3/4/2014

1

CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group

The Battle for the American Consumer

Utah Credit Union AssociationAnnual Meeting and Convention

Steve Heusuk, Sr. Manager StrategyMarch 14, 2014

2

Agenda

• Who are the players battling to provide financial products and services to American consumers?

• Why is customer centricity the common battle cry?

• How can we achieve cooperative member centricity?

3/4/2014

2

3

I. The Battleground

4

Financial Institutions

Retailers

Platform Players

New Entrants

Alternative Payments

Telecoms

Card Companies

Non-Bank Competitors

The Battleground

Savings Lending

Investments Insurance

Financial Services

Payments

Source: BDU Analysis

3/4/2014

3

5

Key Competitors - 2014

New EntrantsTelecoms

Retailers

Alternative Payments Source: BDU Analysis

Platform Players

Financial Institutions

Card Companies

Non-Bank Competitors

6

Case Study: Retailers

Source: MCX, BDU Analysis

Ambitious Plans Speed Bumps or Deal Breakers?

3/4/2014

4

7

Case Study: New Entrants

• Leading P2P lender– Provides loans to prime consumers that are funded by investors at the time of origination– Loans originated by WebBank, a Utah-based ILC

• Google took a $125M stake in the company in May 2013

• Majority (81%) of borrowers using their loans to consolidate debt / pay off credit cards

• Facilitated $258M of new loans in January 2014

Source: Lending Club, lendacademy.com

8

Case Study: Alternative Payments

"We challenged ourselves to find a better experience than swiping a credit card. We figured the only better way to pay would be to do nothing. Just walk in a store, and, like magic, when you're ready to

pay, money is transferred securely. No wallet. No card.

Not even touching your phone.“

- David Marcus, President, PayPal

3/4/2014

5

9

Case Study: Telecoms

• Marketed as a checking account substitute– Issuer is Bancorp Bank– Servicer is Blackhawk Network

• Combines a smartphone app (iOS or Android) with a branded prepaid Visa card

• No maintenance fees, minimum balances or activation fees

• Also, no fees for:– Bill payments– Remote check deposits– Withdrawals at one of T-Mobile’s 42,000 in-network

ATMs– Reloads at T-Mobile stores (non-T-Mobile customers

would pay additional fees)– Funds transfers to other T-Mobile Mobile Money users

Source T-Mobile

10

Case Study: Non-Bank Competitors

Source: Mercedes Benz, credit.ford.com, CAT Financial

3/4/2014

6

11

II. Customer Centricity

12

Customer Centricity Bandwagon

3/4/2014

7

13

Customer Centricity Defined

“A way of banking based on trust and fairness

that uses knowledge of customers to meet

their needs and achieve sustainable, valuable,

long-term relationships.”

- Boston Consulting Group

14

Why The Need For Customer Centricity?

• Increased competitive pressure

• Declining loyalty

– Increased switching between financial institutions

– Growing number of banking relationships per consumer

• Shifting product needs

– Economic conditions

– Changing attitudes and demographics

• Convenience driving channel shifts

– Mobile growing rapidly (but, traditional channels remain important)

Source: BDU Analysis

3/4/2014

8

15

Declining Loyalty For Banks

0%

10%

20%

30%

40%

50%

60%

Yes No, but I amplanning to

change

No

Have you ever changed your main banking provider?

2011 2012

0%

10%

20%

30%

40%

50%

60%

One Two Three Four orMore

How many banks do you bank with?

2011 2012

Source: “The Customer Takes Control - Global Consumer Banking Survey 2012”, Ernst & Young, 2012.http://www.ey.com/Publication/vwLUAssets/Global_Consumer_Banking_Survey_2012_The_customer_takes_control/$FILE/Global_Consumer_Banking_Survey_2012.pdf

16

CUs Enjoy High Levels Of Consumer Trust

0% 20% 40% 60% 80%

National Banks

Local Banks

Credit Unions

Dec. 2012 Dec. 2009

0% 20% 40% 60% 80%

PNC

ING Direct

Regions

TD Bank

A Credit Union

USAA

Chicago Booth / Kellogg SchoolFinancial Trust Index 2013 Temkin Trust Ratings

Source: Chicago Booth / Kellogg School Financial Trust Index; 2013 Temkin Trust Ratings, Temkin Group

