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INSIGHTVAULTfor Retail Banking

Q2 2018

Ideas

News Not Noise

Tech Trends

Research Nuggets

What’s Going On

Q2 2018

TABLE OF CONTENTS

INSIGHT VAULT

What’s Going On .................................................................... 3It’s Time to Kill Financial Education—and Develop a FinHealth Services Market ..................3

News Not Noise ...................................................................... 8The Featurization of PFM: Why Citi Won’t Steal Customers With Its Mobile PFM App ...........8

What Do Other FIs Need to Do About Big Banks’ Deposit Domination? ........................... 12

Is It an Apple Co-Branded Card or a Goldman Sachs Co-Branded Card? ......................... 15

Will Square Threaten Banks to Be Consumers’ Primary Bank Account? ........................... 17

The Cultural Differences Behind Megabanks’ and Smaller FIs’ IT Spend .......................... 18

Ideas .................................................................................. 22It Doesn’t Matter What Consumers Think About Bank Branches ..................................... 22

Can You Handle a Contrarian Opinion About the Customer Experience? .......................... 29

Tech Trends ......................................................................... 33Can Banks Become Digital Identity Providers? ............................................................ 33

Research Nuggets ..................................................................37Are the Mobile Pays—Apple, Android, and Samsung—in Trouble? ................................... 37

Mobile Retail Sales Growth Projections Are Too Pessimistic ........................................... 39

The State of Small Business Borrowing ......................................................................43

About Cornerstone Advisors ....................................................45

2© 2018 Cornerstone Advisors. All rights reserved.


From reading the banking-related press, I can only conclude that Millennials are financially struggling morons whose hands need to be held through every financial decision they make.

Like this, as reported in CU Today:

“According to one expert, traditional methods for financial education are a waste of time when it comes to helping Millennials plan for their financial futures—instead, credit unions should share financial advice that helps Millennials get through the week or month and relaying that information through mobile platforms and real-time alerts.”

There are (at least) three things wrong with that statement:

1. Traditional methods for financial education are a waste of time when it comes to helping Millennials because it’s a waste of time for all generations.

2. Not all Millennials need help “getting through” the week or month.

3. Real-time alerts have been around for a long time and haven’t solved anything for anyone (i.e., of any generation) because they don’t address the root cause of someone’s financial troubles.

Financial Education Doesn’t Have the Impact Proponents Would Like to Believe it Does

The press is filled with study after study attempting to prove that Americans’ level of financial literacy is low and that, therefore, we need more financial education. The credit unions eat this up.

There are a couple of issues with this perspective. First, according to a study conducted by a University of Colorado professor using the Federal Reserve’s Survey of Consumer Finances:

“57% of U.S. households exhibit signs of financial illiteracy, a phenomenon even among college degree holders. Financial illiterates report that they are aware of their lack of financial knowledge, and thus they bear less financial risk and allocate less money in risky assets, and are constructively less overconfident. Collectively, financial illiterates’ households adopt a portfolio choice strategy that is fully rational.”

In other words, households that are financially “illiterate” may actually be exhibiting smarter financial behaviors, and making smarter financial decisions, than so-called financially literate households.

Second, there’s more evidence that education efforts fall short. In a study titled So Many Courses, So Little Progress: Why Financial Education Doesn’t Work — And What Does, the author found:

“One-size-fits-all financial education has been demonstrated to have little to no effect on changing real-world financial behaviors. A meta-analysis of more than 200 studies found that educational interventions explained only 0.1% of the financial behaviors studied.”

And therein lies the fundamental problem with financial education: It’s focused on addressing financial literacy, not financial behavior.

It’s Time to Kill Financial Education—and Develop a FinHealth Services Market

WHAT’S GOING ON

http://www.cutoday.info/THE-feature/It-s-All-About-Real-Time

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3117044




Perceptions of Financial Literacy are Influenced by Economic Conditions & Life Stage

In 2013, I surveyed US consumers how their financial lives had changed from pre-recession to recession to post-recession, and about their level of financial literacy. The percentage of Millennials who considered themselves to be financially literate in 2013 versus 2010 jumped dramatically:

Did Millennials devour a ton of financial educational material over the course of those three years to cause this rise in their self-reported literacy levels? You’ll never convince me the answer is yes. The answer is two-fold:

1. Economic conditions improved between the depths of the recession in 2010 and 2013, making them feel like it was easier to manage their financial lives, hence, making them believe they were more financially literate, and

2. The younger group, in particular, had the experience of joining the working world and having to manage real money—not the theoretical nonsense they were fed in financial education classes back in high school.

Millennials Are Doing a Lot Better Than You Think They Are

Guess what, folks? Not every Millennial is a hopeless basket case charity candidate struggling to make ends meet. Four out of 10 younger Millennials, and nearly half of older Millennials have no problem making the monthly payments on their loans (or so they say). Fewer than four in 10 say that it’s often a struggle.

Source: Aite Group

Source: Cornerstone Advisors survey of 2,015 US consumers between the ages of 18 and 72 with a checking account and a smartphone

Younger Millennials(1988-1996)

Older Millennials(1980-1987)

Gen Xers(1964-1979)

BabyBoomers(1945-1963)

I often struggle to make the monthly payments

36% 38% 25% 11%

Occasionally, I have trouble making the monthly payment

23% 15% 15% 18%

I have no problem making the monthly payment

41% 47% 59% 71%

% of Millennials Who Consider Themselves to Be Financially Literate

2010 2013

Millennials (21-26) 24% 47%

Millennials (27-34) 30% 50%

Which best describes your ability to make payments on the loans you have outstanding?


A Bank of America survey also dispels the notion of Millennials as financial illiterates. The survey revealed that among Millennials:

• 47% have at least $15,000 in savings, up from 33% in 2015.

• 16% have at least $100,000 stashed away, twice as many that said they had saved that much two years earlier.

• 63% said they’re saving—1% less than the percentage of Gen Xers who said they’re saving.

• 54% have a budget, and three-quarters of them stick to it each month.

• 60% feel financially secure.

The numbers might even be better than they appear. The BofA survey lumped all Millennials—aged 23 to 37—together. It’s likely, however, that the 30-something Millennials are in better shape than the 20-somethings who are first getting started in their careers.

Here’s the paradox, however. Despite the generally positive feelings about their own financial situations, BofA found that among Millennials:

• 73% believe their generation overspends on unnecessary indulgences.

• 64% think their generation isn’t good at managing money.

See the problem here? It’s a perception problem. Although many Millennials are doing OK, their perceptions of their generation may be inaccurate.

Why? Maybe it’s because they read the reports in the press and keep seeing everyone tell them that they’re financially illiterate. (Nah, that can’t be—they don’t read the press. Do they?)

Financial Health Services—Not Education—Is What’s Needed (But There Are Hurdles)

What’s needed to improve consumers’ financial performance (not just “health”) are financial health products and services (let’s just call it FinHealth), not educational material.

