Small Business is Big Business

While most banks are spending more time and resources trying to address the needs of small businesses, a large percentage of this segment is still underserved. According to a Javelin Strategy & Research report released last year, about two-thirds of the 26 million small firms don't have business banking accounts.

Smaller companies usually integrate their business and personal relationships or simply open another personal account according to the Javelin report released late last year. That means they may pay lower account fees, but also don't receive cash flow and treasury service attention from a bank's small business sales team, potentially impacting the business' ability to grow.


At a time when banks are looking for ways to acquire new customers and generate additional revenue, marketing to and serving this untapped banking segment is a win-win for banks and small businesses alike. The challenge is to uncover these somewhat hidden relationships. Sometimes, banks are evaluating transactions to determine what customers are using accounts for business purposes while others are using social media to have small businesses indentify themselves.

According to several reports over the past two years by Aite Group, while smaller businesses tend to use banking services similar to consumer banking relationships, their payments habits show tremendous growth opportunity for debit and credit cards as well as online banking services. In fact, according to Aite, only 4% of spending by small businesses currently is done on a small business credit card. Capital One has already responded to this opportunity by allowing small businesses to combine their business rewards with their personal rewards. Other banks are tracking checks and ACH transactions to help find underserved businesses.

Alternatively, firms like Bank of America are leveraging the power of social media to develop the Small Business Online Community which has over 50,000 registered users, while American Express continues to promote their very successful small business OPEN Forum where small businesses can find articles, expert blogs, success stories and advice with limited networking opportunities. Wells Fargo is also the first bank using blogs to stay in touch with small business and retail customers, while VISA teamed up with Facebook to create the VISA Business Network for small businesses to share advice and potentially grow their customer base.

Going forward, bank marketers should take notice of the smaller business market (under $500,000), tieing together personal and business relationships, changing payments behavior and providing better cash flow solutions that can help these business grow.

Mobile Banking Popular Among Smart Phone Users

According to the "Mobile Money Study" published last month by Data Innovation Network almost 70% of US smartphone users had used at least one mobile banking and/or payment service on their phone in the previous three months.

As has been found in previous studies and reinforced by Doug Brown from Bank of America at last year's BAI Retail Delivery Conference in Boston, the Mobile Money Study found that checking account balances was the most popular banking application (82%) followed by looking for posted transactions (62%). Account alert features were also popular (46%), with roughly 40% of those surveyed transferring money between accounts.


Interestingly, an overwhelming majority of smartphone users accessed mobile banking using their mobile browser (66%) as opposed to a mobile app (20%), with a large number of respondents interested in a mobile wallet concept where they could swipe their phone like a credit or debit card. This possibility was also found to be popular with a Gen Y panel when I attended last year's BAI Transpay Conference in San Diego.

As the penetration of smartphones continues to increase, consumers will become more and more comfortable with and demanding of mobile banking services. I expect the availability and ease of use of mobile banking to become a significant competitive differentiator in the coming 12-18 months for financial institutions.

Interchange Amendment Could Change Reward Programs

As if we haven't seen enough regulatory changes over the past 12 months with the Card Act and Reg E, now there is the possibility that Washington will limit interchange fees for debit transactions.

As noted in a recent Client Briefing from Celent Research, part of the proposed legislation requires the Fed to determine a “reasonable and proportional” interchange fee, which is no easy task given that interchange fees are there to balance the incentives in the payment system and tend to cover such difficult-to-quantify items as the payment guarantee and convenience.

In other words, the government can't look at just the operational and fraud prevention costs. In addition, current interchange fees differ by sector and are not standardized currently.


As was the case with the other two payments legislations already enacted, the idea behind the interchange amendment is to protect the consumer and lower prices (in this case, the thought that merchants will pass the banking savings on to the consumer). Given the financial times and the narrow margins at many retailers, the passing along of reduced costs is unlikely. In reality, the consumer is likely to lose on many fronts.

If interchange income is legislated at a lower level, banks will most likely raise fees on alternative services to compensate. So instead of the merchant picking up some of the burden, the consumer will be directly impacted. In addition, with more and more banks heavily promoting rewards programs on debit cards, these programs will need to be significantly restructured or eliminated altogether. This may have a bigger impact on smaller banks and credit unions than larger banks where costs can be spread. Some banks may be forced to stop issuing cards which is why community banking associations and CUNA are aggressively fighting this proposed bill.

In the end, banks will most likely be forced to find alternative revenue sources and potentially new ways to structure rewards programs with stronger merchant involvement. New programs such as that offered by Cardlytics (covered on April 29) or fee-supported rewards programs such as the program at KeyBank may be viable alternatives.

