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30 alabama banker ▲ summer 2011
Banking Out of Recession:
Emerging Techs Create New Opportunities by Lee Wetherington, AAP, director of strategic insight, ProfitStars®
Let’s face it. It looks dire. Unemployment remains high, the housing
market sketchy. Durbin threatens a loss of $10 billion in fee income.
And Dodd-Frank promises to keep us all mired in new regulations for
quite some time.
No hope, right? Wrong. Despite major economic, regulatory and fiscal
challenges, banks are entering a new era of unprecedented
opportunity made possible by powerful innovations in online, mobile
and payments technologies. The first question is: where to begin?
Get a Dashboard
Durbin’s potential impact is forcing many banks to reevaluate their
business models and recalibrate pricing across all products and
services. Before you can identify and prioritize the right technologies
for cutting costs, generating revenue and enhancing profitability, you
must first know what’s working and what’s not. And technology can
help here too.
Modern data visualization enables your bank to know where you’ve
been, where you are and where you’re headed—all at a glance.
Understanding which customers add to the bottom line, and which
customers take away, is crucial.
After Durbin, the margins, or lack thereof, will leave little room for
guesswork, and that’s why every bank, regardless of size, should start
with a profitability dashboard that provides real-time, actionable
intelligence on customers, products, income and expense. From this
vantage, the technology choices for now, soon and later become more
clear.
See figure 1.
If you know which 10 percent of customers are generating 200 percent
of net income, you can prioritize the technologies most important to
this segment. And if you know which 20 percent of customers are
draining net income, you can begin to price products in ways that
secure the viability of the bank long term.
If you know which 10 percent of customers are generating 200 percent
of net income, you can prioritize the technologies most important to
this segment. And if you know which 20 percent of customers are
draining net income, you can begin to price products in ways that
secure the viability of the bank long term.
The end goal is to decrease attrition among your profitable customers,
move marginal customers into a profitable position and increase
attrition among those who continue to drain net income. Segmenting
and pricing products and services based on profitability can yield
dramatic results.
See figure 2.
Online Opportunities Abound
Banks aren’t the only ones in need of a dashboard. According to a
recent BAI/Hitachi study, consumers today are much more concerned
about fiscal restraint and budgets than ever before. In short, they are
looking for more than a balance update from their banks. They want
the meaning of their account data upfront—without having to do math
in their heads to get it. And once they
are in control of their finances, they’re
looking to save, avoid fees and locate
the best deals.
Just how much cost savings can banks
realize by converting offline customers
to online banking and online customers
to more intensive usage of services like
online bill payment? According to Javelin
Strategy and Research, the potential
savings is $8.3 billion industry wide, or
$167 per customer per year. How is this
possible? Compare the average in-
person branch transaction cost of $4
with the average mobile transaction cost
of 8 cents, and the math becomes clear.
With more than 70 percent of banking
transactions happening outside the
branch, getting your online channel right
has never been more important.
Technologically SpeakingTechnologically Speaking
Figure 1
alabama banker ▲ summer 2011 31
Online Financial Management (OFM)
OFM is the second generation of online banking and the most direct way of compelling
consumers and businesses alike to use your online channel, helping your bank realize the
substantial cost-efficiencies of the self-service that results: online transactions cost the bank
only 17 cents while, again, branch transactions cost $4.
OFM not only aggregates all of your customers’ bank data in one place—even data from other
financial institutions with which your customers hold accounts—it visualizes that data in ways
that give customers a clear understanding of where they stand with their finances, how their
spending/saving/budgeting compares to previous months (or similar households), and what they
should consider doing next.
See figure 3.
For the bank, OFM boasts solid ROI. Active users of OFM are 31 percent less likely to switch
banks, 26 percent more likely to carry higher balances, 23 percent more likely refer friends and
family, and 17 percent more likely to open new accounts, according to the Aite Group, a Boston-
based consultancy.
In 2011, OFM is going mainstream. The real differentiator will be how OFM is integrated
throughout the online experience your bank provides. Rather than being relegated to a single
tab of your transactional website, the various OFM components (e.g., charts, graphs, alerts, etc.)
will be widgetized, or rendered inindividual application components that can be placed
wherever customers want them—on their account homepages, mobile devices or even social
network sites.