Early PFM providers were pioneers but never really got past budgeting and expense categorization. Newer fintech entrants are providing tools that do things like enable automatic (i.e., forced) saving. All well and good. But for the financial health services market to bloom and prosper, it must overcome a number of hurdles:

• Lack of consumer demand. There’s a paradox in modern American society: Money is very, very important to us, yet we really, really hate spending time and money managing it. This produces a challenge for FinHealth entrepreneurs: There is no existing consumer demand for the services they are bringing to market. There may be a need—but there is little to no demand (in the economic sense, where people have a measurable willingness to pay for products and services).


• Definition challenges. What is financial health? The term has connotations in the industry, implying something that applies to an underserved and/or more-needy segment of consumers. But someone who makes or has a lot of money isn’t necessarily financially “healthy,” and, likewise, someone who doesn’t make or have a lot of money isn’t necessarily financially “unhealthy.” This produces another challenge for FinHealth entrepreneurs: A potentially lucrative segment of consumers (i.e., those who can afford the services and may be willing to pay for them) don’t see themselves as good candidates for the services because of the prevailing definition of financial health.

• The lack of an established market category. A not-so-unique problem facing FinHealth entrepreneurs is the challenge of creating a market category. For the two reasons listed above (as well as others), there is no established market for FinHealth in the United States. Any entrepreneur trying to create a new market category faces challenges and uncertainties in selecting and executing on a profitable revenue and monetization strategy when there is no historical precedence.

• Inconsistent track record of results. The studies cited earlier demonstrate the shortcomings of financial education. Other types of FinHealth approaches—like PFM—have little to show for themselves in terms of impact on financial health and performance. Most of the studies I’ve seen show a correlation between the use of PFM and desirable behaviors (to the bank, like cross-sell success), but they don’t establish a causal relationship between the tools and financial health.

• Measurement challenges. And how could those tools be shown to have a causal effect? There’s no generally accepted way to measure financial health! As a result, any number of providers in or coming into the market can claim to improve consumers’ financial health, but how do they prove and validate their claims?

The banking and FinTech communities needs to put discussion (and efforts) related to financial education behind them. It’s 2018. We have big data, artificial intelligence (AI), machine learning, mobile ubiquity, you name it. The opportunity to grow and nurture the FinHealth market—through products and services, not education—is potentially huge. I say “potentially” because without an established market, it’s not a sure thing that consumers will pay for it. But c’mon—if we’re willing to pay $5 for a flavored latte, it’s not inconceivable that we’d pay $5 for a FinHealth product or service.

SO WHAT


Building a FinHealth Services Market

How is this FinHealth services market going to come to fruition? I haven’t seen a FinTech startup in the space that strikes me as having the vision to bring together the various types of potential FinHealth products and services into a cohesive offering. Likewise, I’ve yet to run into a bank or credit union with the vision, desire or resources to do it.

I’ll guess we’ll just have to wait for Amazon to do it.

Sadly, Amazon seems to be the only player with the understanding of how a platform business model works, and how to build an ecosystem (or market) around a particular space.

There’s a lot of great work being done in the FinHealth space by the Center for Financial Services Innovation and the Omidyar Network. Perhaps separately or together they can help engineer the development of a FinHealth services platform to launch a legitimate and sustainable set of FinHealth products and services.

Ron Shevlin Director of Research Cornerstone Advisors


Average Deposits ($ trillions)

Q3 2016 Q3 2017 % Growth

JPMorgan Chase $1.34 $1.43 7.0%

Wells Fargo $1.26 $1.31 3.6%

Bank of America $1.23 $1.27 3.6%

Citigroup $0.94 $0.97 2.3%

US Bancorp $0.32 $0.34 5.2%

According to a press release from Citibank:

“Citi will launch new mobile capabilities on the Citi Mobile App® for iPhone to include seamless in-app account opening, a 360-degree view across all financial accounts and spending insights to enhance clients’ financial wellness. In addition, the app will offer a first-of-its kind among banks—non-Citi clients can create a profile and connect their accounts across financial services providers to benefit from the app’s account aggregation, spending insights and bill management features.”

Supporting Citi’s decision to build a digital-first app were the results of a consumer survey that found:

• 87% of consumers trust banks more than non-banks when it comes to handling their finances.

• 87% want a snapshot of their entire financial life in one place.

• 79% prefer a single app to manage their finances instead of relying on several specialty mobile apps.

The bank’s Global Consumer Bank CEO said: “Over the past few years, we have been transforming our U.S. Retail Bank into a growth engine in our core markets while developing new mobile banking capabilities as a platform to one day serve consumers nationwide. That day is here.”

It’s understandable why Citi is doing what it’s doing, however. Claims that the retail bank is a “growth engine” may be true in some respects, but Citi lags the other megabanks in deposit growth.

The Featurization of PFM: Why Citi Won’t Steal Customers with Its Mobile PFM App

NEWS NOT NOISE

This is an interesting move on Citi’s part, but its efforts to get non-customers to create profiles and connect their accounts to the megabank’s app will fail. Citi is misinterpreting consumer behavior and failing to understand the direction that PFM is taking.

SO WHAT

Source: Forbes

https://www.businesswire.com/news/home/20180326005509/en/Citibank-Announces-National-Digital-Banking-Serve-Clients


If Account Aggregation is the Answer, What Was the Question?

It’s great that nine out of 10 consumers might want a snapshot of their entire financial life in one place, and that eight in 10 say they would prefer to use a single app to manage their finances instead of relying on several specialty mobile apps. I’m sure 99.9% of people want peace on Earth and to end world hunger—but that doesn’t mean they’re actually going to do anything about it.

And that’s been the problem with PFM and account aggregation—people express interest in these capabilities, but their actual behaviors don’t align with their attitudes and intentions.

In fact, when we asked consumers what features or factors would be most important to them if they were in the market for a checking account, just 16% of Millennials—and fewer Gen Xers and Boomers—mentioned “tools to help manage financial life” as an important factor.

Citi also has some catching up to do, on a national basis, in terms of consumer purchase consideration. In a recent survey I conducted, respondents were asked: “If you were looking for a new checking account, of the following FIs (or type of FI) which would you be most likely to choose from? (select up to 3)” Across each of the generational segments, Citi lags the other megabanks:

Young Millennials (1988-1996)

Old Millennials (1980-1987)

Gen Xers (1964-1979)

Boomers (1945-1963)

Bank of America 43% 49% 32% 21%

Wells Fargo 35% 31% 26% 18%

A credit union 29% 31% 36% 46%

Capital One 26% 28% 29% 23%

JP Morgan Chase 23% 28% 23% 22%

Citibank 21% 28% 20% 17%

A community bank 16% 15% 26% 28%

A large regional bank 14% 13% 18% 20%

U.S. Bank 13% 14% 11% 8%

USAA 12% 12% 11% 12%

A digital bank 7% 6% 9% 7%

I don’t know 6% 3% 4% 7%

None of the above 1% 1% 3% 6%

Source: Cornerstone Advisors survey of 2,015 US consumers, Q3 2017


If the PFM capabilities that Citi touts as being able to help attract non-customers—i.e., account aggregation, spending insights, and bill management features—were that important to someone, wouldn’t they already be banking with a provider that offered those capabilities?

