports and cross
tabs.
Thinking Exercises: Integrated Account Aggregation
If a picture is worth a thousand words, what’s a Flash demo worth? Even
though we go to great lengths to describe innovative new services, it doesn’t
really sink in until you’ve personally sampled it. To loosen the cobwebs, we
recommend a hands-on session running an innovative online service through its
paces. If you need ideas, see Table 2, below. These are the innovative services
we’ve selected each of the past six years. You can find more information about
each by consulting the appropriate OBR back issue.
Table 2
OBR Thinking Exercises
1999 through 2004
|
Year |
Subject |
Exercise |
| 2004 | Integrated account aggregation | Use OneView from Everbank |
| 2003 | Premium online banking | Review 1st Source Bank of Indiana’s segmented online banking offering |
| 2002 | Account alerts | Use fyiAlerts from Charter One |
| 2001 | Savings | Open a savings account and setup automatic transfers at ING Direct |
| 2000 | P2P payments | Pay for an eBay purchase with PayPal (now owned by eBay) |
| 1999 | Account aggregation (stand alone) | Sign up and use account aggregation at VerticalOne (now Yodlee) |
Source: Online Banking Report, 9/04
2004 Exercise:
Integrated Account Aggregation
Direct banking pioneer Everbank (Jacksonville, FL; $2.7 billion) has
raised the bar again with its new online banking platform (screenshot left).
There is
much to be learned from its implementation, the culmination of three years of
effort. We’ll be reporting on it in depth in an upcoming report. But don’t wait
for us to tell you about it. Get out a pad of paper, study its website, and take
notes. If you really want to see it in action, you’ll need $1500 to open an
account, and you’ll need to wait a week for your paperwork to be processed.
Either way, pay special attention to the degree of integration occurring with
the account aggregation technology.
Time Needed:
– 60 to 90 minutes
Material Needed:
– paper for note taking
– (optional) $1500 to fund an initial deposit
– (optional) username/password for at least one outside
account to aggregate at Everbank
Instructions:
1. Visit the bank
www.everbank.com
2. Navigate to online banking demo and follow the instructions.
Optional: Open an actual account ($1500 needed). Note how Everbank’s account
opening process works compared to yours; jot down ideas for improvement.
3. Observe how the bank displays its online banking options. Pay
special attention to how account aggregation plays a role throughout the
service.
4. Finally, look closely at the boxed content on the right. Note the
features and functionality and think about what you would put in a similar box
within your online banking application.
Building the Case for Increased Investment
Every year it’s a battle to win approval for your business
plans. This process, though far from perfect, is a necessary evil to ensure
that only the most promising plans are funded.
Online banking, which in the U.S. generates little direct
revenue, often requires creative spreadsheeting to show a positive
NPV. Following are some of the positives to incorporate into a winning
business case.
-
Stay competitive: improving account retention and
increasing sales -
Improve sales by differentiating your products and
services with online functionality -
Increase cross sales, especially credit/loan
products -
Increase online banking and bill payment
transaction fees -
Create a new stream of monthly and/or annual
service fees with a premium service option -
Use marketing dollars more effectively through
targeted online promotions -
Reduce costs through self-service
-
Improve customer satisfaction, retention, and
cross sales
Allocating scarce budget dollars
If you are looking for the biggest bang for your buck, look
to online lending and small- and micro-business initiatives. According to
Celent’s study across 1.5 million Digital Insight users (in 2001),
online lending generates four times the combined value (NPV) of banking/bill
pay. Business services were even more valuable, resulting in returns of
nearly six times that of banking/bill pay.
Everbank made a sizable investment in a new online
banking platform, a highly customized mix of Metavante and Teknowledge
software. Previously, the bank used the S1 online banking platform.
NPV from various online banking products
|
|
$ Return (NPV)1 |
||
|
Product |
5-Yr Total |
Per Cust2 |
Index |
|
Banking, statement info. |
$6,000 |
$0.12 |
1x |
|
Bill pay |
$17,000 |
$0.33 |
3x |
|
Lending |
$83,000 |
$1.65 |
14x |
|
Small business |
$123,000 |
$2.45 |
20x |
|
Total |
$228,000 |
$4.56 |
38x |
|
Combinations |
|
|
|
|
Banking and bill pay |
$23,000 |
$0.45 |
4x |
|
All except small business (lending, banking, bill |
$105,000 |
$2.10 |
18x |
Source: Celent, 10/01 For a better understanding, read
Celent’s Customer Retention and Cost Savings Drive Online Banking ROI,
Oct. 17, 2001
(1) NPV over 5 years at a 50,000-customer bank; includes direct revenues,
cost savings, and retention. (2) Per-customer figures are across all
customers, on- and off-line, consumer and small business.
