BankerVision

Video makes the naked bank

Last night, I was part of a panel debate on whether "video will be the next channel revolution in banks", at the Financial Services Club. As usual, it was conducted under Chatham House Rules, so I'm not going to name names here.

I think it was probably amusing to everyone to have the innovation guy take the negative view. I actually don't think video will be that much of a big deal.

But there were a couple of very good point from those who think it is a big deal.

The one that caught my attention was "video makes the naked bank".

The basic premise is this. If you can see into a call centre, getting a view of what goes on behind the scenes, might it make banks more responsive to customers? Might it encourage a level of transparency that presently doesn't exist? Ultimately, wouldn't video make the customer experience better because of the increased fidelity of the communication?

There were plenty of video and network vendors there who thought these were killer arguments.

But I have a different view. Firstly, I don't think the largest part of our new customer demographic - the ones who do Internet as main channel, for example - are all that fussed about having a two way visual communication. Their channel choice is as self service as it comes. They go out of their way to avoid any face to face contact with their branch.

What about the people who presently do go to the branch? These, presumably, are the ones who would benefit from greater access to expertise that comes from the "on demand" features of video: the idea that you can call in an expert over the video link from anywhere if no one local is available. Now, if a customer makes a channel choice to have personal contact, what are the chances there will be delight when we put him or her in front of a video screen? I think not much.

Anyway, just what is the business case for video? Does it result in new product sales? Does all this on-demand expertise reduce customer churn? Who can know, because there just aren't all that many banks doing it at the moment. There is all this anecdotal evidence, apparently, that customer satisfaction is up, that product sales are up, that every metric of interest to a banker is up. But no-one has shown me any evidence that really stands up.

Here's my thinking on this. If the business case for remote video advice stood up, a similar case for remote voice advice would also have stood up. Yet, so many banks, who are fully equipped with telephones, don't do remote voice advice. Why?

And here is my last point. It would hardly be all that simple to make the bank end of the video link represent a bank's brand values perfectly all the time. Consider this: it is a call centre, and it is two AM. The staff have worked maybe six hours of an 8 hour shift. They are tired, and they probably don't look perfect. They most certainly aren't all starch, shine and makeup.

Do I think customers would care? Of course they would. They are the same people who changed banks because they didn't like accents on telephones.

The paper inflection point

I was in this meeting the other day about a new product we are planning. The specifications and features of the product were pretty much defined, and the discussion was about how best to deliver it to customers. Usually, those sorts of discussions are mostly about IT, and this was no exception.

Now, our new product is nothing all that complicated. But it does need IT support, and some of the IT things needed are fairly involved. Significant enough, in fact, to cost several millions were we to do everything we might like.

When you start talking numbers like that, there is often a degree of incredulity from those without an IT background. How can it cost so much? I can buy a DVD down the road and install things at home myself, and that is more complicated that this!

Non-IT people rarely see how much complexity is involved in big systems work. Then again, the fact there is so much complexity is a huge problem for everyone, and things are getting worse, not better. The combinatorial explosion of things that can wrong whenever you touch anything sometimes makes it easier to just touch nothing.

That's where paper can be an out-of-the-box solution. I can't recall the last time I was in a meeting and someone actually proposed implementing a product using paper processes.

But for a new product, one that might or might not be big, and certainly won't be big in the next two years, what is wrong with using paper?

You can imagine the horror when it was suggested. The cost! The cost!

Less, actually, than doing a custom system and getting it to work, when one considers potential product volume over the first two years.

IT systems are now so expensive we are at an inflection point. The point where doing things manually is more economically efficient for certain higher value, lower volume products than doing them automatically.

Paper as an innovative solution requires political fortitude on the part of the proposer. It is almost always unpopular. We've all been so indoctrinated in thinking that people based processing is bad we no longer even put it up as an option any more.

But look at its advantages. It is quick to get going. Quicker than practically any kind of IT. It is robust, and can recover from unexpected failures with ease. And it is cost effective for startup projects that don't have all that much volume and don't know exactly how things are going to work out at the beginning.

IT has none of those attributes. And I doubt it will get them any time soon.

Consider this: you can put paper behind a web site or any other self service channel and have the most fantastic experience you can imagine.  It is therefore a wonder to me why web startups invest so much in their backoffice IT when they could probably get by with a beautiful user interface and a bit of elbow grease.

