Tuesday, September 30, 2014

Why Omnichannel and Digital Banking will Not Succeed at Your Credit Union or Bank

Omnichannel and digital banking is such a massive initiative, how do credit union and bank executives get their head around it? There are so many parts, where do you start? Have you ever sat down to create a list of solutions today’s members/customers expect, or will soon expect from their credit union or bank?

Here is my list in no particular order. What have I missed?
1.    Data and ID security
2.    Easy but secure authentication
3.    Continuity of transactions, applications and services across all channels
4.    Online banking
5.    Mobile banking
6.    Personal financial management (PFM)
a.    Spending learning and predictions
b.    Expense tracking, tagging and management
c.    Retirement
d.    Budgeting
e.    Investment
f.     Education
7.    Online forms that adapt to the device accessing the form
8.    Process workflow
9.    Management defined business rules
10.  Automated decisioning - credit and accounts
11.  Electronic document management and signature
12.  Data aggregation and analytics
13.  Voice command recognition
14.  Digital assistant - predictive
15.  Digital credit origination - instant approval, access and funding
16.  Credit servicing (payments, balances, due dates, payoff balances, and remaining term)
17.  Digital account opening - instant approval, access and funding
18.  Account funding (ACH, debit card, credit card, PayPal)
19.  Digital account management
a.    Digital account-change records
b.    Digital account switching
c.    Digital account lockdown service to freeze access that freezes the account until a passcode and/or shared secret is provided
e.    Antivirus and spyware protection
f.     Onboarding program with quick-start guide
20.  Video - Skype, FaceTime, Online (PC, mobile and tablet)
21.  Call center
22.  Smart ATM
23.  24/7 message chat, email, text support, voice message
24.  Social media monitoring and contribution
25.  Abandoned application management
26.  Web, ATM, phone and branch reloadable pre-paid cards
27.  Prepaid ATM/debit cards with web, branch, phone and ATM reloading
28.  Real-time core data processing system (no end of day batch)
29.  Behavioral predictive analytics
30.  Real-time credit manager (regular preapproved credit offers and notification with instant approval and access)
31.  Push text notifications and verification
32.  Balance and event trigger notification
33.  Email and text rate updates/alerts
34.  Real-time money movement
a.    Send, receive, spend, save, mobile deposit, bill pay, photo bill pay, P2P, PayPal, wire transfer, app
35.  Personal banking portal
36.  Digital document vault
37.  Blogs and custom web content, personal finance microsites with information and tools for key segments such as
a.    College students/new graduates
b.    Empty-nesters
c.    Families with younger children
d.    High school students
e.    Middle school students
f.    Movers
g.    New homeowners
h.    Newlyweds
i.     Primary/elementary students
j.     Retirees
k.    Retirement planning
l.     Singles
38.  Account aggregation
39.  P2P lending
40.  E-statements
41.  E-Receipts
42.  Loyalty program and sweepstakes
43.  YouTube/Vimeo video - educational and product/service demo
44.  Teen/tween banking with parents
45.  Mobile app with youth UI
46.  Credit score and credit score enhancement
47.  Credit and ID theft monitoring and alerts
48.  No fee overdraft protection
49.  Customer relationship management (CRM) system
50.  Just in-time one off marketing/offer
51.  Secure charitable fund raising
52.  Exception management system
53.  Digital appointment tool for scheduling banker meetings
54.  Digital newsletter and newsletter archives
55.  iBeacon and digital fence
56.  Relationship pricing
57.  Relationship product packaging
58.  Investment club support
59.  A user interface that is shared by the member/customer and staff
60.  Online help functions
a.    Auto-response to all queries
b.    Form-based queries
c.    Departmental email addresses/phone numbers
d.    A forum where the community can help each other
e.    Site-search with filters
f.     Executive email addresses
g.    Video information/tutorials
h.    Context-sensitive HELP
i.     Demos (online and mobile)
j.     Virtual suggestion box

Head spinning? How can a credit union or non-national or non-super regional bank compete? How can they afford all these solutions? How can they evaluate all these solutions? How can they implement all these solutions while also knowing innovation and the resulting list grows daily? How do you plan for the next solution that you do not know is coming? Credit unions and most banks simply do not have the resources, expertise and capital to continue in what is amounting to the old arms race between the Soviet Union and the United States. 

