FinovateSpring: Cyber Security, Branch Banking, Partnerships, Financial Wellness, and More

Cyber security is finally at the frontline of conversations, but is it that easy?

Today we chatted with Sean Sposito, Security Analyst at Javelin Strategy, about the challenges that financial services companies have when dealing with cyber security. While awareness of cyber security has never been higher, Sposito asks whether that really equals an impenetrable safe wall?

Banks: who do you want to be when you grow up?

We ask John Waupsh, Chief Innovation Officer at Kasasa, where the branch stands? “Consumers, including millennials, still want to go into the branch and talk to somebody,” Waupsh says. But he counters with the fact that banks should be investing in a future of embedded banking.

FI + Core Vendor + Fintech: What it takes to make the partnership work

Tina Giorgio, President & CEO of ICBA Bancard, speaks with us live at FinovateSpring 2018 about the three Ts  – time, talent, and treasure –  that can guide community banks as they seek to adopt new technologies.

Financial wellness first: transforming the digital experience

“As a financial services industry, we have not yet been able to help a customer understand that the decisions that they make today impact their short and long-term goals,” says Tiffani Montez, Retail Banking Senior Analyst for Aite Group. Taking a new perspective on the digital experience, Montez addresses the key themes that can be facilitated by keeping financial wellness at the forefront: mobile experience, the role of the branch, and reinventing the checking account.

Security scars are key to innovation

“What’s your surface area and what are you defending?” is the first question you should be asking yourself when considering cyber security, according to Ben Johnson, CTO & Co-Founder, Obsidian Security. We speak to him live at FinovateSpring 2018 about the best practice and innovations in cyber security today.

“Banks can’t be everything for everyone”

We speak to Alex Jimenez, Vice President Senior Strategist, Zions Bancorporation about the key takeaways from the panels he participated in that addresses payments and platformization.

 

Alt-Branch Banking: Be the Home for the Homeowner (or Renter)

the_wallThe writing is on the wall. The bank branch wall that is. In a world of ubiquitous smartphones, bank branch ROI continues to plummet. That leaves many financial institutions wondering how to replace the branch’s historic role as the center of customer acquisition.

There are many strategies:

  • Substantial digital marketing and sales efforts
  • Relationships with major local employers
  • Lending, and banking, small businesses
  • Leadership in K-12 financial education
  • Affinity programs with local retailers
  • Social media and PR champion

None of those are particularly novel. But one you may not have tried recently is becoming the go-to financial institution in your area for homeowners and apartment renters. Being the local bank that helps people meet one of their top priorities in life, having a roof over their head, puts you in an enviable position.

Again, this is a strategy that goes back decades (e.g., Savings & Loans in the United States, Building Societies in the United Kingdom), but digital technologies open up new avenues of integrating partner services into a cohesive “Home for Homes” strategy:

  • Finding a home/apartment: Integrations with Zillow, Redfin, newcomer Faira (which “wrapped” the Seattle Time Sunday paper this past weekend in 3-full-pages ad)
  • Traditional home financing: Standard and jumbo mortgages, purchase and refi
  • Alt-financing home/apartment (note 1): Rehab loans, crowdfunding integrations, rental-deposit loans, and so on
  • Home/apartment repair loans: Smaller loans, potentially more of “emergency” type
  • Traditional home equity lending: Installment loans, lines of credit, and so on
  • Realtor support: While there is no shortage of independent mortgage brokers working with real estate agents, many (most?) can’t provide a flow of inbound leads to the agents; this is where established FI brands can leverage their standing in the community (within RESPA guidelines, naturally)

After you find a new home buyer/renter/refinancer, the hard part begins. How to convince them you are the long-term home for their home? A novel approach, but one fraught with regulatory/risk/ROI concerns, is the lifetime mortgage, e.g., a mortgage preapproval that moves with you from home to home provided you continue to meet down payment and income requirements (NOT the UK meaning, a reverse mortgage).

While reprising the Third Federal Mortgage Passport might not be possible in the current regulatory environment, there are ways to incent customers to move their other bank accounts (though, thanks to Wells Fargo, you better be super careful with sales incentives).

CFCU Community Credit Union's "First Home Club"
CFCU Community Credit Union’s First Home Club, a down-payment assistance program from the Federal Home Loan Bank of New York.