Use of Online Banking and Bill Payment Continues to Grow

According to the 2010 Consumer Billing and Payment Trends survey published this week by Fiserv, the number of households that use online banking increased more than six-fold between 2000 and 2010, and the number that use online bill payment increased nearly eight-fold. In fact, 72.5 million U.S. households (80 percent of all households with Internet access) use online banking, while 36.4 million households (40 percent of all households with Internet access) use online bill payment.

Illustrating that online bill payers are not just the youngest and wealthiest demographic, in 2010, consumers age 21-34 made up 28 percent of online bill payers, consumers age 35-54 made up 48 percent, and consumers over age 55 made up a surprising 24 percent of all online bill payers, while more than a third of online bill payers had a yearly household income of less than $50,000.

In addition, as other studies have shown, consumers who pay bills online consistently use more services from their financial institution than the average customer, with usage of additional services becoming even more pronounced in recent years. Loyalty is also strong, with 49 percent of customers who use online bill payment saying they were less likely to switch to another financial institution as a result of their experience with the service.

Fiserv suggests that with the similar benefits of biller direct and emerging technology alternatives (such as PFM), it will be more important than ever to illustrate the benefits of bank-based online bill payment including the consolidation of billing and payment into a single site and the ability to eliminate the need to remember multiple passwords.

What's in Your Wallet?

In the past, bank marketers have relied on models based on demographic, geographic, psychographic and purchase variables to better understand their customers and prospects. Some financial institutions even use attitudinal, lifestyle or customer value segmentation to improve the targeting of their marketing communications.

As consumers are provided more and more options as to how to transact business and make payments, however, a better way to segment may be achieved by using advanced behavioral segmentation based on payment decisions. In other words, when consumers open their checkbook, reach for their wallet, turn on their computer, or use their phone, what payment option they choose may help bank marketers improve targeted engagement, channel and relationship expansion communication.

Payments behavioral segmentation may also be the best indicator of future financial services purchases since it can gauge changes in consumer purchasing, saving and investment patterns and enable Payments to effectively join Product, Pricing, Place and Promotion as the fifth P of marketing for bankers.

There are definitely challenges posed by payments behavioral analysis, however, since it introduces an element of time into the analysis that is different from other types of modeling. As opposed to using a single point in time like marketers can do for age, income, geography or even attitudes and lifetime value, behavioral segmentation requires analysis over a period of time with the length of time impacting the nature of the segmentation. Different conclusions can be made when looking and long vs. short-term trends. This is especially true during a time of significant economic change like we have today, where people's buying, saving, borrowing and payment behavior may be in transition.

Another challenge is presented by the number of channels and insight capture options available within the payments landscape, since consumers can pay using checks, debit, credit, ACH and even P2P or P2B using mobile devices in person, online or through the mail. As a result, it may be easier to capture ranges of transactions (high/medium/low) or develop a segment grids measuring ranges of transactions based on method and channel. As a starting point, marketers could potentially track tendencies using just one component of the payments continuum like measuring just point of sale transactions over time.

A final level of complexity is added when you consider whether how the consumer decides between funding today's purchases out of current income, wealth or borrowed funds. This adds the element of financial management into the picture.

Using all or singular components of payments data, bank marketers can build attitudinal segments that answer the questions "what payment instrument does a customer usually choose" and "why does a consumer choose a particular instrument (or channel)". While no easy task, it is one that can reap significant rewards. This is because the foundation of most financial management decisions revolve around the consumer's choice of payment method. Their attitude around safety and security, borrowing and saving, electronic or traditional all provide insights not available with traditional segmentation and open the window to the customer's potential level of engagement and potential value for your bank.

While certainly not a flawless segmentation process since the environment is constantly changing and is far from frictionless, payments behavioral segmentation could provide a level of insight not found in with other modeling processes and could assist in proactively addressing customer needs, improving customer lifetime value and enhancing the customer experience.

I would love to hear from banks that may be employing some form of payments behavioral modeling to drive marketing communications beyond the selling of payments products. Are other behaviorally modeling techniques working?

New Smart Card Geared to Convenience and Safety Conscious Consumers

As banks continue to innovate around the use and rewards structure of both debit and credit cards, the penetration of smart cards in the United States has lagged other countries. That may soon change, however, after Pittsburgh-based Dynamics, Inc. won the first prize ($1,000,000) 'DemoGod' award at this week's Demo tech start-up conference in Silicon Valley.

Leveraging a programmable magnetic stripe that can be changed at any time (but still able to be read at today's magnetic stripe POS readers) the MultiAccount card can carry different card accounts on one piece of razor thin plastic.

