Brett King

Posts Tagged ‘Advocacy’

Transparency, Broken Risk and the Loss of Physicality

In Bank Innovation, Customer Experience, Economics, Engagement Banking, Future of Banking, Strategy on October 19, 2011 at 12:33

Recently I’ve been discussing with bankers, economists, strategists and futurists the future of the banking industry. At a time when we’ve got the likes of the “Occupation of Wall St” (#OWS) through to discussions in various camps about the very survival of banking as we know it, a question you might ask is how did we get here so quickly? 10 years ago, discussing the collapse of the modern day banking system and widespread loss of trust in bankers, might have been ludicrous, unthinkable – but today it is happening.

The New Normal is inherently unstable
As bankers most of us would have preferred if things had just stayed the same as they were, or at least returned to the ‘good ole days’ once the dust from the global financial crisis had settled. Instead we’re faced with talk of a “New Normal”, of increased volatility and of sustained uncertainty. There’s now a growing concern that a Greek default will trigger a crisis in the Eurozone, which in turn will bring on a new ‘great depression’. It is not lost on the public at large that this is a financial crisis we probably didn’t need to have. It is a financial crisis that was bought on by the ultimate in speculative investment behavior, the creation of financial instruments designed to create wealth and trading momentum from underlying, sub-prime debt that really should never have been readjusted as collateralized ‘AAA’ rated securities. So here we are today with so called blue-chip or developed economies which have higher volatility and risk, than so-called emerging markets. Since when did China and Brazil become better bets than the US as investments?

The perfect storm for a financial system in crisis is not just the failure of the banking system to self-regulate, or the default of sovereign nations in respect to servicing their national debt. The perfect storm is driven by three primary mechanisms that aren’t normally discussed as macro-economic factors, but are critical as part of a discussion around reforming the banking industry. They are:

1. Increased Transparency and Visibility
2. The Reassessment of the role of Risk and Regulation, and
3. The Loss of Physicality

Adjusting to a Transparent World
The response to bailouts, banker bonuses, new rates and fees structures, and to the financial crisis itself is indicative of the fact that bankers can no longer just assume that the public at large will trust that banks know what they are doing. How has the industry at large responded to this increased transparency? At first with incredulity, then with a defense of the indefensible, and finally with begrudging acceptance.

There are still many banks today, for example, who not only prohibit the use of social media in the bank workplace, but refuse to engage with end consumers in any really useful way through social media. In a world where dictators can be overturned, where public opinion is expressed in mentions, tweets, likes and fan pages, and where consumers can be as loud and effective as your most expensive marketing initiative – how do you adjust?

Understanding that you now answer to the public and you need to defend your positions with openness, logic and fair value, Brian Moynihan’s defense of BofA’s recent fee hikes shows a lack of nuance in this new, socially transparent world:

“I have an inherent duty as a CEO of a publicly owned company to get a return for my shareholders,” Moynihan said in an interview with CNBC’s Larry Kudlow at the Washington Ideas Forum… Customers and shareholders will “understand what we’re doing,”… “Understand we have a right to make a profit.”
Brian Moynihan, CEO – Bank of America

As a bank you do have the right to make a profit, but customers now understand more acutely than at anytime in history that they have rights too. It’s not that customers don’t want to pay for banking, it’s not that they are unreasonable; it’s that they now demand value and they are assessing that value, and exposing your shortcomings when you don’t meet up to their expectations.

In this way, what we need to do as an industry is better understand our value in the system. Right now we have trouble articulating that because we’ve become too historically focused on ‘banking’ as the system, rather than banking as a financial service to those that have the right to pay and choose. The balance has tipped in favor of the voice of the consumer.

