After years of debate the battle lines have been drawn and it is clear what financial services institutions must do to succeed. In the new world order, the winners will be tech-savvy institutions that constantly innovate while managing expenses carefully. However, executing on these objectives is easier said than done.
We predict ten trends for 2015, with the first five focused on revenue generation and the last five on cost reduction:
Drive revenue with online/mobile channels. Online and mobile banking is not new but banks continue to refine their approach to effectively use these channels. A few years ago, the discussion focused on the use of digital channels to increase convenience for customers and to cut costs for banks. In 2015, we predict that banks will focus more on leveraging online and mobile to deepen relationships with current clients and drive revenue.
Banks will increasingly use digital channels to cross sell products to current customers. This will include displaying targeted offers through secure message display in online and mobile banking. These channels can also be used to more effectively onboard new customers and quickly increase the profitability of a relationship. The use of online and mobile has been expanding to other lines of business like wealth management, with examples that include booking appointments and conducting personalized communication (e.g. video chatting) through mobile apps. Citibank’s Private Bank In View is a prime example of a bank using mobile to its fullest potential.
Make smart branch transformation investments. The omnichannel customer interacts with a bank’s physical channels in new ways, and many banks are beginning to adapt their branches to fit changing customer preferences. These branch investments might include self-serve kiosks where customers can perform a wider range of transactions than at a typical ATM, smart ATMs that include video technology and iPads for branch employees.
To date, many of these innovations have not made it out of “concept branches.” These investments are costly, so banks are right to take it slow. New technology will continue to spread across the branch footprint, but smart banks will be surgical and make sure they are deployed only where the investment is warranted. Many banks focus too much on adoption of these new branch technologies, and it will be important to instead measure hard metrics like retention, new customer acquisition and cross sell to prove out profitability.
Banks should also experiment with creative ways to make the most of such technologies. Perhaps a kiosk could show targeted product videos once a customer has signed in to spur cross sell. iPads could increase employee mobility and allow for a leaner staffing model.
Better relationship management in commercial and wealth management. Commercial and wealth management are relationship-driven businesses, but analytics can help optimize engagement activities and customer interactions to drive revenue growth. Commercial bankers and wealth advisors increasingly track activity through CRM solutions like Salesforce. This data can be mined to better understand what types of activities are most valuable and how to prioritize efforts across clients and bankers.
For example, under what circumstances do in-person visits make a difference and drive growth in the relationship? Measure the response to an in-person visit based on characteristics like banker tenure, current relationship, stage in the sales cycle and type of client.
Commercial bankers and wealth advisors also make judgment calls, such as when to offer better pricing or a richer acquisition offer. This is an important part of their role, but it is also valuable to provide them with a playbook to increase odds of success. For example, make sure bankers know when it is most likely to be valuable to offer a better price and what types of customers respond well and become longer-term high-value clients.
Prepare for rising rates. No one knows exactly when rates will rise, but banks are beginning to prepare. As rates do increase, competition for deposits will be fierce and funding will become more difficult. We are well past the days of free toasters, and banks are testing rich offers to attract deposits. One especially creative incentive is Santander Bank’s Extra 20 Checking, which offers a $20 bonus each month to qualifying customers.
Banks need to experiment with different sizes of offers (perhaps $50, $100 or $150) to find the tipping point that gets customers to respond. It is also important to test different offer requirements to see what creates stickiness and long term profitability. Is it better to require a minimum balance or sticky services such as bill pay, online banking, and direct deposit?
When evaluating these offers and requirements, don’t just look at response rates and make sure to track long term customer profitability. Getting promotions right requires advanced planning and constant experimentation.
Combat new entrants such as Walmart and GoBank. Walmart, which for many years had promised an in-house banking solution primarily to reduce its credit and debit card fee costs, has formed an alliance with Green Dot, a California based issuer of credit and debit cards, to create GoBankthis year.
This is a serious threat to retail banks. First, with lower ongoing account costs for customers, Walmart has positioned itself well to gain a big chunk of the much talked about unbanked and underbanked populations, which traditional banks have historically had difficulty serving. Second, Walmart already has a large and well-optimized distribution network, potentially prompting customers to switch from existing banks. Finally, GoBank is proving to be a very innovative bank in its own right and exploring some interesting ideas through the partnership, such as a “Fortune Teller” feature of their app, which advises customers whether an item is within their budget.
Banks need to keep an eye on the impact of new competitive threats and continually take action to prevent attrition. Measure the impact on branches near a GoBank to understand which types of products and customers are impacted. Banks should be prepared to respond in highly affected areas with a range of actions such as offering more competitive rates, deploying marketing campaigns and launching new products.
