Navigating innovations in

Navigating innovations in
Retail banking

Agenda Implications of the changing landscape
Business model innovations to rebuild the bank New Markets services

An industry undergoing fundamental changes
Changing customer behaviors Customers have changed their banking behaviors, demanding a better total experience (greater convenience, service, and products dedicated to their needs) Threats from new entrants New competition from non-bank institutions threaten banks’ payments business The industry faces significant macro challenges Retail banking positioned for disruptive innovation

A shift in the relationship between consumer/ financial providers
Technological developments and changes in customer behavior and expectations along with failures and other priorities of traditional players set the ground for new approaches in many industries The days in which banks were the only provider for banking products are over. In today's environment, even start-ups are trustworthy enough for customers to commit their money A variety of new players now compete to become part of customers' financial habits. Announcements by large Internet companies such as Google, Amazon, and Facebook engaging in payment or account management have shaken the industry New competitors draw heavily on emerging changes in customer expectations and behaviors as well as new technologies, thereby challenging the influence of traditional bank touchpoints Customer relationships, technology, new touchpoints, and the competitive landscape are changing the future of retail banking Source: AT Kearney, “Inside tomorrow’s retail bank,” 2012; New Markets analysis

Changing customers behaviors
Retail banking channel interactions 2016 estimates Internet, mobile apps, social media, and other such innovations are no longer special, and have become the new normal Customers are becoming hyper-connected, using multiple channels to meet their various financial needs It is inevitable that banks need to integrate these technologies into their channel strategy to meet customers demands Mobile 20-30 times per month Web/Tablet “screens” 7-10 times per month Call center, IVR & voice response 5-10 times per month ATM 3-5 times per month Branch 1-2 times per year Source: Bank 3.0; New Markets analysis

Customers taking greater control of their banking relationships
Customers are more likely to use other banks 50% of customers have changed or are planning to switch banks The majority (58%) of customers use multiple banks Customer advocacy, leveraged by social media, is gaining power 37% use online personal networks/trusted communities as a source of information on banking products Customers want to play an active role in tailoring their products and services 68% are willing to provide their bank with more information if this leads to greater personalization or better service Customers want better value and improved services Sensitivity to fees and charges is the single leading driver of customer attrition Customers want to see improvements to fundamental services they expect to work perfectly, not only within branch networks but also with other channels Source: Ernst & Young, “The customer takes control: Global consumer banking survey 2012”; New Markets analysis

Mobile banking usage increasing sharply
Source: Bain & Co., “Customer loyalty in retail banking,” 2012

Four phases of behavioral disruptions
Where we are now Source: Bank 3.0

Competitive threats from new entrants, especially within payments
Disruptive technology New distribution model Mobile wallet Google’s Virtual wallet Apple’s Passbook Visa’s V.me Square wallet P2P payments Paypal Fiserv’s Popmoney Social media Dozens of crowdsourcing platforms (from both banks and non-banks) Retail store payments system Walmart & American Express’s Bluebird prepaid debit cards Source: New Markets analysis

Digital payments posing serious threats to banks
Some big banks sneer at newcomers, arguing that the technology involved in adding a card reader to a phone can be easily replicated However, the innovation has less to do with the device reader than with a business model that has made a huge difference to costs involved in accepting credit-card payments Rapidly overturning a lucrative merchant acquisition industry Source: The Economist, “A wealth of wallets,” 2012

Banks start to react to these new competitors
Innovations in digital payments are forcing big banks and the credit-card networks to respond in kind, either by teaming up with the innovators or building their own competing systems Citigroup is working with Google, currently the only bank to have its card in the Google wallet JPMorgan Chase has built its own network to allow people to make payments by , using their phones or computers Barclays recently introduced a similar system to Chase’s in Britain Source: The Economist, “A wealth of wallets,” 2012

Other macro challenges
Regulatory Higher consumer protection laws focused on reducing fees and increasing transparency (Dodd-Frank, CFPB, etc.) New regulatory oversight costs, increased capital requirements, and direct fees to cover federal intervention (Basel III, Durbin Amendment, etc.) Macroeconomics Extended low interest rate / Net Interest Margin environment Slow economic recovery Longer-term worries about inflation Source: Booz & Co., “Capturing growth in US retail banking”; New Markets analysis

Retail banks are in a position to innovate in response to growing challenges
Opportunities Changing banking behaviors of customers Erosion of brand equity and consumer loyalty New technologies that allow financial functions to take place outside the traditional branch network Regulations that reduce revenue growth Integrate and deliver excellent customer experience across channels Build more holistic profiles of customer needs and wants Deepen customer relationships and leverage points of impact Source: New Markets analysis