There are bigger Risks than Risk
I was in a conference in Oslo earlier in the year and talking about the need for retail banks to adjust to serving their customers better, no matter when or where they needed banking, and a banker in the audience defended the need for a strict, traditional approach to physical KYC (Know-Your-Customer) because banking is first and foremost about ‘managing risk’ – at least that’s what he said. With our almost myopic focus as an industry on risk management and risk mitigation, we’ve perhaps missed the biggest risk of all – the fact that we are putting so much of the risk workload back onto the customer and the front-end of the business, that we’re starting to become a problem.

I’ve talked at length previously about the huge amount of time the front-end staff and customers spend in an attempt to reduce the potential legal or regulatory enforcement risk. When I, as a customer, am spending 50%, 60% or perhaps 90% longer doing a simple task like opening an account or applying for a loan than I did 20 years ago – do I see that as progress, or do I feel it a burden? Do I see such moves as a reduction of risk, or do I merely see it as an increase in complexity? In such a risk adverse environment, the bank is no longer serving the customer, the customer is serving the bank – and the customer is increasingly getting intimidated by the thought of having to navigate this complexity before he can get to the actual product or service he wants.

If you look at the biggest consumer shifts in the last 15-20 years, the biggest shifts have been driven around change in process or distribution that makes life simpler and easier. Here’s a few examples:

  • Mobile phone versus Landline
  • Google Search versus Catalog
  • Online Trading/Travel versus Broker/Agent
  • Multi-touch screen versus stylus/keyboard
  • iPad/Tablet versus PC
  • Kindle/eBook versus Paperbook
  • Online News/Streams versus Newspaper
  • Email/SMS/Facebook versus Mail/Telephone

The threat here is complexity, and invariably as we try to manage risk, we’re actually making customer facing processes more complex. This is bucking the trend of almost every other core customer interaction we’re seeing today.

The Loss of Physicality
I recently posted on American Banker | BankThink about my views around branches, checks/cheques and all things physical in banking. I suggest you read that separately, but a key consideration or thought in that article is as follows:

“The bank is no longer a place you go. Banking has becoming something you do. It is now contextual, and measured in terms of utility – how easily someone can use bank products or services to accomplish a task like shopping, traveling or buying a car or a home. The more a bank insists on physicality, the more it risks becoming irrelevant to customers who no longer cherish the traditional processes and artifacts. In just four years, that will be the vast majority of your customer base – not a marginal demographic, as some would prefer to believe.”

In this environment, retail banking is ripe for disruption. Why? Because instead of understanding the shifts around us, we’re digging in – levying fees, increasing complexity, and arguing that customers are just going to have to suck it up. After all, where else are they going to go?

Increasingly customers have a choice. Whether it is pre-paid debit cards, mobile wallets, PayPal, or other challenges to day to day financial interactions, the concept that as a regulated industry we’re protected from having to make the hard decisions and actually reform the way we work, is foolhardy.

We need to start working very differently…


Why social media is the community banker’s friend

In Customer Experience, Social Networking on June 7, 2010 at 02:37

Community banks and credit unions have been around since the mid 1800s. Unlike most commercial banks which exist as publicly listed companies, credit unions and community banks are normally not-for-profit structures built to serve the community or groups where they are established. Generally these community banks or credit unions serve a specific geography (as in the case of community development banks) or specific industry or interest groups. According to Wikipedia there are over 46,000 credit unions in 97 countries around the world, making this form of banking an essential part of the financial system, particularly in underbanked segments.

In recent times credit unions have had some solid success despite the Global Financial Crisis. In the United States alone there are 4,101 community banks (52% of all of the 7,932 FDIC-insured financial institutions) with total assets at $909.8 billion (Source:CUNA, FDIC.) US-based credit unions recorded savings totaling $784.1 billion for the first quarter, an increase of 6.6 percent over the previous quarter. Banks such as Bank of America, Citibank and Comerica all lost deposits between June 2005 and June 2009, according to the FDIC.

