The Flaw in Omni-Channel Banking, Why Bi-Direction Channel Banking is Next

Just when you thought you had the evolution of banking channels figured out I am here to explain the flaw in the latest evolution of banking channels; omni-channel banking.

The progression of banking channels has evolved from credit union and bank focused to being about the member or customer experience. From a single banking channel (inside out), which involved an in-person visit to the credit union or bank to omni-channel (outside in) which is designed to allow the member or customer to access banking services and products using multiple channels, in a seamless and consistent manner.

Here is the problem. Successful implementation of omni-channel offers a member or customer access to banking products and services across and between multiple interactive channels in a customer focused seamless manner; but what happens when they encounter a problem? As much as self-service, automated processes, intelligent workflow and automated decisioning are designed to simplify and expedite a transaction, invariably problems occur that require communication or assistance from bank or credit union personnel.

You know the drill. You have a service problem and you know what happens next. You call your credit union or bank and get that annoying automated call tree. Once you finally get someone live you explain the problem and they say, “Just one minute, I will transfer you to Jane in the XYZ department”. Your call is transferred and you get a message saying, “All personnel are on the phone please hold”. After waiting on hold for 5 minutes listening to promotions you have no interest in hearing, someone answers the call and you again carefully explain the problem. After hearing your problem explanation the person says, “Sorry, but that is another department”, and promptly transfers your call. This time your call is immediately answered. For the third time you try to patiently explain the problem. The employee says, “So what are you trying to do on our website”? You respond, “I am trying to apply for a loan and a credit card”. “OK, I can help you, but I have to access two systems. Our loan system and our credit card system”. The conversation goes on-and-on and it is like the “customer is from Mars and the employee is from Venus”. There is a total disconnect.

Why? Because you and the employee are accessing different systems, seeing different information and even worse, the customer is accessing the customer facing interface while the employee is accessing the administration module.  It happens every day in retailing, banking, cable, phone, and most service industries, but it is changing, led by companies like Amazon and FedEx.

For a true low friction member or customer experience the customer/member support team must be able to access and view in real-time the path the customer has taken and have access to support data, regardless of the problem trying to be solved.  To accomplish that goal silos must be broken down, training provided, the user experience (UX) of banking systems must be consolidated, and what application architects and business analysts call the “non-happy path” must be incorporated into the system. When something goes wrong the best opportunity to solve the problem is if both parties are accessing the same system with the same data and error messages, not front-end and back-end systems.

Omni-channel banking is an important initiative, but it must move to what I call “bi-direction channel banking”. Omni-channel focuses on the member or customer experience, which is 50% of the solution. Bi-direction channel banking brings customers and the employees together on single user experience (UX) platform and completes the circle.

We know banking is complex and is driven by multiple banking applications. There is the core data processing system, payment systems, general ledgers, cash management, credit origination systems, credit servicing systems, online and mobile banking systems, account opening and the list goes on. How can a bank or credit deliver a single system view to both its customers and employees with all these different banking systems and applications?

Through a user experience platform (UX presentation layer) that uses an enterprise services bus middleware as an integration layer, connecting to the bank’s or credit union’s multiple banking systems.

Simple…… no but achievable, and replacing all those legacy banking systems is not an option for most banks or credit unions.  Instead of replacing core data processing systems and other critical banking systems, embrace them for what they do, process and manage transactions.

Using a UX presentation layer provides credit unions and banks a customizable solution displaying what and to whom information is displayed.  Within the presentation layer customized automated processes, intelligent workflow, business rules and automated decisioning can be incorporated, which allows each credit union or bank, regardless of their existing legacy systems to be able to develop their own solutions that fit their banking model.

In one of my blogs, “Do We Need Better System Integration or Fewer Systems to Integrate?” I argue Gonzo Banker’s position that rewriting all the bank’s systems into a single system is the right way to go. For all but the largest national and super regional banks, rewriting multiple systems into a single application is not viable.  

Multiple banking systems are a fact of life for credit unions and banks. The complexity, processes, external transaction networks and regulation involved in banking makes having a single banking system impractical. Instead of focusing on a single system, embrace what each of these individual banking systems do, …. process and manage transactions. The vast majority of banking systems were developed for internal back-end use by bank or credit union staff. As the transition from brick and mortar banking to digital banking has evolved, those legacy banking system have not evolved with the change. As a result, credit unions and banks are trying to deploy customer/member facing banking systems that were designed to be back-end employee facing systems.

By focusing on the presentation layer and integration middleware layer, banks and credit unions have an opportunity to maximize their investment in existing banking systems, while being able to deploy bi-direction channel banking using customizable user experience (UX) presentation/middleware platform.  In order to deliver a seamless customer experience credit unions and banks need to deploy technology, re-organization, processes and training that are externally focused while closing the loop so employees and customers are working from the same playbook. The future of banking is bi-direction channel banking, the next step beyond omni-channel banking.   

Why the Status Quo Must Change - What Banks Can Learn from Credit Unions

Credit union membership declined from June 30th 2013 to June 30th 2014 at 54% of all credit unions, according to NCUA data.  Median credit union membership was also down

0.4%. for the same period. Overall credit union membership grew 3.7%. Also, during the same period the NCUA approved 234 credit union mergers and 20 were closed by NCUA supervisory action. The number of credit unions is reducing by about three to three and a half percent a year.