2005/2006 Planning for Premium Online Banking
As we discussed last month , there’s a real void in the marketplace when it
comes to premium online banking services. In today’s retail environment,
where you can choose from hundreds of varieties of every product on the
shelf, it’s shocking that Bank of America provides just a single flavor of
online banking to its 11+ million subscribers. Granted, users choose which
features to use, so the service isn’t truly identical for all.
But surprisingly, everyone still pays a single price: $0. For Bank of
America, that price point has been an important and highly visible component
of its strategic branding message. However, we view 100%-free online banking
as a temporary aberration. U.S. banks have had their hands full during the
past few years complying with new regulatory initiatives and fighting
fraudsters from around the globe.
And it’s a relatively recent phenomenon that online banking penetration
has surpassed 20% at many banks. Below that point, there aren’t enough
customers to make a segmented offering profitable. So even though it will
require extensive buyer education, we believe that by this time next year,
at least one, and possible two or three, top-10 U.S. banks will offer
premium online banking options.
The pioneer in this area is Online Resources, which began offering
MoneyHQ, a premium online banking option, late last year. Early
results are mixed. While Online Resources admits that client adoption has
been slower than expected, it is pleased with consumer adoption, which
stands at 9% of bill pay customers across the 45 clients who’ve been live
for at least four months. In total (as of Sep. 29, 2004), 120 clients are
signed, with 90 operational, representing 33% and 25% respectively of
eligible clients.
Strategically, we have no doubt that MoneyHQ is the right
direction, and the 9% initial adoption rate is encouraging. However, it’s
difficult for ORCC’s community bank and credit union clientele to
successfully educate the market on the benefits of premium online banking.
It may take the multi-million dollar advertising budgets of the big players
to really jump-start the service. We should know a lot more as 2005 unfolds.
Jim Bruene, Editor & Founder
Pricing Online Bill Payment
We just sent our latest report, “Pricing: The Fee vs. Free Controversy” to the printer. It should arrive in your mail in a week to 10 days.
In the report we look at the widespread practice of offering of online bill payment free of charge. You can read the report for our detailed conclusions, but suffice it to say, we are not wild about this trend. Online banking and bill payment provides significant value. And without a tangible revenue stream, it’s difficult to make the appropriate investments in the channel. We think bank customers will actually be better off in the long run if they shoulder at least a portion of the extra costs of a robust online banking service.
Free bill payment is particularly vexing. Here’s a service that runs circles around the paper equivalent. Users can save time, save money (postage, late fees, and check printing fees), can improve bill tracking and budgeting, and make their financial life easier. And, if the electronic payment doesn’t post at the biller on time, the bank and/or processor will go to bat for them to resolve the problem. Try doing that with a paper check that’s “lost in the mail.”
So why do banks insist on providing this beneficial and costly service free of charge? They are doing it for the “relationship” value. No doubt users love getting something for nothing. And we won’t dispute the correlation between bill pay users and higher household profitability. But so what. You can correlate higher profits with any service designed for a well-heeled audience.
The bigger question is this: Is free bill payment, costing $50 to $100 per customer per year, the best way to gain more loans and deposits from your best customers? It may be, but there may also be less expensive ways to achieve similar results, such as lifetime transaction archives or more account security options.
It’s a tough call.
If you’d like to learn more about the future of online bill payment, check out the Online Banking & Bill Pay Forecast: Current, future and historical usage: 1994 to 2016 from our sister publication, The Online Banking Report.
AmSouth’s Online Bank Account Switching Tool
AmSouth Bank has posted a new "special offer" on its home page. The bank’s "Click to Switch" program promises, "The fast online way to tell your bank it’s over."
Clicking on the graphic leads to a page with some advice for switching checking accounts. It’s the usual laundry list of advice, none of which is really helped by the online connection. There is one useful link for changing the direct deposit of social security benefits. Though, that is likely to be of little use to most online users contemplating a switch to AmSouth Bank.
We like what AmSouth is doing, we just wish there was more meat in the offer.
Gallery of Free Bill Payment Promotions
Widespread Misuse of Gartner’s Online Banking Fraud Estimates
By now you’ve probably dealt with the repercussions from the June 14 MSNBC
report by Bob Sullivan entitled, Survey: 2 million bank accounts robbed,
followed by the subhead, Criminals taking advantage of online banking,
Gartner says. A consumer (or senior banking manager) reading the article
would likely come away believing that two million U.S. consumers lost money from
their checking accounts due to online banking. 1
In fact, here is what Gartner actually said in
its report2:
Illegal access to checking accounts is the fastest-growing type of
consumer fraud, and may be proliferating through online channels.