Merchant-Funded Online Statement Rewards
While debit card rewards may die with Durbin, everybody likes a deal. In 2011, banks will
partner with companies like BillShrink and Cardlytics to integrate merchant-funded rewards and
bill-savings offers into the bank’s online account transaction detail.
See figure 4.
As customers peruse their statements online, they will see discounts and rewards from the
merchants with whom they already have relationships. Banks that parlay these targeted rewards
online will share in the revenue from the merchant sponsoring the rewards. This is one of the
best ways to monetize your relationships with retail customers without levying new checking
account fees.
Soon, these statement offers will also be available in real-time on customers’ mobile phones
within the merchant’s store. Using GPS geo-
location, customers will be alerted to “nearby”
offers as they cruise the aisles.
See figure 5.
True Online Small Business BillPay and Micro
Cash Management
Small-to-medium size businesses (SMBs) are
looking to restore momentum post-recession.
SMB owners are making due with consumer
online banking services that do not address even
the most basic of businesses’ needs. No help
with payroll, taxes, remote deposit, funds
transfers, wires, nothing.
The most immediate online need of the average
SMB is a bill payment offering that enables the
electronic payment of employees, transaction
limits per employee/payee, electronic invoicing
and collection of payments, integration with the
SMB’s accounting system, and the ability to track
unpaid receivables.
See figure 6 & 7.
Figure 2
Figure 3
32 alabama banker ▲ summer 2011
Currently, only 10 percent of SMBs have remote deposit capture (RDC), yet 35 percent are
willing to pay for it. According to Celent, if deployments grew to 20 percent of SMBs,
financial institutions could gain another $720 million in fee revenue annually.
Moreover, according to Aite, 49 percent of businesses are willing to pay a premium to access
an SMB bill payment or micro cash management service on the mobile device. Specifically,
the average SMB owner prioritizes two-way actionable alerts that allow him to monitor and
approve the movement of money in and out of the business in real time.
Serving the SMB market with the right technologies and services is the single biggest fee
income opportunity awaiting banks in 2011 and beyond.
Mobile Mojo
By the end of the year, over half of all mobile phones in the U.S. will be smartphones,
according to Javelin. By 2014, 100 million U.S. consumers will be mobile banking regularly.
And with big names like Google, PayPal and the wireless carriers entering the near-field
communication (NFC) payments fray, mobile has certainly found its mojo.
For banks, the question is how to tap the migration to a mobile-centric universe in ways that
cut costs, improve service and generate revenue.
See figure 8.
The Art & Science of Mobile Alerts
Discussions of mobile banking typically center on which mode to offer, e.g., text, mobile
browser or downloable app. The real issue, however, boils down to alerts: how many, which
ones to offer, how to word them and whether to make them two-way (i.e., allow customers
to respond to them in real time).
Based on research by Javelin, half of all U.S. households will be receiving mobile alerts by
2015, and alerts are the best way to preempt customer use of more expensive channels like
call centers, interactive voice response systems and branches.
The most popular mobile banking alerts are for overdrafts, large withdrawals/purchases,
balances thresholds, bill due dates and deposit confirmations. The real art of alerts,
however, is that of making them clear, easy to understand and actionable. Otherwise,
mobile alerts can actually create and drive traffic to call centers and branches in response to
confusion or anxiety.
Alerts also facilitate fee-income opportunities. Real-time alerts for credit monitoring,
expedited bill payments and overdrafts can all command a fee, especially when bundled
creatively with other account services that are attractive to specific consumer and business
segments.
Mobile Remote Deposit
Some pundits see the accelerating decline of check volumes as sufficient reason to second
guess remote deposit capture (RDC). With 96 percent of checks being cleared electronically
via image, why invest further in the automation of a declining method of payment, right?
Wrong. It’s just the opposite.
The fewer the checks you receive, the more inconvenient and frustrating it is to have to
deposit each of them manually. This simple fact, combined with the heightened expectations
that accompany smartphones, is making mobile RDC one of the hottest technologies of
2011.