The primary reason cited for credit union mergers according to the NCUA is to offer expanded member services.  U.S. financial institutions under a half billion dollars in assets have a difficult expense and income challenge, due in most part by non-existent economies of scale. As margins shrink, the mega banks get more efficient and technology demands and expenses increase, this challenge is going to become even more difficult to manage.

A look inside these numbers reveal what most industry analysis have been saying, the large get larger and the small are getting smaller.

Membership in credit unions with assets:

• Over one billion dollars grew 6.2% 
• Between half billion and one billion grew 4.3%
• Between 250 million and 500 million grew 1.5%
• Between 100 million and 250 million grew 1.4%
• Less than 100 million shrank by half percent.  

Only 7% of all credit unions, 456 out of 6,558 exceed a half billion dollars in assets. Long-term, even the best credit union executive management teams will be extremely challenged to operate viable credit unions under half billion dollars in assets unless they identify and serve a special niche and recognize that their ability to compete in the digital banking space will become more and more difficult. Credit unions must find a way to achieve greater economies of scale to reduce operational and technology costs. 

The chart below shows the inefficiency of credit unions as their size decreases.

What is an acceptable efficiency ratio target? There are several high‐performing credit unions nationwide that have set long‐term targets to move toward a 50% efficiency ratio. Cornerstone Advisors, Inc. recommends that all credit unions target at least a ratio below 70% and more optimally somewhere between 60 – 65%.

For comparative purposes, the operating efficiency ratio for all banks average 65%. Community Banks’s average efficiency ratio is 73%

Banks under a half billion dollars in assets face the same challenge as their similarly sized

credit union peers, the inability to achieve economies of scale to move their operational

efficiency to the level believed necessary to be able to compete long-term in the retail financial services space. Where banks have an advantage over credit unions is that 19% of banks (1,090) are over a half billion dollars in assets compared to only 7% of credit unions (456).  As of June 30th, 2014, there are 12,315 credit unions and commercial banks. Both are shrinking at 3% to 4% a year. Of the 12,315 financial institutions, only 12.5% exceed a half billion dollars in assets. 10,769 banks and credit unions have an asset based of less than half billion dollars. How do they continue to compete? Through cooperation and collaboration!

The most effective way to for banks and credit unions under a half billion dollars in assets to achieve economies is through a cooperative effort that provides technology solutions and combines back-office operations for multiple banks or credit unions. Credit unions have used with mixed results “credit union service organizations” (CUSOs) designed to provide either operational or technological economies of scale. CUSOs are generally non-profit entities that are owned in-part or wholly by the credit unions that use the CUSO’s services.

As a former executive of a core data processing CUSO I have seen the strengths and weaknesses of the CUSO models. Generally the most successful CUSO’s focus their services around transaction processing and transactional services, where economies of scale can be achieved. The less successful CUSO’s tend to focus on the development and deployment of their own proprietary technology solutions. 

Why are technology/software development CUSOs less successful? Software development, technology hosting, support, installation, data conversion and distribution is expensive and capital intensive, and generally cannot be spread over a large and diverse base of customers. A CUSO by its nature serves a limited number of credit unions. The limited number of credit unions is a catch 22. The capital required to fund a technology CUSO is too high for the limited number of credit unions and the CUSO needs capital to grow.

I believe the successfully CUSO model must adjust from being transaction orientated to being both transaction/back-end oriented and a technology aggregator. By combining transaction processing with non-proprietary technology solutions, CUSOs have an opportunity to deliver:

1. Lower back-office/back-end operational costs
2. Favorable technology pricing through aggregation and distribution

There is a CUSO network that has successfully moved towards a hybrid of this model, 

Michigan based CU Answers, Xtend and eDOC, who are all part of the cuasterisk.com brand, a network of credit union owned CUSOs. These three entities are headed in the right direction, although they rely on the development of their own technology solutions. Their primary market is smaller credit unions, however, the true value of this solution must be recognized by credit unions of all sizes. 

For this CUSO model to work, the CUSO must have strong and focused management with a clear mandate and vision. Too often CUSO boards consisting in-part or in-whole of credit union CEOs that own the CUSO, but have little knowledge about the business the CUSO undertakes. The result is they fail to establish a clear vision, set a clear mandate and metrics and fail to see the big picture, instead focusing CUSO management on their individual credit union requirements/expectations. My best recommendation to CUSO owners, hire qualified management team, hold them accountable and then get out of the way. 

Bankers and larger credit unions executives ask, “Why would I want to partner with a competitor”? Good question, and the answer are simple, “Survival”. The end isn’t coming today or tomorrow, but what about five or ten years from now? The consolidation numbers are real and are not going to slow down. In fact, I expect consolidation, mergers and acquisition to start growing at a faster pace. 

The time is quickly approaching when bankers and credit union executives must begin to consider alternative business models in order to remain sustainable. Back-office/back-end processing is a transaction commodity process that does not offer a sustainable competitive advantage. The right technology vision and solution mandate will allow common back-office processing, achieving transactional and back-office economies of scale while offering a customizable user and staff interface, workflow, business rules and data analytics  that can be customized by each credit union or bank without adversely affecting the technology platform and follow-on upgrades. Think of Salesforce and similar SaaS platforms that are customizable and unique to each company, but still run on a common platform in a cloud environment.

Survival of banks and credit union under a half billion dollars in assets may be dependent upon them competing on the front-end and cooperating on the back-end.  

What is the triggering event that will cause banks and credit unions to examine and take action on this idea, or is the inertia so great that it is like a frog placed in cold water that is slowly heated a boil? 

What is the water temperature at your credit union or bank?