• PayPal and Google Checkout Show the Way for Banks’ Payment Operations

• Nonbank Payment Institutions: A Threat and an Opportunity for Banks

• Banks’ Retail Payment Operations at a Tipping Point

Banks need to stop looking at non-bank payment providers as foes. When consumers work with PayPal outside of a banking relationship, the bank completely looses visibility of the customer relationship – and the customer isn’t thinking of the bank either. True, PayPal and others have hijacked Internet payments revenue away from banks. But the real danger for banks is that they loose relevance in the customer relationship and the financial supply chain.

The industry would do well to partner with PayPal and other non-bank payment providers, both to meet the needs of their customers (who want to work with PayPal, too) and to maintain the relationship with their customers (rather than losing site of what happens with payments outside their walls).

The current mobile retail banking hype in North America requires banks to understand and support not only the current customer demand for alert services, but also the evolution of these services into an anytime/any mobile device point of access to financial information and transactional services. This is a simple point, but one often forgotten by North American banks. Banks that deploy mobile retail banking simply because other banks have done so run the risk of achieving poor return on investment (ROI) and creating dissatisfied customers and mobile retail banking channel silos. As more banks support alert-based services, and the mobile device becomes “just another customer touchpoint,” a bank’s lack of a strategic approach to mobile retail banking will seriously damage its competitiveness in the long term.

• “Introducing Pattern-Based Strategy“
• “Balance Investment in Four Categories to Support Pattern-Based Strategy”
• “Five Eras of IT Business Value Add: From Automation to Pattern-Based Strategy”
• “CEOs and Chief Strategy Officers: Balance Investments With Pattern-Based Strategy”

Pattern-based strategies enable business leaders to actively seek, amplify, examine and exploit patterns (see “Introducing Pattern-Based Strategy“). Seeking patterns will require new disciplines and technologies that identify patterns of change to indicate opportunity or risk. Exploiting patterns will require new disciplines and technologies that enable an organization to establish a consistent and repeatable response (focused on results) to patterns of change.

Loan portfolio management should immediately become a critical element of a lender’s corporate pattern-based strategy because it uses technology to expose signals that may lead to a pattern that will have a positive or negative impact on operations.  It can be used to significantly the credit losses forecasted for the global financial services industry.

To date, banks have done little to address a lack of customer trust, yet low customer trust matters and should be a big concern for banks.  What’s the next step?

In “Financial Crisis Marks the Start of New Customer Conversations,” we discussed that banks must act immediately and use every communication medium to acknowledge customers’ concerns and to deliver the message that the bank is committed to their financial stability and security.  At a minimum, banks should:

• Commit to desirable behavior – Commit to desirable behavior, such as increased transparency with customers.
• Communicate more, not less – It may be difficult to communicate with customers that are angry or distrustful, but a lack of communication will breed more distrust and dissatisfaction.  Banks should:
  • Provide personalized information and communication for individual lending customers and answers to questions such as:  “I’m worried about losing my job or my house. What should I do?”
  • Solicit customer feedback and act on it
  • Make it easy for  customers to complain
  • Reach out to every customer (not just the “good ones”) to tell them that you value their business and trust, and to understand if they have any concerns.

Banks should use multiple mediums to communicate:  social networking technologies (blogs, microblogs, FSNs and others), Web sites, telephone, e-mail and others.  Banks should leverage customer preferences for individual communications, which would be best accomplished through a centralized customer preference profile (see “Hype Cycle for Banking and Investment Services Customer Technologies, 2009”).

• 32% of cardholders have paid off and closed an account since January 2008
• Half of those that closed their account did so because of new policies such as adding fees, lowering credit limits or raising interest rates.

Moving forward, issuing strategies must change for banks to be profitable and consumers to be more satisfied.  At one end of the continuum is high volume, low differentiated products – for example, airline miles per dollar spent.  I would even include programs that increase rewards per the number of products you hold with the bank in this category.  This has been the predominant model in the industry to date.  As for me, these products are fine as long as there are no annual fees.  With an annual fee involved, not interested – and the general cardholder population seems to be saying the say thing given recent studies.

