Brett King

Archive for November, 2010|Monthly archive page

What The Beatles’ success on iTunes means for Banking…

In Customer Experience, Economics, Media, Retail Banking, Strategy on November 26, 2010 at 03:01

The Beatles are arguably one of the most successful bands of all time, but their foray into the digital music space has long been frustrated. In their first week on the iTunes store, however, the Beatles amassed a staggering 2 million individual song downloads and over 450,000 in albums sales. Not bad for a band who stopped recording music 30 years before the iPod was even invented. Their success is evidence of something else entirely, and it should terrify banks mired in physical methods of banking.

Apple versus The Beatles (also Apple)

The fact that The Beatles held out on launching their ‘content’ into the digital space for so long is sadly typical of many very traditional businesses confronted with changing modality and business models. The Beatles conflict intellectually with the digital space actually commenced as a legal battle between Apple Computers and Apple Corps (The Beatles Holding Company) that started more than 30 years ago in 1978. At that time The Beatles filed a lawsuit against Apple Computers for trademark infringement. In 1981 the initial case was settled for just $80,000. Conditions of the settlement were that the two “Apples” would not infringe on each other’s businesses, i.e. Apple Computers would not enter the music business, and Apple Corps would refrain from selling computers. Thus, in 1986 when Apple allowed users to record songs to their computers, it was perceived they were in breach of that agreement. The legal jostling continued until February 2007, when a reported settlement of some $500 million was reached over the trademark dispute in favor of Apple Corps.

Modality shift kills physical music distribution

Confronted with the digital age most of the recording industry bristled. They saw changing modality, a shift to digital music as a threat to their entrenched distribution channels. Rather than embrace digital distribution the likes of the RIAA, when confronted with innovation in their sector, lashed out with lawsuit after lawsuit, starting with the famous case against Napster. The RIAA’s strategy was built on the sole premise of trying to prevent people from using file sharing networks so their existing distribution networks could be propped up indefinitely, and they celebrated Napster’s decline into bankruptcy as a sign of success for this strategy.

Clearly most saw the writing on the wall, but rather than change, the RIAA and the industry as a whole buried their head in the sand, hoping to limp along till change was absolutely inevitable, or worse thinking that they were immune to change. By all accounts, the RIAA was woefully unsuccessful in this strategy. Today, new artists live or die based on their ability to move product in the digital space, and The Beatles move at long last into the digital space singles that the last bastions of support for traditional, physical music distribution is crumbling. In fact, physical “record” sales peaked in 1999 at $14.65 Bn. By 2007 Physical sales of music content were already less than in 1993 having reduced to around $10 Bn, and by then end of 2010 it is expected digital music sales will finally overtake physical sales all together. Clearly the sector was in massive trouble with its decision to resist digital sales and the hundreds of millions spent by the RIAA on legal bills were largely a complete and utter waste of money. Those precious funds should have instead been put into revitalizing the industry digitally. The RIAAs actions in this light were reprehensible.

The RIAAs attempt to kill off digital distribution failed dismally

It’s not just ‘physical’ music that’s at threat

Others have faced similar battles in recent times, including Blockbuster who filled for Chapter 11 in September of this year, clearly signaling the near death of physical distribution of DVDs. Encyclopedia Britannica faced the same type of troubles when Microsoft introduced Encarta to show Windows’ multimedia capability in the mid-90s. This almost spelled the end of Britannica’s 300 year old business overnight.

What is under attack here is not DVDs, it’s not The Beatles, RIAA, Books or CDs and vinyl – what is under attack is Physical Distribution of goods that can easily be digitized. In that sense, the bank sector is in massive trouble because almost everything a bank does can be digitized.

Much of what our banking experience today means is wrapped up in the banking sector’s love of physical distribution. The centre of retail banking from an organization structure perspective in most cases remains the branch, which started life arguably as a physical distribution point for cash. Branch P&Ls exceed ‘digital’ by a factor of 50-100 times in most retail banks of today – an inequity that speaks volumes to ghastly outmoded thinking in bank boardrooms. Cash, Cheques, Plastic Cards, Branches themselves are all inevitable victims of this modality shift.