Here’s a list of perks to offer new homebuyers/renters:

  • Homeowners club with content, discounts and offers
  • Systematic savings program to save for down payment or rental deposits
  • Card rewards geared towards home expenditures
  • Significant interest-rate kicker and/or bonuses on the first few thousand in savings (see CFCU Community Credit Union at right)
  • Simple refi process (see PenFed’s program powered by Mortgage Harmony for example)
  • Reward-point bonuses for home-related purchases on your credit/debit card
  • Homeowner/rental insurance
  • Homeowner repair services with financing discounts (integrate with Thumbtack, Angie’s List, etc.)
  • Energy-conservation services with financing discounts
  • AirBnB integration for renting out home/apartment

Bottom line: No matter how well your branches are doing today, most financial institutions need to pursue viable new-account generation alternatives to make up for falling branch traffic.

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Notes:

  1. findevr-sv16Apartment financing is a relatively new need (see previous post). And the magnitude of it might surprise anyone who hasn’t checked out the urban rental market in recent years.
  2. Looking for more inspiration for your technology stack? Don’t miss our third annual FinDEVr Silicon Valley next week (18/19 Oct).

Friday Fun: Banking with Coffee

starbucks_wellsfargo_side

 

The connection between banking and coffee is tenuous at best; however, a number of banks (especially in the United States) have underused lobbies and there appears to be an infinite appetite for caffeine. So when demand meets supply, there are opportunities.

I know you’ve heard this all before from me 11 years ago (yikes), The Wall Street Journal last year (Capital One) and The Financial Brand numerous times. But it’s Friday and I’m sitting in the best example I’ve personally experienced, a big, old Southern California Wells Fargo branch in Orange that turned the main part of the lobby over to Starbucks, but kept the teller windows and offices along the side. It’s a great spot for coffee, and banking, if you are into popping into a branch (or just the ATM).

starbucks_wellsfargo_inside

Unless you are a major, it may be difficult to get Starbucks on board, but working with an independent has a lot of benefits, even if they can’t pay Starbucks-level rent. To name a few:

  • Branding: You may have a trusted brand, but adding good coffee, wifi and pastries to the mix can’t hurt.
  • Traffic: There is almost no reason a non-customer will just wander into a bank unless they have already decided to open an account. Coffee will bring people in. Converting them is another matter (that we are avoiding today).
  • Rewards: Everyone likes free stuff. Linking transactions, account opening, savings levels, and so on, to points-redeemable in your branch could be a good retention vehicle.
  • Crowdsourcing: One area with which coffee shops struggle is providing an experience that differentiates them from others. Using the bank’s customer base to crowdsource entertainment, book/magazine exchange, food ideas, and so on could help build community.
  • Meeting space: Small businesses love to meet in coffee shops. However, privacy is an issue. Turn over that under-used conference room to select small-biz customers and community groups, with priority to clients of course. (Extra credit: web-based reservations).

Bottom line: There are many drawbacks to sharing your space—hours, staffing, strange visitors, and so on—but it’s Friday and it’s still summer, so I’m not going to get bogged down in the details. Enjoy the last week of August!

Future Friday: Downsizing the Bank Branch While Engaging with More Customers

bank popup

The number of traditional bank branches (1000+ square feet, fully staffed) are on the decline. In some European countries, more than half have already disappeared. In the U.S. (as of YE 2014), we are only down 5% from the peak (see inset below, note 1), but the trend will gain momentum as leases expire and revenues are squeezed by politicians (thank-you election year) “protecting” consumers and competition from non-banks (probably in that order).

number of bank branches dbrWhile I appreciate the helpful people and wide-open space, most (note 2) bank branches are just too costly to support the declining “non-digital” customer base. That has led to eerily empty branches (not exactly a great branding statement) which no longer generate enough new business to pay their way (though they may support legacy deposit bases making them seem profitable).

Consider the four cornerstones of branch value:

  1. Opening accounts, especially for someone new to the bank
  2. Servicing accounts, especially when there is a problem
  3. Providing advice, especially for loans and business services
  4. Visible reinforcement of the brand (i.e., very expensive billboards)

Numbers 1, 2 & 3 can be more efficiently handled online, over the phone, or at the customer’s location. But what about #4, the branding value?