If you were looking for a new checking account, which three features or factors would be most important to your decision?


n=316


n=469

Gen Xers (1964-1979)

n=709

Boomers (1945-1963)

n=521

Lowest monthly fee 42% 39% 48% 47%

Best overall value for the money 35% 35% 39% 42%

Best online and mobile banking tools 32% 38% 34% 36%

Best rewards program 32% 29% 27% 23%

Most convenient bank locations 30% 35% 41% 50%

Best combined debit and credit card rewards 22% 20% 17% 14%

Best capabilities/tools to help manage financial life 16% 16% 12% 9%

Best mobile payment tools and capabilities 16% 18% 15% 11%

Best in-branch experience 13% 14% 13% 13%

Best P2P payment tools 8% 7% 4% 1%



The Featurization of PFM

Citi’s strategy fails to understand the longer-term trend in PFM: The days of the big-honking, throw-every-feature-into-the-kitchen-sink approach to apps and solution development are behind us.

Eight in 10 consumers might say they would prefer to use a single app to manage their finances instead of relying on several specialty mobile apps—but that’s not what they do. The reason they don’t do that is because few consumers want all the features that the big-honking PFM apps purport to offer.

Consumers don’t need to register for and connect to a PFM app like Citi’s to take advantage of spending insight or bill management capabilities. They can find a tool they like, and through application programming interfaces (APIs), that tool can connect to their existing providers and data.

In other words, consumers want—and can have—PFM features, not solutions.

If someone wants to maximize their savings, there are a number of apps in the market that can help them do that. If they start using one, but after some time, find another one they like better, they can stop using one and start using another one.

You can’t do that with most (all?) banks’ PFM offerings, however. The ability to mix and match—or plug and play—isn’t there.

If Ciit’s mobile PFM app becomes a true platform, however—where third-party PFM feature developers can seamlessly plug in—then I can see Citi’s non-customer strategy succeeding. But not until that happens.


The Wall Street Journal reported that:

“In 2017, 10 of 22 major regional banks experienced declining U.S. deposits, compared with only two the year before. The smallest U.S. banks have also seen deposits decline. The declines could mark the start of an important industry shift where deposits become less plentiful and Main Street banks do more to compete for them. The three biggest banks added a combined $118 billion in U.S. deposits last year. As a group, the nearly two dozen regional banks added a net amount of roughly $55 billion.”

What Do Other FIs Need to Do About Big Banks’ Deposit Domination?

The problem isn’t that deposits are becoming less plentiful—the problem is where the deposits are going. And the challenge for regional, mid-size, and small banks and credit unions goes beyond the dominating market share of the megabanks. The challenge is a longer-term trend called deposit displacement.

SO WHAT

Source: Wall Street Journal, FDIC

https://www.wsj.com/articles/the-biggest-banks-are-gobbling-up-deposits-heres-whos-not-1524999612


Deposit displacement is the displacement, or diversion, of funds away from traditional checking accounts into other accounts. Examples of deposit displacement include:

• Health savings accounts. There’s close to $44 billion sitting in health savings accounts, more than three times the amount in those accounts in 2012. Where’s all that money coming from? It’s being diverted from checking accounts during the payroll direct deposit process.

• P2P payments. You’ve heard about Venmo’s growth in users and payment volume, but did you know that Venmo users have $2 billion just sitting in their accounts? That’s $2 billion that used to sit in checking accounts. Deposit displacement from P2P payments is a lot bigger than that, because Apple’s P2P service doesn’t put money back into bank accounts—it keeps it in an Apple prepaid debit account. Deposit displacement from P2P payments could climb into the tens of billions of dollars: In consumer research Cornerstone conducted, 44% of Millennials said they would be very likely to use a PayPal general use debit card—and might even make it their primary payment card. That’s not just deposit displacement—it’s payments (and interchange) displacement.

• Merchants. Starbucks customers have more than $2 billion sitting in their loyalty accounts, as well. Finally, other merchants are waking up to this approach. The fastest growing mobile payment app? Walmart Pay. In a recent survey, half of Walmart Pay users found it to be more convenient, faster and more secure than swiping a debit or credit card.

Source: PYMNTS, InfoScout

Percentage of Respondents That Have Tried the Mobile Wallet


• Robo-advisors. AT Kearney estimates that by 2020, robo-advisor accounts will have $2 trillion in assets. What’s important to this discussion is that the consulting firm expects half of those assets to come from funds currently sitting in deposit accounts.

• Amazon. In the consumer research we conducted, 43% of Millennials said they would open a checking account from Amazon if the retailer offered one. But three-quarters of the 43%—and three-quarters of the consumers from older generations who said they’d open an Amazon checking account—said they would open that Amazon account and keep their existing bank account open. So banks and credit unions won’t necessarily see much account attrition from an Amazon account—but what they will see is deposit displacement.

“Better mobile banking” isn’t going to stop this trend. Deploying chatbots to provide AI-based customer service isn’t going to stop this trend, either. Reinventing the checking account is what mid-size banks and credit unions need to do to reverse this trend.

How do non-megabanks reinvent checking? Bundling other services would be a good start. The Amazon-related data from our consumer survey provides a clue on why this might be a successful strategy. I mentioned that 43% of Millennials said they’d open an Amazon checking account—but that was an account bundled with other services. When asked if they were interested in a free checking account from Amazon without the other bundled services, across every generational segment, fewer consumers were interested.

Checking accounts have become “paycheck motels”—temporary places for people’s money to stay before it moves on to bigger and better places.

SO WHAT


Reports of a joint credit card from Apple and Goldman Sachs hit the press recently. The Wall Street Journal reported that:

“The planned card would carry the Apple Pay brand and could launch early next year, replacing Apple’s partnership with Barclays. The Apple-Goldman card could help the companies combat weaknesses in their core businesses. As new iPhone sales growth slows, Apple is focusing on services such as mobile payments, streaming-music subscriptions, and App Store sales, and Apple Pay adoption has been slower than executives hoped. Goldman, meanwhile, is pushing into consumer banking to compensate for a slump in securities-trading. It launched a retail banking business called Marcus in 2016 for online savings accounts and personal loans, and executives have been exploring adding credit cards and wealth-management tools.”

The announcement also caused a slight giggle to see that the card “would carry the Apple Pay brand.” What “brand” is that? According to pymnts.com, as of December 2017, just 3% of Apple iPhone users had ever used Apple Pay to make a transaction. And among that 3%, just 17% said that they use Apple Pay “every chance they get.”

