Where’s The Innovation?
BY KAREN EPPER HOFFMAN
Today’s out-of-the-bank thinking is focused on enhanced customer service and relationship management.
Industry experts identify innovative thinking in driving customer loyalty, lending, mortgage lending, branch management, customer service models and online banking.
Conversations with a wide range of experts —bankers themselves, consultants and other solutions providers — suggest that much of the out-of-the-box thinking today is happening in broad daylight. Don’t expect to find the next whizbang technologies being worked on in bank R&D labs, we were told. Innovation today is in how retail banks design their branches and manage their branches and employees, while seeking to differentiate themselves through the relationships they forge with their customers. As financial institutions focus on the retention and acquisition of customers, a modest number of products that seek to innovate banking applications are being introduced by non-banks.
In Driving Cardholder Loyalty
Dennis C. Moroney, senior research analyst with Boston-based TowerGroup, Inc., gives a presentation that threads together the declining rate of responses to credit card direct mail solicitations, the rising number of non-active credit card accounts and the growth in voluntary (and non-voluntary) credit card attrition rates. The data, Moroney said at NACHA PAYMENTS 2006, suggest that a new approach may be required to build customer loyalty, retention and profitability.
Information technology spending is rising at an annual rate of 6% a year, according to Moroney. But, while IT dollars had been previously invested in driving costs down, an increasing amount is being focused on the management of the credit card portfolio to better understand customer preferences as a means of building a revenue stream.
The consumer, according to Moroney, is looking to banks to serve as a “consumer preference guardian,” which he describes as protecting customer information and location, controlling access, delivering meaningful advertising and rewarding customers to allow the receipt of advertising. Financial institutions can play a valuable role in protecting the consumer’s interests in “gluing” the physical and electronic world together.
Moroney cites a hypothetical example of a bank customer entering a sporting goods store. Because the customer has stored his interest in being alerted to sales on tennis rackets with his bank, the bank notifies the customer when he’s in proximity to the sale. This application could take advantage of mobile technologies RFID, GPS, near field communication and wi-fi, among others, while the bank guards the customer’s privacy and access.
“Technology is the enabler for the next big idea” on how to retain and motivate customers to use their credit card balances, Moroney said.
In Branch Management
In their quest to provide better service to customers, some banks have not only changed the way their branches look and the way their staff interact with customers — they’ve also changed the way their branches are managed.
For Rick Spitler, managing director of the New York City-based consultancy Novantas LLC, this trend toward empowering local branch managers represents an important innovation. While the final word on capital expenditures and other major decisions still comes from headquarters, decisions regarding product pricing and promotion are being driven more and more by regional managers at banks such as Fifth Third Bancorp of Cincinnati, Ohio and Sovereign Bancorp of Philadelphia.
“The promise of CRM [customer relationship management] is finally beginning to take hold,” Spitler says. “And with that, you’re going to see more banks managing their branches based on the region they’re in.”
In essence, he says, these banks are “turning branch and regional managers into entrepreneurs” — a significant departure from the hierarchical structure that many banks continue to follow. The expected benefit: Banks that may have a national presence, but still can maintain a regional, even local, feel will give customers the best of both the big bank and small bank worlds.
In Mortgage Lending
Since his days as an executive vice president at Huntington Banchares Inc., William M. Randle has been one of banking’s most outspoken proponents of technological innovation.
As CEO of Columbus, Ohio-based Synoran LLC, an enterprise software and services provider for financial services companies, Randle cites a Bank of America initiative as an example of innovation.
BofA uses video kiosk technology for consumers looking for a home and working through the mortgage process. The Charlotte-based bank’s “HomeOwnership Centers” feature a touch-screen application that enables consumers to view home listings and check out mortgage products at kiosks in bank branches and real estate agencies. The kiosks feature a 20" by 40" screen and each machine is configured for the local market.
The kiosks combine advertising with the self-service capability. For example, when the machine is not being used, it flashes pictures of the featured area properties to draw attention.
Randle expects more banks to develop such applications, using wireless devices and especially mobile phones.
In Customer Service Models
When consultant James M. McCormick thinks about innovation in banking, he thinks of distinctive service-oriented business models that lead to improved revenue growth.
Cherry Hill, N.J.-based Commerce Bancorp, for example, has extended its already extensive service hours and added branch hours on Sundays in effort to live up to its motto of being “America’s most convenient bank.” Once Commerce gets customers in the door, it wants to bowl them over by providing what it calls a “wow” level of service, which is yet to be matched by many other players in retail banking, says McCormick, president of First Manhattan Consulting Group in New York City.
Commerce’s ground-breaking service approach is supported by an extensive training program — the bank runs its own “university” akin to those run by powerhouse retail brands like Disney and McDonald’s. Commerce branches rely on an open floor design, which allows for employees to more quickly and easily make eye contact and then verbal contact with customers, McCormick says.
