Brett King

Archive for March, 2011|Monthly archive page

6 things Banker’s shouldn’t be saying…

In Bank Innovation, Future of Banking, Strategy on March 17, 2011 at 23:20

Banking is changing forever. Organizations like Britannica, Blockbuster, Borders, and even Bank of America (hint: don’t start a business with ‘B’) all suffer from the same collective challenge. When your business is built around a specific distribution model, how can you adapt when that distribution model is no longer relevant?

The inertia behind existing processes and distribution systems is an almost impossible force to break. It takes real planning a foresight to be able to reform your business around these massively disruptive mechanisms, and in most cases it sees a complete sea change in respect to the dominant players. Who would have thought that one of the largest sellers of books in the world in 2011 would be Apple? This is not due to publishing or distribution capability, but a change in how books are read. It’s all about behavior.

In this context, when you hear stupid statements being made by bankers, it is because they are too embedded, too focused on the detail, and aren’t stepping back looking at the bigger picture of the behavioral shift.

Things bankers say that concern me…

# 1 – Branches are here to stay…

This is not actually the point. By arguing that branches are here to stay, you are essentially either trying to defend your existing business model, or you are discounting the value of other channels like mobile, the web and ATM.

Customers are simply looking for the most efficient way to do their banking, and they’re fiercely channel agnostic. When we evaluate potential branch locations, the primary consideration is convenience – if that location will generate the required traffic and custom to be profitable. At an average investment of US$1m plus, there is a fine art to ensuring a branch is able to generate real return. The only problem is, the branch is not the most convenient channel today. So when your primary metric for your physical network can’t be supported when measured against digital channels, you’ve got a problem. You need to start thinking differently. The branch is just one channel, not THE channel.

#2 – Checks (Cheques) will be here for a long time to come yet…

Really? Why? The data shows that in every developed economy where checks exist that they’re in rapid, permanent decline. It is just a matter of time. Some argue that we still might have 10-15 years before checks disappear in the US. The problem is, if this really is the case, then the US is even more screwed than we previously believed because not only are they behind the rest of the world in respect to payments, but they are resisting changes that promise efficiency gains, reduced costs and greater customer satisifaction.

In the UK this is how the Payments Council announced the closure of central cheque clearing in the UK.

“The Payments Council Board has agreed to set a target date of 31st October 2018 to close the central cheque clearing. Cheque use is in long-term, terminal decline. The Payments Council was faced with the choice of either managing the decline to ensure that personal and business cheque users have alternatives easily available to them; or to stand back and let the decline take its course.”
UK Payments Council, Dec 2009

If you are in banking, rather than arguing checks are here to stay, you should be looking at alternatives and making the transition as orderly as possible, not being faced with a critical issue in the near-term. For example, why are we still issuing checking accounts when we start a new customer?

# 3 – NFC won’t get adopted for decades because the POS infrastructure isn’t there yet…

Apart from eliminating plastic, NFC has a bunch of other potential implications. Firstly, we’ll be able to integrate the retail experience a great deal more. For example, a customer will be able to use their phone to scan a product and get a real-time price, or see if there are competing offers from other retailers where he’s shopped before, and if his bank is prepared to offer a special low interest purchase plan or financing.

Individuals will be able to do seamless phone-to-phone transfers by just touching their phones together. This form of P2P will dramatically reduce the use of checks and cash just because it is so simple. Try selling me a checking account or a physical debit card when I can simply punch in how much I need to pay you into my phone and we touch phones. The behavior is the driver, and you won’t need POS infrastructure to do a bunch of this type of sexy NFC stuff.

What behavior will do though is raise expectations on the payment side very rapidly…

# 4 – I don’t get social media, where’s the ROI?

Wrong question. You might not get it, but billions of people are still using social media. The question is how should you be using it?

The issue with social media right now is not the ROI, but the hit you will likely take as a result of not being a part of the conversation. Right now today many of your customers are on social media talking about your brand, defining your brand image in a new way, and if you’re asking about ROI it means either you are looking at social media as purely a marketing channel or you can’t work out how to control the social media ecosystem. Both which show a core misunderstanding of the multi-modal nature of communications in the SM space.