One analyst quoted in one of the articles speculated that Apple could “offer additional rewards for cardholders who make purchases when they link the card to Apple Pay, encouraging them to use it.”

Yes, it could do that, but the two firms would have to get their cards into people’s hands in the first place. The prevailing sentiment among many of the experts quoted was the card would be most appealing to Apple loyalists. While many Apple customers are fiercely loyal to the company, Apple-related purchases probably don’t account for a very large percentage of their overall purchases—like an Amazon might—diminishing the attractiveness of the card offering to all the Apple fanboys and -girls out there.

It’s not an impossible task. Cornerstone’s consumer research found interest among Millennials for an Apple Pay debit card. But there was significantly greater interest in a PayPal card (which has already launched) and potential competition from Google and Venmo.

Is It an Apple Co-Branded Card or a Goldman Sachs Co-Branded Card?

A Google search on “apple goldman sachs credit card” turns up more than 1.1 million results (on my laptop, at least), with articles from WSJ, Forbes, NY Times and MarketWatch. That’s pretty good coverage when you consider that the announcement says the two firms “could” launch a joint credit card, and that it “could launch early next year,” which is at least eight or nine months away. The only other “planned” joint credit card I can imagine getting this kind of press is a Facebook/Cambridge Analytica card (I know that makes no sense—just keep reading).

SO WHAT

https://www.wsj.com/articles/goldman-sachs-apple-team-up-on-new-credit-card-1525966214

https://www.marketwatch.com/story/goldman-sachs-and-apple-explore-a-joint-credit-card-should-you-get-it-2018-05-11


I asked my colleague Tony DeSanctis, senior director in Cornerstone’s payments practice, what he thought the “so what” of this announcement should be. He said, “I guess my whole ‘so what’ is ‘so what?’” I agree. The amount of press attention this “announcement” is getting is way out of line with what the market impact will be—if it actually does ever come to market.

How likely would you be to use a general use debit card from the following P2P providers? (% of Millennials responding “very likely, might use it as primary card”)

PayPal Apple Google Venmo

44%

25% 24% 20%



I’ll add my two cents here: Dorsey may be accurate that “people are using [Square] as their primary banking account,” but it’s probably not a very large number of people. As we previously reported on the Insight Vault, few consumers call a digital bank or neobank their primary bank.

In a recent survey we conducted, we asked consumers, “Which of the following financial institutions (or type of institution) do you have your primary checking account with?” Just 1% of Millennials say they have their primary account with a digital bank (i.e., like Chime and SoFi).

What’s really going on here? Deposit displacement. Easy money movement is eroding the importance of the primary checking account. But even Square, which is benefiting from this trend today, won’t be immune to its effects in the future.

Megabank

Large regional bank

Credit union

Community bank

Other FI

USAA

Digital bank

57%

17%

13%

6%

4%

3%

1%

CNBC reported that:

“Square customers are treating the payment company’s Cash app more like a bank account than the company intended, CEO Jack Dorsey said this week. While that wasn’t a goal, he said Square plans to capitalize on the trend. ‘People are using this as their primary banking account, and in some case it’s their only bank account,’ Dorsey said. ‘We are reaching an audience that is under-served and even to the point of unbanked, which wasn’t a stated goal but it’s something we love and want to lean into more.’ The company had 7 million active customers on its money-transfer app in December alone, Square said in its recent quarterly letter to shareholders.”

Will Square Threaten Banks to Be Consumers’ Primary Bank Account?

According to Cornerstone Partner Steve Williams: “Many predicted Square would fade away when the physical mobile dongle became a thing of the past. Seven million Cash users is a signal that consumers ‘hire’ a bank to make it easy to hold and move money, and they could care less if it’s a bank per se. Banks have to jump on simple money movement not because it makes money but because it can help preserve the legacy banking revenue attached to those accounts.”

SO WHAT

Which of the following types of FIs do you have your primary checking account with?

(Base=Millenials)


https://www.crnrstone.com/insightvault/2018/01/24/neobank-threat-worried-banks/

https://www.crnrstone.com/insightvault/2018/05/01/fis-need-big-banks-deposit-domination/

https://www.crnrstone.com/insightvault/2018/05/01/fis-need-big-banks-deposit-domination/

https://www.cnbc.com/2018/05/18/square-stumbles-into-the-banking-business.html


The Wall Street Journal reported that:

“Citigroup spent $8 billion on technology in 2017, [and] JPMorgan Chase said it will spend $10.8 billion on technology in 2018. In previous years the bank has said that roughly a third of its tech budget is spent on new investments. The big figures also give a sense of how much banks are betting that new technology, ranging from robotic process automation to open-ledger blockchain systems, can help slash costs over the longer term.”

The Cultural Differences Behind Megabanks’ and Smaller FIs’ IT Spend

The WSJ article prompted a tweet from fintech influencer Jim Marous, who asked, “Citigroup: Big Bank, Big Spender on Tech – Can Regional & Community Banks Keep Pace?” I can tell you that the answer is: “They aren’t. And neither are the credit unions.”

SO WHAT

The Spending Side of the Coin

Eight or 11 billion dollars is certainly a lot of money to spend on technology—especially when you’re a financial institution with a quarter of that in assets.

But let’s put this in perspective. Citi has roughly $1.385 trillion in assets. According to the National Credit Union Administration, total assets in federally insured credit unions hit $1.34 trillion in the first quarter of 2017. And Chase alone has $755 billion more in assets than that ($2.1 trillion for the mathematically challenged).

Even considering the differences in size between a Citi, Chase and a mid-size bank or credit union, the megabanks outspend smaller FIs in technology in terms of:

• IT spend % of assets. As a percentage of assets, Citi’s IT spend is 0.577% while Chase’s is slightly lower at 0,504%. In contrast, according to the 2017 Cornerstone Performance Report, at the median, mid-size banks spent 0.223% of assets on IT, down 6% from the 2015 report. Credit unions fall in between the megabanks and mid-size banks. At the median, credit unions invested 0.410% of assets in IT according to our 2016 report. And that figure was up from 0.360% in 2014.

• IT spend % of total expenses. Citi’s $8 billion IT spend represents about one-fifth of its total expenses, according to its CEO. At mid-size banks, on the other hand, IT expenditures only represent one-tenth of the total non-interest expense base. At credit unions, it’s a bit higher, around 13%.

https://blogs.wsj.com/moneybeat/2018/05/30/citigroup-big-bank-big-spender-on-tech/

https://www.crnrstone.com/corner-store/cornerstone-performance-report-banks-2017/


If the total IT spending levels at megabanks aren’t enough of a concern to mid-size financial institutions, where the money is going might be. As the WSJ article pointed out, megabanks “are betting that new technology, ranging from robotic process automation to open-ledger blockchain systems, can help slash costs over the longer term.”