This could be a debit card and credit card, personal and business card, etc. Push a button on the card, and an integrated light source highlights the account being accessed. A card with a light source alone provides a WOW factor for the user.

For those users interested in an expanded level of security, another card (called Hidden) presented at the Demo conference by 31 year old Dynamics Chief Executive Jeff Mullen only shows an abbreviated account number on the card. To get a complete account number to appear, the user needs to type their PIN on a set of five buttons on the surface of the card. When the correct PIN is entered, the electronic stripe is then populated with the appropriate magnetic information so that it can be used in today's readers. In other words, the card is of no use to a thief unless they have the integrated PIN.

Both cards are thinner than traditional cards in the marketplace today, yet still have a small built in microprocessor with integrated memory which is powered by a battery with a three year life. Oh yeah, and the cards are both scratch resistant and waterproof, which Mullen displayed as part of his 5 minute presentation demonstrating the card at the Demo conference.

This new card technology is definitely coming at an opportune time, as bank marketers are looking for new ways improve engagement by stimulating the use of card products and the participation in rewards programs. With the Durbin Amendment set to impact interchange income for debit card transactions next year, bank marketers need to find ways to get top of wallet placement in the consumer's mind and through usage. The benefit of combining multiple card accounts on a single piece of plastic alone could have major financial benefits for banks. This type of product could also impact retention of relationships, further impacting the customer lifetime value.

As the planning process is well under way at many banks, an introduction of this type of product (which has been in a stealth test mode for an extended period in the marketplace by Dynamics) could provide the foundation for a new payments strategy. With behavioral segmentation already built into the product's benefit continuum, this could be the answer to many concerns of card product managers and bank marketers alike in 2011.

Update (October 5, 2010): It was announced yesterday that Citibank will be the first bank in the country to leverage the Dynamics, Inc. card programmable magnetic stripe, embedded battery and chip as well as integrated buttons on a payment vehicle in a well publicized pilot. The Citi 2G Credit Card will allow consumers to make a choice whether to pay for a purchase using a traditional credit account or to utilize points for the purchase.

“People don’t typically think of credit cards as an innovative product, but we are excited to be the first issuer to pilot these advanced technologies and additional choice at checkout through the ‘next generation’ of credit cards,” said Terry O’Neil, executive VP of Citi’s North America credit card division. “With Citi’s latest feature, customers now get a credit card that better fits their lifestyle and needs, putting more options right in their hands.”

At a cost of about three times the cost of traditional plastic cards, it will be interesting to see if other banks get on the bandwagon and develop innovative and segmented products based on this technology.

DDA Under Siege

As part of the planning committee for this year's BAI PaymentsConnect 2011, I would love to take credit for the great title of this program track, but I am not sure even the great minds at the BAI could have foreseen how apropos "DDA Under Siege" would be for bankers attending this year's conference that wraped up today in Phoenix.

If there was a unifying theme from the many sessions I participated in this week, it was that revenue lost from last year's Reg. E and this year's Durbin amendment can not be completely recaptured through repricing. Instead there needs to be a stronger focus on targeted customer acquisition, share of wallet growth strategies, retention, product innovation and cost containment. While everyone at the event seemed to be interested in what others were going to do around checking repricing, the energy was definitely focused on building a stronger platform for the future.

Sessions at the conference started with a review of the BAI/Finacle Innovation Imperative Customer Sentiment Study completed last Fall, which found that while there is still a ways to go in the customer's confidence in the economy and the banking industry in general, the view of bankers is more closely aligned with the consumer than in the past couple years. This uniformity of beliefs should assist as banks try to build messaging around their checking repricing and try to improve the customer experience. The study also found that the customer's perception of their bank being 'innovative' tends to correlate with satisfaction, product ownership and overall confidence in their bank.

Steve Mott from BetterBuyDesign followed the BAI research presentation with a very fast paced competitive overview of the payments industry, including a discussion around Google, PayPal and several potential payments platforms from the U.S. and even China. His message was that it will be up to the banks to leverage their customer relationships, distribution network and trust advantages to maintain some level of ownership of the consumer payments continuum. He emphasized, however, that the bank 'ownership' of payments is anything but guaranteed.

David Stewart, Senior Expert from McKinsey & Co. expanded on his recent BAI Banking Strategies article, emphasizing the continued importance of the debit card in the bank's payment product arsenal. In addition to providing financial metrics around the value of the debit customer and the real impact of repricing with net interest margin and other fees are included, he emphasized that trying to move mindshare or marketshare from debit to credit may be close to impossible in today's economic environment. David also shared the view of McKinsey that the potential for merchants to 'steer' payments from one payment vehicle or another was unlikely since doing so may actually cost the merchant more in discounts than could be retrieved in interchange savings.