Banks don’t want to lose that, nor should they. But it’s time to find more cost-effective approaches. One answer: Locate micro-branches within established retailers or in other shared spaces. You keep your brand in front of the community, drive traffic for retail partners, and provide assistance for customers who absolutely need to see a smiling face in the real world.

What I mean by micro-branch isn’t really a branch at all, it’s more of a deposit-taking ATM/kiosk (or two) staffed by a single banker. Think airport check-in with roving staff helping at kiosks. And micro-branch/kiosks could be staffed only during peak-traffic times. For a good ROI, the banker must be able to close (or seamlessly refer to others) higher-value products such as loans (including purchase financing), credit cards, business services and insurance.

Most in-store bank branches are currently in grocery stores or Wal-Mart. But there are other retail locations that could benefit from micro-banking centers to draw traffic, provide services, share in the rent, and in some cases, assist with purchase financing:

  • Office supply/shipping stores: One of the last places in the real world still frequented by businesses (and consumers) that need supplies to do their jobs and don’t have time to wait for Amazon delivery. Team with Office Depot/Staples or shipping locations to place micro-branches within their stores.
  • Home improvement stores: Here’s another physical retailer likely to remain viable for a long time. Home project supplies are often not conducive to shipping, and many shoppers still need assistance figuring out what they need. There are good synergies for a micro-branch dispensing home improvement financing, along with other typical branch services.
  • Other high-value retailers: If banks can get in-store staffing down to 1 FTE or less and fund consumer purchases in-store, it would be possible to expand into lower-volume locations such as electronic stores, department stores, popular furniture stores, outdoor equipment retailers, and others. Although ultimately, this opportunity is likely to be more efficiently handled through technology integrations with the retailer.

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On the other hand, banks could reverse the in-store model by hosting other service providers within existing branches to share costs and generate activity:

  • Ecommerce kiosks: The last mile of ecommerce, actually getting products delivered to the end user, is still expensive and problematic. Team with Amazon, eBay, et al to add kiosks, lockers, etc. installed within the bank branch. A branch with a RedBox, BestBuy vending machine, Amazon lockers, FedEx drop-box, maybe some coffee for us caffeine addicts, would be a much more vibrant space.
  • Other professional services: Team with non-competing service providers such as Realtors, CPAs, tax prep services, law firms, tutors, insurance providers, investment advisors, to create a one-stop shop for a variety of needs.

It’s an exciting time to be involved in banking alt-delivery. Simultaneously maintaining a bank’s local presence, while dramatically decreasing long-term costs, is the kind of tricky business problem that will create new winners and propel the careers of those making the right bets.

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Notes:
1. Source: From the latest Digital Banking Report (formerly Online Banking Report), Bricks + Clicks: Building the Digital Branch, March 2015 (a great read and well-worth the price)
2. I am saying “most” traditional (i.e., large) branches are not viable in the long term, unless their business model or cost structures are dramatically changed. But that doesn’t mean there still won’t be thousands (maybe even tens of thousands) of profitable brick-and-mortar locations for the foreseeablfinovateEurope_bannere future. There just won’t be 100,000+

Picture credit: Retail Week

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PS. Don’t miss 
FinovateEurope next month. 

Feature Friday: Umpqua Showcases the Closest Branch on its Website

umpqua_personal_home

I’m not a fan of bank branches (except Chase’s Northeast Seattle outpost, Hi Ben). In my view, 80% of what goes on there is better done remotely, and the other 20% just doesn’t provide enough ROI. But if you do have good branches, you should at least use your digital presence to showcase them.

Probably the best example of growing a franchise using branching—at least in the United States over the past 20 years—is Umpqua Bank. It grew from a small community bank to a West Coast regional on the back of its innovative branching strategy. (Warning! Do not try to copy this strategy; it’s not 1995 any more.) So, it’s no surprise that Umpqua is one of the more adept FIs in showcasing their local, branch-based services.