Accelerate and improve channel migration. Many digital banking innovations are demand driven from customers who want more convenience. However, once the early adopters are on board, it can be a struggle to get other customers to migrate to new channels. As banks look to rethink the branch and reduce cost, accelerating channel migration is an important step in the process.
Banks will continue innovating with new ways to speed channel migration. Banks have been taking steps to improve ATM and mobile banking services to further incentivize customers to transact through these channels. Some are also training staff to show customers how to take advantage of these channels or set up online/mobile banking as part of the onboarding process. Banks need to continue innovating and monitoring adoption to determine which tactics truly work to migrate customers away from the branch.
It will be just as important to monitor the long term effects of channel migration. Does steering a customer away from a teller window towards new technology turn a customer off and cause them to attrite? Does migrating a customer to digital banking reduce future cross sell? Banks have been laser focused on adoption and now need to track longer term performance across key metrics such as attrition, cross sell, balance and revenue.
Intelligently rationalize the branch footprint. As mobile, online, call center and other “non-traditional” channels grow in popularity, many banks will continue to explore how to shrink their branch footprint in 2015. One way to do this is to simply close branches. However, before shuttering branches on a large scale, banks should analyze recent closures to gain a full view of the impact of such actions. Banks can measure the impact of closure both on new account generation in the market and on existing customers. This informs whether closure is a good idea, but should also be used to identify which customers should be targeted with outreach communications to prevent attrition.
Additionally, many banks are developing new “mini” or “express” branch formats to continue serving customers in person while cutting costs. However, these smaller format branches can hurt performance with more complex products and some customer segments. Banks need to understand exactly where these formats will work best to avoid pushing away customers and losing sales in those branches.
Figure out universal staffing. As customers transact less in the branch, the other side of the coin is to reduce staffing to cut costs. However, the risk is that you will miss out on cross sell, particularly with sales of more complex loan and investment products.
Many are turning to universal bankers as the answer. With a leaner staff that performs every function from teller to wealth advisor, you can reduce staffing costs and minimize the downside. This sounds good but is easier said than done. Employees often resist this kind of change at first. Banks also fall into the trap of assuming this model works well everywhere. Specialization occurs for a reason, and some branches will perform better with a specialist staffing model.
First, determine the profile of branches where this model works. Perhaps it works well in suburban branches with a drive-through and a high percentage of traffic through remote channels, but poorly in high-volume urban branches with significant foot traffic. Second, make sure employees receive proper training and continually try and evaluate which mix and cadence of training programs works best. Finally, analyze which types of employees perform best in this role and target that profile when hiring future employees for this position.
Find new levers to reduce costs. While there is more focus on new branch formats and staffing models to reduce costs, banks should look towards other levers as well. For example, should branch hours be revisited? For years, the focus was on increased convenience with weekend and weeknight hours. Yet, as customers rely more on other channels, we have found that some areas can reduce branch hours with little downside. This lever can be pulled quickly, though banks should be careful given the risks.
Banks should also more closely evaluate their marketing spend. Banks increasingly rely on search advertising, display, direct mail and e-mail. These marketing channels provide the opportunity to be more targeted and more efficient with spend. Measure the impact of these marketing investments and segment performance based on customer characteristics to identify which types of customers respond well to each channel. Then, avoid spend that will not drive a significant response and focus on investing in the right channels for the right customers.
Improve efficiency ratios in wholesale banking. Many banks desperately need to improve their efficiency ratios. Wholesale banking is an expensive line of business and is an overlooked area in finding ways to become more efficient. Commercial banker sales force costs are significant, and banks invest heavily in acquiring and maintaining these important accounts.
Start by better prioritizing target accounts. Which types of accounts warrant more time and attention based on industry, sector, size of relationship, and current mix of products? Next, what is the right staffing investment for each account? Identify the optimal team size for each account or set of accounts. Determine which accounts should receive specialists for maximum impact and which accounts do not require specialists. By analyzing where specialists drove the most improvement and targeting their future deployment, one bank improved revenue impact by a factor of three with the same number of specialists.
Finally, training programs are expensive in wholesale banking both in terms of hard costs and the opportunity cost of time. Measure which training programs actually drive improved outcome and focus on those, cutting programs that have less impact.
Mr. Weidman is senior vice president at Washington, D.C.-based Applied Predictive Technologies, a data analytics firm that helps retail banks test how various business changes alter customer behavior. He can be reached at [email protected].
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