So what can credit unions and banks that do not want to be merger candidates and want to survive do? The technology race to the top is not a winnable solution for most banks and credit unions. Out branching is not a winnable solution. That leaves a couple of choices:
  1. Develop a niche that is not reliant or expecting the latest technology solutions - You may not be their primary financial institution, but your niche is profitable and long-term sustainable enough to remain strong. A credit union or community bank in a small rural town is not a sustainable long-term niche. Walmart loves your market and demographic.
  2. Partner with other credit unions or banks to develop a technology strategy, roadmap, funding, R&D, hosting, implementation and support plan that serves each of the participating credit unions or banks.
Partnering with your competitors or with credit unions and banks outside your service area may seem like a scary and radical proposition. It is, but what is the alternative? Can your credit union and bank really stay on top of and fund the technology solutions members and customers expect? 

I have used this data in several of my blogs because it speaks to exactly what is transpiring today. The data is clear and the members/customers have spoken by their actions. According to the millennial disruption index study, Chase, Citi, BofA and Wells Fargo are among the ten least loved brands by Millennials. According to FICO's Forging Lasting Banking Relationships with Millennials, 68% of Millennials use Chase, Citi, BofA or Wells Fargo as their primary bank. Only 15% use a credit union and only 9% have a regional bank as a primary bank. More Millennials bank at national banks than any other generational group (55% for Gen X and 43% for Boomers). Why, because the big national banks have a digital strategy and are leading the market with the implementation of their strategy.

Credit unions and banks are losing the battle for the next profitable generation of customers, the Millennials. Millennials, 18 to 35 age bracket now make-up the largest age segment of our population, passing the baby boomers. If you don’t have a plan to meet their banking needs, then your credit union’s or the bank's future looks bleak because there are plenty of traditional and emerging non-traditional financial service providers that will. 

Are you ready to partner with other banks or credit unions? In addition to achieving technological economies of scale, another part of the plan can be to achieve economies of scale in back-office processing. Why do you want to own the technology and back-office processing? Because you always have? Instead, why not focus on marketing, front-end operations, brand, and differentiation through the service and support you provide. Just because technology and back-office operations are shared does not mean that the credit unions and banks that are part of the shared technology and back-office support team need to look, operate or execute the same as the other participants.

Lead with creativity, marketing and service and you will have happy members/customers and you will not have the burden of technology and back-office operations. 

Is there any doubt credit union and bank consolidation is real? Is there any doubt the NCUA and FDIC are encouraging through regulation consolidation of banks and credit unions. Industry experts forecast that in 15 years the number of remaining banks and credit union could be reduced by as much as 50%. What is your credit union's or bank's plan to be one of those remaining credit unions or banks? 

"United we stand, divided we fall", Aesop. "Innovation is taking two things that already exist and putting them together in a new way", Tom Freston. Wise words or blasphemy?

Agree or disagree with this proposition? Why? Is it workable? What are the problems? What would stop its implementation? Pipe dream or viable solution of the future?    

Tuesday, September 23, 2014

Do We Need Better System Integration or Fewer Systems to Integrate? (Gonzo Banker)

I read an article ”Do We Need Better System Integration or Fewer Systems to Integrate?” by Terence Roche, co-founder of Cornerstone Advisors and contributor to Gonzo Banker. In the article he says, “If I were to go to most bankers today and ask them what one thing they would do to improve their systems environment, a large number would say better integration of the systems they are using. Ten years ago, if I had asked them that same question, the majority probably would have said - hang on to your hats here - better systems integration. Despite a lot of focus on middleware, application programming interfaces (APIs) and other tools, this issue has never stopped being top of mind with system users.”

He goes on to suggest that the solution is not better system integration, but rewriting systems following the design principle of other industries - customers and employees use a common system and the front-end experience is the start point? He cites Amazon, Uber and FedEx as examples of other industries to follow. 

I accept the author’s premise that banking systems need to be built around the front-end member/customer experience first and then the back-end that credit union and bank employees access and use to support the member/customer. From that point forward I will argue the opposite as it relates to the solution he proposes, rewriting the many banking technology solutions into a single platform. 

He rightly points out that back-end banking systems (their core processing systems) were written 20 to 40 years ago and are based on antiquated technology. They were designed before self-service or member/customer facing solutions were even a twinkle in the eyes of the developers. They were batch systems designed to process transactions. 

Unlike Amazon, Uber or FedEx, the level of innovative solutions (third party and homegrown), complexity, high level of expertise required to create and deliver these solutions and the ongoing regulation that must be overcome is limited, compared to what banks and credit unions face.