(emphasis mine)
The report goes on to say that most consumers do not know how their checking
accounts were robbed: Only 17% believed their info was stolen off the Internet;
another 10% reported wallets stolen; and only 5% recalled giving up personal
info to phishers.
Gartner also said that 70% of the online consumers reporting losses also
report that they banked or paid bills online, “which exposes their (codes) to
the Internet.” However, what Gartner failed to point out was nearly 70% of
online consumers that weren’t robbed also bank or pay bills online, so
it’s a meaningless correlation.
Finally, consider the research methodology. It looks staggering in the
headlines to say that two million people were robbed. But my
back-of-the-envelope calculations indicate this huge number was extrapolated
from fewer than 75 respondents reporting a recent unauthorized checking account
withdrawal (from Gartner’s survey of 5,000 online adults). Some fairly large
errors can occur generalizing a small sample size to the entire population. I’m
not saying it’s wrong, but one should be wary.
As bad as the MSNBC article looks for the online banking industry, the NBC
Nightly News with Tom Brokaw got even more carried away. They took an even
bigger number, 4.5 million, which Gartner said is the number of people who have
ever had an unauthorized checking account withdrawal, and mistakenly said that
all those people were robbed via online banking. Here’s MSNBC’s synopsis of the
TV feature posted online next to the Sullivan article (see inset):
An estimated 4.5 million Americans have had money stolen from their
Internet bank accounts. NBC’s Bob Hager reports.
This is a great example of what happens when a respectable piece of research
is taken out of context. It begins to have a life of its own as other news media
echo the original broadcast.
While many subsequent news articles echoed the conclusions of the original
MSNBC piece, some dug deeper. For example, NBC affiliate WEEK-TV quoted
Peoples Bank (Bloomington/Normal, IL) CEO Ed Vogelsinger as saying that
despite having 20% of their base using online banking, so far no one has
reported any Internet banking fraud. Way to go, Ed.
We urge our readers to take appropriate steps through their PR channels to
set the record straight. At a minimum, be prepared to rebut the MSNBC numbers if
approached by the media, and feel free to send any reporter our way to
corroborate your position.
Contact: Jim Bruene, Editor, Online Banking Report, 206-517-5021 or email
jim@onlinebankingreport.com .
1 Reference: <
http://www.msnbc.msn.com/ /id/5184077/>
2 Banks Must Act
Urgently to Stop Account Hijackers, by Avivah Litan, Gartner, June 14,
2004
Current Events as Marketing Opportunities
Strategic Alternatives to Across-the-Board FREE
Eliminating bill payment fees is the simplest way to make customers happy.
However, there may be less expensive alternatives that position you better
for the long term.
First, let’s look at how consumers choose a bill payment service
provider. It’s not so much about the price. What they want is to have their
bills paid in a timely manner with the least amount of effort and maximum
amount of control. Other factors play a role as well:
- overall complexity of household finances
- technological sophistication and outlook
- financial experience and behavior
- risk tolerance
Table 9, right, lists 43 attributes related to the consumer’s bill
payment purchase decision.
So, rather than offering it fee-free, perhaps you could improve your
value-proposition in other ways to provide a similar adoption lift without
losing the fee income altogether. Following are five alternative
approaches.