The biggest risk to a FI today is reputational risk because you are not fully engaged with your customers in the social media space. Do you have a head of social media? You should do – and he needs to be a very senior resource.

#5 – Our customers don’t use mobile banking

I’m going to just say the obvious here. That’s probably because you don’t provide an App…

By 2015, the single most interacted channel for retail banking will be the mobile channel. Does your P&L reflect that reality? If you think you should wait until then to invest, then you’re in more trouble than we thought. I can use my phone as a boarding pass, but I can’t get my account balance or make payments because you don’t support it. My expectations of my phone in respect to utility is massive.

#6 – We have lots of time to get this right…don’t worry

If you aren’t worried, then don’t worry…you won’t have much to worry about in the very near future 🙂

So what if Apple delays NFC?

In Mobile Banking, Technology Innovation on March 14, 2011 at 16:36

There’s rumours flying around about Apple possibly pulling out of their previous NFC (Near-Field Communications) launch commitment for the iPhone 5. Of course, Apple has neither substantiated or denied these rumours. However, I can already hear a collective sigh of relief from many of the card product teams globally who now think they have another year before having to worry about NFC. If, and that’s a big if…if Apple does decide to delay NFC does it really change anything?

Firstly, a delay is not cancelling their intention to deploy a strong mobile payment platform. Secondly, a delay in Apple launching NFC doesn’t change the fact that Google, Nokia, Samsung and a bunch of others have already deployed NFC capable phones and that increasingly NFC capable POS are fast becoming ubiquitous. Thirdly, it’s not like the outcome is going to be any different in 3 years time.

Apple is still massively committed to NFC as a strategy. They’ve created a world-class team led by Benjamin Vigier, they have a ton of patents around mobile payments with NFC integrated into the experience, their iPhone platform has been designed with this capability in mind, and they’ve been busy buying up NFC chipsets. If you think they are walking away from NFC, then whatever you’re smoking is some pretty potent stuff.

The fact is, if your business is based on plastic credit or debit cards – it is just a matter of time before you are going to have your Encyclopedia Brittanica, Blockbuster, Borders, Newspaper, Video Casette, CD-Rom moment. That is, payments modality will change not because of an Apple iPhone, but because the mobile phone as a device is just too ubiquitous and too easy to use as a payments device. Whether it is NFC, P2P, Square or other emerging mobile-based payments technology, the mobile phone is still going to be the future of payment interactions.

The need for standards
In Japan and South Korea, they’ve been running NFC payments networks and technology since 2001. So right now today, you could argue the US and the EU are 10 years behind in respect to this capability. Now admittedly in Japan SUICA and FeLiCa are two separate standards, but this hasn’t held up adoption. In South Korea they didn’t bother with a competitive approach, they just got all the parties together and demanded a standard. The thing is in both South Korea and Japan, the carriers, the banks, the regulators all worked together for the greater good.

I just don’t see this happening in a location like the US. Admittedly in the EU there is probably more of a framework for having a standard, but the worst thing for NFC is the likelihood of a whole cabal of different players who want to ‘own’ the standard. You can’t incentivize people to cooperate unless they understand how they’re going to make money, and with interchange under threat in multiple markets, then the most obvious revenue stream around NFC mobile payments is no longer considered the potential cash cow it once could have been.

But none of that really matters. It still won’t stop NFC, P2P, smartphone or mobile adoption rates in any appreciable way.

When?
One of the most intelligent things I heard in respect to the Apple NFC rumour (which incidentally I think is probably an Apple Black Ops false flag operation) was from David Birch from Consult Hyperion. When we were discussing whether the rumor was true he said:

“Not sure. If it is true, this gives Google a real opportunity…”

Right now Google has the phone and the Android OS platform capability to deploy NFC payments, they just need the App(s), the wallet and the integrated payment network. I would hedge my bets that they’re pretty close to doing that.

So at the end of the day – whether the iPhone 5 does or doesn’t have NFC – it doesn’t mean NFC is no longer viable, and doesn’t mean the phone won’t be the most disruptive device in payments and banking ever!

SXSW: Where’s the Bank Innovation coming from?