To expect a company with a single banking technology platform to develop, deliver and support all the technology solutions to meet the needs of their customers, regulators and employees is not practical. There are several core data processing companies that have gone down that road with very limited success. 

Why not build a single member/customer and employee user interface (UX) platform that accesses all these diverse systems and databases and let the diverse systems and databases do what they do best, process transactions? The result is a single member/customer and employee UX with integration to all of the credit union’s/bank’s front-end, back-end systems and supporting services. How data is input, retrieved and used would be dependent upon how the credit union or bank design their user interface (UX). Designed around business rules, workflows, and decision matrixes, this UX using today’s technology can be built around drag and drop and customization menus. Work that can be done not by credit union/bank IT programmers, but by the new banking team of the future:
  1. Data analyst - Google has even created a new name for this position, Data Scientists
  2. User experience designer - Must be able to tell your story in a simple and in an intuitive way
  3. Algorithmic risk specialist - Identifies risk through multiple data sets without requiring input from the users
  4. Predictive analytics - Provides services, solutions and expected responses at just the right time, "the magic second" of opportunity.
  5. Behavioral psychologist - Must understand your members or customers, their desires, buying and behavioral patterns. The future of bank marketing is behavioral patterns not demographic profiles
  6. Social media expert - The person that develops the message and engages your members and customers
The sheer complexity, services integrations and number of technology front-end and back-end banking systems make a single rewritten system with the required specialization and ongoing regulatory compliance almost impossible. A single system is a utopia that will not happen.

Credit Unions to their credit are actively designing a standard interface protocol “Credit Union Financial Exchange” (CUFX) led by the CUNA Technology Council that will help facilitate integration between technology solutions. A UX platform integrated with the credit union’s or the bank’s front-end, back-end and outside services have a much higher probability of success and is a realistic goal to achieve omnichannel implementation than a rewritten single technology platform.

For your enjoyment, a fun cartoon about and OmniChannel Banking. It hits the mark. 

Thursday, September 18, 2014

Putting the Digital Banking Puzzle Together

Digital banking is a relatively new term that encompasses ATMs, mobile banking, online banking and has expanded to include essentially all banking channels except for the branch. Like most iterations, digital banking started as a single solution, ATMs, but really gained traction as a term when online banking and mobile banking were introduced.

The result of this iterative process has been the implementation of a "collection" of technology solutions that are intended to allow credit union members and bank customers to digitally interact conveniently and effectively with their financial institution. Let's call this Digital Banking 1.0

Problems with Digital 1.0 are abound. The first problem is a lack of strategic planning and thinking as the new technology solutions and channels were introduced. The agenda and digital innovation are being driven by the major national banks that either have the resources to develop the technology or have acquired the technology. Everybody else is following, trying to keep up. As a result, there is no digital strategy, it is all reactionary, and digital implementation is a hodgepodge of disconnected solutions.

I was having lunch yesterday with a couple of friends and a discussion about banking began. How exciting I must be as a lunch companion. A question was asked, "Who has an account at a credit union or small bank?" They are both in the millennial generation and confirmed that they both have an account with either a credit union or small bank. I asked, “do you also have an account with a major national bank?" Again they both said they do. I then asked, “who do you prefer to do business with?" They both expressed a preference to for their credit union or community bank; however, both of them almost exclusively use the major national bank. I asked why? They both said, "Because they make it easy to do business with them." 

The credit union and community bank were their preferred financial institution because they provided better loan and deposit rates, better in-branch personal service, and they knew their names, but at the end of the day that is not enough to win their business. Why, because it is not easy enough to do business with the credit union or community bank. Both are relatively new to the Atlanta area. When they moved, their big national bank made the transition easy. To this day, neither one of them have set foot in their new branch locations. The lack of a comprehensive digital strategy sent these two high value customers to a large national bank.

This was a chance discussion, ............how often do you think this happens every day? The data is clear, according to the millennial disruption index study, Chase, Citi, BofA and Wells Fargo are among the ten least loved brands by Millennials. According to FICO's Forging Lasting Banking Relationships with Millennials, 68% of Millennials use Chase, Citi, BofA or Wells Fargo as their primary bank. Only 15% use a credit union and only 9% have a regional bank as a primary bank. More Millennials bank at national banks than any other generational group (55% for Gen X and 43% for Boomers). Why, because the big national banks have a digital strategy and are leading the market with the implementation of their strategy. 