David also left the attendees with the following strategies for trying to reposition the debit product in the future:

• Base debit strategy on new debit economics as opposed to the old economics
• Price products for competitive advantage
• Rationalize customers on the relationship level not just checking level
• Remember that the debit product is still sticky and builds customer engagement

Ending the morning sessions was a presentation by Hitachi Consulting around the findings of their semi-annual Consumer Payments Preference Study released last Fall. Some of the highlights included:

• The millennial generation provides a good opportunity for growing payment volume (especially around mobile)
• Ease of use and convenience drive payments behavior
• Debit is still the preferred payment method
• Credit for online purchases expected to increase
• Micropayments will continue to increase

Hitachi also emphasized that security continues to be a concern of consumers and is impacting the take up rate of mobile for payments.

The afternoon sessions revolved around ways that banks are trying to take back the payments franchise and extend relationships beyond just the DDA, with speakers from the Federal Reserve, Fiserv, Comerica, Fifth Third, Peak Performance Consulting, Novantas, TD Bank and Huntington Bank all providing unique viewpoints. It was clear during these sessions that the days of every bank having close to the same product set are over. While some of the larger banks may retain a Free Checking program (PNC's decision was referenced often during the conference), many are completely revamping their deposit product portfolios in a way that reinforces their brand and leverages their customer franchise. All of the banks were also bullish on credit products as well as the need to continue to capture increased share of wallet.

Hank Israel from Novantas stated that banks should segment their customers based on channel preference and will most likely price their product set in one of the following ways:

• Keeping Free Checking (hoping to make it up on volume)
• Fee for services (make it up within the checking product set)
• Product bundling (packaging product sets based on customer needs)
• Relationship pricing (drive value from relationship perspective)

A strong case was made for all banks to move more to a relationship focus that can optimize customer profitability and focus on customer needs.

Tuesday's sessions focused on how banks can go on offense through mobile banking, prepaid debit and mobile payments as well as how institutions can better defend their customer base through onboarding and rewards. Some of the key takeaways from the mobile banking session presented by FIS and M&I Bank included:

• Smart phones will be used by the majority of consumers by the end of 2012
• Mobile banking will surpass online banking by 2015
• Remote deposit capture is the 'power app' that engages the customer (more are needed)
• Mobile banking customers have a 53% lower attrition rate (Tower Group)
• Mobile banking customers decrease VRU use by 55%

The speaker from M&I Bank also emphasized the need for banks to build mobile banking critical mass quickly, with a focus on expanding the solution set coming after 'getting the basics done right'. He referenced that mobile banking customers at his bank had higher balances, increased check card usage, and a better bill pay adoption rate than similar customers without mobile banking.

Greg Schreacke from First Federal Savings Bank and Robert Gitner from Velocity Solutions discussed the market potential for prepaid debit and how a bank could build a checking product set around the card. Research was presented that showed the following characteristics of a prepaid debit user:

• 53% have a checking account
• 50%+ want a prepaid debit because of overdraft fees
• 47% want immediate access to funds
• 46% believe they can get better service at a retailer than a bank
• 43% have had a previous problem that limits their ability to open a traditional checking

In the mobile payment presentation done by Calvin Grimes from Fiserv and Emmett Higdon from Forrester Research, the impact that mobile banking has on the customer relationship was again emphasized. It was shown that not only is a customer who uses mobile banking 30% more likely to stay with a bank, but the customer is also 26% more likely to recommend their bank. The team emphasized that now was not the time for banks to stand on the mobile financial services sidelines, but instead should be searching for ways to move their mobile solutions from being simply informational to being more transactional.

While many banks are still trying to build the business case for mobile payments, the following benefits were shared:

• Customer acquisition and retention benefits
• Lower cost of servicing
• Revenue generation potential and revenue retention
• Competitive parity
• Better customer experience
• Deeper customer engagement

It was also mentioned that, while security and privacy concerns still remail around mobile payments, these concerns will eventually work in favor of traditional financial institutions since customers inherently trust banks more than companies like Google, Apple or even their phone company.

The presentation that I did in partnership with Bill Stamp from KeyBank focused on the market trends around onboarding as well as the basics on development and implementation of a successful onboarding program. Interestingly, when the attendees were informally polled as to their current onboarding programs, while the majority were doing something, less than half were using more than one communication channel, very few were leveraging three channels, and only one bank was communicating with their customers more than 5 times in the first 90 days. It was stressed that this lack of a focused and consistent onboarding process could hamper organization's objectives of improving customer engagement, increasing fee income and definitely hurt cross-sale and retention efforts.