It is a further wonder that banks, with hundreds of years of experience paper technology have forgotten it exists.

iPhone iHype

It is amazing to me how much hoo-haa the iPhone, especially in its new incarnation, is generating in banking. The thing is a phone after all, and yes, it has a nice new interface and is visually appealing, but does it really do all that much more than any other phone that's out there?

It is easy to forget that there are are lots of people who can't use mobile phones at all, let alone an iPhone. My mother can just about press the send key to dial a number. And when I've taken new banking self service options to her, she isn't interested in investing the time to learn them.

My mother isn't alone.

When I look around the office I work in, I am startled by how many people don't have any kind of smart phone, let alone an iPhone.

Let us not forget there is a huge segment out there who are poorly served by this latest gadget, from a banking perspective at least.

This was brought home to me recently during various meetings at which I was pitching a new self service innovation we are considering. It goes directly to the segment I just described: the ones who don't want, or can't be bothered to, learn some new gizmo.

The universal consensus: everyone will do everything on the phone in a year or so. Doing anything else is a mistake.

My view: if people aren't going to do the Internet, what chance have we got of getting them onto apps on mobile phones? And last time I looked, no traditional bank has 100% adoption of the Internet channel (and though I don't have numbers in front of me right now, I'd bet that direct banks also have this problem, though to a lesser degree).

But it not the hype over the mobile channel that fascinates me, because there is always some fashionable channel in the news. It is the fact that everyone has fixated so heavily on one particular device.

There are shades of earned media envy showing, I think. I recall when certain banks rushed into Second Life, earning significant press fanfare. The result was the rest of us started to think about virtual worlds too. Press attention naturally waned, and so did the various islands established by banks.

Bank of America, with its recent release of the first native banking application on iPhone is similarly earning lots of press. It is causing quite a few banks to question whether they should change their online banking priorities to iPhone as well. Just the other day, a good friend in another institution told me that they were thinking about doing iPhone, and that suddenly it was the most important thing on the development agenda. We both laughed.

iPhone in banking is a bit of a fad. The present urgency to get on the bandwagon will wane as soon all the earned media stops playing the iPhone tune.

I wonder what the next big hoo-haa is going to be? Oh I know! The one that always intersperses itself in a banking slow news month: the branch is back, long live the branch!

Transparency Tyranny

In January of this year, TrendWatching, one of my favourite sites, suggested that Transparency Tyranny would be a big thing. For those who don’t follow the site, they are referring to the decreasing time it takes for anything someone – especially a large company – does before the reset of the world knows about it. If a customer has a bad experience in your branches, transparency tyranny makes sure that that customer can reach an audience of hundreds, maybe even thousands, to talk about the experience.

For a bit of work I was doing here at the bank, I recently had cause to look at what people were saying about us in various online communities. And I found out something very interesting: our staff are actively writing about us and their work and trying to turn around the negative comments that some people have left. I was not surprised, given that I, too, write about my work at the bank.

This post, entitled “Please don’t hate us too much” is especially sanguine and interesting. It details life behind the counter, and tries to put the view of a teller. It does it successfully, in my view. The author, Toniq, is a housewife, mother of 4, who works part time.

But what I can tell you, is that our Toniq and our other people are posting in these forums without the formal permission of the bank. They are doing it anonymously, of course

At present, we have very few people at Lloyds TSB who are actually blogging under their real identities, and even fewer who talk about their work in public via the medium. It is possible, in fact, that I am the only one at present.  I have permission, but even so, this blog is specifically disassociated from the bank in the disclaimers on the site. I may be an employee, but when writing here I write as an individual.

The thing with this trend to transparency tyranny is that – as can be seen with the post above – it is no longer possible to pull down the cone of silence. People will speak about whatever they will regardless. We are lucky that, for the most part, we’ve got staff who are being supportive.

I very much admire the efforts of Vancity with ChangeEverything. As an experiment, I tried my usual searches to see what kind of sentiment people were expressing about this institution. “Vancity Hate”, “Vancity bad” and “Vancity crap” all returned nothing especially negative. When you do the same with Lloyds TSB, there’s much to read. Even given the difference in our size, the Vancity approach – providing a community forum (which is actually a moderated environment) - seems to have attracted a positive halo.