Most large banks require users to enter a ZIP code to personalize the website experience. But even then, you generally have to go to an ATM/branch finder to locate the closest branch. Umpqua wisely automates this process on both its desktop and mobile website, though it works more seamlessly on the desktop (see desktop example, above).

umpqua_open_signThe bank uses visitor IP addresses to showcase branches in their city, but it goes one step further (at least in Chrome), by asking permission to use your location. If granted, Umpqua shows the exact branch closest to you. The branch name, address, and contact info are showcased right across the top of the screen. Finally—and I love this little touch—during open hours, there is an old-school “Open” sign in the right-hand corner. They could go one step further and add the temperature and maybe the time right below.

Those personalization techniques, while quite simple, makes prospective customers feel confident that the bank has a local orientation and really desires their business, whether it be digital or branch-focused.

Not everything Umpqua does is perfect. The bank also attempts to showcase local events on the left-hand column. But in my testing today, they were wildly off base. For instance, it listed a farmers market that was 40 miles away and didn’t mention the one within walking distance.

Delivering High-touch Service without Breaking the Bank

idea_bank_mobiledeposit_car_rightThere continues to be a healthy debate about the future of bank branches. Usually the focus is on whether bank customers of the future will go to physical branches for help. The answer to that depends not only on consumer preferences—clearly a large segment desires a branch option— but also on costs to deliver on those preferences.

The bigger question: To what extent do consumers want to interact with humans to optimize their financial experiences? And if human interaction is still needed/desired/preferred, how can it be most effectively delivered accounting for cost, effectiveness, customer satisfaction, revenue generation, and so on.

We’ve looked at technology solutions—chat, call backs, IVR, etc.—over the years. But one area we haven’t explored here is the idea of delivering the human help at the customer’s location instead of at the bank’s. I got to thinking about it after hearing an interview with Ron Johnson at today’s Collision conference. Johnson, the mastermind of Apple’s retail stores, and former JCPenney CEO, just launched Enjoy, which adds a human component to the buying process for higher-end electronics (screenshot below, news coverage).

enjoy_homepage

Like Best Buy’s Geek Squad, when you buy something online at Enjoy, one of its employees actually delivers and sets up your new equipment (currently only in San Francisco and NYC) at no extra cost over retail prices. When pressed on how they could make money doing this, Johnson said they were taking all the overhead expense of a brick-and-mortar location and instead investing it into talented employees who can deliver a better experience at the customer’s location—or at a nearby coffee shop.

Banks can do the same thing. If someone wants to open an account and doesn’t want to, or can’t, do it online, the bank can dispatch someone to take care of it at a location chosen by the customer. Already a typical model for many financial professionals—e.g., mortgage brokers, insurance brokers, business bankers, stock brokers, financial planners, etc.—the key to making it work is to simultaneously downsize physical brand costs; otherwise, mobile bankers are just an added expense.

You can see this idea playing out in Poland, where small-biz focused Idea Bank has deployed four high-tech electric BMW i3 cars (see inset above) to collect deposits from small business customers via an ATM built into the side (see demo here). As with Uber, visits from the roving depositories are scheduled via smartphone app. Security-wise, I’m not sure this is the best way to handle cash, but I do like the idea of mobilized bankers.

Bottom line: Branch or no branch, many customers still need occasional hand-holding. It will be interesting to see how that plays out with a smartphone-wielding customer base.

Sales & Marketing: Preparing for a Future without Bank Branches

It’s been almost a year since my last branch rant (here), so I feel I’m due. As I’ve said before, as founder of a business tied to the success of digital channels, I’m totally biased, so proceed with caution.

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During lunch at the Bank Innovations conference here, I engaged in a spirited debate about the value of branches. And later that week, I enjoyed Optirate’s rebuttal to The Financial Brand’s defense of bank branches. It’s one of the more highly charged, and important, issues of the day.

Here’s what it boils down to:

Branches have value…

         …but not enough to pay the rent

Since customers won’t pay directly for branches (see note 1), banks must cover their costs with low deposit rates, penalty fees and other charges. That has worked for a while, but eventually leaner competitors will figure out how to cherry pick the profitable customers/services. We saw ING Direct siphon off a few billion in deposits during the high-rate years and now we are finally starting to see alt-lenders making a small dent on the loan side ($1 billion or more each being originated this year by Lending Club, Sofi, and OnDeck Capital).

The writing is on the wall. The branch, as we know it, is on the way out (note 2).

