Brett King

Posts Tagged ‘Citi’

Lessons from Apple – Great Branches don’t bring customers back

In Branch Strategy, Customer Experience, Retail Banking on March 8, 2012 at 13:22

The new iPad just launched to the usual hype, anticipation and fanfare. Every time a new Apple product comes off the assembly line, it gets put under the biggest magnifying glass imaginable as crowds of onlookers parse the announcement with scholarly intensity, hoping to piece together a picture of what might emerge and what the implications for the world at large will be.

Apple calls their latest release “Resolutionary” in reference to the retina display capabilities of the screen embedded in the new iPad. The New iPad’s “Retina Display” has 1,000,000 More Pixels than a HDTV, and its resolution is so dense that it is beyond the capability of the human eye to recognize individual pixels. We’re reaching the theoretical limit of display resolution – higher resolutions won’t matter if we can’t see the detail.

But that’s not the interesting observance. Apple is the most valued company in the world right now, and it is in that position because it inherently understands consumer behavior in respect to product, brand interaction and purchasing behavior. There’s a lot of banks that would like to think if we turn all our branches into “Apple Stores” that customers will flock back to the branch. But that’s not what the Apple story is telling us.

Will “Apple Store” Branches Save us?

On the eve of 16th December, 2010, Citi opened a glamorous, high-tech branch in New York City’s Union Square. The 9,700 square foot branch was designed by Eight, Inc., the same firm of architects responsible for the unique design of the iconic Apple store. Although Citi actually launched their store concept in Singapore first, the New York store was almost positioned as the saviour of branch banking itself and the “Apple store” moniker was applied repeatedly to indicate it’s revolutionary nature. If you read some of the reports and commentary on Citi’s branch it was clear that many bankers believed that if you just got the branch format right, made the space more attractive for customers, that they’d storm the branch and all would be made right with the world.

But that’s not what happened. While Citi’s “store” was certainly innovative, there’s no evidence that there’s been any net gain in retail activity because of the evolution in branch design. However, some brands like Umpqua, Jyske (Danish) and Che Banca (Italy), playing on the same premise, have claimed some increased branch activity as a result of their evolved spaces. So what is the reality? Are innovative new branch layouts going to change behavior when it comes to banking?

You only need to look at Apple to answer that question.

Store First?

For many Apple newbies their first interaction with Apple products is through an Apple Store or a Apple retailer, but not always. The new iPad that was released yesterday is not yet available in-store, but already there are tens of thousands stacking up to buy the product through their online store. Pre-order activity for the iPad has already had an effect on the online store for Apple.

Checks by Computerworld through 4:15 p.m. ET from multiple locations in the U.S. found the Apple e-store either still sporting a “We’ll be back soon” banner, or if it did load in a browser, becoming unresponsive during the purchase process – Computerworld Article March 7th, 2012


What we know of Apple is that they don’t insist on you coming into a store to make a purchase, or start your relationship with their brand dependent on some process that requires a face-to-face registration for their first product. For the release of the iPad Apple had to actually restrict online customers to buying only two of the devices, due to overwhelming demand through the online store.

The argument often heard by bankers is that regulation forces physical face-to-face compliance processes on us, but even regulations don’t force chartered banks to insist on a face-to-face interaction to onboard or identify a customer. Like Apple, today’s behavior of consumers means we should be ambivalent to the channel a customer chooses.

For the sake of the argument though, let’s assume that the first interaction is in an Apple Store or in-branch. How do customers behave in their interactions with the Apple brand once they have purchased their first iPad, iPhone or Mac computer? Does the most excellent ‘store’ experience drive them back to the store repeatedly over time? No

Great "Stores" don't bring customers back

Let’s look at the revenue story.

Show me the Money!

The average Apple Store makes approximately $34m in revenue annually, with $8.3m in operating income. However, if you examine the 10-K filing for Apple, revenue is split almost 50/50 between online (& device-based store) sales and their retail presence.

Since the Apple “App store” opened on July 10, 2008 Apple has booked close to $6 billion in revenue just on “Apps”. CyberMonday is used as the benchmark for US online and mobile retail sales, and figures show that iPhones and iPads account for a staggering 7-10% of all US online sales activity on those days.

What we know from all the data is this. Customer’s might start their relationship with Apple in-store, but they don’t have to, increasingly they’re choosing not to. Even if they do, 70-75% of the lifetime revenue from the average customer comes from sales online and that is increasing over time.

Customers simple won’t ever go back to the store to buy an App after they’ve bought an iPad or iPhone in-store.

There’s a lot about banking that are like Apps in our financial relationship. Credit limit upgrades, wire transfers, bill payment, CDs/Fixed Deposits, etc. In fact, once we’ve started our relationship with a bank as a customer, pretty much every product we engage with could be purchased just like an App through a better ‘store’ interface online.