So it seems it is possible to address transparency tyranny in a positive, directed way. That’s something that we, at Lloyds TSB, are still getting our heads around. In the meantime, I guess we’re grateful to the anonymous Toniq and her ilk for putting the point of view constructively from our side.

As a final note, by the way, we haven’t said our people can’t write about us in public. We just haven’t said they can. And that’s an important distinction, I think.

Rabo gets it

A recent post by Linkdump points to a news item coming out of the Netherlands: that the innovative Rabo Bank are about to start an NFC trial with a supermarket chain and a mobile operator.

I am not surprised by this move.

As I've mentioned before, Rabo Bank are presently innovating in the mobile space. You can get your new mobile phone from them complete with airtime package.

Let us assume for a moment that NFC is the next major payments technology, and that embedded ubiquitously in phones it becomes a key way to pay, along with cards and cash. What Rabo are doing with the handset puts control of the payment instrument into their hands. It disintermediates any telco who might have aspirations to take payment volume via the mobile bill. And it has the potential to be a powerful loyalty system if you tie call pricing to share of wallet.

The fact that there is now an NFC trial starting suggests to me that Rabo gets this, and is taking active steps to make sure it carves out its territory early.

Forget anonymity in peer-to-peer lending

 

The other day I came across FYGO, a new twist on the P2P loans concept. Rather than an anonymous market where lenders and borrowers are joined together auction style, FYGO creates a social network in which you borrow and lend to people you know.The network is created using your contacts and all the lender and borrower amounts are aggregegated.

That's quite a different play to Prosper and Zopa. In those cases, a large percentage of loans go unfunded. According to Deutsche Bank, as many as 70% of total loan requests don't lead to a transaction. If my own experience trying to explain P2P is any guide, this is largely due to individuals worrying about whether or not their loan will be paid off by someone they don't know and can't identify.

With FYGO, you are either borrowing from someone you know directly, or who they know directly.

There is a person-to-person negotiation feature, so users are able to agree between them loan terms and come to an acceptable arrangement to both parties pre-funding.

Compared to its anonymous-parties cousins, I think that FYGO has a good opportunity to go beyond low-value unsecured credit, albeit today they are limiting loan amounts to $2000USD. For example, you could imagine it as a vehicle for small business loans, even a means for angel investors to get to interesting startups.

In the meantime, however, FYGO are doing something very interesting already. Knowing who are you are lending to (and borrowing from) may be the thing that the other P2P sites were missing. If that's so, then FYGO is likely to be the place where the P2P action is happening.

Amateur productions in banking

Over at RoughType, Nicholas Carr makes a comment on new releases from Apple Inc. that I thought was rather interesting.

Jobs, in fact, couldn't possibly be more out of touch with today's Web 2.0 ethos, which is all about grand platforms, open systems, egalitarianism, and the erasing of the boundary between producer and consumer. Like the iPod, the iPhone is a little fortress ruled over by King Steve. It's as self-contained as a hammer. It's a happening staged for an elite of one. The rest of us are free to gain admission by purchasing a ticket for $500, but we're required to remain in our seats at all times while the show is in progress. User-generated content? Hah! We're not even allowed to change the damn battery. In Jobs's world, users are users, creators are creators, and never the twain shall meet.

Which is, of course, why the iPhone, like the iPod, is such an exquisite device. Steve Jobs is not interested in amateur productions.

Of course, this is a banking blog, not a technology blog, but you know, it got me to wondering. Might "prestige" bank brands steer clear of all this Web 2.0 stuff in order to ensure that customers have an "exquisite" experience? What about the "amateur" lending models of Zopa and Prosper? Users giving each other financial advice at Wesabe? Those experiences can be relatively variable, depending on the parties in the conversation.

The key question: does the deliberate lockdown of a superior customer experience (a la Apple) translate into a premium product that customers would switch banks for?

What consumers value in banks

Guess what? Customers care about price more than anything else when they deal with their banks.

The other day, I came across ciao.co.uk, a shopping site that hosts user-written reviews and ratings and which includes many (most!) of the providers of financial services in the UK. For banking, users are asked to give an overall rating of the institution, as well as their individual ratings for price, staff courtesy, promptness, and efficiency.This data is interesting because it enables one to do some statistical analysis of what customers (at least in the UK), think is important in their banks.