But most banks have built their franchises by opening new accounts at branches. So what are the alternatives? There is no right answer as it depends on your strategies and customers, but here are some general ideas (note 3):

  • Provide state-of-the art online/mobile applications and onboarding (note 4)
  • Go after the kids of your current customers, then take care of them through major life stages so they never leave (note 5)
  • Increase your branded-ATM presence in your geographic footprint (apartment lobbies, large employers, etc.)
  • “Power the POS” with free card processing for your cards (if merchants steer customers to your card)
  • Partner with employers to provide banking as an “employee benefit” including a schedule of bank employee “office hours” for advice, help and limited transaction support
  • Focus on small and mid-sized businesses (including startups), and take staff directly to the business location
  • Drive traffic (foot and digital) to your merchant customers with relevant offers
  • Consider roving “mobile banks” that operate like food trucks, moving about the community and parking in high-profile locations (might as well sell cheese and bacon sandwiches too)
  • Participate in crowdfunding/P2P loan platforms to gather new assets (note 6)
  • Provide in-store/dealer financing (real-world and digital)
  • Co-locate with compatible service businesses (insurance, tax prep, real estate, etc.)
  • Have a presence at local events, festivals and street markets (portable ATM, water stations, bathrooms, etc.)
  • Get very involved in local real estate

I am not saying that all branches should be closed. Schwab proved that it pays to have at least one physical location in every major city. But branch costs need to be reduced fast.

It won’t be easy. Change is hard. Layoffs are VERY hard. And unproven digital strategies supplanting longstanding branch-based sales are risky. But I’m not sure there is any realistic alternative for the majority of financial institutions.

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Embedded image used with permission of Getty Images.

Notes:
1. It’s true that the same could be said about online or mobile channels. But, for the most part, the digital alternatives operate at a fraction of the per-user cost of branches.  
2. It’s a 40-year process, however (see OBR 128, April 2006, subscription).
3. For 500+ ideas, see our annual planning report (Sep 2013, subscription).     
4. See: Online Account Opening, OBR 168/169 (June 2009, subscription).     
5. See: Youth Banking, OBR 194/195 (July 2011, subscription).     
6. See: Crowdfunding, OBR 216/217 (May 2013, subscription).

In Defense of Bank Branch Doubters

image Since I became an online banking proponent twenty years ago, literally betting my family’s future on it by starting Online Banking Report, I’ve been a bit pessimistic about the future of branch banking. My personal experiences both as a consumer, and small biz owner (one of the segments that supposedly needs the branch the most) have ranged from pleasant to mind-numbingly frustrating.

Yes, consumers like having branches around. Yes, consumers still go there to open checking accounts. And yes, consumers still value branch location when deciding where to bank. 

All those things are nice. And even the biggest branch bear recognizes that those are powerful positive attributes. And for the record, I’ve can’t recall anyone saying that branches will quickly disappear or "die" (at least not in the pre-Brett King era). Most of the doubters have simply said they expect branches to become less relevant over time (note 1).

My main problem has always revolved around the branch’s cost effectiveness. Sure, you open a few accounts every week at the branch, but what would happen if you had 50% fewer branches? Would you lose 50% of your new accounts? Or would 90% of those would-be-customers just go to one of your other branches or open via online/mobile (especially if you offered state-of-the-art online account opening technology). What’s the ROI of a branch network with 50% lower costs that opens just 5% fewer checking accounts? And could those cost savings be moved into efforts that more than made up for the 5% fewer accounts? 

There isn’t a single answer to that question. Some segments need the branch more than others. As Ron Shevlin pointed out two weeks ago, it depends on your strategy and execution.

But for the mass market, especially the next generation of parents, homeowners, and car buyers, the branch’s ROI (if it’s positive at all) will lag a similar investment made in alternative channels. Can I prove it? Nope, there are too many variables. It’s an exercise that must be carried out by each and every participant based on your market and strategies.

Bottom line: The bank branch will still be relevant for another few decades at least. But I’m willing to bet a copy of Bank 4.0 that the number of United States bank branches will fall at least 20,000 (20%) by 2020. Although, it’s not really about the number, it’s about reducing their overall cost. So if banks dramatically downsize the footprint, such as Wells Fargo’s new 1200 sq. footer in Washington DC, the total number of branches may stay at a relatively high level. 