The Financial Times reported last week the following sentiment in the banking sector:

Banks across the UK, Europe and the US are now bringing service centres back into their local markets and investing heavily in their branch networks. More significantly, many are attempting to restore their battered reputations by putting customer satisfaction at the heart of their business
Financial Times, November 17, 2010

Physical banking is dead (at best dying)

This strategy is massively flawed. While improvements in customer service should be applauded, the fact is, based on distribution metrics, take up of mobile banking, internet banking, mobile payments, and other such indicators, the investment should be going into improving customer journeys, experience and service in the digital space. Most banks need to increase their investment in the digital space ten fold in the next 3 years at a minimum.

Like The Beatles, most banks when threatened with this modality shift, will find it extremely uncomfortable. The reality is, though, if they embrace the change revenues will follow. To give you some indication of the vast gap between shifting modality and the reality of bank distribution strategy, most banks still classify Internet Banking as a ‘transactional platform’ for saving distribution costs. For most customers today, though, they are 30-50 times more likely to visit your bank by logging in to Internet or Mobile Banking than visiting a physical branch. The problem with bank strategy in this respect is, if you come to a branch a core strategy is to try to sell you a new product. Today, most banks don’t sell anything through Internet Banking. If they did, most banks would be shocked to find out that they’d be actually selling more product online than through their entire branch network today.

It’s not branches that is under threat today – it is physical distribution. Banks can take the music industry approach and stick their head in the sand until things are absolutely inevitable, or they can adapt.

Don’t worry – you don’t need to develop an iPhone banking app…

In Business Banking, Customer Experience, Engagement Banking, Mobile Banking, Retail Banking, Strategy on November 19, 2010 at 10:26

As of May this year, only 4% of US FDIC insured institutions in the United States had any sort of mobile play, a small subset of this group had iPhone apps, and an even smaller percentage had Android apps. We already know that mobile Internet based banking is the fastest growing interaction channel for banks today, so this level of commitment by the industry is quite concerning. So why so slow?

Why so slow?

The challenge is that iPhone came into being in 2007 and it wasn’t even on the radar of banks generally. Organizations like Bank of America (who launched their App in July 2007) were an exception. Wells Fargo, for example, was the last of the big 4 banks in the USA, and they didn’t launch their native iPhone App until May 2009. By 2008, when many banks were considering launching an iApp, the Global Financial Crisis was upon us and budgets were being slashed, so rather than cut Bonuses, we saw bankers cut discretionary spending in the areas of IT. Mobile was often the first to go, because the attitude was “we don’t have to worry about that yet…maybe in 10 years time”. 2009 the budget woes continued, and 2010 was about rebuilding trust so the focus was on keeping costs low so that improvement in net earnings could be demonstrated to shareholders. Thus, we approach the start of 2011 when many banks will be thinking about mobile for the first time realistically.

This is all woefully lagging the customer behavior curve, but good to finally see the majority of banks are starting to think of ways to enable customer behavior through the mobile device and now committing to not only iPhone, but Android platforms too.

The Future Mix

By 2015 the day-to-day interactions of the average retail customer will be very different. Driven by changing customer behaviors, increasing pressure on our time, increasing customer expectations around improved interactions and journeys, etc will drive a complete shift in channel priorities. By 2015 the #1 interacted channel (or by frequency if you prefer) will be mobile, #2 internet on the desktop and TV, #3 ATM, #4 Contact Centre, and #5 in the branch. Even #1 and #2 might tend to look a little the same; in that, as devices like the iPad become more capable the lines between ‘mobile’ and desktop blur, so the issue of the ‘journey’ or the interaction itself becomes very critical.

It’s not just one App that we will need either. There will be a bunch of interactions we’ll be managing in this space. Increasingly those journeys will become contextually integrated and delivered via HTML 5 no longer restricted to an “App” or browser-based, instead being based on a contextual trigger, event or service opportunity.

So obviously banks need to make a big P&L commitment to mobile as a channel and to journeys as a philosophy for serving the customer moving forward. So how is it that I advocate that you don’t need to worry about developing your App?

Lessons from VTB24 in Russia

Last week I visited with the multi-channel team at VTB24 in Russia. They are the second largest retail bank in Russia and have close to seven million customers. Given the growth in smartphone adoption and mobile usage in general in Russia, just like everywhere else in the world, there is an obvious urgency to investing in mobile platform development. This was the challenge presented to the VTB24 team.