It is past time for credit unions and banks to move into Digital Banking 2.0. You have lost
tremendous ground to the big national banks when it comes to the next generation of most profitable banking members/customers. It is not too late, remember they want to do business with credit unions and smaller banks; you just have to win their business by making it easy and convenient to do business with you.

How do you make it easy and convenient to do business with you?
  1. By making digital banking a highest priority
  2. By developing a digital banking strategy
  3. By allocating the resources necessary to implement your digital strategy
  4. By mastering social media communication
  5. By treating digital banking as its own P&L channel, and not a channel to drive members/customers to the branch or call center
  6. By quite asking the question was is the ROI. That is simply a question to stop moving forward. By the way, Forrester analysts have developed a concrete ROI for mobile banking of 15.7%, if that information helps you feel better
The first step is to assign or hire a digital banking executive to lead your credit union or bank into Digital Banking 2.0 

Tuesday, September 16, 2014

Credit Union’s and Bank’s Race Against Digital Darwinism

Digital Darwinism is a fate that threatens most organizations in almost every industry. Because of this, businesses not only have to compete for today but also for the unforeseeable future. Digital Darwinism is the phenomenon when technology and society evolve faster than an organization can adapt. There are many reasons for this of course. Every fabric of a company is strained due to internal and external influences. The challenge lies amongst the very leaders running the show today. Their mission and the processes and systems they support today may already be working against them. The financial services industry is quickly dividing into two groups:
  1. Digital Leaders -  those financial institutions that have a digital strategy and embrace change
  2. Digital Darwin’s - those financial institutions that face distinction through the lack of adapting to change
Technology is now part of life among those who live an active digital lifestyle. Connected consumers or Generation-C  or Information Age Generation as they are often referred represents a growing subset of consumers as a whole. They’re simply more connected than everyone else. As a result, they’re more informed and empowered. And, their expectations, at the same time, are soaring. They demand attention, personalization, and efficiency… their way.  And, they require that your values match their own. This goes beyond expectations. This is about entitlement.

To compete, to thrive, requires new perspective…now. It also necessitates transformation of the digital and philosophical kinds. Time is ticking. As customers and employee behavior evolve and once your competitors set out to address them, you’re reactions and actions seal your destiny and legacy.

The answer to digital Darwinism is digital transformation. Digital transformation is the use of technology and methodology to address shifts in behavior by upgrading or overhauling processes and systems that amplify existing and unforeseen opportunities.

Sounds easy right?

The real story is that most credit unions and banks aren’t ready to face this challenge. Turmoil exists inside as CIOs wrestle with existing roadmaps and managing legacy departments. Managers manage against dated procedures skillsets. Marketing, sales and service teams are missing customer touch points and needs because they’re unaware of new windows or customer suppositions.

Investing in technology is not the answer. That’s a reflex or a tactic. Building upon the house of cards that is your existing IT infrastructure is also not the answer. Investing in digital transformation to earn newfound relevance is the goal and the solution.  Now’s not the time for a wait and see mentality. If the culture of your organization is risk averse, one that waits for others to take the first step, trust me when I say that first mover advantage is indeed an advantage.

Capgemini and MIT Sloan set out to learn more about the challenges that face organizations, leaders and what they’re doing (or not doing) to adapt. In the seminal report released in 2012, “Digital Transformation: A Roadmap,” the team found that all companies surveyed face common pressures from customers and employees and as such, digital transformation is now inevitable. Successful digital transformation as validated by the report does not come from implementing new technologies but instead from transforming the organization to take advantage of new possibilities that new technology provides.

Yes, it’s complicated, challenging, and terrifying.  But it takes courage in the face of VUCA, volatility, uncertainty, complexity and ambiguity, to not only solve problems but admit that they exist. It also takes vision to see a new direction and leadership to unite teams and show the way.

The key to digital transformation according to the report, is “re-envisioning and driving change in how the credit union or bank operates. That’s a management and people challenge, not just a technology one.”

Everything begins with fixing what may not appear broken today. Start by assesses the experiences your members/customers are having today and how their online and mobile behavior is affecting decision-making. Then, re-think and redesign your member/customer journey. Examine how the current infrastructure of your organization can optimize performance or where it hinders it. The answer lies in new technology, processes and business models.

So what’s the answer?