Business model innovations to rebuild the bank Integrate multichannel models Build holistic profiles of customers Deepen customer relationships New Markets services

Breaking down the silos
Innovations in retail banking over the past few decades typically have been launched and maintained in silos—each with its own sales and distribution model, technology, and operational infrastructure The invention of the electronic demand deposit account decades ago triggered a revolution in retail banking This was soon followed by innovations such as the ATM, credit card, floating-rate mortgage, home equity line of credit (HELOC), and various personal lending products Each innovation was generally launched and maintained within its own silo, leading to the operational models that we observe at US banks today But customers do not use channels or products in isolation of one another Banks need to rebuild the organizational structure, create a total customer experience, and better serve customers when they need it “If the institution were to step back from the day-to-day operations and actually look at how a customer interacts with them, they’d realize that from a product, process and channel perspective, the customer is totally agnostic. They just want to get their banking task done…” Brett King, Bank 3.0 Source: PWC, “Getting to know you: Building a customer-centric business model in retail banks,” 2011; New Markets analysis

Three institutional challenges
Personal incentives Each product line operated in a silo and used to be profitable Consolidation meant lost jobs and, potentially, a reduction in job responsibilities and authority of business-unit leaders Few institutions had the courage to invest in the system integration efforts needed to gain an enterprise-wide view of the customer. Instead, they focused resources on improving the product experience and introducing new product variations and features to support revenue growth Integration complexity Consolidating the technology platforms and operations of multiple product lines is a highly complex process that is fraught with execution risk Designing shared processes, workflows, forms, and technology necessitates reconciling the diverse and often conflicting business and technology requirements of various product groups Individual business units lose absolute control over the product-development process in a multi-product, customer-centric world Organizational structures Product-line investments, revenue, and cost allocation models typically do not support multi-product or entity-level projects that might improve operational efficiency and organizational profits Instead, incentives tend to be tilted toward funding and implementing projects within silos, thus driving the market share and profitability of each silo rather than of the organization as a whole Source: PWC, “Getting to know you: Building a customer-centric business model in retail banks,” 2011; New Markets analysis

Business model innovation
Integrate multichannel Customer centricity Build holistic understanding of customers Deepen customer relationships

Why the need to integrate channels
Customers change their banking behaviors “Alternative channels” – online, mobile – are increasingly becoming the main touch points Yet, banks fail to meet customers’ expectations on the online and mobile banking channels

Defining true multichannel banking
True multichannel banking provides a rich set of products and services to customers in a seamless and always available fashion across all channels Consistent customer experience Appropriate levels of support All channels available at any time of day All channels able to deliver a satisfactory interaction Source: McKinsey, “Banking on multichannel,” 2010

Branch at the core of multichannel networks
Source: Capgemini, “World banking report,” 2011

The changing role of branches
Branches will not disappear, but their current main role must end and shift to a new role and form Branches will be designed differently. They’ll be smaller, and fit into typical retail footprints. There will be fewer free standing branches (less need for large branches with drive-ups) Branches will be staffed differently. There will be greater utilization of universal staff who can handle sales, service and transactions — we won’t need as many tellers Branch managers will need improved market management skills. With fewer teller transactions, branches will be more like sales centers, and this means greater micro-market knowledge and calling skills to improve trade area sales penetration Banks will implement tighter cross-channel integration with hub branches and call centers, especially for expert support and customer advisory functions. Leading banks are already experimenting with video conferencing and similar technologies Successful financial institutions will have more robust front-line relationship management technology to enable staff to deliver better customer service, stronger profitable cross-sell, and achieve greater share of wallet Source: PPC Group, “The changing role of branches,” 2010

Elements of multichannel banking are available, but few banks manage to link them seamlessly
Source: Bain & Co., “Customer loyalty in retail banking,” 2012

Integrating multichannel essential to excellent customer experience
Source: McKinsey, “Banking on multichannel,” 2010

Roadmap to channel management (1 of 2)
Source: Deloitte, “Evolving models of retail banking distribution,” 2008

Roadmap to channel management (2 of 2)
Source: Deloitte, “Evolving models of retail banking distribution,” 2008