In contrast, these new technologies aren’t even on the radar at many mid-size FIs. At banks, for examples, just 5% have already made investments, or will make investments in 2018, in robotic process automation. And at more than six in 10 mid-size banks, AI isn’t even on their radar. Among credit unions, more than half are at least discussing AI and blockchain.

The Philosophical and Cultural Side of the Coin

The real issue here isn’t the level of spending—it’s the underlying philosophies and organizational cultures driving (and determining) the tech spending levels.

In a recent blog post, Chris Skinner wrote about the excuses smaller banks give explaining their resistance to technology (which was discussed on a recent episode of Breaking Banks with me and Reading Coop CEO Julieann Thurlow), which included:

• We have too much to do. • But it costs too much. • But we have to build it. • But the regulators won’t allow it. • But the big banks have the advantage because they’re big. • But it’s hard to change.

Skinner concluded:

“If you don’t think you can change a teeny-weeny bank, then what the hell are you doing there? Massive banks are changing and they’ve got 1000x the challenges you have. Most of the barriers to small financial firms seizing the digital opportunities are created by negative thinking. But then I have to say that most small financial firms I’ve met are ultimately constrained by the negative thinking of their CEO. This is because many small financial firms are led by a CEO who was anointed ages ago. They got the job, and they’ve been there for years. They’re not really a CEO to be honest, but just a caretaker for the next guy.”

I agree with the “massive banks are changing” point, but not the rest of the quote. I know (and work with) a lot of mid-size bank and credit union CEOs who have been in their role for a while, and I think I can safely say two things about them: 1) They weren’t “anointed,” and 2) They’re not prone to negative thinking.

In response to a tweet from Skinner about his blog post, I responded with the following tweet:

“Must be me, but I don’t hear any of those excuses. I hear: ‘we don’t need to be digital—our customers rely on branches and people are our biggest asset.’”

https://thefinanser.com/2018/05/small-bank-thinking.html/

https://breakingbanks.com/episode/you-cant-change-the-wind-but-you-can-adjust-your-sails/


To clarify my comment, I meant that’s what I hear when I’m hearing between the lines. It’s generally not a spoken thing among the execs—it’s their fundamental philosophical belief about banking. The thinking is different for:

• Banks. On the bank side, it’s driven by the reality that commercial—not retail—lending is the driver of profits in the organization. The level of technology-driven change on the commercial side has not been as dramatic as it has been on the retail side, leaving many bank execs feeling comfortable with their lack of tech-driven change. And with growing post-financial crisis profitability, they’ve got numbers to support their view.

• Credit unions. On the credit union side, it’s driven by misguided competitive thinking (I’m trying to find a nice way to say “delusion”). CUs (and banks, for that matter) look at the product app by channel numbers, which still heavily favor the branch, and conclude consumers want “advice” from branch personnel when they open accounts. Or they look at research that says Millennials still go into branches X times a month or quarter, and conclude: “See? Even Millennials want to talk to people in branches!” Then they look at the ACSI satisfaction numbers and conclude that their higher sat scores are due to their “people.”

Unfortunately, this thinking misses three important points:

1. Consumers go into branches to open accounts because the digital account opening process sucks in 99% of financial institutions.

2. Consumers go into branches to talk to branch personnel because there’s no option to Facetime them—or even call them directly!

3. Branch personnel are not nearly as knowledgeable as the senior execs would like to think they are.

The point of Marous’ tweet was to wake community bank and credit union execs up to the realization that the megabanks are spending a lot on technology—and have been (and have garnered more than half of the Millennials checking account business, as a result).

And yet, there are still chief financial officers at community banks and credit unions who benchmark their organizations’ IT spend, find out their institutions are spending more than 0.223% or 0.410%, and want to know how to reduce IT spend down to the median.


What’s a Smaller FI to Do?

There’s a sentence in the WSJ that points to the opportunity that mid-size banks and credit unions have in their fight against the megabanks:

“[Mega]banks are betting that new technology can help slash costs over the longer term.”

Let the megabanks focus on cost-cutting. Mid-size banks and credit unions should look for the opportunities to use technology to reinvent and redefine banking products (that’s what I was getting at in my recent Insight Vault post titled, Can You Handle A Contrarian Opinion About The Customer Experience?).

Focusing on how much is spent on IT without taking into account where the money is going, and what you’re getting in return for it, is utter foolishness.

Trying to match the megabanks’ level of spend on IT is doable, and probably inevitable for smaller FIs over the next 10 years. But where they put that money will determine their success and failure.

https://www.crnrstone.com/insightvault/2018/05/13/can-handle-contrarian-opinion-customer-experience/


2%4%

2%

17%17%

77%

53%

27%

Visit a branch Call the contact center Text chat Video chat

Quick question Lengthy topic

Celent released findings from a survey regarding consumers’ channel attitudes and behaviors, which, predictably, fueled the ongoing holy war between the Branchophiles (who believe that the branch is still the center of the banking universe) and the Branchesaredeadivists (who believe that Branchamageddon is just around the corner, if not already here).

TearSheet (a neutral observer) published the following chart from the study:

The Financial Brand (a non-neutral observer) used that chart in an article titled, New Study Shatters Myth That Digital Channels Are Killing Branches, as well as the following one:

It Doesn’t Matter What Consumers Think About Bank Branches

IDEAS

Preferred method of communication with a banker

Preferred method to discuss with bank/credit union

Source: Celent survey of US adults, February 2018, n=2,350 Q. If you wanted to have a conversation with a banker, how you would interact with him or her?

Source: Celent

45 to 60

30 to 44

18 to 29

I prefer digital interaction with my bank. Branches should be unnecessary.

I bank digitally, but prefer some banking matters to be handled in-person.

I prefer in-person interctions with my bank.

5% 36% 60%

Over 60 4% 31% 66%

40%48%12%

54% 39%7%

20% 40% 60% 80% 100%

https://thefinancialbrand.com/72977/digital-channels-retail-branches/

https://thefinancialbrand.com/72977/digital-channels-retail-branches/


There are (at least) three things wrong here:

1. The answers don’t match the question. The question in the Celent survey (according to the published chart) was, “If you wanted to have a conversation with a banker, how would you like to interact with him or her?” Seems to me that the appropriate responses should be choices like “In-person,” “Phone,” “Text chat” and “Video chat.” Whether someone banks digitally is irrelevant to the question at hand. Personally, I would like to have seen an option to let respondents answer, “it depends.” Remember Shevlin’s Law of Consumers’ Channel Choices, which says:

Consumers will choose the channel that is most convenient to them at the time they want to conduct the transaction or interaction.

2. The data ignores interaction frequency. OK, so 77% of consumers prefer to “visit a branch” if they have a lengthy topic to discuss. But how often do they actually do that? The Financial Brand article showed that roughly half of consumers (give or take a few percentage points across the generational segments) visited a branch for “info/advice, question, open an account/loan” purposes at least once in the past two years.

SO WHAT

Great—but if they visited the branch just once in those past two years for those purposes, does that “shatter the myth” that digital channels are killing branches?