Some community banks such as Keystone Community Banks have increased deposits 27 percent over the past five years. Provident Bank in NY has performed exceptionally well over the worst years of the financial crisis with 16 percent growth in 2008 and 4 percent growth in 2009. Compared with the negative growth in deposits from mainstream financial service providers, this sort of growth is exceptional. To be fair, there are some community banks that have suffered due to loan exposures established in 2004-2006, and a fair number of community banks that have failed, but comparatively as a group they appear to be performing robustly against mainstream financial institutions.

In Australia, one of the nation’s biggest credit unions, the NSW-based Teachers Credit Union, has seen it’s lending growth spike by 12 percent for this financial year, a rate that has outpaced the broader market including the big 4 banks there. Deposits have also increased, up 5 percent for the year to date.

‘Credit unions and building societies are starting to take a little more off the banks. This time last year the [big 4] banks had 93 per cent of the lending market and now they are down to 88 per cent,” said the CEO of the Teacher’s Credit Union’s, Steve James.

Why the surge in deposit growth for community banks and credit unions in the current environment? Undoubtedly there are two main factors. Firstly a strong public backlash against “Big Banks” has produced an uplift in support for local ‘banks’ who are more sensitive to the needs of their community and secondly, there is a strong synergy that community-led banks have with the massive growth in social media.

In fact, there are a bunch of reasons why social media must be a core strategy for community-led banks, cooperatives and credit unions, but I’d like to focus on a few specific areas:

From Physical “Communities” to Virtual

Community banks and credit unions exist largely to serve a specifically aligned group of community members. In some instances these members are bound geographically, while others are bound by a common cause or industry, such as credit unions built around specific professions (teachers, pilots, postal workers, etc). This community spirit worked to create unique growth opportunities for such institutions in recent times.

In Australia while the ‘big four’ were moving to shut down branches in country towns and suburbs, Bendigo Bank formed a “Community Bank® initiative to help rural communities secure long-term branch banking services” . Using a community owned joint-venture model, Bendigo Bank opened more than 100 community bank branches during the period 1999-2003, making it the fastest growing bank in the country.

The very sense of community that binds the individuals who support such financial institutions is also a core element in the success of social media (which we often refer to as ‘virtual communities‘.) So all these community-led institutions need to do is tap into that same sense of community online as they do in the real world. Instinctively they’ll find it much easier to participate in the conversations and interactions that take place in the social media space. Mainstream banks are used to a tight control over their brand and related communications – in this environment many of them still feel threatened by the way social media empowers the voice of consumers.

Higher rate of Customer Advocacy

Forrester’s 2010 Customer Advocacy rankings report, ranks nearly 50 financial services firms in the United States by the percentage customers who agree with the statement: “My financial provider does what’s best for me, not just its own bottom line.” Credit unions ranked much higher than the big banks, as they have in previous years, with 70 percent of credit union customers saying their financial institution puts their interests first. Whereas the bottom seven of this year’s rankings included Bank of America, Chase, Capital One, TD/Commerce, Fifth Third, Citibank, and in last place, HSBC. These bottom seven rated between 16 and 33 percent.

Higher "Customer Advocacy" for community banks fits well with the social media model

Poor customer advocacy explains why Social media is threatening for big banks. In September of 2009, Ann Minch successfully rebuffed Bank of America’s attempt to increase her credit card APR through the smart use of social media. Arianna Huffington of Huffington Post supported the “Move Your Money” campaign in the new year, promoting this ’cause’ on CBS and other mainstream media in the first quarter. The hashtag #moveyourmoney continues to track popularly on Twitter even today. Social media builds advocacy for great service organizations, but for the big banks who tend to focus more on EPS than customer satisfaction, social media exposes their inadequacies.

Technology enables reach

In the US in recent times, BankVue and their Kasasa banking unit have built an extremely successful model as an integrator for smaller community banks. They have taken marginal players—smaller banks from communities around the US—and given them a platform for greater customer involvement and profitability. Kasasa already has 15 banks enrolled onto its common platform. It gives customers of those banks a much broader service network because they can go into any Kasasa partner bank, use their ATM, process a cheque over the counter, or pay bills. It suddenly gives a smaller community bank the competitive capability of a much larger brand in respect of network and services.