Case study – Value proposition through multichannel in France
La Banque Postale has developed a “Choose the way you bank” approach, offering the client the opportunity to select his preferred way to interact with the bank Remote vs. branch-based Dedicated vs. non-dedicated relationship managers Turnkey vs. self-service offers Caisse d'Epargne Rhône Alpes promotes a new banking relationship through its monbanquierenligne (“My online banker”) offer with a dedicated advisor accessible remotely during extended hour BNP Paribas offers a similar value proposition with its Internet branch combining direct channel for daily relationship, and branch access for services requiring a more specific expertise Source: Oliver Wyman, “Multichannel banking: Unravel complexity to turn ambitions into reality,” 2010

Case study – Branch of the future model
The conundrum facing most banks is that even as their customers make less use of branches for everyday transactions, the banks have yet to find an equally good way of drawing in new customers and doing more lucrative business with existing ones Citibank is piloting banking’s versions of Apple’s stores At the centerpiece of the Citi’s branch of the future is a huge, interactive media wall displaying local weather, news and financial updates There is also a touchscreen “Planning Table,” a series of interactive “Work Benches” and a digital “Service Browser” where customers can cruise Citi’s products and services If a customer needs service, they can head over to the “360 Station,” a concierge-style rotunda Customers can also opt for a live video conference with a remote Citi specialist Source: The Economist, “Bank branches: Withering away,” 2012

Case study – Physical infrastructure from online banks
Online banks are trying to build a physical infrastructure to supplement their online offering ING Direct’s new 17,000-square-foot facility is not a branch but a cafe and community center where every staff member is trained to make lattes, answer questions about checking accounts and mortgages, and work the call center on the top floor Instead of a tellers' window, there's a bar that offers Peet's coffee, pastries, cold sandwiches and salads - all from local vendors, so of course there are vegan options Although there is an ATM on site, employees cannot take or dispense cash for banking purposes. They will help customers open an account, but they won't do it for them because ING is "a self-service operation" In the basement are meeting spaces equipped with iPad-controlled audiovisual equipment where small businesses and nonprofits can hold gatherings for up to 40 or 50 people at no charge

Why the need to build holistic profiles of customers
Transition from an organizational/product to a customer view of the portfolio Develop products and services that matter to customers Figure out whom to target and how to market offerings Differentiate offers in an increasingly competitive environment Connect the dots between customer value and sustainable ﬁnancial performance Attain top-of-wallet status with customers Source: PWC, “Experience radar 2013”

Integrating data across channels essential to building holistic profiles of customers
Source: PWC, “Getting to know you: Building a customer-centric business model in retail banks,” 2011

Integration around the customer
Key considerations: Capturing and analyzing the right customer data Understanding customer needs throughout their life cycles Source: PWC, “Getting to know you: Building a customer-centric business model in retail banks,” 2011

Capturing and analyzing the right customer data
Capturing the right data exposes significant information about customers’ purchasing habits, financial needs, and life stages—all factors that drive their expected purchasing decisions Gaining insight into the dynamics of a customer’s household is as important as knowing and meeting the needs of the individual Source: PWC, “Getting to know you: Building a customer-centric business model in retail banks,” 2011

Encouraging holistic customer understanding to meet their needs throughout their life cycles
Key considerations: Assumptions should be based on historical customer data (e.g. likelihood that a customer will adopt a product, average duration they will hold the product) and external market data (e.g. probability that interest rates will rise or fall in the next 10 years) Start with one year of historical data and refine the model each year as more data is collected. During the first few periods, it may only be possible to use the data on a relative (rather than absolute) basis Over time, the assumptions that were used initially can be replaced with actual historical information, creating a more accurate and refined model Source: PWC, “Getting to know you: Building a customer-centric business model in retail banks,” 2011

Challenges Too much data
In 2009, U.S. banks and capital markets firms collectively had more than 1 exabyte (or one quintillion bytes) of stored data Lack of understanding among executives of what big data is, and how to use it Source: The financial brand, “Big Data: Big opportunity in banking?,” 2012

Best strategy is to start small to build an enhanced customer profile
Source: The financial brand, “Big Data: Big opportunity in banking?,” 2012

Case study – Citigroup starting small with card transactions data
In Singapore Citigroup keeps an eye on customers' card transactions for opportunities to offer them discounts in stores and restaurants If a customer who has signed up for this service swipes a credit card, the system can look at the time of day, the location and the customer's previous shopping or eating habits If it finds that he enjoys Italian food, it is almost lunchtime and there is a nearby trattoria, it can send a text message offering a discount at the restaurant That may give the bank a second transaction and a cut of the extra spending The model for this is Amazon's online store, which recommends items that a customer might like based not only on what he has bought previously but also on what similar customers have bought Source: The Economist, “Crunching the numbers,” 2012

