A collection of observations, ruminations, predictions and random thoughts from Cornerstone Advisors.

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July 28, 2015 by Ron Shevlin Ron Shevlin

You Don’t Know Jack!

 

I was telling a friend of mine–a senior executive at a mid-size credit union–why many banks and credit unions deceive themselves when they say their competitive advantage is their superior level of service (if you want to know why, see this and this).

My friend said:

“You don’t get it. We do have superior service. It comes down to knowing our members better than any mega-bank could ever know them.”

I looked at him and said, “You, my friend, don’t know JACK! Or Jill, or Jim, or Jerry, or Jeannie, or any of your other members whose names start with the other 25 letters of the alphabet.”

I explained to him that his credit union knows just a thin layer of who its members are. Sure, when a member walks into a branch, employees know that it’s Jack Jones, that his wife’s name is Jane, and that they have two wonderful kids, Jenny and Jeffry who attend Jefferson College. I told him, however, “Your credit union doesn’t know:

  • How much money Jack has. You only know how much he has with you. And if he’s got any money, it’s a good bet he doesn’t have much of it, let alone all of it, with you. So you really don’t know his investment needs or risk tolerance.
  • What Jack’s financial goals are. Oh sure, you have a PFM app that has a goal tracking capability. But PFM users account for what, 10% of your overall member base? What’s the chance that Jack is one of those members AND uses the goal tracking feature?
  • How Jack makes his money. Oh sure, you might know how much he makes because you can see that direct deposit coming in every month, but you don’t know if that stream of income is safe and stable, or if Jack works in an industry that is on the decline.
  • How Jack spends his money. You’ve got a piddly percentage of your member base using your online bill pay platform, and it’s a good bet you didn’t issue all the credit cards he has, so you really don’t know where the money is going. And worse, you’re not even doing anything to analyze the debit card spend data you do have.”

Sensing that I had won yet another debate regarding banking, I eased off the gas pedal and said to my friend: “So you see, you don’t know Jack. And as I look around the industry, it’s the mega-banks and fintech startups–not the community banks and credit unions–that are doing something about it.”

***

“Yeah, but where and how are we going to get that data?” asked my friend.

“Sit down, grasshopper,” I counseled, “and I’ll tell you the secret to member data collection, but only if you promise not to share the secret with anyone.”

“Tell me, or I’ll kick your snarky @ss out of my office,” he replied.

“YOU ASK THEM.”

“Hold on a minute here, you yourself said that consumers aren’t using PFM tools like goal-setting features, let alone account aggregation that would give us that kind of information. And consumers don’t like to have all their financial eggs in one basket, nor do they trust financial institutions with all their data,” he retorted.

“Listen, pal, all I’ve heard from you credit unions over the past five years is how your Net Promoter scores are through the roof–and that the big banks’ scores are in negative territory–and how every consumer survey finds that credit unions are so trusted by their members. If your members really do trust you–and are so likely to refer you to their friends and family–then why wouldn’t they share personal financial information with you?”

“So, that’s all we have to do–ask them?” he inquired.

“No, you have to use your transaction and interaction systems to capture the right data points, and then analyze that data to make judgments and assumptions about your member base.”

“But we don’t know how to do that,” he admitted.

***

If you don’t have the right data about your members (customers), aren’t capturing the right data about your members (customers), and don’t or can’t analyze the data to figure out what the right data is and make assumptions and judgments about your members (customers), then:

  • How in the world can you say you know your members (customers) better than any mega-bank could? and
  • Your so-called competitive advantage isn’t much of a competitive advantage, is it?

***

Over the past two years (or so), I don’t think I’ve encountered a bank or credit union executive who doesn’t want to improve his or her organization’s analytics capability. I also don’t think I’ve met one who really knows how and where to start to do that. Nor do I think I’ve met one whose CFO would be comfortable with the fact that, even if they had a plan for where to start and what to do, there is no calculable–or reliably calculable–return on the investment needed.

This is what strategy is all about–understanding your advantage, or deciding on what that advantage should be–and making the investments needed to build the capabilities to leverage that advantage. Even if you can’t put an ROI number on it.

***

Back in the late ’90s, a couple of really smart consultants wrote a book called The Discipline of Market Leaders in which they asserted that market leaders excelled on one of three competitive dimensions, while maintaining reasonable levels of performance on the other two. Those dimensions were: 1) operational excellence, 2) product leadership, and 3) customer intimacy.