As a data junkie, I naturally grabbed everything from the site, and, armed with Excel, did some quick analysis. Using the review scores and the score for each individual attribute (efficiency, promptness, etc) I performed standard linear regressions to see if there was some kind of relationship. I also performed some statistical tests of significance to see what kind of authority we might attach to the results.

Here's what I found out.

Firstly and foremost, the thing customers care about is price. Price is the variable most significantly related to review score, and explains 87% of the data. Next up, but significantly less predictive is staff courtesy (67% of the data), followed by promptness (59% of data) and efficiency (58% of data). These numbers came from an analysis which was significant at the p=0.01 level (for those who don't care about statistics much, that means that, statistically speaking, there is good reason to believe that there is a very strong relationship between review and the factors mentioned).

As a control, I also performed a regression on the number of reviews left for each bank by users against the review score. There was no detectable relationship, from which I conclude that the number of reviews is probably random and not related to exceptionally good or bad performance of banks. As a side note, I eliminated all banks which had fewer than 10 customer reviews, taking out mainly niche players.

It isn't surprising, I suppose, that all four factors are contributors to a customer's review score of a bank. And it is certainly not a surprise at all that price is the thing everyone cares about: everyone knows that banking products are commoditised.

But isn't it interesting that staff courtesy seems to be more predictive of review score than promptness and efficiency?

It suggest to me, at least for UK banks, that overall customer satisfaction could be improved just by goaling staff on polite behaviour. It may be that customers are less bothered by terrible business processes and waiting in queues as long as the employees they speak to treat them well.

Of course, the UK, home to the most appalling customer service on the planet, may be a skewed sample. If anyone finds any other sites with appropriate data for other markets, I'd be delighted to redo the analysis. And, if any of you would like the source data (and my analysis) in its Excel form, please mail me and I'll send it.

Update: Mike Shoeffler, at the Price of Everything blog has a very different interpretation of these results. He advances the argument, at least for deposits, that in general customers barely care about the rate, and explains why he thinks that's not incompatible with this analysis.

Further Update: Ron Shevlin explains in this comment why rate might not be the primary decision factor for customers even for mortgage.

Things that will be different for banking in 2007

It seems that this time of year is one where everyone looks mistily into their crystal balls and comes up with their predictions of what the next year will bring. In fact, I see this morning that Colin, over at BankWatch has also got a post with his thoughts about the next year coming.

Since I'd hate to miss the prophetic bandwagon, I spent some time reviewing the posts I've made over the last year. Using them as sources, I came up with a few predictions of my own. Here then, are some things that I think will be different in banking in 2007

1. Banks will reaslise that just as there is practically no differentiation in product, there is none in channels either.

Way back in February, I started thinking about the question of competitive advantage, given some research that was done by McKinseys. That research stated that organisations using commodity solutions over highly customised ones were generally more effective from a competitive point of view. Later that month I wrote a post entitled Channels don't Matter because I kept coming across spurious arguments from banks about why they had to build their own stuff from the ground up, especially Internet banking. Since 7 of ten transaction in the Internet channel are account balance, just what is the competitive advantage of building your own Internet banking? It's not as if there are so many ways you can display a balance, after all. When all is said and done, investment in channels alone is always going to drive a short term advantage - channel based innovations are too easily copied, just as product innovations are easily copied. In 2007, banks will realise this, and make efforts to do commodity based systems, freeing up dollars and brain power to work out what they can do to differentiate, such as creating product bundles with other industries, or using network externalities to create barriers to exit.