VTB24 was strongly committed to a mobile App for the iPhone platform, but budget constraints being what they were, they didn’t expect to be able to invest in the development of the App until 2011. Some preliminary conceptual work had already been done, but the platform wouldn’t be mobilized till next year. They already had previously deployed WAP-based banking but this was looking tired compared with customers expectations for App-based mobile banking.

So in this environment, Daniel Gusev, who was tasked with developing the plan for development and launching the iPhone App, was very surprised to wake up one Saturday morning and find the following tweet:

“Great to see VTB24 finally has their iPhone app!” – Tweet (translated from Russian feed)

WHAT?!? This was Daniel’s immediate reaction. This can’t be right?! After all, he was the one tasked with developing the App, if someone else in VTB had been working on something, he would have known. So he logged on to the iTunes store in Russia and sure enough, there was the App for download.

The App as it appeared on the iTunes store

The immediate reaction was to suspect foul play. That someone had created an App to phish identity details from customers or use man-in-the-middle technology to conduct electronic theft. However, after requesting source code from Apple, VTB24 found that the App had no suspicious content, and in fact, had adapted the iPhone APIs around WAP commands to convert the mhtml-based commands of VTB’s to a workable iApp. An elegant, and workable solution.

Daniel then tracked down the developer and had a simple question? Why on earth would you do this?

The customer answered, “Well, I wanted iPhone banking and you guys didn’t have it, so I thought I would try to see if I could build it myself. When it worked, I figured other customers might use it too!”

Wow!

So VTB24 have engaged with the developer. They now have a live iPhone App that was built by a developer for a fraction of the cost, in a fraction of the time that they would have taken to develop it. Yet, it works and works well, even at some point claiming a number 3 spot in Finance section of the Russian App Store (without any marketing support from the Bank)

Conclusion

There is a lesson here. Sometimes due to embedded politics and internal gaming, we want to control such ‘projects’ as the “iPhone App” internally. We might argue around compliance, risk, security, etc, but this approach shows that by thinking outside of the box, we could actually have much quicker innovation in the customer space than we currently do.

The moment we turn the “iPhone App” into an internal project, we are essentially guaranteeing a 3-9 month turn around time to implement and launch. By engaging a developer community, we could reduce this time, cut costs, and probably end up with some really creative solutions that we would not have thought of ourselves.

Take this on the road. Try to breakdown the barriers and IT silos in respect to production of new channel solutions. The end result may be better than anything we could do internally.

The biggest risk: I won’t give you my money…

In Customer Experience, Groundswell, Social Networking, Strategy on November 18, 2010 at 00:23

During the global financial crisis, governments spent billions to bail out banks in an effort to keep liquidity in the banking sector, largely so that lending could continue at a time when businesses needed as much help as they could get. However, in a financial crisis when the economy is in recession, it is counter-intuitive for a bank to lend money to customers who might get into further trouble. So the bail out didn’t work in stimulating the economy the way it was intended. The autopilot ‘internal’ risk function kicked in and prevented it from doing so.

Some could argue that the ‘risk’ function within banking, while acting to protect institutions, may have actually negatively impacted the speed of recovery. While we have all sorts of classifications around risk within the business environment today (operational, legal, socio-political, financial and market) the greatest risk we potentially face in the banking sector is actually none of these. Our risk “compass” needs to be re-tuned in the light of customer behavioral shift.

Industry Reputational Risk

Bankers often talk about the ‘trust’ consumers have in banking as a defining characteristic of why customers give us their money instead of simply keeping it under a mattress. It’s also why many bankers have difficulty understanding why customers of today seem perfectly happy to give money to the likes of PayPal, M-PESA, Lending Club or Zopa. The fact is trust in banking is stubbornly stuck in the doldrums, largely as a result of the whole sub-prime, CDO debacle.

So will trust return? This is a big theme this year. We are essentially dealing with reputational risk. Not for an individual brand or institution, but the collective reputation of the industry as a whole.

That’s the regulator’s job…

To assume we can fix this problem is to ascertain that we can have a coordinated approach to restoring consumer confidence as an industry. There are a few issues with this, namely that we generally leave such broader issues to the regulators. After all, what can one bank do about this on it’s own?