Bill's presentation around KeyBank's onboarding program illustrated that developing and managing an onboarding initiative is an ongoing process where testing of offers, channels, and communication sequence and cadence is continuously needed. Bill also shared how an onboarding process can reinforce cross-selling done at the new account desk and the importance of reinforcing engagement with services before the cross-selling of other products.

To further reinforce the importance of engagement and retention in a highly competitive and revenue challenged marketplace, Tom Brooks from Regions Financial Corporation, Lynne Laube from Cardlytics, and Aaron McPherson from IDC Financial Insights showed how a highly innovative merchant-funded rewards program may be the answer for banks looking to move away from a 'reactive' interchange funded program to a 'proactive' program that could be bring higher value to the customer and even make money for a bank.

Lynne Laube discussed two macro trends in the banking industry that has paved the way for a merchant-funded program:

• Digitization of payments (where and how payments are made)
• How customers relate to banks (>50% have online banking with 7 visits a month to their online banking site)

The benefits of a program like Cardlytics offering shared by the panel included the ability to target actual transactions for incremental growth and engagement. The benefit to the customer is that offers will always be relevant, while the merchant benefits from only providing offers to people very likely to be interested in their services. Since the targeting potential is so strong, more valuable offers can be developed as opposed to when a merchant is discounting to the masses.

While the program at Regions is relatively new, the benefits included:

• No enrollment is required (all customers with online banking and electronic statements are included)
• Ease of value transfer (no coupons are needed since the customer can electronically 'activate' an offer and 'redeem' the offer simply by using their debit card)
• Immediate notification of earnings/rewards
• Rebates deposited directly into account
• Offers are targeted and relevant
• Integrated user experience
• Fully funded as opposed to being a contingent liability like with points programs

The success of this innovative rewards program was probably best illustrated when Lynne mentioned that Cardlytics is partnering with 2 of the top 5 banks already and expect their customer base to grow from 15M today to more than 60M by the end of the summer. For more information on Cardlytics, read my earlier blog on the company done last year.

Without a doubt, this was a well-timed conference covering a broad range of topics on the front burner of many banks. On each attendee 'to do' list upon leaving, I am sure there will be a review of any pricing changes not yet implemented, a strong focus on ways to engage and retain new and existing customers we can ill afford to lose, and a much more accelerated movement to future payment products like mobile and even P2P.

I would love to hear from other attendees about their experience and takeaways.

Kaching Ushers In New Era of Mobile Banking

The Commonwealth Bank of Australia has broken new ground in the advancement of mobile payments by introducing a new iPhone application that allows users to pay friends or businesses using Near Field Communication (NFC), Facebook identification, an email address or a mobile phone number.

Kaching (pronounced like the cash register sound Ka-Ching)  will initially only be available for users of the iPhone 4 and 4S (with soon to follow Android support) using a specially designed case with built in NFC chip. With this case, the phone will allow the user to simply tap and pay at a PayPass terminal. 'This banking breakthrough marks a significant milestone in the evolution of how people pay and receive money from each other," stated Commonwealth Bank of Australia chief information officer Michael Harte.

According to a CBA spokesperson, the use of a specially designed NFC case is only an interim solution until iPhone, Android and other smartphones introduce new versions of phones with NFC integration built in. In what some believe could be the beginning of the end for plastic credit and debit cards and potentially even cash, this form of electronic payment would be conducted 24x7 in real time if both sides of the transaction are CBA customers and one to two days if the payment is made to a customer of another bank.


CBA has more than 6.2 million online banking customers and is the seventh largest bank in the world. According to the bank, more than 16 million logons from a mobile device were made in August (a 229% increase from last year) with close to 80 percent of these from an iPhone.

The integration with Facebook is a first in the payments world, but is felt to be a logical extension due to the acceptance of Facebook and the very strong smartphone usage by Facebook users. The iPhone application even integrates other iPhone features such a GPS function to find branches and ATMs.

Kaching iPhone Mobile Payments Screen

The Kaching app will include password encryption technology to ensure a lost or stolen phone would not be compromised and not banking information will be stored on the phone. Payment recipients will also be protected, with all un-retrieved funds credited back to the payer after 14 days the bank said.

While this technology or integration has yet to be introduced in the United States as a mobile banking application, it is expected that new virtual banks such as BankSimple and MovenBank will leverage this technology as part of their rollouts. According to Brett King, founder of MovenBank and author of the bestselling book Bank 2.0, the use of Facebook for payments or even to complete the new account application process is not so far fetched as security and acceptance of Facebook continues increase. In addition, King believes virtual currency like Facebook credits  may replace today's physical currency ('The Bank of Facebook: How Will Facebook Interact With the Global Economy' Fast Company Expert Blog by Brian Solis).