3/4/2014

9

17

But Struggle With Wallet Share

$-

$3,000

$6,000

$9,000

$12,000

$15,000

Highly Loyal Members Less Loyal Members

CU Members’ Average $ in Outstanding Loans With CUs vs. Banks

Loans Outstanding with Credit UnionsLoans Outstanding with Banks

Source: “Loyalty Drives Profitability”, Credit Union Magazine, Aug. 2013

18

Customer Centric Positioning

Customer-centric, not product-centric

We start with what the customer needs—not with what we want to sell them. We also want to

offer our products to customers in ways that are most convenient to them.

Bank like you live

We’ve never thought of ourselves simply as a bank.

We’re really more like knowledgeable neighbors, the kind you invite over for a cup of coffee, seek advice from and chat with over the fence. And

we’re here to help you bank like you live.

When was the last time your bank made you feel valued?

At Webster, we’re more than your bank. We’re your partner. We work with you to understand

your needs, listen to your concerns, and help meet your

goals.

Source: Company websites

3/4/2014

10

19

Peppers & Rogers’ Journey to Customer Centricity

Insight

• Customer Data Strategy

• Customer Segmentation

• Customer Behavior Prediction

• Customer Lifetime Value Analysis

• Retention Analysis and Prevention Strategies

• Campaign Analytics

• Segment Investment Planning

Strategy

• Corporate Strategy and Business Unit Strategy

• Customer Centricity Roadmap

• Portfolio Management Strategy

• Contact Center Strategy

• Business Planning and Feasibility Studies (Business Case Development)

Business Design

• Customer Experience Management

• Sales / Service Model

• Channel Management

• Distribution Network Management

• Sales Force Management

• Campaign Management and Marketing Programs

• Loyalty Programs

Capabilities Development

• Organizational Structuring

• Customer-centric Processes

• Business Requirements Gathering

• Performance Management

• Customer Centricity Metrics

• Cultural Change Management

• Business Change Management

Deployment

• Program Management Office

• Deployment Management

• Organizational Transformation and Alignment

• Training and Empowerment

Custom

er FocusPro

duct

Foc

us

Source: “Retail Banking: A Transformational Model for Growth Using a Customer-Centric Approach”, Peppers & Rogers Group. 2011.http://www.peppersandrogersgroup.com/DocumentDownload.aspx?Doc_ID=33296

20

III. Seven Steps to Cooperative Member Centricity

3/4/2014

11

21

Seven Steps To Cooperative Member Centricity

1. Implement a data strategy

2. Understand members’ differentiated needs & behaviors

3. Anticipate and meet member needs

4. Adhere to a sustainable financial model

5. Deliver service excellence

6. Enliven member democratic control

7. Don’t forget about product & price

22

Step 1: Implement A Data Strategy

Factors driving “Big Data”:

• Volume – growing exponentially

– Walmart alone has captured 2.5 petabytes (PB) of data » 1 petabyte = 1 quadrillion bytes = 20 million filing cabinets of text

• Variety – more data types and sources than ever

• Velocity – accelerated data flow converging on real-time

- By 2014 ~2/3 of data analytics will be done in real time

- Customer demographics

- Account balances

- Transactional

- Product usage

- Click streams / browsing data

- Social media

- Geo-locational

- Email

Source: “Peer Research - Big Data Analytics”, Intel IT Center, Aug. 2012

3/4/2014

12

23

Data Volume Growing Exponentially

Source: “The Digital Universe in 2020: Big Data, Bigger Digital Shadows, and Biggest Growth in the Far East”, IDC, 12/2012

Digital Information:Measurement Units

24

0

200

400

600

800

Util

ities

Tran

spor

tatio

n

Insu

ranc

e

Edu

catio

n

Ret

ail

Pro

fess

iona

lS

ervi

ces

Secu

ritie

s an

dIn

vest

men

tS

ervi

ces

Hea

lth C

are

Pro

vide

rs

Ban

king

Com

mun

icat

ions

/M

edia

Peta

byte

s*

Stored data by U.S. Industry, 2009

Data Capture By Industry

* 1 Petabyte = 1M Gigabytes Source: “Big data: The next frontier for innovation, competition, and productivity”, McKinsey Global Institute, June 2011