In conclusion, social media is a big part of the recent success of community-led banks and credit unions comparative to the big banks. The smart community banks today should rapidly tap into the power of social media to extend their reach, to empower their communities and to continue to differentiate their customer advocacy capability versus the big banks who are ‘too big to care’.

Banks: KYC is Killing Your Customers (Huff Post)

In Retail Banking, Strategy, Technology Innovation on February 23, 2010 at 05:53

See the original blog entry on Huffington Post…

In my discussions with bankers about innovation, I often hear them tell me that perhaps in other industries innovation could be achieved, but due to heavy regulation and the compliance requirements of the banking sector that such is more difficult for financial institutions. This is part of the story, but I’m sure that it is fixable.

I met with a Private Banker from one of the dominant bank brands in Asia this week. In Central Hong Kong this bank has it’s own tower, of which three floors are dedicated to the Private Banking unit, but that’s only half true. Almost half of that office space is taken up by a team that is designed to reduce risk to the bank by ensuring that customers are accurately informed of the risks their investments will carry, and to ensure that the bank does not commit itself or their client to undue risks. The name of this team within the Private Bank – the Business Prevention unit – I jest ye not.

Has it come to this that regulation and risk aversion is such an important part of the bank that we now actively try to prevent business occurring? It would appear so.

This explains a great deal about the current state of our banking sector. If customers are a risky proposition, then how does the bank make money? Well they invest it in stuff where they know they have an element of control, or in the case of sub-prime they try to actively engineer it so that they make profit regardless of the underlying asset risk. Some banks have even been known to borrow money from the government and margin trade on it in recent times…

The point of this is that banks have become so myopic in respect to customer risk that as customer we’ve almost become an anathema. In fact, the compliance workload we as customers have to deal with these days is so offensive, that it is almost not worth engaging a bank for an investment deal or asking for a loan. To illustrate, in the mid 80’s I recall being a student and walking in to open an account with no identification, I filled out two cards with a specimen signature, my address and particulars, and that was it. Now that same bank requires a 100-point identification scorecard to be realized, and the basic current account application form is some 18 pages long. This is progress apparently.

Compliance procedures are Killing customer experience Figure 1 – Internal Compliance Procedures are bad for business

Now, I appreciate we have Anti-Money Laundering, we have identity theft, we have IRS and tax departments eager to know what we’re doing with our money, and we have regulators that are making it their job to ensure we don’t invest in a financial product that we don’t fully understand. Sometimes, just sometimes, however, we just want a decent banking experience. We just want it to work, and the more paperwork you throw at us, the more hoops you make us jump through – the worse our banking experience is.

The thing with this is, that although there are regulations and legal constraints, most of the work we have to do is due to internal bank policy and process. For example, let’s say an existing customer comes to the bank to ask for a loan – this is a customer we’ve known for 5 years, his salary gets paid every month on time, and he’s a low credit risk based on what we already know. Why then is it that this same customer has to fill out an application form with the same details he’s provided us with since day one?

There is absolutely no regulatory or legal requirement for the process to be handled in this way. Right now this is all about making it easier for the bank to mitigate risk for their brand. A customer-focused bank would either allow the customer to sign on with their Internet Banking credentials to agree to the loan, perhaps sign on a tablet or digital form or if absolutely necessary generate a paper application form based on existing customer records where all he had to do was sign. All of these solutions would produce exactly the same result from a regulator’s or compliance perspective as a hefty paper KYC process.

So why as banks don’t we do this way? Firstly, no one senior enough in the bank has sponsored such a move. Secondly, because the internal IT department would probably take 15,000 man days, and $184.63 m to enable this. And lastly, because at the end of the day as bank executives we get rewarded for mitigating bank risk, not for making customer experience better.

Regulators and bankers need to separate ‘customer’ risk from operational risk, and in this way innovation can still occur.