According to the report, executives are mindful when approaching digital transformation, recognizing that focusing on any one area would miss the point. Capgemini and MITSloan discovered that digital transformation is unfolding in three key areas: 
  1. Member/Customer experience
  2. Operational processes 
  3. Business models
The study also identified nine elements that defined each of the three pillars. They are as follows:
Customer Experience
  1. Customer understanding
  2. Top line growth
  3. Customer touch points
Operational Process
  1. Process digitization
  2. Worker Enablement
  3. Performance management
Business model
  1. Digitally-modified business
  2. New digital business
  3. Digital globalization
Successful enterprises pursuing digital transformation incorporated several elements, in their own way, as the building blocks for technology, process, and business model investments. Interesting, and not a surprise though, that no company in the sample had fully transformed or embraced all nine elements. Of course they haven’t. This is leadership not management and the vision required to move forward is as elusive as the leaders who will lead digital transformation.

To come full circle, the report also outlines the challenges facing organizations to take the first steps toward relevance.
  1. Lack of impetus rises to the top. Why change when the business is performing wonderfully as is? If the company is not experiencing pain, then it’s difficult to prescribe a painkiller. As the report notes, this skepticism often results in the investment of processes that prevent digitally focused experiments and ultimately business changes.
  2. Regulation and reputation rightfully plague certain businesses, especially those in financial and healthcare. There’s a piercing fear of regulatory sanction. At the same time, there are reputational considerations that may carry a far more devastating outcome should something go wrong. However, there is hope. The study found the companies here are evaluating digital investments based on four criteria:             
          i. Economics
         ii. Burning platforms
        iii. Strategic foundation investments
        iv. Low risk investments. Sometimes answers appear through every step you                  make, no matter how small.
  3. Missing skills can prove fatal if not addressed sooner than later. Many executives use “professional judgment” to make important decisions about the future. Their competitors however are harnessing the power of big data to embrace analytic-based decision-making. Social media, mobile, big data, are just a few of many technologies disrupting businesses. I refer to this as the “Wheel of Disruption.” New skillsets are required to understand new tech, bring about change from the top-down and also to reverse mentor from the bottom-up.
  4. Culture issues are often the chokehold of digital transformation. Sometimes, as the report notes, legacy leadership is part of the dead weight that prevents successful transformation and long-term viability. The best answer may in fact be to hire new leaders for their fresh perspective and the culture it can create. Successful enterprises also empower front-line workers to make autonomous decisions.
  5. IT difficulties are often lacking in infrastructure and capabilities.  Personally, I see this as a significant challenge and to address it requires that the IT function undergo an overhaul starting with mission and purpose. You can’t lead transformation against the current technology roadmap. With CMOs estimated to outspend their CIO counterparts, IT should replace the “I” for information with innovation. You cannot innovate, adapt, or thrive if you build on top of legacy systems that prevent true integration or at least match how employees and customers connect and communicate outside the organization. 
    One executive was frank on the subject, “We have through the last 50 years proliferated our IT systems and applications. We don’t retire systems. We just add on top of them, which creates a tremendous amount of expense and complexity.”
  6. Decision-making is slow, sluggish and often painful. Governance issues are rooted in the inability to get find and share actionable information across the enterprise. To do so requires changes in processes and decision-making enterprise-wide. Without a top-down approach, existing governance dampens the winds of change, thus creating coordination and collaboration issues. One group may solve problems but they cannot or will not collaborate with other units. The channel conflict is real and it must be addressed through an overarching, longer-term vision.
  7. Vision is commonly nearsighted. No two visions are equal as they are measured by distance and loftiness. Sometimes vision is incremental and not enough. As the study notes, “Unless senior executives establish a transformative vision of the future, managers in the rest of the firm will tend to locally optimize within their own spheres of authority.”
Challenges exist in every organization. It is how leadership addresses them now and over time that defines their fortune and legacy. This is not a time for the spaghetti theory where stakeholders randomly throw pasta on the wall to see what sticks. This is about an investment in transformation to meet or exceed customer and employee expectations at every step of their journey. It takes vision. It takes courage. It takes resilience. Without it, organizations will continue to make the same mistakes as they always have. 
Technology isn’t the answer; it’s an enabler.

The real value of digital transformation pays its dividends in the short-term, but its true prize is one that remains out of reach. The goal is to create a culture of empowerment, agility, innovation, and engagement. Technology is not the answer in of itself. Technology is a way of life and business. Its impact on society is only accelerating. If you do not adapt, you will fall to digital Darwinism. You are competing as much for relevance as you are market share. By re-imagining your company’s direction and how it works, technology (and people) become part of the solution instead of the problem. This increases revenue, cuts costs and improves competitive advantages.