3. It doesn’t matter what consumers’ current or stated behaviors or attitudes are. Some of the research findings about consumers’ channel preferences are incredulous, at best. A study from Fiserv found that 44% of consumers said they prefer to do their “standard daily transactions” at a traditional branch with tellers.

% of consumers visiting bank branch for into/advice, questions, or account opening in past 2 years

Source: Celent

18-29years old

30-44years old

45-60years old

60+years old

53%49%

54% 55%


I find this really hard to believe. First off, what exactly are “standard daily transactions?” I would guess they were things like checking the account balance, transferring funds between accounts and paying bills.

If 44% of the people in this country want to get up off their couches, get in a car, drive to a branch, and then wait in line to conduct those transactions, then we are living in a country of morons.

Sorry, but there is simply no way that 44% of Americans want to do that (unfortunately, that doesn’t disprove the moron scenario, however).

Channel preferences for standard daily transactions

Source: Fiserv

Traditional branch with tellers

Online throughcomputer/laptop

Mobile banking with smartphone/tablet

Fully-automated branchwith no staff

44%

39%14% 2%


What If We Asked About Process Preferences?

What do you think the results would be if researchers asked their questions differently, in terms of process instead of channels. Consider, for example, the following survey question:

Assume that you were in the market for a checking account. Which of the following processes would you prefer to do to open that account:

a) Turn on your laptop, go to the bank’s website, click on an “Open Account” button, choose the desired account, and give the bank 2-3 pieces of information about yourself.

b) Turn on your smartphone, go to the bank’s mobile app, click on an “Open Account” button, choose the desired account, and give the bank 2-3 pieces of information about yourself.

c) Turn on your laptop or smartphone, launch the browser, go to the bank’s website, click on the contact us link, write down the phone number, turn off the laptop or smartphone, pick up the phone, dial the phone number, figure out what the hell the interactive voice response choices are, push a button, wait 10-15 minutes for a representative to get on the line, and then spend another 15-20 minutes giving the representative information about yourself.

d) Get up off your couch, get in your car, sit in traffic as you drive to a bank branch, find a place to park near the branch, go into the branch, wait 15-20 minutes for a branch manager to see you, fill out 10 pages of forms, get a lollipop for your kid, then sit in traffic to get back home.

I’m just guessing, but I wouldn’t be surprised if the results of my survey turned out differently than what the other researchers are finding.

The Third Perspective on Branches

There is a third group in this debate: the Branch Rationalists. They tell the Branchesaredeadivists that branches are here to stay, but then turn to the Branchophiles and tell them that branches need to change.

A BAI Banking Strategies article titled Five Tactics for Keeping Branches Relevant represented this third party when it offered five points of advice for “turning your branch infrastructure into a strategic advantage to enhance wallet share”:

1. Shift the focus to “higher quality” exchanges.

2. Cast a wider net for talented staff.

3. Approach branch design with fresh eyes.

4. Find inspiration from other innovators.

5. Apply smart, and safe, technological and process improvements.

Unfortunately, these tactics don’t address a few key issues:

https://www.bai.org/banking-strategies/article-detail/five-tactics-for-keeping-branches-relevant


1. How do you get consumers to come into branches for “higher quality” exchanges, and how much will it cost to do so?

According to the article, “some questions about financial choices are best asked and answered in person.” Prove it. I’d buy the argument that some questions are best addressed by humans, but that contact could be by phone, text, email or videoconferencing.

Even if the article’s statement were true, the fact of the matter is that many consumers don’t turn to their banks for help making financial choices.

My point here is that it’s a whole lot easier said than done shifting the interaction composition from low-quality to higher-quality exchanges. If I were the CEO of a bank, I’d want to know how much it was going to cost me to effect this change–and what I was going to get for my investment in return.

2. Will “casting a wider net” really attract talent?

The article suggests that banks should hire candidates with sales expertise, and train them to be bankers. There are (at least) a couple of things wrong with this logic: a) What makes you think good salespeople want to go to work for a bank that pays poorly and doesn’t have a strong sales culture? and b) If your bank isn’t seeing strong traffic into the branches today, simply hiring a few good salespeople isn’t going to change that, and worse, because of that, good salespeople will leave to find more lucrative opportunities elsewhere.

Ironically, the advice to find talented staff could be interpreted to imply that today’s branch staff isn’t that good. If that’s true (and I have my share of stories about incompetent branch stuff as I bet you do), then it begs the question of why any bank would want more of its customers coming into the branches if they can’t staff them with good people.

3. Why should a bank or credit union do any of those five things?

The unanswered—and sadly, unasked—question underlying the whole subject of keeping (or perhaps, making) bank branches relevant is: What good will it do?

In other words, if I, as a bank CEO, were to follow all the recommendations listed in the article, what bottom line improvement would I see?

The article promises that the five recommendations will turn your branch infrastructure into a strategic advantage to enhance wallet share, but I didn’t see any proof of that.

Conclusion: What branchophiles fail to see is that a strategy that involves “keeping branches relevant” is a strategy that is swimming upstream.

The flow of the banking river is toward digital engagement. Just as there aren’t too many types of fish that can successfully swim upstream, there aren’t too many banks or credit unions that can prosper by swimming upstream, either.


For every dollar a bank invests to shift the interaction composition, hire new branch staff, redesign branches, and invest in branch-related technological and process improvement, that’s one less dollar that can be invested elsewhere.

Bank Branches Aren’t VITAL

The BAI article suggests that banks find inspiration from other innovators. OK, how about Apple?

Apple reinvented the way technology products are sold. (They didn’t get it right on the first try, it took a couple of tweaks.) What Apple did get right, regarding the sale of technology products, is creating a retail experience that is:

1. Visual. People want to see the product.

2. Informative. People want to talk to store reps who know about the products.

3. Tactile. People want to touch and use the product.

4. Advocative (I made that word up). People want reps who will recommend products that are right for the customer, not just for the store.

5. Lean. The buying process is fast, with a minimal number of steps. No waiting in cash register lines. Fast and lean.

Apple stores are successful—at least, to some extent—because they succeed at accomplishing these five things.

Try this exercise: Create a chart with the five attributes listed above as the rows in your chart. For column headers, enter the various channels with which a bank interacts with customers—branch, call center, online and mobile. Using a scale of 1 to 5, where one is low and five is high, score each channel by its potential to deliver on the attribute. Total each column’s score.

If the branch score is the highest, repeat the exercise after you’ve come down from your LSD trip (which, ironically, can be very visual, informative and tactile).

And Yet the Debate Rages On

I had lunch recently with a former colleague who’s a consultant with expertise in change management and organizational culture. He scoffs at most firms’ stated desire to change their culture, because doing so would mean changing senior executives’ fundamental views about their firm and their industry.

It’s no different with this branch holy war. No amount of data is going to convince the Branchophiles and Branchesardeadivists that they’re wrong.