In Bank Innovation, Customer Experience, Future of Banking, Strategy, Technology Innovation on March 13, 2011 at 02:12

South-by-Southwest’s Interactive sessions in Austin, TX are a major creative and customer-focused experience. The amount of networking that is taking place, the amount of active innovation and discussion on taking it to the next level is awesome and mind blowing. There’s only one thing…

If there was a game on at SXSW to find 20 bankers – It is highly doubtful that anyone could win that one.

There’s innovation discussions occurring around mobile, gaming, social media, user experience, geo location, but it appears SXSW only has 4 sessions that are connected with banking, which is indicative of the level of engagement. There are payments and retail engagement discussions, there are gaming and social discussions, there are startup and venture discussions, health and work discussions, but not so many on banking.

In our session today where we attempted to discuss innovation in the banking arena, we had spirited discussion around who are the innovators, but the reality is we didn’t get into really sexy innovations. We didn’t get into how mobile payments would change the world, the emergence of new digital currencies, virtual banking models that cross borders, distributed and pervasive banking content embedded into the retail experience, Infographics style PFMs transforming customer engagement, new banking models leveraging off the likes of P2P, social or community enablement, reinventing the credit score or improving financial inclusion through cheaper smartphone platforms. The reason we didn’t get into any of the really sexy stuff is that the problems of innovating the banking sector are much more fundamental today.

Some of the Twitter feedback based on the #BankInnovation hashtag from the session “Banks: Innovate or Die!” indicated frustration at not diving into more deeper matters of innovation.

One blog response from Oscar Llarena (aka @softwaremono) asked the question “Does Customer Service = Innovation?“. In many ways, this very question and the amount of time that was spent talking about customer behavior and the ability of banks to match customer expectations is very telling when it comes to what innovation is needed in the banking arena.

Organizational Inertia
One of the key issues and the reason expectations are low in the financial services space is that most banks don’t even classify these things as innovation. When you ask a die-hard banker about innovation you are more likely to hear about Collateralized Debt Obligations, Derivatives, Barbwire Hedge Contracts or Swaptions than technology integration or customer experience improvement. This is because fundamentally banking has really never had to rapidly innovate the basic model of engagement of customers; branches, cheques (checks), credit cards and other such mechanisms are innovations that occurred over the space of decades or centuries.

The other issue is that risk aversion, philosophical marriage to traditional distribution models and embedded metrics around products sold through branches, mean that organizationally the bank has to first start thinking about changing the way the performance of the business is measured, and structured, before serious innovation can take place. This will take time.

In the meantime the easiest way to create innovation (that goes against the grain of long-embedded business practices and performance structures) is to simply circumvent the traditional bank organization. It could be argued this is why UBank, Jibun Bank, First Direct and ING Direct have been so successful at doing banking better – because they didn’t have to solve the organizational problem first. However, when we see more fundamental business model innovations like P2P lending and new payments systems like M-PESA, these have circumvented banks all together.

Banks will eventually get their act into gear and either replicate alot of this stuff, or acquire it to get the innovations, but such an approach would be like Blockbuster putting up a website that looks like NetFlix. Unless you fundamentally redress the organizational reliance on a very traditional business model and structure, then it’s never quite going to work.

Why innovation has to start with the customer…
In retail banking or financial services, one of the reasons we get so hung up on just some simple elements around customer service, the user interface between the bank and the customer, transparency and the way a bank assesses the risk of an individual consumer is simply that these are the areas that are now so glaringly obvious that they need a more rapid solution. Why? Because they are the very areas where the gap between customer behavior and expectations is growing rapidly with the delivery capability of the average retail bank. Before you can really start with breakout innovation you need to be able to meet customer needs.

Can you do that if you are trying to convince customers to buy irrelevant products because they are higher margin, or if you are trying to force customers into a branch because you’ve got a substantial investment in real estate? No.

So is customer service innovative? Transforming the customer experience and engaging customers in new ways, is a massive leap forward in banking – it may not be sexy innovation, but it is transformational for a sector who thinks they make profits despite their customers.

Why SXSW still matters for banks
In this environment, there are massive opportunities for entrepreneurs and innovators to create bridges between the customer and the institution. This will be through start-ups, new apps or UIs, new user experience models, gaming, and all the sexy stuff that SXSW at large is discussing. But it likely won’t be through traditional banks (sorry @annaobrien). Why?