2. Social lending will expand further, and markets with active social lending sites will begin to impact unsecured lending sales at banks

Zopa recently made it to the BBC (read about that here). Prosper have started to publish detailed data from their originations marketplace, which has led to a bevy of independent sites doing analysis. But both address something that is very interesting in banking: the need to customise products to markets of one. I started to think about this in July, when I began to be interested in the Long Tail of Banking. A few days later, I came across Zopa and Prosper, and I was struck immediately by the way these two sites address the long tail issues at banks. As I noted then, the day someone cracks the secured market for loans - mortgages, say - there will be very serious trouble brewing for traditional institutions. I actually made this point at a Latin American banking conference in September, with mixed results, which included disbelief that P2P lending could even exist, let alone be a successful model. The key question, however, is whether P2P is a new loan market, or whether it canibalises existing bank business. Initially, I wasn't sure, but now wonder if savvy depositors and clever borrowers are going to Prosper and Zopa rather than their bank. If that is the case, then I'd suggest that any market with a P2P loans marketplace is going to get more difficult for banks in 2007.  The fact is, P2P, especially when combined with social networking effects, is a better model than the current one - all you have to do is look at the arrears rates on Prosper to see how this is working. I'd go further to suggest that, responding to the threat, innovative banks will get into the P2P market themselves in 2007, realising that fee income can be just as attractive as interest income, if the alternative is no income at all.

3. Banks will finally realise they have missed the boat in the online payments space and give up trying to compete with PayPal and Google.

Although it is true that most online transactions are done today with cards, there's no doubting the fact that Google and PayPal have stitched up the market for two of the biggest sources of online transactions: advertising and auctions. As I noted in April, PayPal are also going after the third major source of online transactions - telephony. More to the point, they are also starting to reach into the real world, for example, at Barnes and Noble, you can now pay with your PayPal account at the checkout. Anyway, in July, I began to wonder if it was, in any case, too late to compete with these two. Later that same month, I found out that PayPal has more accounts that the largest institutions in the world. In August, I saw research by Booze Allan suggesting that by the end of 2007, up to 20% of online volume could shift from cards to players like PayPal. That's a lot of money. Why do I think that banks should give up now? Because both PayPal and Google are closed value systems - money that goes into their environment stays in. Just what are they doing, do you think, with those huge float amounts that must be sitting around generating income for them (they don't pay interest, remember!). Subsidising their payments operations maybe? Compete with that,  banks. If getting their hands on the online payments market is problematic, at least banks are starting to realise that they can reinforce their position by leveraging what they are good at: reaching into the real world. For example, Barclays have just done a deal to embed the Oyster (London transport) payment facility into their own credit cards. On the other hand, as I related way back in January, Western Union sold their online payments business, recognising early that the economics weren't working in the new online age.

4. More data supporting the banking arms race hypothesis will emerge and bankers will begin to look for differentiation beyond the customer experience.

In June, after a particularly trying round of trade shows, I was struck by how often vendors and bankers talk about differentiation via the customer experience. How often do you hear about it? For me, it is at least once a day. Anyway, this got me to wondering there might be declining marginal returns for incremental investments in customer experience beyond a certain level. In other words, might there come a point where the customer experience, whilst differentiated, didn't make much difference any more? I also began to wonder what the economics of such a situation might be: might investments continue to ratchet up and up, arms race style, as institutions compete with each to have the best branch, the best Internet, or the best call centre? In such an environment, the winner clearly is the bank with the deepest pockets.In April, I posted on BAI research that suggests that most customers don't even want a relationship with their bank. In May, I reviewed the behaviour of customers in the banking environment, and according to the research I had, found that most customers treat their bankers badly, regardless of the customer experience. And in August I noticed something interesting in some academic data I was reviewing: it appears that increasing the branch count of an institution reduces the origination rate of loans per branch. Do these point to a banking arms race? Maybe, maybe not. Do they point to a decline in value of the customer experience? Almost certainly yes. In 2007, I'll continue to collect data points, and I think a pattern will emerge. Customer experience will begin to be seen not as a path to sustainable differentiation, but as a cost of doing business. Following from that, institutions will worry about how much all this me-too is costing and start rationalising.

5. The cost of power to run the servers will start to be a factor in businesses cases

I was thrilled in November that Finextra picked up my analysis of a recent deal between IBM and BNP Paribas to move all the servers used in their risk calculations to a utility data centre. The arguments I used then were that, actually, BNP could have gotten a better deal by going to Amazon. But what I didn't consider then, was that the cost of energy is increasingly significant in application deals, such as the one BNP made. As I spoke about last week, it isn't acceptable that the cost of running an infrastructure can just double in three years without much in the way of a business case. Consequently, in 2007, I'd expect we'll start to see energy costs not only factoring in business cases, but architectural design decisions. When the cost of the power is more than the cost of the hardware, what choice is there but to consider the cost of the power? And what is the choice that you have when the cost of power plus the hardware is more than the cost of designing the application for better performance in the first place?