But to be an effective leader, you need to step out of your preconceptions and beliefs to make smart decisions about:

• Branch efficiency. Branch productivity trends are not encouraging. According to the Cornerstone Performance Report, over the past few years, the median number of teller transactions per branch has declined (not surprising), but teller transactions per teller FTE are virtually unchanged. That’s not a good sign. In addition, two other key productivity metrics—new accounts opened per platform FTE and direct consumer loans closed per branch—have declined.

• Sales process design. Changing the branch size and staffing model accomplishes little if changes to the sales process aren’t made. Many banks and credit unions have launched customer journey mapping efforts to reengineer sales processes, but these efforts often fail to identify: 1) the cultural hurdles that impede changes; 2) how employee rewards and incentives must change; and 3) the one thing that could add value or differentiate the institution.

• Channel budget allocation. In many institutions, the budgeting process only serves to reinforce the existing silos that exist in the organization. Shifting dollars between channels is hard—but is required in order to build new capabilities in emerging channels.

Whatever you do, the key lesson here is: Don’t listen to surveys about channel preferences. If ExxonMobil (and the other gas companies) had surveyed consumers in the early 1980s, do you really think people would have said: “Ooh! Yes! I want to get out of my car in the snow and rain and pump my own gas!”?

If you think that the best path to increasing profitability is to reduce branch expenses, then shut the suckers down. Betcha anything your organization quickly finds ways to compensate for the change in channel access.

If you think that the best path to increasing profitability and sustaining future success is keeping branches open, then go for it. After all, there are still companies out there you can rent a horse and buggy from if you really need to.

http://www.crnrstone.com/publications/Cornerstone_Report_MidSizeBanks.php

http://www.crnrstone.com/publications/Cornerstone_Report_MidSizeBanks.php


I recently had the honor of presenting at First National Horse and Buggy’s annual strategic planning offsite. I’m probably violating terms of my agreement by posting this, but the company’s planned changes to its user experience are so innovating and exciting, I don’t care how much trouble I get in.

What’s so exciting? The two most innovative planned improvements to the customer experience involve:

• Convenience. As the population ages, people are increasingly finding it harder to climb the stairs to get into the buggy. So FNHB will be deploying mini-escalators attached to the side of the buggy to make it easier for customers to get in.

• Security. Users were reporting that bad actors were stealing buggies at night, using them to go places, then returning them before daybreak. So FNHB is installing combination locks on the buggies’ wheels. If you don’t know the combination to the lock, you can’t use the buggy!

What’s Wrong with This Picture?

I didn’t really present at FNHB’s strategic planning offsite, of course, because there is no FNHB. There’s no FNHB because horse buggies are all but extinct (OK, yes there is one place in the US where they aren’t). And innovating on the user experience for an extinct—or soon to become extinct—product is a waste of time and money, wouldn’t you agree?

Yet, this is exactly what banks and credit unions in the United States are doing: innovating on products that, while not extinct, are flawed.

I did (really) present at the recent Finovate conference, however. Two of my fellow panelists spoke about the need to improve the customer experience—one focusing on the mobile experience, the other on the branch experience.

Don’t they get it? Improving the experience of a fundamentally flawed product is like installing an escalator on a horse buggy.

The hype and near-singular focus on customer experience in banking is out of hand, and actually detrimental to the changes that are needed. And some of the claims simply hold no water. A recent article published on The Financial Brand made the following claim:

“By following the footsteps of customer experience pioneers like Amazon, Netflix and Google, financial institutions can deliver hyper-personalized experiences across channels.”

The title of the article included the term “hyper-relevant experiences.” I didn’t know what that meant, so I looked it up. The best I could find was something from a Cisco paper that said:

“Personalization occurs when a retailer knows who a customer is; hyper-relevance happens when a retailer knows exactly what a customer is trying to accomplish in a real-time shopping context.”

Can You Handle a Contrarian Opinion About the Customer Experience?

https://www.cisco.com/c/dam/en/us/solutions/collateral/executive-perspectives/global-retail-wp.pdf


I really can’t imagine that customers care about this distinction. It’s silly, really. I’m on my bank’s website, on the mortgages page. Is it really “hyper-relevant” to know I want a mortgage?

Competing on Product Innovation

In their book The Discipline of Market Leaders, the authors posited that industry leaders excel in ONE of three disciplines—product leadership, customer intimacy or operational excellence—while maintaining competitive positions in the other two.

The book was written before the advent of the “customer experience” so I might argue there’s a fourth discipline a leader could compete on. In any case, I would definitely argue that a firm aspiring to be a market leader must provide an acceptable level of customer experience.

Strategists must determine, however, if investing in experience improvements really creates an economic return and/or competitive advantage (the latter produces the former). Importantly, they must determine two things: 1) How much will it cost to be the industry leader in customer experience? and 2) What competencies or capabilities will be required to achieve and maintain that leadership position?

Here’s my assertion: Only the top 25-30 banks in the United States truly have the resources—money for technology, and money for people—to be among the leaders in customer experience.

Smaller FIs don’t have the money to invest, and their reliance on third-party vendors for technology means they probably don’t have the capabilities/competencies to be the customer experience leader.

Most banks and credit unions must rely on one of the other disciplines to be the primary discipline in which they compete. Let me make a case for the product leadership discipline.

Auto Loan Features Trump User Experience

Cornerstone surveyed U.S. consumers to understand what factors influenced their choice of auto loan provider. Across the generational segments, lowest rate and lowest monthly payment were the two most important factors.

Among Millennials and Gen Xers, “transparent and flexible loan features” was the third most important factor. Among these three segments (Millennials were sub-categorized by those in their 20s and those in their 30s), “speed of application and decision process” was ranked toward the bottom of the list. (Note: To see the actual percentages, download our research report Reinventing Consumer Loans.)

https://www.amazon.com/Discipline-Market-Leaders-Customers-Dominate-ebook/dp/B00CW0H27A/ref=sr_1_1

https://kasasa.com/landing-pages/cornerstone-reinventing-consumer-loans.html


Ranking of Factors Influencing Choice of Auto Loan Provider



Gen Xers (1964-1979)

Boomers (1945-1963)

Lowest interest rate 1 1 1 1

Lowest monthly payment amount 2 2 2 2

Transparent, flexible loan features 3 3 3 5

Digital tools to track / pay the loan 4 5 6 8

Customer service quality 5 4 5 6

Previous relationship with institution 6 7 4 3

Dealer referral to get lower car price 7 8 8 7

Speed of application / decision process 8 6 7 4

In addition, roughly half of Millennials said that they would choose the provider that provided flexible terms and assistance in paying back the loan faster—and would even open a checking account with that institution if that’s what it took to get the loan.

Imagine an FI offered an auto loan that had a comparable rate to other FIs, but gave you: 1) flexible monthly payments; 2) assistance paying back the lean faster; and 3) insight into how payments affect balances.