On the other end of the continuum is segmentation, including lower volume, highly differentiated products.  The PNC Virtual Wallet Student is an example.  It sends a text message or e-mail to students and parents if there is a risk of overdrawing or if the account goes below a pre-defined level, parents can transfer money to the student’s account through a Send Money feature and other features.  Ink from Chase is another example – small business cards with options to full pay, split pay, pay down balances faster , track business spending patterns and other features.

At first glance, credit losses and changing regulation seem like a millstone around the neck.  At second glance, they may push the industry to specialization and segmentation that draws consumers back.

For one thing, not all homeowners qualify (Freddie Mac or Frannie Mae guarantee $5.5 trillion of the $10.9 trillion of residential mortgages in the US).  This program has struggled as well – only 360,165 (or 12%) of 2.9 million eligible distressed homeowners have started trial modifications under the Home Affordable Modification Program (HAMP) (as of August 2009).  Some of the largest US banks, such as Bank of America, have only done HAMP modifications for 7% of eligible loans.  In addition, earlier this year Fitch Ratings estimated that 55% to 65% of overall loan modifications, and 75% of sub-prime loans, will become at least 60 days delinquent in the next 12 months.

Loan portfolio management has been shown to improve average unpaid-principal-balance increase in net present value (NPV) from modifications using loan portfolio management (relative to nonoptimized loan modifications using general risk scores) by 25%.  With such a big impact like this (sometimes up to 35% of NPV), I think banks and servicers in the US mortgage industry will turn back to loan portfolio management once banks either decouple from the Treasury by paying off TARP funds, determine that HAMP modifications are not sustainable (low bank adoption rates would suggest resistance already), or both.

Okay so here’s the thing. Today, out of the blue, I was called by my main relationship bank. The caller started the call by identifying who I was – odd on the basis that they called me personally. This was not one of my two main branches but presumably the call center. They thanked me for my business and asked me if they could take some of my time to help improve the value I was getting from the relationship.

I responded by asking the caller if she was trying to sell me a product. She said, “no, I will only be offering advice” on how you can improve your banking activities. Out of curiosity I decided to listen but gave her 2 minutes to provide the “advice”

She proceeded to start asking me survey-type questions. Is this my main bank? Am I happy with the service/banking relationship? We then get to question 3: “Would you say that most of your banking transactions are done using a debit card, credit card, cheque, or at the bank branch?” I didn’t know whether to laugh or cry. I responded by asking her whether she had looked at my profile and status of my accounts before calling. She said yes, and even excitedly said she had the information in front of her! To which I replied that, if this was the case, she would surely easily have been able to give me the answer to her question. Indignantly she responded by saying this was not possible as she couldn’t/wasn’t prepared to go through all of my transactions to find out that information  and that it was better to ask me. Now, call me old fashioned, but I thought I was the customer and the bank was supposed to:

(a)    “know its customer”

(b)   offer service

(c)    offer a personalized service

At least that is the tone of the vast majority of marketing messages today. On the basis that +95% of my transactions are via credit card/online banking it really would be only a cursory exercise to figure out the answer to her question.

I asked her how, if she had my profile, had reviewed the status of my accounts etc, yet could not answer a simple question, how she was going to offer me advice on how to improve my banking relationship and value? Again she was indignant and replied that this was obviously not a good time to speak to me and proceeded to hang up!