NFC support is increasing in the U.S. with the launch of the Google Wallet last month that allows for consumers to pay in select stores with phones running its open source platform. NFC is expected to gain much wider acceptance with the anticipated integration within the next generation of smartphones, especially the iPhone 5.

So, is this the beginning of the end for credit cards, debit cards, checks and cash? Will this introduction hasten the full scale introduction of new banks and bank platforms that leverage new technology and payment  methods? Will branches and ATMs even be needed in the future?

I would love to hear your thoughts.

Are Bankers Ready For The Bank 3.0 Reality?

In an exclusive interview about his newest book, Bank 3.0, Brett King discusses how change occurring in the banking industry is inevitable, speeding up and disruptive. 

From the mobile wallet wars to the impact of social media, tablets and the 'de-banked' and digital consumer, Bank 3.0 shows why banking is no longer a place you go to, but something you do.

A great deal has happened since Brett King wrote Bank 2.0 in 2010. Two years ago, banks were under siege as the foundation of the banking system was close to collapse and the image of the industry as a safe and secure environment was being challenged. The impact of social media was just beginning to be understood by the financial services industry and mobile technology as we know it today was in its infancy. Heck, King even referenced his (now long gone) Blackberry in the first chapter of Bank 2.0.

With Bank 3.0, King discusses how consumers are less likely to view their retail banking provider in terms of capital adequacy, branch network, products and rates. Instead, customers are more likely to determine their banking partners by how easily they can access their accounts when they need to, and how much they trust their provider to execute business on their behalf. For those who read Bank 2.0, King's new book retains some of the foundation and case studies, but updates several areas based on what has occurred (and will be occurring) relative to digital delivery, payments, social media, and the power of 'big data'.

On the eve of the introduction of Bank 3.0 in the U.K. (introduction in the U.S. is scheduled for early November), I interviewed Brett King about his new book and about how he views the banking industry today.

What has occurred in the marketplace that warranted the publishing of Bank 3.0 just 2 years after your successful book, Bank 2.0?

Brett King: The marketplace has changed significantly around how consumers are engaging with their financial institutions. Compared to two years ago, traditional banks are challenged more than ever from a distribution perspective because of the movement to mobile and digital channels, and because they are not well positioned with their current bricks and mortar networks for a positive customer experience. 

The philosophy of banks, with their secure firewalls, operational structure and compliance mindset, is counter to how any other industry engages with customers in the digital space. Since Bank 2.0, the competitive environment has also changed a great deal, with partnerships being developed, alternative players and new bank start-ups being introduced, underbanked segments emerging, and social media merging with bank service engagement. People are beginning to take a functional and utility view of banking, which is why I say in the subtitle of the new book, 'banking is no longer a place you go to, but something you do'.

In Bank 3.0, you discuss that despite these marketplace and behavioral changes, traditional banks in the U.S. have made only minor changes to their distribution models. Where do you see bank branch distribution going in the near and mid-term?


Brett King: We have already seen a number of new players enter the market, especially in the payments space such as Isis, Square, PayPal, Google Wallet, etc. In addition, prepaid cards have become much more popular and represent the fastest growing deposit product in the U.S. This is significant since most bankers do not consider the product to be 'real banking'. From the consumer's perspective, however, prepaid cards are real banking. This is the mistake traditional bookstores and movie distributors made when new distribution alternatives emerged. They didn't take the challenge seriously. Bankers need to realize that prepaid cards are changing the way people are viewing bank relationships on the grassroots level. 

Finally, as transactions continue to migrate to online and mobile channels, we will see more and more banks reconfigure their traditional branches to reflect the new digital reality, with many banks also starting to close unproductive (and economically deficient) branches. These trends will only escalate going forward due to the costs of delivery and the reduced revenue potential.

No new U.S. bank charters have been issued in the recent past. What challenges are faced by start-ups like Movenbank related to regulations and other outdated barriers to entry?

Brett King: The challenges we've had have not been from regulators, but from the risk and compliance areas of the financial organizations we are trying to partner with. In fact, we've met with the Fed, the Treasury and the CFPB and they have all been overwhelmingly supportive of what we are doing. They understand the changes occurring in the marketplace, and have liked the financial literacy built into our product, our engagement model and the value we bring to the overall banking experience.

Alternatively, the banks themselves are having difficulty innovating . . . moving from the way they have done things in the past, using paper applications, signature cards, etc. to using web signatures and online authentication (which is much safer).

Do you see the cost of mobile innovation discussed in Bank 3.0 being an additional 'market disrupter' impacting the ability for smaller institutions to succeed and ultimately survive?