The reaction of many firms was predictable:

  1. “We don’t want to compete on price and be the low-cost provider.” Which completely misinterpreted what dimension #1 was all about.
  2. “We’re in a commodity business, so there is no opportunity to compete on product leadership.” Which completely missed the opportunity to de-commoditize a commodity business.
  3. “We compete on customer intimacy, and knowing our customers better than our customers.” Which completely overlooked what intimacy really meant, and what investments were required to achieve and maintain that intimacy.

***

If you work at a community bank or credit union and tell me, “I don’t think we can compete on the basis of product leadership,” I don’t think I’d try to talk you into it. If you tell me that operational excellence isn’t for you, I might try to educate you on what that really means before accepting your answer.

If competing on customer intimacy is going to be your path to advantage, fine. But what does that really mean? It doesn’t mean knowing who your customers/members are when they walk in the door or log on. It means putting that intimacy to work by providing advice and guidance that other FIs can’t because they don’t know your customers/members as well as you do.

You’ll have to know Jack–or you’ll have to hit the road, Jack.

-rs


Successful customer relations start with smart strategic planning.

Cornerstone Advisors has helped hundreds of banks and credit unions develop customized strategic plans aimed at profitable, predictable futures.

Contact Cornerstone today to learn about our unique, best practice-based Strategic Planning Methodology.

Cornerstone Advisors


 

Filed under: Marketing, Strategy



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July 21, 2015 by Terence Roche Terence Roche

What Vendors Won’t Tell You About Outsourcing

“A satisfied customer — we should have him stuffed!” -Basil Fawlty, Fawlty Towers

Most anybody in the industry knows that financial institutions outsource more than they did five years ago, and they will have outsourced more in another five.

There are very valid reasons for this trend. The biggest we see is that banks are finding it increasingly difficult to attract and retain key areas of talent – disaster recovery management, data center penetration/breach, data communications, to name just a few. A vendor’s ability to hire talent for tens or hundreds of clients that you have trouble hiring yourself can be a huge advantage to you.

Another reason is that many necessary and important but not particularly strategic areas – infrastructure design, payroll processing, etc. – really do lend themselves to being outsourced if the terms are right.

Let’s stipulate that you will outsource more and manage more vendors. That said, it is critically important that you approach this with management/board expectations set right in terms of how the relationship will work. What follows are some truths about outsourcing that need to be factored into your relationship and vendor management strategy. All of them, by the way, are not things you’ll hear in a sales presentation and, mysteriously, don’t appear in any PowerPoint slides.

1. It isn’t a “partnership.” Sorry, it’s not. I’m in a partnership. In fact, I have two great partners, and here’s the thing: we share the upside when we do well. And, we share the downside if we don’t. There are days our relationship runs strictly on trust, not master agreements and terms/conditions. You and your vendors don’t have the same agreement. You pay minimums no matter what happens to your business. You take the downside if volumes drop. Real differences are settled by contract language. If everybody wants to talk about the “spirit” of partnership, fine. But the basis of the relationship is that they are selling a service and you are buying it, and you need to treat the arrangement that way.

2. It almost certainly won’t be cheaper than insourcing. We have run financial models on hundreds, if not thousands, of financial proposals for both in-house and service bureau delivery of the same system from the same vendor, and here’s the thing: when you factor in all costs, volume growth for the term of the agreement and project-related charges, outsourcing can sometimes be the same cost but will likely be higher.

The first reason is that even if base pricing looks equal, growth is always more expensive in pay-by-the-drink arrangements (where you pay for every additional account/transaction day) than it is in a licensing deal (where you don’t). The second reason is that you’re not getting all of that expertise and risk mitigation you no longer have to hire for free. Why would you? We often hear the argument that “you will save a lot of staff costs if you outsource to us.” Sure you will, but that cost is more than recovered in monthly fees you wouldn’t pay if you were in-house.

Don’t get me wrong here. I’m not saying you should be in-house because it’s cheaper. The reasons to outsource are still valid. They just aren’t less expensive.

3. You don’t benefit from vendor economy of scale, at least during the term of your deal. Have you ever seen an outsourcing agreement that says, “If, during your contract term, we find out that economy of scale has reduced our per-unit processing costs, we’ll pass some of that on to you by way of a lower base price?” Neither have we. You can get lower pricing, but only at contract renewal and when you negotiate well. If vendors can get per-unit cost down, they keep it. Don’t confuse tiered pricing with economy of scale. Tiered pricing is what you get for giving a vendor more incremental volume, and you should pay less for it in the first place.