Wednesday, September 10, 2014

How Apple Watch Will Change the Face of Banking

Credit unions and bankers, I have good and bad news for you with the introduction of
Apple Watch. The good news, your members/customers will have another way to interact with your credit union or bank. The bad news, your members/customers will have another way to interact with your credit union or bank.

Apple Watch introduces a whole new interaction channel, wearable technology. Just like the ATM, computer, mobile phone, and tablet; wearable technology is the next technology channel that your members/customers expect and will want to be able to use to interact with your financial institution. 

What makes wearable technology and Apple Watch in particular different, is the small display surface available on Apple Watch. Apple recognized this limitation and went back to the future to create a digital crown, similar in concept to the Blackberry roller-ball. Using the crown on the side of the watch allows interaction without covering the display surface. 

Call it a good start. The problem is Apple Watch is still highly reliant on manual scrolling and swiping to interface with the technology. That is a concept that is left over from the PC, mobile phone and tablet. 

Yesterday when Apple introduced Apple Watch it, was the "first generation". Remember the iPhone:
  • iPhone (1st generation)
  • iPhone 3G
  • iPhone 3GS
  • iPhone 4
  • iPhone 4S
  • iPhone 5
  • iPhone 5C
  • iPhone 5S
  • iPhone 6
  • iPhone 6 Plus

The first generation Apple Watch is undoubtedly going to be a long list of future versions of Apple Watch and other wearable technology solutions. What does that mean? It means reliance on manual scrolling and swiping to interface with the technology will evolve to voice, virtual assistant and behavioral predictive technology. For credit unions and banks it means another technology solution that must be incorporated into their channel strategy. A technology solution in which the rules will rapidly evolve.

It is exciting times for fintech providers and consumers, but I am not sure credit unions
and banks feel that same level of enthusiasm. The milestone marker just changed and many credit unions and banks are still trying to adjust to mobile technology. Moore's law suggests that the pace of technological change doubles every two years. 

Most credit unions and banks have not been able to fully assimilate the mobile space and the opportunity mobile presents. How are those same credit unions and banks going to handle wearable technology such as Apple Watch?
The fact is the pace of technological change and the costs associated with the technology is beyond the scope and capability of all but the largest national and regional banks. Credit unions and banks, ...... the walls are closing in on you and your corner is looking dark. How can you change the game and give your credit union or bank an opportunity to survive and thrive?      

Through cooperation. Technology solutions and non-member/non-customer facing operations do not have to be owned, controlled and executed by each credit union or bank. Credit unions and most banks simply cannot keep up with the technological change and the costs associated with technology solutions. Instead, a new cooperative entity needs to be created to handle all technology and non-member/non-customer facing operations. Through the use of shared resources true economies of scale can be achieved, but it must include both technology solutions and back-office operations in order to realize the full true cost savings. It may be radical thinking, but based on the prognosis for credit unions and banks, it may take radical action to change the paradigm. Sometimes radical surgery is required to save the patient.

The time to act is now. Remember Moore's law, the pace of technological change doubles every two years. You are already behind and you do not have time to wait before the next technological leap occurs.  


Tuesday, September 9, 2014

Now Hiring ...... The Banking Team of the Future

If you are the CEO or executive of a credit union or bank you are facing a rapid transformational change as a result of technology and the emergence of non-traditional financial service providers. Credit unions and banks are struggling to understand the impact of this new environment, and how to succeed. Combine these factors with increased margin pressure and consolidation and you have a recipe for credit union and bank opportunity and failure.

Is there any doubt that emerging technology and rapidly increasing and evolving member/customer expectations has and will continue to change the way banking is conducted? Do you believe that banking as we know it today will look the same in five years? If you answered "no" to either of those questions, then it is time to rethink your credit union's or bank's strategy. Your credit union's or bank's viability may hinge upon your and your executive team's vision; how to address the changing market conditions. It is time to reevaluate your vision, perspective and hiring to meet the revolutionary changes occurring and about to occur in the financial services market. 

If you believe technology is and will become increasingly more important to your credit union's or bank's strategy, one of the first questions you must address is, "how is your credit union or bank going to afford the technology resources required to compete?" Citi, BofA, Wells Fargo and Chase have the resources, but I can assure you, long-term your credit union or bank does not. 