Brett King: The problem is that there are so many start-ups in the financial services and payments space that are impacting the way people view financial services that significant technology projects need to be undertaken by traditional banks just to keep pace. Investing in a technology layer, combined with the new costs of compliance, will be a challenge for smaller institutions. That doesn't eliminate the potential for smaller organizations to collaborate or to build partnerships to respond to market realities, but I don't see this happening.

With the rapid acceptance of tablets, how do you see tablets changing the way people do banking and the services banks may provide leveraging this technology?

Brett King: As we have seen in the retail space already, mobile will change the context of banking including where and how a consumer conducts business. For instance, the process of buying a home and securing a mortgage becomes much different when the shopping for the mortgage is done online significantly before a customer enters a branch (if they do so at all). A tablet can also provide a rich user experience due to the real estate of this device compared to a smartphone and the tactile capabilities compared to online interaction.

Turning this around, if a customer can get this experience on a tablet, why can't that level of experience be replicated at the ATM, as part of online banking and even in the branch? In the end, I think the growth in tablets will force banks to build enhanced customer experiences across all channels.

You have a section in your book dedicated to the impact of social media in financial services. How do you see social media changing banking in the future?

Brett King: Currently social media is impacting banking in a couple ways, including servicing and social dialogue. Customers are increasingly expecting to be able to reach their bank regarding service issues using Facebook or Twitter and get a response immediately. Many banks are falling short in this area, not providing adequate support for 24/7 social channel access.

In addition, consumers are using social media to follow and engage in dialogue about brands (both positively and negatively). If a brand performs well, this can lead to advocacy which in turn can lead to referrals and new business. This positive dialogue becomes critical in restoring trust in an individual bank's brand.

At the end of each chapter in your book, you provide key lessons and recommendations for banks willing to embrace change and take advantage of market opportunities. What is the biggest risk facing traditional banks as they move forward?

Brett King: The biggest risk facing traditional banks is the distribution and cultural bias towards physical branches. The difficulty in unwinding this investment is extremely difficult due the vast scale of branch networks. How do you turn such a ship in such a short time when you are so used to doing things in a certain manner? Leasing and rental contracts present a hurdle, but changing the branch-based culture at most banks may be a bigger challenge.

Your book contains dozens of case studies and references to financial institutions around the world that are innovating and developing new ways to engage with customers. Where is the greatest banking innovation occurring today?

Brett King: The countries that I believe are the best at this would include Australia, many of the Latin American countries like Brazil, some of the countries in the EU including some of the Danish banks and Swedish banks. In my opinion, the U.S. is definitely at a disadvantage due to their over investing in branch networks. The non-banks and new start-ups provide the best examples of innovation in the states."

Commonwealth Bank of Australia - Kaching Facebook Banking

Bank 3.0 is about the transition from banking dependent on a physical structure to banking that can be done at a time and place most convenient to the customer. It is about a new form of engagement and experience that harnesses the power of the internet without sacrificing the 'human touch'. It is about leveraging the potential of big data for better 1:1 interactions and more powerful marketing. 

Brett King's newest book emphasizes that consumer behavior is changing faster than ever before and that banks need to decide if they will embrace the change or be a victim of the change. Innovation and experimentation are no longer an option. They are the only way to do business.

Bank 3.0 was released today in the U.K. and is scheduled to be released in the U.S. in early November. In addition, Brett King mentioned that he will be offering free copies of his new book to Twitter followers over the next couple weeks on a first tweet, first served basis. Brett's Twitter handle is @BrettKing.

Monetizing Mobile Banking

As consumers are becoming more comfortable with mobile banking and mobile payments, financial institutions and technology providers are beginning to develop and deploy more innovative solutions with a focus on gaining market share, reducing costs and realizing new sources of revenue. It is clear that the question is no longer whether mobile banking and mobile payments will be important to a bank's business (84% of respondents to a recent KPMG survey said that it is). The question has become, can banks realize the full potential of the channel from a customer development and revenue perspective.

To this end, one of the best sessions I attended last week at the BAI Retail Delivery Conference was around the opportunity for banks to monetize mobile banking. Presented by Matt Wilcox, senior vice president of eBusiness strategy for Zions Bancorporation and Drew Sievers, CEO of mFoundry, the session focused on the opportunity for mobile banking to move from simply reducing costs to actually being the foundation for revenue generation. 

Mobile Banking Evolution

At the beginning of the presentation, Wilcox presented an overview of the mobile banking evolution that has occurred over the past several years. According to Wilcox, mobile banking has evolved from being simply a channel innovation to providing the potential for significant channel migration cost savings as shown below. He noted, however, that banks should not build business cases around 1:1 transaction displacement, since many consumers increase their overall transaction volume as they move to more automated channels. This is similar to what occurred with ATM volumes that increased at a much higher rate than branch transactions decreased in the past.