The problem with this approach is that regulators can only regulate, they can’t make us do good things for our customers. Despite strong regulation, 11 banks (Including the Big 4) are facing class action in Australia by customers over fees. Despite toughening regulation in the United States, the “Move Your Money” campaign continues to live on to this day. It is also why peer-to-peer lending networks are flourishing, why Mint and Blippy are garnering the trust of millions, and why PayPal is the world’s leading online payment network. Customers are moving on, plainly because the industry is no longer differentiated by a reputation built on trust.

Let’s face it – regulation is not going to restore trust. The only two things that will fix this gap is building transparency and delivering great service at the coal face.

Restoring trust requires us to be un-bank-like…

I’ve heard many banks talk about service and being more transparent, but the reality is this is a tough target. When we look at service as a sector we see costs and those costs have to be justified – the question always will be; will an increase in service bring more revenue or simply translate to costs? When we look at transparency, this is counter-intuitive for banks. We have spent our entire existence finding ways to hide margin, fees, and to justify those elements as part of the banking ‘system’ in order to return EPS.

The problem is if you screw up with customers today when they’re standing in the branch in a lengthy queue during their lunch break, they are just as likely to start Tweeting or shouting out to friends on Facebook about how “hopeless bank ABC is in the city branch today, this queue is massive!”

How do banks respond to such communications?

  1. Most ignore these Tweets as inconsequential – does that restore trust?
  2. Some respond positively to the tweet, explaining how sorry they are and what they are doing to resolve it…
  3. Unfortunately, some Respond negatively; I’m sorry the customer feels this way, but this is not what we are like – really, some people are just never happy!

The only of these responses that will work positively to rebuild trust in the sector is to suck it up, respond positively, and figure how to create a better service culture or resolve the process problems that created them. You can’t do that if you aren’t listening.

Excellence is trustworthy

When you build a great service environment, then there is no need to worry about being transparent. Customers these days will pay a premium for great service. If service is not your thing, then be transparent about that, but explain you don’t charge as much as those other banks and that is the benefit of your bank. If, however, you want to keep fully loaded fee structures in place, then you’ll have to be transparent about the cost of delivering great service. If you aren’t delivering great service, and you are still leveraging fees like it was the 90s, you’ll find out that this strategy doesn’t work – just ask the big 4 banks in Australia. NAB, thus far, is the only bank to positively respond to this pressure by taking a new, transparent stance on fees.

There are some simple steps to take that will bring rapid improvements:

  1. Simplify bank language through a plain-language initiative – refer Centre for Plain Language and Whitney Quesenbery
  2. Make it easy to find the best phone numbers to speak to the right area of the bank on your website, circumvent IVR menu trees where possible. Citi in the US does this pretty well.
  3. Mystery shop, not competitors, but the most common processes in your multi-channel environment and see where these need to be drastically simplified, and use Observational Field Studies to see how customers work in real-world settings.
  4. Put a social media listening post in place and respond positively and openly at every opportunity – check out Gatorade’s Mission Control
  5. Review the biggest complaints you get in the call centre, and try to fix those customer journeys proactively. We call these Torch Points…

Building trust starts with creating great customer journeys that improve service levels and demonstrate a willingness to be transparent. We can’t rebuild trust without these elements. The biggest risk today, is simply that I don’t trust you enough to give you my money.

The end to hard cash is nigh!

In Economics, Mobile Banking on November 11, 2010 at 10:47

I’ve been at the E-Money, Cards and Payments conference in Moscow today. Coming off the back of SIBOS it is quite interesting to have a discussion not just about payments, but around modality and the emergence of strong mobile payments methodologies and practices. We already know that checks/cheques are in terminal decline, but when you bring up the ‘end of cash’ this gets a great deal of emotive responses or general disbelief that this is possible or probable. It is becoming quite clear, however, that regardless of the emotion and habitual systemic behavior that there is an number of issues that are combining to create a critical decision point for governments, regulators and the banking community to get actively behind the removal of cash from the system. Here are some highlights:

Net Social Cost

Cash costs society comparatively significantly more than alternative payments methods such as debit cards. At the conference Leo van Hove, Associate Professor of Economics at the Free University of Brussels, presented data showing that in Belgium 10.24 Euro is the threshold where cash starts to lose it’s efficiency due to marginal costs, and in Netherlands this is about 11 Euro. In a discussions from the floor between Leo and Dave Birch (@dgwbirch), however, the two experts identified additional social costs beyond distribution, including money laundering, gambling, crime, etc that make physical money a net negative in the social impact picture under most scenarios.