Probably because you will never see a traditional banker at SXSW because they don’t get the imperative for customer innovation. They send along the geeks, who they expect to build the apps and to maintain the social media presence, but those resources won’t be sitting in the boardrooms talking about new organizational structures, different performance metrics and how to transform the business wholesale.

In the end, the success of start-ups and innovators like SmartyPig, LendingClub, BankSimple and MovenBank will be initiatives that banks feel compelled to follow because customers feel affinity with these new brands. But don’t expect them to rush into it…

In the end customers will win and I guess that is all that matters.

Retail Banking Innovation Infographic

Is product innovation enough?

If your bank is opening branches – get worried

In Branch Strategy, Customer Experience, Retail Banking on March 8, 2011 at 17:37

In my recent book Bank 2.0 I posited that I wasn’t against branches and that rather than advocating the wholesale closure or departure from branch networks, that I was interested in seeing branch focus/form change. The reality is though, the more and more I look at what is wrong with the whole retail banking business in respect to innovation and change, the more that branch-led distribution thinking is killing the ability to innovate because of bloated legacy cost structures.

Branch networks have to shrink
Let me put this out there on the table right now. The current network of branches for most retail behemoths has absolutely no chance of survival in the near future. I’m not talking 10 years out here… I’m talking in the next 2-3 years. Which is why I was bemused by the following piece of news a couple of weeks ago in the WSJ:

The New York bank, No. 3 in U.S. deposits as measured by the Federal Deposit Insurance Corp., wants to expand the Chase name. Some expected an acquisition. Instead, Charlie Scharf, the head of retail operations, said J.P. Morgan would build 1,500 to 2,000 new branches over the next five years–an expansion equivalent to the entire branch network of a large regional bank.
Wall Street Journal: JP Morgan Sees Long-Term Payoff In Huge Branch Expansion, David Benoit (Dow Jones Newswires), Feb 16, 2011

JP Morgan is hoping to add $2Bn dollars in pre-tax earnings by 2025 off the back of this move. Are they serious??

Let’s just look at a few of the facts:

The action is all in channels, not in branches.

Bank visitation and utilization is in decline, cross-sell effectiveness has leveled off, and there is massive debate over what the branch should look like? Bank’s aren’t build deeper, richer customer relationships through branches – despite what they might wish. Branch usage is in decline, costs of branch distribution infrastructure is increasing and ROI is decreasing, the skill mix of staff required is changing and the new resources required to differentiate are expensive and difficult to find and train. The future of branch looks pretty bleak.

Citi's new "Apple Store" - A better branch won't solve your problems...


Why are big banks slow to change?

The bigger the bank brand, the more they already have invested in physical real-estate. The most powerful individual in the retail bank, besides potentially the Head of Retail, is going to be the guy with the biggest bucket – the Head of Branch Distribution. In this environment, strategy is led by those with the most power and leverage internally and much of that is still down to P&L. In this environment, the instinct of the banker is to fall back on old established habits and to lead with a branch distribution strategy when there is spare cash for growth, rather than experiment on something new like Mobile or Social Media. It’s why a bank like JP Morgan Chase, HSBC or Bank of America will spend 90-95% of their “channels” budget on branches still today, flying in the face of all logic to diversify channel expenditure in a major way. It’s why very few of the bigger banks still are yet to appoint a head of mobile or a head of social media.

Sure digital channels are cheaper to run, and you can’t just close half your branch network overnight, but the mix of investment is simply wrong. If you don’t start by reinventing the engagement of customers across every channel, then one day you are going to be stuck with an irrelevant business.

One positive example of adaptation is the recent appointment by TD Bank of Brian Haier to the role of Head of Direct Channels and Distribution Strategy. Brian’s background was leading the Retail Distribution business for TD Canada Trust with a salesforce of 25,000 frontline staff. I guess TD figured out the best way to solve the budget problems was to take one of the Branch guys with the biggest buckets and simply put him in charge of Direct Channels so there would no longer be any argument about where the future of the bank lies.

For JP Morgan Chase, on the other hand – if I was a shareholder, I’d be offloading stock, quickly…