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Note:
1. In my 2006 report, The Demise of the Branch, I called it a "40-year cycle," specifically projecting a 40% decline in number of U.S. branches by 2025, with total square feet falling by 55%.

The Bank Branch as a Retail Sales Channel

Old Bank Hotel, Oxford, England

There has been much discussion about the future of the branch. We’ve weighed in on it a few times (note 2). And of course, we are completely biased towards remote channels.

While it’s clear that branch transactions are headed downwards, many still believe the branch has a reasonable future as a center of for sales and marketing. Logically, this makes sense because most of us opened our primary accounts in a branch way back when. 

But what’s the reality going forward?

Certainly branches are a good source of new accounts. But what is the acquisition cost?  I’m not going to pretend to know the answer, but it’s interesting to look at how many new relationships a typical branch opens in a month.

Ignoring routine cross-sold savings accounts, credit lines and such (important, but usually less dependent on branch sales personnel), how many brand new primary account relationships (e.g., centered around a checking account) are sold in a typical branch each month? Would you guess 50? 100? More? 

What if I told you it was about 2 per month in the United States, if you ignore the top-20% of high-performers? Would that change your thinking about the future of branch-based account opening?

Assumptions
I haven’t seen any figures on this, so bear with me while I do a back-of-the-envelope calculation, which I think proves the point, even if there are a number of unsubstantiated estimates here:

  • There are about 100 million U.S. households with bank accounts
  • Annual account churn is in the 10% to 20% range. Let’s call it 20%, so that’s 20 million households in play each year 
  • There are 100,000+ bank and credit union branches

So it’s pretty simple to see that 20 million new accounts divided by 100,000 branches = 200 new accounts per year per branch, or about 4 per week.

That may sound low, but it’s overstates the value of the typical branch considerably. More refinement is needed:

  • Not every household uses a bank branch to open a new relationship. Let’s say say that online/mobile/call-center captures a 20% share, that cuts the branch number to 160/year. 
  • And of the 160 customers that chose to open a new account in the branch, a good portion would still have opened an account at the same bank even if the branch had not been there (because of the brand’s reputation, advertising, word-of-mouth, employer referrals, etc.). Let’s call that 30% of the total.

So now, we are down to 10 million “net new” accounts delivered by branches, or about 2 each week per branch.

But that’s still overestimates the impact of the “typical” branch. Using the Pareto principal (80% of new-account volume comes from 20% of the branches), then 80% of the 10 million “net new” accounts, or 8 million, were opened by 20,000 high-performing branches. The remaining 80,000 branches opened just 2 million net new accounts (note 3). 

Bottom line: If my assumptions are in the right ballpark, the lower-performing majority of branches (in the 80%) opens just 2 net new account relationships per month. That means on any given day there is only a 1 in 10 chance that a net new account relationship will be established (note 4).

So, ditch that $2 million branch remodel, re-energize your online/mobile services and start driving prospects to your remote channels (note 5).

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Update (9 PM): A reader (thanks Mr. Pilcher) noted that the business market is also a big factor in branch sales activity. Agreed. Using the same logic as above, assuming 7 million U.S. businesses with employees and 20% annual churn, each of the 80,000 lower-performing branches would add 2 new business relationships per year. But given their value, that could be more important than the 2 new retail relationships added per month. 

Math: (7 mil biz x 20% churn x 80% sold in branch x 70% where branch was deciding factor x 20% going to the lower 80% of branches) divided by 80,000 branches = 2 new biz relationships each year per lower-performing branch

Notes:
1. Photo of the Old Bank Hotel in Oxford (UK), which was a bank for 223 years until purchased in 1998 to be renovated into a hotel.  
2. Our one and only report on the subject was published in 2006 here (subscription). There is nothing wrong with branches. Customers like them and they are important brand ambassadors. But most locations are just not cost effective in an increasingly digital world.
3. I realize that most branches open dozens of accounts every week; but here I’m trying to focus only on “net new relationships.” In other words, new household relationships that would have gone to the competition if the physical branch hadn’t been there. It’s impossible to measure, so this is complete speculation.
4. The higher performing group does about 15x that volume, or 33 new accounts per month.
5. Our latest report published last week, 2013 Guide to Online & & Mobile Banking Products, Pricing & Strategy (subscription), sheds some light on your priorities going forward.