Similarly, Seattle-based Washington Mutual Inc. has stepped out of the box by earnestly cultivating an image as the “anti-bank” bank in order to engage consumers dissatisfied with conventional offerings, McCormick says.
These service-oriented advances align with the general trend of moving from a growth strategy based on cutting costs to one built on winning over new customers, McCormick says. He adds that the select few banks that can use their innovations — in design, training and product offerings — to distinguish themselves based on the power of their service are reaping the rewards in additional customers and deposits.
In Online Banking
The latest technology introduced by Yodlee, Inc., a company previously known for its account aggregation technology, seeks to advance online banking to what President and CEO Anil Arora calls the “Online Banking 2.0” stage.
Yodlee Moneycenter, introduced by the Redwood City, Calif.-based company in June 2006, is a suite of applications that contains a robust online bill pay service with an accompanying personal financial management (PFM) package. “It’s personal financial management made easy, and it’s where we think online banking is headed next,” Arora says.
Features of Moneycenter include account aggregation, enabling customers to view all their accounts, not just those at their primary bank; a bill pay service that enables customers to pay with their credit card as an alternative to debiting their DDA; the ability to transfer funds between accounts; automatic expense categorization; portfolio management tools; and expedited same-day payment options.
Gwenn Bezard, research director for Boston-based Aite Group, says Moneycenter “combines several applications into one single platform and that represents a big departure from what the industry has been doing so far.” He cites the ability to pay online bills with credit or debit cards as being a particular strength, since it can “drive some interchange revenue for banks.”
Another advantage of Moneycenter, from the consumer standpoint, is that no manual data entry is required, unlike commonly used PFM packages like Quicken and Microsoft Money. All data is imported automatically from other online accounts using Yodlee’s aggregation technology. “We’ve tried to make it super simple,” Arora says. “Complexity is a key barrier in other PFM products.”
In Lending
As the former chairman and CEO of E-Loan, Inc. (sold to Puerto Rico-based Popular Inc in November 2005), Chris Larsen is an acknowledged financial services pioneer. He expects his new company, San Francisco-based Prosper Marketplace Inc., will establish a similar record for innovation and financial success.
Prosper.com, in development for two years before its launch in February 2006, takes its cue from the popular online auction company e-Bay. The difference is that instead of creating a market for consumers to sell their personal goods over the Internet, Prosper offers consumers a place to borrow from and loan money to one another. It calls itself the Internet’s first person-to-person lending marketplace.
“When we looked at the consumer credit market, the consumers had been cut off” from reaping the rewards derived from the ever-increasing lending boom, says Larsen, who serves as Prosper’s CEO. “We thought we should make a marketplace that was more efficient [than lending money to a friend or acquaintance] and included the participation of individuals.”
Prospective borrowers come to Prosper looking to find lenders; would-be lenders, in turn, can shop the listings and bid on loans they’d like to make. These lenders can set a minimum interest rate they’re looking to earn and can lend from $50 to $25,000 on each loan they select. Borrowers, in turn, create loan listings for as much as $25,000 and set a maximum rate they are willing to pay a lender.
Prosper makes its money by collecting a one-time fee of 1% on funded loans from borrowers, and an 0.5% annual loan servicing fee from its lenders.
Although the site has been open to the public only since February, Larsen says that at any given time there are about 1,000 active loan listings on the site, with the average loan size about $5,000.
In Lending ‘For Life’
From his vantage point as founder and editor of Seattle-based Online Banking Report, Jim Bruene sees and writes about a lot of innovative banking technologies. But one of the innovations that excited him lately has more to do with marketing than technology.
It’s called “Mortgage Passport” and it’s offered by Third Federal Savings & Loan of Cleveland. The program offers qualified customers an automatic pre-approval “for life” on a mortgage for a new house or a refinancing. Enrolled customers use an actual “passport” card to identify themselves to real estate agents. A spokesperson for Third Federal, Cherie Skoczen, confirmed the details about the Mortgage Passport, but declined to offer more details about its popularity with customers.
“It’s a great way for a bank to say, ‘We want to keep you for life,’” Bruene says.
As long as borrowers don’t declare bankruptcy, they are assured that they can obtain a mortgage. Bruene says this can be a powerful selling point for people buying their first home or concerned that they might have to “keep proving themselves to lenders over and over again” if they choose to move.
Much as card issuers market credit products to college students in the hopes they’ll remain faithful customers as they increase their wealth, the idea behind these movable mortgages is that the borrower will opt to stick with the same lender as they upgrade and become an even better risk, Bruene says.
Ms. Hoffman is a freelance writer based in Poulsbo, Wash.