One of the complexing statistics discussed in a previous article I wrote titled, "Who's on First? The Contradiction of Millennial Research", Chase, Citi, BofA and Wells Fargo are among the ten least loved brands by Millennials, yet 68% of Millennials use Chase, Citi, BofA or Wells Fargo as their primary bank. Only 15% use a credit union and only 9% have a regional bank as a primary bank. More Millennials bank at national banks than any other generational group (55% for Gen X and 43% for Boomers). Why is that the case if Millennials don't like the brand? 

The answer is simple, the four national banks have such a lead in technology implementation that credit unions and other banks cannot catch up. Who do you want to bank with, the original or a "copycat me too" provider that is 6 to 24 months behind? This is not good news for credit unions and most banks. You cannot afford the resources necessary to:
  1. Identify
  2. Purchase or build 
  3. Implement 
  4. Support/upgrade
the technology solutions nor can you catch up. Add to this to the fact that you cannot out branch the national bank's branch network and you have to ask, "how do you compete?" Price or a niche? Boutique banking? In my last article titled, "Credit Union and Bank Premature Death Proclamation" I identified a way credit unions and banks can compete. 

Through cooperation. Technology and non-member/non-customer facing operations do
not have to be owned, controlled and executed by each credit union or bank. Instead, a new cooperative entity can be created to handle all technology and non-member/non-customer facing operations. Through the use of shared resources true economies of scale can be achieved, but it must include both technology solutions and back-office operations in order to realize the full true cost savings. It may be radical thinking, but based on the prognosis for credit unions and banks, it may take radical action to change the paradigm. Sometimes radical surgery is required to cure the patient.

For those credit unions and banks that are ready to move forward, your hiring and team must change. The easiest step is identifying new technology solutions. The second easiest step is purchasing new technology solutions. Most credit unions and banks have handled the first two parts reasonably well. Implementation, that is a whole different ball game. Most credit unions and banks create a project team, identify a wish list, send out a request for proposal, review the proposal, purchase the solution, test the solution and then put it out to their members or customers. 

WRONG, WRONG, WRONG. Implementation is the most important part and the least effectively executed part of the equation. You see...... it is not about the technology. It is about what you do with the technology. If the same people that have been implementing and supporting your core banking and network solutions are the same people implementing your member/customer facing solutions you are doomed to failure. 

The team you need to hire today is very different than the team any credit union or bank has hired in the past. The banking team of the future must include experts that cover six different areas of responsibilities:
  1. Data analyst - Google has even created a new name for this position, Data Scientists
  2. User experience designer - Must be able to tell your story in a simple and in an intuitive way
  3. Algorithmic risk specialist - Identifies risk through multiple data sets without requiring input from the users
  4. Predictive analytics - Provides services, solutions and expected responses at just the right time, "the magic second" of opportunity.
  5. Behavioral psychologist - Must understand your members or customers, their desires, buying and behavioral patterns. The future of bank marketing is behavioral patterns not demographic profiles
  6. Social media expert - The person that develops the message and engages your members and customers
Radical, maybe. Logical, absolutely. What are you waiting for?               

Thursday, September 4, 2014

Credit Union and Bank Premature Death Proclamation

Your credit union or bank may not be walking dead, but may be on life support with the need for immediate attention. This is the second part of a two part blog, providing a solution to a problem all credit unions and community banks face. So how does your credit union or bank compete in today’s fast evolving financial services market? 

A major challenge credit unions and community/regional banks must overcome is how to achieve economies of scale without being forced into a merger or sale. Economies of scale, including the ability to quickly introduce technology solutions that will drive member or customer engagement, reducing operational costs and technology expenses.

The financial services market has undergone tremendous change over the past 10 years, which is only accelerating with new non-traditional banking entrants and technology innovation. As innovation and demand for customer facing solutions increase, so will the budget necessary to offer those solutions. As credit unions and banks continue to introduce complex products and product variations the operational costs associated with running a credit union or bank increase.

Credit unions and banks operate in a tightening margin business, with expectations of their members and customers that they offer leading edge technology solutions and new products, which increase operational costs. Economies of scale that the mega banks and large regional banks enjoy are not available to credit unions and community banks.

Unless this scenario changes, long-term credit unions and community banks face a bleak future, or they will need to identify small unserved niches, or be willing to meet only parts of their member’s or customer’s financial service expectations. These are not great options, so how can credit unions and banks change the emerging scenario? By thinking WAY OUTSIDE THE BOX.          

Credit unions and banks that do not want to be merged or acquired by larger credit unions or banks must find ways to achieve economies of scale. How? Through cooperation.