Base Materials and Production

An average US 1 Penny coin costs 1.67 cents to manufacture, and the Dime (5 cent piece) costs 7.7 cents to manufacture. So it is clear that coins in general are becoming untenable as raw materials costs for copper, silver, gold, etc climb yet further. A great quote from SIBOS of a few weeks ago from Carol Realini (@carolrealini) was that projecting the future need for physical cash into the Indian economy would take more paper than can be produced from all the trees in the world if based on real physical currency. With an increasing focus on carbon cost of production, then surely cash itself is a massively expensive proposition for society and is no longer an efficient mechanism for governments. Banks may be holding on to cash because their retail businesses are still largely based on physical cash distribution, but the reality is this is a false economy for society as a whole and is certainly not responsible as we move towards a greener future.

Not mathematically efficient

Ok, so this one I can’t put claim to. This was the discussion going on virtually between Leo van Hove and Dave Birch today via Twitter, etc. Dave points to a recent Blog Post from the Freakonomics gang that suggests the correct denominations for coins should be 3-cents, 11-cents and 37-cents based on correlations between pricing, spend, coin production, distribution, etc. Alan Burdick puts this combination slightly differently when he supposes that we need 5-cent, 18-cent and half-dollar combination.

By one estimate, $10.5 billion in coins just sits around in people’s homes gathering dust…
Alan Burdick, Discover – The Physics of Pocket Change

Mobile Payments and contactless Debit Cards

There’s been a lot of chatter about mobile payments, the NFC integrated iPhone, M-PESA, G-Cash, PayPal and so forth in the blogosphere of late. It is clear there is a lot of anticipation of this potential, but there remains some challenges. Ubiquity is going to be challenging because just like with physical cash and currency, competing standards may actual work against adoption. Interoperability between payments networks, between e-Cash and physical cash, etc will be a challenge too.

Nobuhiko Sugiura, a Special Research Fellow of Japan’s Financial Services Authority, and the Associate Dean of Chuo University Business School also presented at the e-Money conference in Moscow. He highlighted the fact that one the regulators got behind e-Money that it’s success was rapid. Just in the last 3 years use of e-Money has increased 300% now to be one of the most frequented personal payment mechanisms in Japan. In fact, one third of Japanese, according to Sugiura-san are already e-Money users. He cited some other great drivers behind e-Money’s success in Japan, which translate as equally well to countries outside of Japan, namely:

    1. Japanese banks have no interest in micro-payments because of the relatively cost base
    2. Convenience stores favor e-Money so that they can reduce their cash float
    3. The unwritten law in Japan is that refunds are “prohibited in principle”, because the Japanese governments want to replace Physical cash with e-Money as quickly as possible

      In the UK, 43 per cent of retail payments are done by debit card and 23 per cent by credit card. Cash still makes up 32 per cent of these payments, but as a percentage of the whole, it continues to reduce. This is a trend throughout the EU and much of the Western world.

      There are compelling reasons why physical cash should disappear, quickly...

      Conclusion

      Given all of the above, it must just be pure momentum in the system as to why we are still using cash. In terms of cries from industry that “cash is back” it would appear that this sentiment should be discouraged at all costs. If you want to encourage savings then promote debit card and e-Money usage, but physical cash is bad for the system all round.

      I say – Bring on the iPhone 5!

      If you think Social Media is about ROI, you’ll be disappointed

      In Customer Experience, Media, Retail Banking, Social Networking, Strategy on November 8, 2010 at 15:58

      Thankfully, I think we are almost at the point of having serious conversations about how social media can be utilized in most organizations, rather than still asking the question “Is Social Media just a fad?”. However, there are some massive misconceptions on what social media will do for the organization. As a result, often we aren’t even hiring the right skills today to build a competent social media presence. We’re also looking to measure social media in a way we measure other marketing initiatives, channels, advertising campaigns and media, but social media is neither a channel, marketing, media or simply an initiative.