Simplicity commands a premium in the U.S., a 4 percent premium to be exact. According to
Siegel+Gale, U.S. consumers are willing to pay $2.6 billion for simplicity—an attractive fee
income opportunity in the age of Durbin. And mobile RDC delivers simplicity in spades.
According to Javelin Strategy & Research, one in every four consumers already desires
mobile RDC, and, since 87 percent of the 20+ billion checks out there are still deposited in
person on paper at the bank of first deposit, the potential is huge.
Figure 4
Figure 5
Figure 6
alabama banker ▲ summer 2011 33
Within 3 years, over half of a projected 100 million U.S. mobile banking consumers will
deem mobile RDC highly desirable. Moreover, creative bundling of mobile RDC with
new account offerings may drive new fee revenue opportunities post-Durbin.
More certain are the cost savings. While mobile banking may not replace more
expensive branch visits one-to-one, mobile RDC will. Unlike generic mobile and PC-
based online banking, mobile RDC specifically preempts branch visits by allowing
customers to deposit checks whenever and wherever the customer encounters the
check. And since the majority of branch activity still revolves around checks, mobile RDC
is a major catalyst for significant cost-efficiencies for the bank.
Payments
According to the latest research, consumers expect to increase their usage of debit,
credit and online payment services over the next two years, especially Gen Yers. No
matter what happens with Durbin, debit cards will continue to dominate payments. The
real question is whether banks can recoup what they stand to lose in debit interchange
if Durbin goes into effect as currently drafted. One possible alternative is prepaid.
Prepaid
Prepaid cards are the fastest growing payment mechanism in the U.S. Over 10 percent of consumers (and
16 percent of Gen Y) use prepaid cards. During the recession, many consumers no longer had access to
credit and debit cards. Prepaid became an attractive, easy-to-use card option for many, with Green Dot
and netSpend leading the way.
For banks, prepaid holds a lot of promise. Not only are prepaid cards growing in popularity, they generate
significant fee income. Many prepaid offerings come with a $5 to $10 monthly fee, not to mention a
reload fee that may average $2 to $5 dollars each instance. Moreover, general purpose reloadable prepaid
cards are not covered or limited by the Durbin amendment.
According to excellent analysis by Aite Group’s Ron Shevlin, banks can recoup up to half of what they may
lose in debit interchange (due to Durbin) with creative bundling of prepaid and credit cards—all without
charging additional fees for checking accounts or debit card transactions. Going forward, look for prepaid
to be turbo-charged via mobile iterations that converge with digital wallets.
Mobile Payments
There has been more evolution and action in the mobile payments space in the last six months than over
the past six years, but universal wave-and-go, tap-and-go payments at the point of sale will not emerge
overnight. While banks should remain vigilant of alternative payments players (PayPal, Google, Amazon),
the short game in mobile will tie back to merchant services and the ability of SMBs to use smartphones
and tablets as card accepting terminals.
Those banks that make this kind of functionality available and integrated with a full suite of SMB payments
and micro cash management services will rule the day, not to mention generate fee income aplenty.
The Future
Where is it all headed? The evolution of online, mobile and payments technologies will ultimately converge at the precipice of every transaction
where consumers and businesses will look to each other and their financial institutions for nudges that help simplify and improve better financial
decisions.
For a taste of what the future holds, look no further than a smartphone app called Red Laser. With Red Laser, you can use your smartphone to
scan the tag of any item in any store and immediately find the best price available elsewhere. And here’s the kicker. You can purchase that better
priced item elsewhere before leaving the store that is no longer earning your patronage.
With OFM fully mobilized and accessible in real time, banks will be able to facilitate better financial decisions on their customers’ behalf. If your
customer eyes a pair of $129 shoes and scans them for a comparative price check, the bank’s OFM should also be able to recommend
simultaneously whether the purchase will square with that customer’s monthly clothing budget, and, if not, set up a savings goal toward that end.
In times of change, fear multiplies, but history teaches us that winners are made in and by the changes that challenge us. We are witness to
extraordinary changes afoot, and we are also its beneficiaries.
Figure 7
Figure 8
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