Banks don’t sell well online because unlike Apple, we think that the primary store customers want to shop at is our ‘branch’ and when they come to internet banking, we often don’t even integrate sales into that ‘transactional’ platform. But the behavior of Apple customers shows that even with the best benchmark retail presence in the world, customers don’t come back time and time again to your store or even chose the store first. Once they are connected with your brand, they buy your product and utility wherever is most convenient, and that isn’t at the store or branch.

The big question is, how many branches can you afford to support if customers only visit them the first time out and do the rest online?

Advertisements

Mobile Payments: More than P2P and NFC…

In Customer Experience, Mobile Payments on June 29, 2011 at 10:37

Today I’ve been in Beetsterzwaag, Opsterland, Netherlands, about 150 kilometers from Amsterdam at an offsite strategic retreat with the ICS (International Card Services) team. Initially part of Bank of America’s presence in the Netherlands, ICS today is an independent subsidiary of ABN Amro NV, but works in the provision of a range of card services around issuance, promotion, processing and so forth. ICS has around 3 million customers today, and the session we had was around the implications of mobile payments in the form of NFC, P2P and other initiatives such as cardless loyalty program implementations.

What emerged was a very interesting realization in respect to opportunities in the mobile payments ecosystem that hadn’t fully occurred to me until this planning session.

More than just a payment

While I’ve often discussed the contextuality of payments and the massive opportunities that companies like Google are trying to leverage in respect to messaging around payments (before, during and after the payment event), it is interesting to think about different payment executions. We need responsible partners in the ecosystem to start handling not just straight through payments, but multiple variations on a theme, understanding the various parties and implied contracts involved.

P2P Direct or Merchant one-off payment

The simplest payment journey to conceptualize is when you walk into a retail store and pay a merchant according to the cost of the purchase, or when you have a service event where you simply take your NFC phone and execute a live person-to-person payment. Today you can already use PayPal Bump to execute a live phone to phone or person-to-person payment, but in the future, I’ll just put my phone into send or receive mode for an NFC payment and the respective individual’s wallet will do the rest (discounting all the back-end complexities, of course).

PayPal is slated to do $3.1 Billion in Mobile Payments in 2011

This is a fairly simple execution – take a payment from one person, send to another via either NFC, bump or a wallet. We can use location services, authentication and NFC to simplify and secure the phone to phone interaction, or we can use an App like PayPal to transfer to a unique individual via their phone number, email address or similar. The ability to split payments amongst a number of individuals, such as paying for a bill at a restaurant would also fall into this category.

The value here is the simple execution of a person-to-person transfer without requiring adherence to the current bank-led wire transfer or ACH equivalent which requires a routing number, an account code, the bank address, etc, etc. The opportunity for NFC phone to an NFC POS or another NFC phone is also obvious.

The credit facility or installment plan

Another powerful in-store implementation will be the ability to offer a real-time credit facility to back a payment. It might be a line of credit, a personal loan facility or a 12-month, low-interest payment plan with regular monthly payments. The ability to offer you real-time finance options that are more competitive than using a competitors hefty credit card APR program is pretty compelling at the point-of-sale, and can steal you away at the most critical moment – when you are about to pay for a big ticket item.

Mobile offers payments providers this sort of contextual opportunity, which currently is too difficult or erroneous to do with a plastic card and traditional advertising offers. Give me an offer in-store and help me execute the line of credit in real-time. Powerful enough to get me to change payment partners right in the midst of a transaction.

The Contract Payment

In this scenario we may have an upfront payment, but the full transaction is only effected with completed, successful delivery of the required goods or services. In business we have constructs like an LOC (Letter of Credit) which facilitates such payment contracts, but in the individual merchant/service provider and consumer space, these sorts of payments contracts are implied and managed informally. However, there may be an opportunity for this to be managed in an semi-automated fashion through the payments ecosystem.

Whether it is time based for hurdle payments to occur as specific milestones are reached, when physical goods are delivered, or when a contracted service is rendered – there is an opportunity to simplify the payments journey by authorizing the subsequent payments via a mobile device or online.

Facilitating the platform

As we move increasingly to person-to-person electronic payments, the ability not only to execute an individual one-off payment, but also variations on a theme with either a payment agreement/plan or a underlying credit facility adds value to the P2P ecosystem.

Today we have the likes of PayPal working on P2P, individual merchants offering some payment facilities, but we don’t have an emerging player combining these different capabilities and relationships to create journeys supported by a range of more flexible, automated payment variations.

When you mix analytics, always on IP layer or the cloud, a mobile device, location and the ability to offer a variety of payment mechanisms, the future of payment journeys looks very, very interesting. Payment journeys offer massive opportunities for reinventing and simplifying the way we currently interact in this space.

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…

BANK 2.0: Are Banks too Big to Change?