So bankers – it is clear to me that before you ink any more marketing messages about service and sales transformation, personalization, “one bank one customer,” “back to basics”, etc that you:

• know your customer
• actually understand what good service entails
• improve training (luckily this call was taped for quality control…)
• provide touchpoint staff with the basic means to perform basic analysis

Needless to say I received no advice but the following research (Gartner client access) may help you in addressing this critical issue:

The Biggest Threats to the Bank Franchise: What Banks Should Do About Them Now

Customer Onboarding: Case Studies Highlight Process and Technology Failings

Customer Experience Management: A Financial Services Perspective

Survey Report on Relationship-Based Pricing Strategies in Banking, 2007

Gartner Consumer Survey 2009: Top Five Online Banking Features Address Communication and Personalization

Banks’ Online Strategies Urgently Need Review and Update

Process-Focused Multichannel Integration for Banking

New Retail Banking Vendors Bring Social Computing to the Savings Account

Getting Customers on Board and Keeping Them There Demands a Process-Centric Approach

Hype Cycle for Banking and Investment Services Customer Technologies, 2009

To Win Over SMBs, Banks Must Make Banking Personal

Customer Preference Profiles Are Central to Truly Personal Banking

In the words of Peter Drucker: “Quality in a service or product is not what you put into it. It is what the client or customer gets out of it.

Why not leverage customers as co-creators of innovation?  A concept that I’ll call “My Lender” is a way to engage customers as co-creators of innovation.  “My Lender” would enable customers and employees to provide input into what an “ideal” lender would be.  What would their ideal lender look like, act like?  What is an ideal customer experience?  What would a bank need to do to get customers to hold more products with one bank?

For the “My Lender” factory to be of value, banks would first need to conduct primary research (including surveys, focus groups) with customers to identify key attributes valued by customers.  Lenders can then use social media applications, collaboration tools or potentially idea management tools to facilitate generating, capturing, discussing and developing, organizing, evaluating and prioritizing valuable insight or alternative thinking that would otherwise not have emerged and/or may be lost through normal processes.

• A doughnut vendor in New York City puts a pile of coins on his counter rather than making exact change for customers and lets customers make their own change.  This enabled him to sell more doughnuts (rather than taking the time to count out change) and built trust with his customers.
• Radiohead (a rock band) let customers decide what they wanted to pay for their 2007 album “In Rainbows” and exceeded all previous digital publishing income.
• Google lets employees spend one day a week on projects of interest, which resulted in Gmail, Google News, Orkut (a social network) and Adsense.
• JetBlue has recently offered a new pricing model to customers through its All-You-Can-Jet Pass.  For $599, a customer can fly anywhere in the JetBlue network as often as they want for one month (Sep. 8th – Oct. 8th).   While the financial impact of this offering cannot yet be measured at the time of this writing, this pricing model puts control in the customer’s hands.  The anticipated benefit for JetBlue is improved revenue and customer retention.

These examples are industries that all have very different business models and pricing structures than banks.  The question becomes: can banks possibly give trust away to get it back?  Yes, but not by putting a change bucket on top of the counter.  Here are a few ideas:

• Let customers build their own products (within pre-defined limits set by the bank)
• Let customers negotiate pricing (while ensuring the pricing still meets risk and profitability requirements)
• Let customers rate products (see here)
• Let customers tell you what their ideal bank looks like (more on this tomorrow).

Pricing transparency in banking is already increasing rapidly (Gartner customers see “How Banks Can Work in a More Transparent Ecosystem to Win Profitable Business“), and along with it the potential for disintermediation.  Price comparison Web sites (such as Pricing Central and moneysupermarket.com) have become an everyday part of many financial services environments and generally rank products by price or rate (Gartner customers see “Social Banking: It’s All About the Money and Customer Focus“).  Personal financial planning websites (such as Mint and Wesabe are increasingly offering consumers recommendations as to the most cost effective lending products available to them.  Interhyp compares banking rates for mortgages and takes over a lot of the process fro the customer. The brand of the bank is pushed to the background.

Banks will need to adapt their pricing strategies to this new, more transparent environment in order to combat disintermediation.  Transparency will lead to the ability of customers to negotiate pricing – which implies the need for pricing flexibility on the part of the bank.  For example, a customer may approach a bank cashier to obtain a loan or credit product. However, with greater price transparency, either through a previous web search or directly to their mobile phone, the customer will likely have access to a full range of comparatives rates from competitor banks.  This will lead to the start of customer-facing price negotiations in lending.