Case study – RBS Citizens leveraging analytics for better customer services
For RBS Citizens, mining big data and leveraging analytics play a vital role in customer retention Citizens employs a variety of proprietary and third-party tools and technologies to facilitate the sales process and to monitor client effectiveness, client usage and client satisfaction This constant interchange of information enhances the customer experience and bolsters customer loyalty by improving efficiency on their end Efficient data mining allows RBS Citizens to be more customer-focused and to develop solutions based on market intelligence and data that tells what the customer wants, not what the bank thinks they want Harnessing customer data also helps identify clients that could benefit from efficiencies, streamlining operations, consolidating banking relationships, and improving the management of their payables and receivables Source: Banktech, “With big data comes great responsibility,” 2012

Case study – Lloyds leveraging analytics for personal financial management
Using the data can help banks offer something genuinely useful to their customers Britain's Lloyds Banking Group is thinking of tweaking its systems to tell customers not just how much money is in their accounts when they ask for a balance, but also how much they will have available once all their usual bills are paid The bank has deep and rich information about customers that can be used to give them (the customers) better insights, rather than just providing the system with internal data to improve risk management Source: The Economist, “Crunching the numbers,” 2012

Case study – Competition from other financial institutions with better usage of customers data (1 of 2) Even as big data are helping banks, they are also throwing up new competitors from outside the industry One such firm is ZestCash, which provides loans to people with bad or no credit histories The big difference between ZestCash and most banks is the sheer quantity of data that the firm crunches Whereas most American banks rely on FICO credit scores, thought to be based on variables, such as the proportion of credit that is used and whether payments have been missed, ZestCash looks at thousands of indicators. If a customer calls to say he will miss a payment, most banks would see this as a signal that he is a high risk. But ZestCash has found that such customers are in fact more likely to repay in full Another useful signal is the length of time customers spend on ZestCash's website before applying for a loan ZestCash's customers are not typical bank customers because of their poor credit histories. Most would normally use payday lenders The firm is achieving defaults of well under half the payday industry's average of 40% Source: The Economist, “Crunching the numbers,” 2012

Case study – Competition from other financial institutions with better usage of customers data (2 of 2) Wonga, a British start-up that offers loans for very short periods, also looks at a plethora of different data sources, such as -address and social-network sites, to make credit decisions on the fly Another firm, Cignifi, digs deep into mobile-phone records, crunching variables such as the time when calls were made, their frequency and the whereabouts of the callers for clues about their propensity to repay loans Tesco, a large British retailer, collects enormous amounts of data on its customers' shopping habits that allow it to send precisely targeted coupons When a household starts buying nappies, signaling the arrival of a new baby, Tesco usually sends discount vouchers for beer, knowing that the new father will have less opportunity to go to the pub The firm also has banking ambitions. It already offers credit cards and loans and plans to introduce full bank accounts Given the depth of its databases, it may well assess the creditworthiness of its customers on the basis of their grocery shopping Source: The Economist, “Crunching the numbers,” 2012

Why the need to deepen relationships with customers
Decreasing revenue due to restricting sources of fee income Much more expensive to pursue new accounts than to expand current relationships Lack of opportunity to drive non-bank consumers to the door Banking products increasingly perceived as commodities

Current models not effective to encourage cross-selling products
The average cross-sell metric for banks stand at a low 4.6 product categories per household, compared to a theoretical maximum of 13 Source: McKinsey, “Back to the future: Rediscovering relationship banking,” 2010

The irony in relationship banking
Banks already have access to more information about their customers than firms in almost any other industry Many have built sophisticated data warehouses to collect and analyze this information …But far fewer have used this information to proactively understand customer behavior in order to make offerings that can expand and retain key relationships More than 80% of respondents who experienced a major life event were not contacted by their bank However, 70% of those who were contacted liked the experience A framework for building enduring customer relation Create a customer-relationship business model Develop and utilize deep customer knowledge Segment customers by lifestyle Build a customer value metric Understand the evolving needs of individual customers Create relationship-based services and pricing Source: Deloitte, “Rebuilding the relationship bank: Delivering a complete customer experience,” 2009

The new business model: Context is king
Many day-to-day banking products are highly contextual Mortgage (at a potential home or with a realtor) Car lease or loan (at a car dealership or when purchasing a car) Credit card (potentially at a mall, or getting ready for a trip overseas) Travel insurance (when booking a holiday, or at the airport) Student loan (when enrolling at college or university) Relevance comes as a key driver Customers want to get a deal, but banks have to make it quick, simple, and fast to executive The opportunity lies in using the existing data and extrapolating a customer opportunity with respect to banking Banks need to influence customers at points of impact to be relevant in their day-to-day financial needs Source: Bank 3.0