In Customer Experience, Retail Banking, Strategy, Technology Innovation on June 11, 2010 at 13:18

Reformists and regulators in the US, in the EU and in other jurisdictions are grappling with the problem of massive banks and how their financial health is tied up with the very vitality of the economy. This happens because as the banks are so large and represent a major indicator of the health of the stock market, and thus the macro-economy, it is possible that one of them went under it would have deleterious effects on the economy at large.

In the US space JP MorganChase, Wells Fargo and Bank of America are all in the top 20 traded stocks by market capitalization, Citibank makes an appearance also in the top traded stocks by volume. If either of one of these 4 banks were to go under, the effect on the stock market and the economy would likely be devastating. This is the classic argument of those that support the ‘too big to fail’ position.

Entities are considered to be “Too big to fail” by those who believe those entities are so central to a macroeconomy that their failure will be disastrous to an economy, and as such believe they should become recipients of beneficial financial and economic policies from governments and/or central banks.

Source: Wikipedia

There is another factor at work here, however, these organizations are structural behemoths. Between these 4 organizations, they employee just under 1 million people in North America alone. Between Google, Microsoft and Apple these top tech firms manage only 150,000 employees. In a tough year financially, the big 4 banks struggled with collective profit of $21.4Bn, while the top 3 tech firms reached a whopping $29.3Bn in operating profits.

To put this in perspective employees of the top US banks contributed roughly $22,256 each to the profit of their employers, whereas top tech employees amassed an impressive $195,973 each as a contribution to the bottom line. This difference in core profitability comes from relative organizational efficiencies and the ability to generate new revenue streams through innovation.

As banks have grown, they appear to become less efficient at generating returns for shareholders. This is where the issue of proprietary trading comes in. Proprietary trading has been used by banks in recent years to generate arbitrage opportunities for profit taking where shrinking margins no longer allowed the same. However, proprietary trading turned out to be an extremely risky way of earning profits during the financial crisis with bets on CDOs going the wrong way and banks getting hammered as a result…

“Merrill Lynch lost nearly $20 billion… Morgan Stanley had a nearly $4 billion loss in proprietary trading in [Q4] of 2007. Goldman Sachs spent $3 billion to bail out one of its hedge funds… Citi lost big — as much as $15 billion, on the CDOs it decided to hold rather than sell off…”

Stephen Gandel, Is Proprietary Trading Too Wild for Wall Street? Time.com, Feb 5th, 2010

So in an environment where product margins are being squeezed, markets are struggling (further reducing margin on investments) and where prop trading is under the microscope, where are new revenue opportunities to come from?

There are a raft of innovations rapidly occurring the in financial services space at the moment, largely independent of the banks. Smartypig, as one example of a cooperative model with traditional players, has developed a platform that has put a unique web 2.0 approach to deposits. Since launching in April of 2008, Smartypig has already taken deposits of more than $400m and are well on the way to more.

P2P lending, derided by traditional players as risky and unregulated, has started to generate some serious looking results. In May the Lending Club, a P2P collaborative social lending network, passed more than $10million a month in Loan Originations. Zopa, another social lending network based in the UK, is approaching half a million users who are happy to lend and borrow to each other.

In the payments arena, there is a plethora of competitors to the mainstream card issuers Visa and MasterCard. There’s PayPal, who continue to go from strength to strength. There’s Square, founded by Jack Dorsey of Twitter fame. More recently Facebook has entered the P2P payments space too.

The thing is – all of these really interesting innovations in financial services are being driven not by banks, but by start-ups, technology innovators and much more agile organizations. Why aren’t the banks at the forefront of these improvements?

Innovation is tough

Innovation is very difficult in traditional institutional structures

The issue lies in two core hurdles. The first is organizational inertia, the fact that for a very long time banks have focused on an organizational structure that is built around the branch as the core of the customer relationship. Products are manufactured around the branch, and marketing is limited to either branding or campaigns of the month. The most senior bankers in the organization are generally those from the ‘distribution’ side of the business. It all works like a grandfather clock.

The second issue is that banks have a metrics and financial system that is fundamentally flawed. Today bank strategy is reinforced by line item budgets that were built during the branch era, and management teams dominated by bankers with 30 years of traditional banking pedigree heavily invested in their real-estate.

These two hurdles are leaving third-parties to innovate the customer experience, and evidently this is where the intersection of changing consumer behavior and business models is creating real opportunities for improved revenue and profitability.

Banks need to hive off a portion of their best people, along with some new aggressive Y-Gen and digital native thinkers, to start thinking out of the box in an independent, cashed-up tiger team. This can’t be under the traditional organization structure because it will otherwise die a slow and agonizing death. This has to be about incubating very different approaches to an otherwise very traditional business, and it can’t happen within the current structures or environment.

Future EPS depends on it!