3/4/2014

13

25

Examples Of Applied Data

Source: “Customer Analytics Is Key To Growth In Banking”, Bank Marketing Strategy blog, June 6, 2013; IBM; Celent

26

Step 2: Understand Members’ Differentiated Needs & Behaviors

• Two segments may perceive different value from the same product

• Segments are defined by:

– Attitudes

– Behaviors

– Demographics

• Segmentation process:

– Define segments

– Determine which segments resonate with your value proposition

– Target those segments

3/4/2014

14

27

Penetration of Credit Union MembersConsumer Segments

Example Of Demographic Segmentation

28

Example Of Attitudinal Segmentation

Segment X Segment YAverage Household Income

$105K $101K

Age (% 45+ years old) 56% 46%

Attitude About FinancesI am in control of my finances (% agreeing)

98% 62%

Generally, I live from paycheck to paycheck(% agreeing)

14% 67%

% Having a Checking Account Through a:Bank 83% 72%Credit Union 27% 33%

% Obtaining Their Auto Loan Through a:Bank 19% 26%Credit Union 13% 14%

Average Savings / Investable Assets $236K $98K

Source: Ipsos; CUNA Mutual AnalysisNote: Above results are for illustrative purposes only. Findings are dated (2009). Significant difference are bolded.

3/4/2014

15

29

Successful Segmentation

“At the very minimum, a segmentation should answer the following questions in order to be successful:

• Which consumer segments represent the largest profit pools in our category?

• What is our share of wallet across segments today?

• How should we prioritize the various growth opportunities within and across segments?

• What messages and offerings will command the attention of these consumers?

• What changes in product offerings, service, and brand perception should we make in order to increase share among targeted segments? How are these changes best achieved?”

- “Consumer Segmentation”, The Boston Consulting Group, 7/22/2008

30

Step 3: Anticipate And Meet Member Needs

Source: “Wells Fargo Beta Tests Cash-Flow Projection Tool for Consumers”, American Banker, 2/20/2012

• Predicts how customers’ financial situation will look 30 days out

• Leverages available customer data, e.g., scheduled bill payments and direct deposits

• Can augment with customer’s own data

Wells Fargo’s Cash Flow Monitor

3/4/2014

16

31

Predictive Modeling: Wells Fargo’s Predictive ATMs

• 500 deployed across the country in February with all 12,000 Wells Fargo ATMs to be converted by the end of May

• Touchscreen ATMs with 5 customizable buttons based on the customer’s ATM usage and preferences

Source: “Wells Fargo ATMs Can Predict What People Want”, thefinancialbrand.com, 2/20/2012

32

Step 4: Adhere To A Sustainable Financial Model

Objective: Ensure your financial model supports sustainable growth for the long term

Key:• Your cost structure and revenue model must support your

value proposition• Emphasize lifetime value of the member

– Treacy & Wiersema: Companies that excel at Customer Intimacy focus on customers that have deep relationship potential

3/4/2014

17

33

ROE Represents The Sustainable Growth Rate

X

ROA Leverage ROE

Net IncomeAssets

AssetsCapital

Net IncomeCapital

=

ROE = Sustainable GrowthThe fastest a CU can grow assets without affecting its capital ratio.

~ Inverse of Net Worth RatioProfit Margin * Asset Turnover

34

Key Theme: Lack Of Scale

Note: Each dot represents a single credit union Source: NCUA Q4 2012 5300 call report data and CUNA Mutual Group analysis

Operating Expense/Average Assets by Total Assets: Top 1,500 CUs

3/4/2014

18

35

Deep Customer Relationships

“Deeper, long-lasting customer relationships can

mean greater revenue, higher customer lifetime

value, lower relative customer acquisition costs

through lower churn, and greater share of wallet.”