      Do you need a social media ”….
      Sentiment analysis, optimization, key influencer engagement, advocacy generation, brand monitoring and attributes, social media outreach, trending, buzz, listening post… Sounds extremely complicated. It needn’t be. The fact is, the reason all of these social media disciplines are popping up is because social media is taking us in new directions in respect to interactions both within the organization and with our customers. I find, however, that in many camps social media is considered a marketing function. Social Media Marketing is a term adopted by many to suggest that social media should become a part of an integrated marketing communications plan. But that falls short.

      Let me ask you this? Would you consider a teller in a bank, or a customer service representative sitting in a call center a marketer? Hmmm, well yes and no. They are involved in selling and/or marketing products, and they represent the brand. But this is a competency in it’s own right, and staff in the branch and call center are not managed by the marketing department. So how does someone tasked with responding to real-time Twitter or Facebook inquiries fit into marketing? They don’t. Campaigns don’t generally fit in social media either unless you can generate a viral campaign that adapts to social media. Having said that I was impressed by the “Buzz Marketing” initiative that IKEA produced at the end of last year.

      The fact is, just as when the Internet arrived in 1994 and the “Dot Com Bubble” started building momentum in 1999, we made a bunch of assumptions about how the ‘channel’ worked, and many of those proved to be wrong. Such as the assumption that you could be pure-play online ala Pets.com and people would use your site just because it was www cool.

      The truth is, you absolutely need to be involved in social media, but don’t expect that by hiring a few staff to put a Facebook page up and respond to Tweets in real-time will be the end of this discussion. We’re only just starting to understand the full impact of social media in business terms.

      How it is changing?
      I like Alex Schultze’s quote about the bursting of the social media bubble in his recent blog post:

      I’d say YES – the social media bubble is about to burst. People are recognizing already that the endless hours of watching the incoming streams from Twitter and Facebook or all the status updates on LinkedIn are hours wasted. All the paid tweets and people or agencies, who have been hired to tweet are not going to contribute to the bottom line. And the fan pages people build to get “fans, followers, connections” are just hopes that it will do something for the business – but it won’t.
      Alex Schultze – Xeesm

      The points are all valid, and yet, just like the dot com boom, when there is a ‘normalizing’ of core social media activities, that is when we’ll really start to use social media constructively and real returns will result.

      Firstly, we’ll understand how customers discuss or rate our products or services in a social context and what are the inflection points. Secondly, the mobile device will become even more critical as we start to recognize tribal behavior beyond the app, and see social media in the sphere of location and context. Lastly, we’ll see organizations starting to understand that the real-time nature of social media is something to be respected and responded too. It will start to shape more responsive organizations. In that way, perhaps the most important understanding about social media is that it is a leading strategy indicator, not a lagging ROI generator.

      “Show me the money!”
      The ironic thing is that you might already be getting ROI from Social Media, or losing revenue because of not having it and not even know it…

      When you engage communities digitally, it does directly result in positive brand sentiment, and it will help you learn about the needs of your customers, effect bottom line revenues, etc. However, can you point to a Facebook page, a quick turn around to a customer service problem on Twitter, and show the actual increases in bottom line revenue or net earnings? Probably not. So the problem is not ROI from social media, but how we measure organizational performance in respect to revenue. The traditional metrics are just not robust or granular enough to give us a perspective on this. Largely because we have such big disconnects between ‘revenue generation’ and customer journeys. Metrics generally assume that if revenue is generated in one channel, it is because the products rocks, that channel rocks, or because the marketing that lead customers to that channel rocks!

      That’s too simplistic a view of the world these days.

      I enjoyed this referenced slideshare presentation from Olivier Blanchard which satirizes the question of ROI in Social Media.

      The key thing is that Social Media is definitely impacting a bunch of areas of business today, but it doesn’t fit cleanly into our accounting, balance-scorecarded, CPM driven world. The sweet-spot is to learn from social media, build that learning back into the business and adapt from the interactions that it drives. To do this, we need to think beyond ROI, but we most definitely need to be there, listening and engaging customers.