6. Multichannel programmes will start to get canceled.

The week before last, I spent some time rambling about the difference between multichannel integration, compared to multichannel replacement. What prompted me to do this was some research we'd done that found that almost 80% of multichannel integrations can be done with about 20% of the work. A customer of ours independently found the same thing. But mutlichannel projects are usually big, expensive and complicated, or else they are non-existent, as I talked about in March. And in June, I came across research suggesting that at least 30% of institutions will drop multichannel by 2010 because it is too big, expensive and complicated. So in 2007, I'd say we'll start to see the first signs of this happening. There are too many projects going on, for too long, that have yet to deliver substantive business, as opposed to architectural outcomes.

This the last post from me this year. I am off to Bulgaria to ski and enjoy the festive season. Actually, considering the lack of snow across Europe, there might be more festive season than skiing. But in any event, to all of you who have read me this year, merry Christmas and a very happy New Year.

Multichannel integration or multichannel replacement

Having returned from another round of trade shows and conference, I am somewhat weary of hearing about multichannel integration. After several years, it's still a hot button for lots of people in the industry. In this category, I mainly put the vendor community, of which I am a part.

For vendors, multichannel is an opportunity to sell more kit. You need more servers, more software, more services. There are whole new layers of technology (like BPMs and so forth) that need to be deployed. And lets not forget even for a moment, that quite often, multichannel integration is actually not about integration, its about selling new channels.

Naturally, if a bank buys several new channels from one vendor, they will be integrated.

But here's a scenario I've seen more than once: a massive multichannel programme centred around channel replacement gets kicked off, starting with, say, Internet banking, and leading to other channels incrementally. The problem is, such projects are so big, so time consuming, that they tend to get canceled after the first, or at best, second channel. Without wracking my brains too much, I could list at least 5 banks that now have a new legacy channel which isn't integrated with anything very much.

Actually, I really question the business cases that allowed such projects to get off the ground in the first place. Cross sell and upsell? Quantify please exactly how these will increase just because channels are integrated? Cost reduction? Well maybe, if we don't factor in the costs of removing channels which were functioning perfectly well, which probably have more functionality than the new, and which everyone in the institution is familiar with.

Improved customer experience?  

That of course, is the rub, and naturally, is unquantifiable unless you're measuring churn and acquisition rates. Which you have to be able to predict in advance of actually signing the contract in order to attach the numbers, and, let's face it, human reaction to "experience" is pretty much unpredictable to start with.

In my view, business cases for multichannel integration don't stack up when you're replacing channels at the same time as integrating. Unless you're replacing everything you still have the cost of integration as well as the cost of the new channels.

On the other hand, the integration only approach - usually represented by service oriented architectures and layers of process engines et al - aren't so speedy to deploy. And the worst thing of all? Instead of touching channels, they touch the hosts. Never touch a host system if you can avoid it: it guarantees a project will take at least as twice as long as otherwise. Two or more hosts: a project that will either fail outright, or will be so expensive and time consuming that perhaps it would have been better not to start in the first place.

Where am I going with all this?

I just had an interesting conversation with the leader of a multichannel programme in a bank customer of ours. His team had done some research that came to a startling conclusion (similar to one we'd come to on our own, actually): that the biggest bang for the multichannel buck comes from a very limited number of cross channel scenarios. I think they came up with five: we at Getronics talk of about the same number.

It is an example of the pareto principle: 80% of the value can be found for 20% of the investment.

None of these scenarios require any rip and replace of existing channels. Neither do many require any host interaction. But all of them are amenable to implementation with a few bits of strategically carved code.

It might not be architecturally pure, or the simplest thing to maintain for ever, but the thing is, such an approach delivers business value quickly, and for way, way less cost.

So I'm thinking, if you're doing multichannel,  there are several points to consider. Firstly, if the vendor has channels to sell, what are they really talking about when they pitch for multichannel? And secondly, is it really necessary to have the whole multichannel-bandwagon, or might something incremental actually do the job?

Disclosure: Getronics does in fact, sell channels. To be clear, we're very interested in banks having our channel solutions. Personally, though, I think that the channel and channel-integration space are two separate things.