- “How Customer Intimacy Is Evolving To Collective Intimacy, Thanks To Big Data”, Forbes.com, Joe Weinman, 6/4/2013

36

Step 5: Deliver Service Excellence

Baseline: Ensure you have the channels in place your members prefer

Objective: Provide consistent, excellent service across all products and channels

Measurement: Monitor member satisfaction in a way that is quantifiable and actionable

3/4/2014

19

37

Building Sustainable Trust

“The consistency of the customer experience is key, because

consistency enables trust, and trust is a fundamental

enabling condition for the development of productive and

authentic relationships”

- Rita Clifton et al., Brands and Branding

38

Prioritization Is Key – Prof. Frances Frei

Impo

rtanc

e to

the

cust

omer

Impo

rtanc

e to

the

cust

omer

High

LowHigh

High

LowHigh

Performance Relative to Competition

Performance Relative to Competition

1 2 3 4 5 1 2 3 4 5

1

2

3

4

5

1

2

3

4

5

Excellence Mediocrity

“If you try to be good at everything, you will run out of money long before you will succeed. Not a recipe for success.”

What have you decided to not be good at?Source: “Credit Union Financial Sustainability: A Colloquium at Harvard University”, Filene Research Institute/Prof. Frances Frei, 2011http://filene.org/assets/pdf-reports/231_Harvard_Sustainability.pdf

3/4/2014

20

39

Focus Investments On Members With Most Potential

“I don’t know the key to success, but the key to

failure is trying to please everybody”

- Bill Cosby

40

Step 6: Enliven Democratic Member Control

Key: This is the one item banks cannot touch

Question: Is democratic member control a true differentiator?

Question: If so, how can we build upon this competitive advantage?

3/4/2014

21

41

Cooperative Principles: How Differentiating to Consumers?

Cooperative Principles Stock Company Analogues

Voluntary and Open Membership • Sam’s Club• American Express

Members’ Economic Participation • Discover Card 5% Cashback Bonus• My Starbucks Rewards

Autonomy and Independence• Some community banks, e.g., West Shore Bank’s

core value of “independence”• LPL Financial – “largest independent broker-dealer”

Education, Training and Information • US Bank – “Financial Genius” program• Bank of America – Financial education website

Cooperation among Cooperatives • Costco Services – Ameriprise Insurance, Aetna• Walmart – MetLife, Greendot, Amex

Concern for Community • Target’s Take Charge of Education program• Ronald McDonald House Charities

Democratic Member Control • NONE

42

Structural Differences

For–ProfitCustomer Centric Attributes Cooperative

Member Centric

Shareholders Ownership Members

One Share, One Vote Governance One Member, One Vote

Potentially High Concentration ofControlling Interests Low

Return to Equity Economic Participation Return to Member

Stock Price Key Driver Member Value

3/4/2014

22

43

Step 7: Don’t Forget About Product & Price

Middle ground of mediocrity:Trying to lead

on all fronts

Source: The Discipline of Market Leaders, Michael Treacy & Fred Wiersma, 1995

Product InnovationLeadership

Operational Efficiency

Leadership

CustomerCentricity

44

A Distinct Value Proposition

CooperativeMemberCentricity

Middle ground of mediocrity:Trying to lead

on all fronts

Product InnovationLeadership

Operational Efficiency

Leadership

CustomerCentricity

1) Full Product Set Relevant to Customer

Segments

1) Full Product Set Relevant to Customer

Segments

2) Competitive Pricing Based on Competitive Cost Structure2) Competitive Pricing Based on Competitive Cost Structure

3/4/2014

23

45

Customer Intimacy Comes Full Circle

“Customer intimacy begins with putting the

customer at the heart of the organization.”

Heena Jethwa, Senior Product Marketing Manager, IBM

46

Recap: Seven Steps To Cooperative Member Centricity

1. Implement a data strategy

2. Understand members’ differentiated needs & behaviors

3. Anticipate and meet member needs

4. Adhere to a sustainable financial model

5. Deliver service excellence

6. Enliven member democratic control

7. Don’t forget about product & price

3/4/2014

24

47

Important Disclaimer

CUNA Mutual’s analysis is based upon certain publicly available information and data, including NCUA 5300 Reports, and is subject to risks, uncertainties and other factors which could cause actual results or performance to differ from the future results or performance expressed or implied in this analysis. We disclaim any representation or warranty, express or implied, as to the accuracy or completeness of our analysis, as well as any obligation to update our analysis. Each recipient should conduct its own independent analysis of relevant information and data, and should base any business decisions upon such independent analysis.

www.sustainablegrowthblog.blogspot.com