4. You get the releases that the entire user base gets. Period. One of the big pushbacks we hear from our in-house clients is, “We’ll lose control if we outsource.” To a large extent, we don’t see that to be the case. Outsourced clients can keep 100% control over and can customize data management, acquisitions/conversions, workflow tools, and many other things that are very important. What you don’t control and can’t customize is the two annual system releases. You may get some kind of vote on what goes into a release, but it is increasingly rare that there will be anything in a release solely because one client wants it. Beyond that, vendors just don’t want to customize code that much. Unless you are willing to pay a whole bunch of money… which you won’t be when you see the quote… which is so high because they really don’t want to do it. Remember that thing about outsourcing being more expensive?

5. SLAs with teeth are about as rare as Deadheads at a Wayne Newton concert. If there are any service level agreements in a standard vendor contract, they usually address three things: system availability, response time and production report availability. Those are good to have, of course, but these things don’t address the reasons you want to outsource. Our in-house clients don’t have issues with up-time and response time. They get the same great (and cheap) hardware and mature (but not always cheap) software that outsourcers use.

As outsourcing grows, this is going to become a more important conversation. Financial institutions don’t need better SLAs for up-time. They need better SLAs for things like:

  • How quickly will processing errors get corrected?
  • How fast will bona fide system code issues get addressed?
  • How fast will one-off requests get priced and scheduled?
  • How quickly will a new third-party interface be available, and will the price be reasonable? Will those interfaces be maintained for the entire term of our contract?
  • At what point do financial penalties go into effect if these are not met?

Vendors have some valid points here. SLAs need to be very clearly defined, they need to be clearly measurable, and they need reasonable time targets to hit. These are all totally fair points that have to be factored into an agreement. Here’s mine: there aren’t enough performance SLAs in most contracts right now. If outsourcing continues at its current pace, more of them need to start being incorporated into contracts

Open question: are there Newtonheads? Or Wayneheads? Somebody help me out. I’m not really up on this topic.

6. Outsourcing is permanent. You won’t insource back. You know it and vendors know it (that means Bob Dole and the American people know it, too). In-house shops stay in-house. In-house shops change delivery to outsourced. Outsourced stay outsourced. I can’t remember the last time I saw an outsourced client change systems to in-house delivery. It just doesn’t happen. The investment in people and infrastructure, often from scratch, is just too big an effort.

Bottom line? Vendors push outsourced solutions hard because outsourced is a better model for them. You’re going to buy the argument and outsource more. But, let’s be realistic about what outsourcing brings to the table and what it doesn’t. Managing to these expectations is increasingly important, especially if you start to outsource more strategic functions (like off-hours customer support, to name one).

Eyes wide open.
-tr


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Filed under: Core Processing, Information Technology, Vendor Buzz



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July 7, 2015 by Steve Williams Steve Williams

The Tale of the Digital Banks

It’s been more than 15 years since the Internet shook the business world and predictions abounded that Internet-only banks would eat traditional banks for lunch. Taking stock on these predictions, it’s clear that the impact of Internet-only banks has been less dramatic than anyone would have predicted.

In recent years, the trade press and industry conferences have buzzed with admiration for digital darlings such as Simple, Moven, GoBank and BankMobile. Pundits have celebrated these new players’ slick designs and future disruption potential. Yet while the demos and screen shots at events like Finovate have provided fascinating fodder regarding the future of digital banking, the FACTS show that these buzz-worthy players have had infinitesimal impact on market share.

Gonzo readers, let’s look at the facts. Let’s take a quick tour of the major digital banking players that have had an impact in our industry and what this means moving forward. Here’s the bottom line:

In the past six years (March 2009 to March 2015), the top 10 Internet banks have grown an impressive $175 billion in new deposits. Think about this. The 10 players without legacy cost structures have grown to the equivalent of the 18th largest bank in the country in only six years. Here’s the breakdown of these 10 banks in order of deposit growth:

Deposits ($000):
March 2009
Deposits ($000):
March 2015
6-Year Growth
($000)
Ally Bank$23,212,768 $60,709,382 $37,496,614
USAA31,334,00662,995,31831,661,312
Capital One*29,565,60754,374,98924,809,382
American Express Bank9,350,80634,512,38125,161,575
Discover27,298,90248,595,89221,296,990
EverBank**7,051,93321,549,35114,497,418
CIT3,025,83416,806,70013,780,866
Nationwide1,904,3335,124,0683,219,735
Bancorp Bank (Simple/PayPal et al)1,495,5584,499,9593,004,401
Green Dot Bank (Go Bank)28,553725,719697,166
Total Top 10 Digital Banks134,268,300309,893,759175,625,459
*Capital One figures are for Capital One USA direct bank and not the regional bank components.
**EverBank figures include acquisition of Bank of Florida deposits of $1.5 billion in 2010.
  • As Gonzo readers can see from the chart above, Ally Bank has knocked it out of the park with deposit growth, more than doubling its size in six years. The strategy to put a consumer-friendly face on the bailed-out GMAC is working.
  • Military affinity powerhouse USAA was not far behind with nearly $32 billion of deposit growth in the same timeframe – an amazing doubling of total deposits with stronger checking and relationship revenue than Ally captures.
  • The major card-based direct banks – American Express, Capital One and Discover – have all done very well. Capital One has not stopped growing since acquiring ING Direct to add to its own direct banking operations. The quiet $25 billion of deposit growth from American Express bank is especially impressive.
  • Niche players Everbank and CIT use Internet deposits as cheap funding for commercial finance and lending activities. Their growth shows how direct banking is a perfect fit for a company that is asset hungry.
  • Interestingly, the Bancorp Bank, which private-labels its charter for players such as Simple and PayPal, has seen solid but not breakout growth. Additionally, Green Dot Bank, which powers Walmart’s GoBank, has grown less than $700 million in the past six years – hardly an industry revolution.