Cooperation sounds like it should be uniquely credit union orientated, but it does not have to be. Technology and non-member/non-customer facing operations do not have to be owned, controlled and executed by every credit union or bank. Instead, a new cooperative entity can be created to handle all technology and non-member/non-customer facing operations. Through the use of shared resources true economies of scale can be achieved, but it must include both technology solutions and back-office operations in order to realize true cost savings.

Technology solutions and the cloud environment have progressed to the point that shared resources do not mean services, products, or user experience need to be the same. Data does not have to be shared and policies do not need to be uniform. The opportunity exists with the right technology solutions and true committed cooperation to allow multiple financial institutions to share resources while remaining and appearing completely independent from each other.

Radical??? Yes, but the consequences of not adjusting your credit union’s or bank’s business model have been well documented. Credit unions have wandered into this arena on a limited basis. Is it easy, ........ no but what is easy that is worth pursuing. Now is the time to make it happen.   

Wednesday, September 3, 2014

Why Your Credit Union and Bank Are Walking Dead!

Chances are your credit union or bank is walking dead! To understand why, it is important to retrace U.S. banking history and regulatory change that occurred in 1994.

Throughout the history of the U.S. much of the world has deployed a banking system that is different than ours. Until the late 1900s the U.S. banking system was primarily an agrarian unit bank system, while a branch banking system was deployed throughout Canada, United Kingdom and Europe. In fact branch banking was not legal in many states until as late as 1993 and was highly discouraged by many other states through onerous regulation.  It was not until 1994 when most interstate banking prohibitions were repealed by the Riegle-Neal Interstate Banking and Branching Efficiency Act, paving the way for a nationwide branch banking model.

The “stated” goal of The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA) was the return to a balance between the benefits of a state bank charter versus a federal bank charter.  Among other notable changes, the Act stipulated that a federally chartered bank wishing to expand must first undergo a review of its Community Reinvestment Act (CRA) compliance. 

We can debate the real purpose of the IBBEA, but my opinion is it was to replace unit banking with branch banking, to pave the way for the creation of a limited number of mega banks and to help redistribute wealth in a stealth and politically palatable manner. IBBEA enabled the very thing Americans fought for over two centuries, the concentration of banking and political power by a limited number of people or institutions.  

Why you ask would politicians want to enact branch banking? Three reasons:
  1. Unit banking compared to branch banking is a highly unstable banking system that creates unnecessary risk 
  2. Allowed for wealth redistribution through the Community Reinvestment Act (CRA)
  3. The creation of mega banks to compete in a global economy 
Why is unit banking unstable? Instability of unit banks is caused by their inability to effectively manage resources in two major areas:
  1. Diversification - Portfolio across a multiple local or regional economies and market conditions
  2. Economies of scale - Operational and technology costs

IBBEA created the opportunity for wide open intrastate and interstate banking, resulting in bank mergers, acquisitions and the creation of mega banks, “banks too big to fail”. So what does this have to do with why your credit union or bank is walking dead?

First, the U.S. banking system has moved from a unit bank to a branch bank system. Virtually all credit unions and community banks still follow the unit banking model. Oh sure, you may have a few branches and some of them may even cross state lines, but the fact remains, virtually all credit unions and community banks have a very difficult challenge managing their loan and deposit portfolio. For example:
  • Inability to move high liquidity from one geographical region to a high growth geographical area that needs the liquidity to lend and generate profit
  • Diversification against economic downturn in in one geographical area offset, but high growth in other areas

Nationwide branch banking and the creation of the mega bank eliminates these problems, which results in an opportunity to create a much more stable banking system. A banking system the politicians and regulators seek to embrace.

The second reason virtually all credit unions and community banks are walking dead is because of a cost structure that is inherent in a unit banking system. A major motivation of bank acquisitions and mergers was to achieve economies of scale, both from a technology and operational standpoint. 

As we all acknowledge technology is a critical to the growth and survival of all financial institutions. As the pace of change accelerates the costs associated with buying and maintaining technology solutions grows. What was your IT budget 10 years ago compared to today? Back office processes and operations while important; add little to help financial institutions grow and are also a big expense to the bottom-line. Economies of scale cannot be accomplished by unit or small banks and credit unions, especially compared to the economies of scale achieved by mega and large regional banks.

As the U.S. banking environment shifted from a unit banking model to a branch banking model in the late 1990s, how is your credit union or bank adjusting to the new realities of the market? Added a few branches, added some “me too” technology solutions? Is that competing or is your credit union or bank walking dead?