1. Conditional (on another purchase)
· Free if you do add something that improves revenues, such as
adding an account
· Free if you do something that lowers costs such as switch to
estatements*
· Free with minimum balance levels
· Free as part of an overall relationship account
2. Crippled (reduced features and benefits)
· Free with usage limited to electronic merchants only
· Free with reduced or pay-per-incident customer service
· Free with reduced functionality
· Free with reduced usage
*Two top-50 banks are using this approach,
First Tennessee and
National Commerce Financial
Table 9
Factors Used by Consumers When Selecting a Bill Payment Provider
- security
- customer service availability
- quality of customer service
- timeliness of payments
- turnaround time of the payment
- payment scheduling requirements
- guarantees in the event of late/lost payments
- usability
- tracking of payments in process
- stop-payment capabilities
- merchant list
- process to add a merchant
- ability to review the billing statement
- confirmation numbers
- confirmation messages
- ability to schedule recurring payments
- how long it takes to complete a bill payment session
- how easy is to make a mistake
- session logs
- payment limits
- look and feel
- integration with other online banking activities
- built-in credit to handle shortfalls
- ability to pay from multiple accounts
- archives of payment transactions
- reporting
- automation options
- positive word of mouth
- customer service wait times
- online FAQs
- online instant messaging support
- telephone support
- learning curve
- SMS/IM confirmations
- ability to schedule via telephone
- integrated email to payees
- budgeting/planning tools
- search capabilities for prior transactions
- expedited transactions
- control
- privacy
- trust
- perceived record keeping improvements
Source: Online Banking Report, 8/04
3. Substitute other lower-cost FREE services
· Free paper check and statement archives
· Free account aggregation with online bill manager (see
www.LowerMyBills.com
)
· Free 24/7 customer service
· Free interbank transfers
· Free credit report information
· Free account alerts
· Free companion air fare or other non-banking incentive
4. Provide overall relationship incentives
· Higher rates or lower fees on checking or other deposit accounts
· Lower rates and/or higher lines of credit
· Higher service levels and better guarantees
5. FREE as part of plain-vanilla, reduced-benefit online banking
package
· Actively upsell advanced fee-based packages with numerous
additional features and benefits (see Table 10 below)
· Limit the life of the plain-vanilla package; enact forced
conversion after several years into fee-based product
Table 10
Bill Payment Product Differentiation
Source: Online Banking Report, 8/04
The Bottom Line on Subsidizing Bill Payment
The real question: Does subsidizing bill payment improve profits more than
spending that money in other ways, e.g., better service, better branches, better
website, and so on? Only individual financial institutions can answer the
question, factoring all the alternative uses of capital. However, we caution
against blindly jumping on the fee-less bandwagon. Think of free bill pay as
just one more strategic choice, not a mandate from the marketplace.
The simplest approach is a breakeven analysis
(see Table 8, right). In other words, will my current bill pay base, and
the new customers attracted to a free offering, bring in enough extra business
to cover the $50 to $75 annual subsidy?1
On the deposit side, the case is pretty weak: to offset a $60 annual subsidy,
you’d need incremental balances of $3,000 at a 2% spread or $6,000 at a 1%
spread. On the loan side, the numbers work better. At a 4% spread, you only need
an extra $1,500 to break even. But is subsidized bill payment really the most
cost effective way to increase loan balances? If so, you should probably make a
more direct tie-in, such as waving bill pay fees for taking a new credit line (see
“Bill Pay Credit Lines,” OBR 81
Mini Business Case
A more precise measure of the balance levels needed to cover bill payment fee
waivers looks at the total cost of bill pay and the number of incremental
customers attracted. For this calculation, use the following assumptions:
· $90 annual cost for each bill pay customer, including internal
servicing costs and outsourced processing
· 50% of bill pay customers would pay $5/mo
· 50% are incremental, drawn by the free offer
· 10,000 total users
So the total incremental cost is:
· New users: 5,000 x $90 = $450,000
· Forgone fees from existing users:
5,000 x $60 = $300,000
· Total incremental costs: $750,000
Table 8
Breakeven Incremental Balances
|
|
Incremental Balances Needed to Breakeven |
|
|
Spread |
Total |
Per Bill Pay Customer |
|
1% |
$75 million |
$7,500 |
|
1.5% |
$50 million |
$5,000 |
|
2% |
$38 million |
$3,750 |
|
2.5% |
$30 million |
$3,000 |
|
3% |
$25 million |
$2,500 |
|
4% |
$19 million |
$1,875 |
|
5% |
$15 million |
$1,500 |
|
6% |
$13 million |
$1,250 |
|
7% |
$11 million |
$1,100 |
Source: Online Banking Report, 8/04
Results
Even with a modest base of 5,000 bill pay customers currently paying $5/mo
for the service, you may need to attract $25 million or more in incremental
balances to make back the $750,000 in incremental costs. Even if you think
that’s possible, is that the best return on the $750,000 “investment.” Would
that money provide a better return if spent on service upgrades, marketing, or
employee education?
When deciding whether you can bring in enough offsetting balances, keep in
mind the demographic trend is moving in the wrong direction. Bank of America may
have been able to improve overall profit 30% after costs; however, that was
against an affluent, early adopter crowd. Going forward into the mass market,
will the same profit lift be seen in the 2005 to 2008 period? We doubt it. The
newest wave of users is less affluent overall, so it will be harder for them to
bring in the balances needed to offset the $50 to $100 subsidy.
1 Assumes total out-of-pocket and internal costs of bill payment
are $6 to 8/mo.