Source: TowerGroup and Fiserv (2010)

Wilcox also provided a look at the differences in profitability and attrition that has been attributed to mobile channel engagement at Zions Bank. As shown below, customers with both an online and mobile banking relationship generated close to 30 percent more revenues than an online customer, while having an attrition rate that was more than 60% lower. 

Source: Zions Bank

While Carl Tsukahara, CMO from Monitise stated in another BAI session that, "the wallet wars will be over in the next two years and that banks need to get off the sideline", Drew Sievers emphasized that banks still are in an extremely strong position relative to other players. According to Sievers, "Banks control the key elements of funds, identity and authentication. In addition, banks have consumer trust and millions of pieces of software on mobile phones, positioning themselves strongly in the mobile wallet market."

Mobile Revenue Potential

This session continued with Matt and Drew discussing the significant revenue potential of mobile banking. The potential was put in context of mFoundry's new mobile banking platform (Fin.X), that provides banks a choice of mobile apps from a Service Provider Network of 30+ companies including FIS, Diebold, Dwolla, Micronotes and Blackhawk Network. According to the presenters, there are 14 categories of revenue that banks can leverage in the future, including more traditional sources such as bill pay, mobile deposit, PFM and security services along with less traditional features such as expedited payments, credit scoring, gift card issuance, insurance quotes and even integrated retail bar-code scanning and bank product cross-selling.

Based on preliminary estimates, close to $100/customer annually can be generated mobile enhancements as shown below. According to Wilcox, "I believe services such as expedited payments take a proven model and revenue stream and make it more convenient on the mobile banking app. In addition, many of the other revenue streams place a value on customer convenience and integrate products that the customer already purchases through other channels such as gift cards, insurance, etc. I think we have only scratched the surface here." Sievers added, "Integrated services like those provided through Fin.X have the potential to transform mobile banking into an institution's most profitable channel."

• Bill Pay: $20
• Online Account Opening: $15
• Merchant-Funder Rewards/Offers: $15
• Enhanced P2P: $6
• Credit Scoring: $8
• Gift Card Issuance: $12
• Insurance quotes/Referral Revenue: $15
• Cross-Selling: $7

Initial mFoundry Fin.X Partnerships

The following is a sampling of partnerships announced last week my mFoundry to be included in their Fin.X cloud-based partnership solution.

Blackhawk Network: Will offer digital and physical gift cards from hundreds of brand name merchants to smartphone users which can later be redeemed electronically.

Micronotes: Will deliver individually tailored and actionable promotions to a customer's smartphone using big data analytics and customer insight improving relevance, timing and offer delivery. 

WAUSAU Financial Systems: Will provide the convenience of mobile remote deposit capture (RDC) capabilities using WAUSAU’s Deposit 24/7 Mobile™ functionality. Institutions can choose from two additional providers of mobile RDC solutions as part of the Fin.X solution.

Dwolla: While mFoundry is already recognized as the company powering the biggest and most successful mobile payments program to date, Starbucks Card Mobile, this partnership allows for a low-cost P2P money transfer service and a real time alternative to ACH payments which can take 2-3 days.

Diebold: Will allow users to scan a Quick Response code on the ATM and enter an authentication code to initiate withdrawals and deposits without a card. The smartphone will be used as an authentication device, reducing the security risk associated with lost cards, stolen cards and skimming. 

"With mFoundry's new service, banks and credit unions can select as many, or as few, extensions as they want", according to Sievers. "We will be adding new partners into the ecosystem in order to create an even larger and richer offering."

Untapped Opportunity

The key to monetizing mobile banking is to aggressively move people from traditional channels to mobile. I asked Wilcox how banks should encourage customers to use the mobile channel when many banks have had limited success moving beyond getting early adopters to engage? According to Matt, he believes getting clients to handle their balance checking on the mobile device is still a huge initial opportunity that will build engagement over time. "Moving clients from the IVR or contact center to the mobile device is still a great opportunity", he stated. "I also believe banks have an opportunity to engage clients within mobile by removing the tie to online banking. We are only now seeing banks decoupling these services, with those banks doing so realizing a larger growth in adoption."

Sievers added, "The future of mobile banking is how you generate more revenue for the financial institution. It's not only about saving money since mobile banking pays for itself. It's about making the channel a revenue generating tool."

Additional Insights

1. Monetizing Mobile: How Banks are Preserving Their Place in the Payment Value Chain (KPMG 2011)

2. New Research Reveals Untapped Market for Mobile Banking Among Offline Customers (Fiserv, 2009)