New customer’s expectations
Source: Council on Financial Competition, 2010

Not focusing on points of sale, but on points of impact
The point of impact goes beyond simply the point of sale. It includes wherever the sales journey might be initiated with a possibility of closure Location-based Need-based Distributed utility Points of interaction Points of impact Point of impact selling strategies Source: Bank 3.0

Leveraging analytics to predict selling or trigger offers
Examples of event-triggered offers Event type Event Event description Significant balance change Investment needs Customer’s account holdings increased by large or significant amount Lead delivered to banker next day who contacts customer with offer (e.g., financial planning appointment) Large transactions Withdrawals/ Deposits A transaction out of the ordinary for that customer Lead delivered to banker next day who contact customer to identify and fulfill changed needs Personal tax loans Redraw request/ Payout request Call center receives request for redraw or payout Term deposits Renewals/ Upgrades Maturing lead delivered to relationship manager RM contacts customer to renew or increase deposits, e.g. offering better rate through a structured product Home loans Fixed rate rollover Banker contacts customer to offer various options, including home equity line of credit, draw down, etc. Source: Bank 3.0

Meeting customers’ wide range of financial needs
Source: Council on Financial Competition, 2010

Other opportunities to expand existing customer relationships
Insurance Workplace banking Loans Mortgages Personal financial management services

Case study – Big banks just starting to connect to customers beyond the traditional channels

Business model innovations to rebuild the bank New Markets services

Key strategic questions
What is our business now? How can we define the market opportunity by looking at what consumers really need, vs. what we traditionally sell? How can we increase our power in the retail banking ecosystem? How do we make ourselves indispensible to our merchant partners? How do we re-define the playing field to end commoditization? Are we a provider of integrated solutions or a supplier to the integrators? How does that affect our sales and marketing approach? While we change our business model, will we help our customers change their business model too? What new markets are opening up due to all this change? How does our heritage give us an advantage in this new world?

Embrace a process that creates customer-centric solutions, driven by clear strategy
Develop consensus about your current situation, your present strategy, baseline knowledge, and key upcoming decisions Undertake primary, qualitative research with target customers to see the world through their eyes Rigorously define the challenges these customers grapple with, and create total solutions that put you in a competitive class you can own Develop business plans focused on mitigating key risks, validating success drivers, and rapidly reaching milestones that improve odds of success Reduce risk before investing for scale Avoid false precision in financial estimates. Focus instead on “what you have to believe” financial assumptions and achieving certainty behind those assumptions Explicitly link near and long-term decisions to underlying strategy Throughout – Work cross-functionally to make the process consensus-building from its inception. Strategic change works best when it is a collective endeavor

Our view on the pattern of success
Think first about the banking jobs consumers and their households are trying to get done Only later view the opportunity through the lenses of your firm Put together total solutions for these needs, potentially encompassing a range of products/services, how those are sold, and the profit formula used to monetize their value Relentlessly focus on target customer types and circumstances Create a business planning process that allows for fast iteration, in the style of good entrepreneurs Drive decisions from over-arching strategy Understand the scenarios for industry evolution, your leverage points to shape the future, and how your actions in individual functions/business units affect those leverage points

New Markets qualifications
New Markets’ Managing Director Steve Wunker created one of the world’s most successful mobile commerce firms, Celpay The company targets African nations where electronic payments are scarcely penetrated Celpay focuses on the B2B market, such as paying for a truckload of soda delivered to a bustling city market Its systems encompass not only transaction processing, but also order placement and financial reconciliation Through tackling a market under-addressed by banking incumbents, and through taking a holistic view of its clients’ needs, Celpay has come to transact over 5% of some of its host nations’ GDP through its systems It also has the distinction of being one of the only profitable mobile commerce ventures in the world We also have experience working with major regional banks on consulting projects in consumer research and strategic planning

Relevant services from New Markets
Light-touch counsel on strategy-shaping process Deeper involvement in strategy and solution creation Structuring of primary research and interpretation of results Business plan creation Facilitation of consensus-building meetings

Who is New Markets? Recent Clients
Experts in reframing market space and generating growth Senior experience Creative and pragmatic First-class consultants, thought leaders, and entrepreneurs

Our team’s publications have appeared in:

Contact Stephen Wunker Managing Director New Markets Advisors
245 First Street, 18th Floor Cambridge, MA USA Tel Fax

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