There is clearly some fun creative activity going on at digital banks, but let’s put the growth of these top digital banks into perspective:

  • While these major Internet players have grown $175 billion in deposits in the past six years, the banking industry overall has grown $2.85 trillion in deposits, meaning these major digital players have garnered approximately 6% of deposit growth in the past six years. Again, this is impressive performance from these players, but it’s not the equivalent of Netflix taking down Blockbuster or Amazon taking down book stores.
  • The credit union industry has grown deposits $260 billion in the same timeframe, jumping from $724 billion to $984 billion. The majority of this growth has come from larger credit unions over $500 million in assets.
  • But here’s the real clincher: in the same period that the Top 10 Internet only banks grew deposits by $175 billion, the three major legacy retail powerhouses – Chase, Wells and Bank of America – grew deposits by $1.27 trillion. Holy cow!

So here’s a quick summary of growth since the great recession:

6-Year Deposit Growth
($000)
Top 3 U.S. Retail Banks$1,271,189,782
All Other Banks1,406,184,759
Credit Union Industry259,952,180
Top 10 Internet Banks175,625,459
Total Bank and Credit Union Growth3,112,952,180

The key takeaway for GonzoBankers is that digital top disrupters are making their strategies work, and hats should go off to them. However, they are not the only players that have put on their game faces and grown the business. The national powerhouses are proving that the “Occupy Wall Street” mood from several years back did not stop these national brands from scaling, and it’s clear that players like Chase, Wells and Bank of America are scaling their digital customer base very effectively. Mid-size and regional banks have also grown deposits solidly, as has the credit union industry. Both have used street fighting tactics and “good-enough” digital banking strategies to gain local market share. Competition in banking is still very multi-faceted, and the book and music industry analogies are just not completely relevant.

What’s Next?

While new digital disrupters are helping banks rethink the customer experience and how they will add value in the future, they have not done enough damage where large banks and other traditional players are feeling the pain. At the same time, no bank or credit union should feel safe from the potential damage that digital players can do to them in the future.

Here’s why. It’s obvious that one factor that has dampened the impact of digital banks has been our bizarre industry rate environment. As the chart below dramatically illustrates, the past six years have been a ride along the trough of near-zero fed funds rates. It has been difficult for digital banks to take advantage of their lower cost models when differences in interest rates are less dramatic to gain consumers’ attention.

When rates finally rise, it could be a whole different ball game. Smart phones will be in more than 75% of all U.S. adult hands, and downloading another digital banking app to grab a better rate on a money market account will be as easy as ordering with Amazon OneClick or playing a new version of Candy Crush. When that time comes, all traditional players may be surprised that their bountiful deposit liquidity is seeping out in an alarming way. Whatever anyone says at industry conferences, this will not be primarily a battle of customer experience; it will be a hard-nosed rate war. To date, nice personal financial management tools, spending reminders and cool navigation have not disrupted bank market share. In the future, when 100,000 financial institution branches become more and more empty space, digital banks will proliferate and help usher in a new period of deposit rate wars. These competitors will use a more streamlined cost structure versus fancy spending pie charts to make a meaningful dent in market share.

So, GonzoBankers, we can feel good that we have not been “Amazoned” or “Netflixed” by digital banks, but it’s healthy to remember that digital innovation will someday rear its head in a different rate environment, and these disrupters will make us seriously question the cost structure we utilize to operate a simple business that gathers deposits, facilitates payments and lends out funds. It’s time for us to seriously rethink delivery cost structures before the market share numbers look different.

-spw


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Visit our web site or contact us to learn more.


 

Filed under: Branch Sales & Service, Commercial Banking, Commercial Lending, Consumer Lending, Marketing, Retail Banking, Strategy, Web & Mobile Banking



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