How would this impact you choice of FI?

Ranking of Factors Influencing Choice of Auto Loan Provider

Impact of Loan Features on Millennials’ Choice of Auto Loan



I would select that FI, and would open a checking account there if that’s

what I had to do to get the loan

I would select that FI, but not if I had to open a checking account

These features would not influence choice of FI for the auto loan

52%

32%

16%


Millennials Gen X Younger Boomers Older Boomers

11% 13%16%

21%

For the majority, competing on customer intimacy or product leadership is the necessary competitive discipline. Please think about that as the rest of the world spews nonsense about “hyper-personalized” experiences.

There’s no doubt that “customer experience” is important. But for the vast majority of banks and credit unions, there’s little chance they can excel or differentiate on the basis of the customer experience (not that there’s a singular “experience,” but don’t get me started on that).

SO WHAT

How difficult was the mortgage process? (% rating process “very difficult”)

Source: National Association of Realtors, 2017

We don’t have comparable data for mortgages, but there is a data point that suggests to us that the mortgage user experience isn’t as bad as some people make it out to be. In a study conducted by the National Association of Realtors, just 11% of Millennials said that the mortgage process was “very difficult”—about half the percentage of older Boomers who said that about the mortgage process.


Can Banks Become Digital Identity Providers?

TECH TRENDS

Although the topic of digital identity has been getting daily attention in 2018, it’s hardly a new topic. In 1993, The New Yorker published what has become one of the most—if not the most—iconic cartoons about the Internet:

Despite a quarter century of technological advances that include e-commerce, social media and the smartphone, there is still no easy way to prove online that you’re not a dog, are over 18, live at a certain address, graduated from a certain school, work at a specific company or own a specific asset.

The meteoric growth in smartphone adoption over the past 10 years outstripped any industry’s or government’s ability to address digital identity challenges. The emergence of distributed ledger technology (e.g., blockchain) promises new approaches to digital identity management but is emerging relatively late to the game. And with the rise of the Internet of Things (IoT) comes a new reality in digital identity:

“On the Internet, no one knows you’re a refrigerator pretending to be a dog.” —Dave Birch

While various “recognition” technologies—e.g., voice, face, fingerprint, iris and vein—have emerged over the past few years, there is still no widely accepted digital identity management scheme in the United States. Will something emerge here?


What’s Going on in the Rest of the World?

Various governments around the world have launched identity initiatives including those in:

• Austria. Austria’s Citizen Card is designed to provide a secure and privacy-friendly form of identity management. Positive aspects of the approach include: 1) Comprehensive data protection law; 2) Independent data protection authority; 3) Limited data kept on the card; 4) Separation of identities by sector; and 5) Integration with 12 government services. Drawbacks, however, include concerns about the security of card readers.

• Estonia. The Estonian e-ID card includes an embedded PKI application that enables online authentication and digital signature with electronic certificates. Positive aspects of the system include: 1) Comprehensive data protection law; 2) Independent data protection authority; 3) Logging that enables auditing; and 4) Minimal data is provided to service providers. The drawback is that excessive data is held on the card.

• United Kingdom. GOV.UK Verify is an identity scheme that establishes a private sector marketplace for digital identity, with private sector organizations creating and managing digital identities on behalf of citizens. Positive aspects: 1) Comprehensive data protection law; 2) Independent data protection authority; 3) Decoupling of identity providers and service providers; 4) Minimization of data sharing; and 5) Focus on end-user experience. Drawbacks include the potential for tracking and surveillance to occur as a result of “matching data set” in all identity transactions.

Today’s political climate will squelch any national identity effort, which will be seen by many (on one side of the political spectrum) as an attempt to limit immigration and identify (and remove) immigrants illegally in the United States. In addition, a government-driven identification system hardly seems to be a priority to the other side of the political spectrum.

As a result, the United States is destined to play catch-up with—and be impacted by—the rest of the world. European developments like GDPR impact U.S. banks and, in some cases, conflict with U.S.-based law—for example, the requirement to notify the government of a data breach within 72 hours of its discovery. According to Andy Roth, partner at law firm Cooley LLP:

Or more specifically … so what about the United States? The prospects for a digital identity scheme in the United States on par with what Austria, Estonia or the United Kingdom has done look slim for the short-term.

SO WHAT


“A European data subject can make requests on what data the bank has on it and can make changes and request deletion of the data. These require business practices that banks don’t have in the U.S.”

While the United States fiddles around with what to call the Consumer Financial Protection Bureau (the current director claims the legal name is Bureau of Consumer Financial Protection, and there’s a bill in the House to change the name to the Financial Product Safety Commission), Rome is burning—the U.S. banking system, that is. Meanwhile, digital identity issues go unaddressed.

Can Banks Be Digital ID Providers?

For all the good work going on to advance the concept of digital identity, there’s a missing component that is the main impediment to change: Trust. In his book Before Babylon, Beyond Bitcoin, Dave Birch wrote:

“Identity is changing profoundly, and money is changing equally profoundly because of the same technological change. What will link changing identities with changing money? Trust. In a world based on trust, it will be reputation rather than regulation that will animate trust in economic exchange. The ‘social graph’—the network of our social identities—will be the nexus of commerce, administration and interaction.”

Do consumers trust banks? It’s debatable. But even if the answer is yes, the better question is whether banks trust each other. Speaking on the prospects of using blockchain technology for digital identity management, one bank exec we talked to told us:

“Banks like Rabobank and RBS have done proof-of-concepts that address actions, consent and decentralize commitment. But they haven’t stored the identities—that’s what needs to be solved. Blocks take time to create. The biggest barriers are liability and trust. Do banks trust each other? Can the first entity be trusted? Can we trust others to have the same stringent KYC [know your customer] policy that we do?”

Bank consortia don’t exactly have a great track record. If you need proof, I have one word for you: ClearXchange.

U.S.-based banks are deluding themselves into thinking they can be digital ID providers. At the recent Finovate conference, a panel discussion on digital identity moderated by Javelin Research’s Al Pascual, included someone from Wells Fargo and the Capital One executive in charge of its new digital ID service. One of my tweets from the session speaks volumes


Bottom line: The political situation in the United States points to a lack of trust in the government among consumers to come up with a digital identity solution, and I doubt there’s enough trust between banks for them to come together. One-off efforts by banks may solve their own institution’s needs, but hardly qualify as a digital identity scheme on a broader scale.

One ray of hope: credit union consortia like CU Ledger. But without a catalyst to improve the levels of trust, we’re pessimistic that much will change at the governmental or societal level in the United States regarding digital identity, leaving bank execs to fend for themselves for the next few years.

Interested in the topic of digital identity management? Check out my research report Digital Identity in Banking: What CEOs Need to Know About Best Practices and Future Directions.

Digital Identity In BankingWhat CEOs Need to Know About Best Practices and Future Directions

RON SHEVLIN Director of Research Cornerstone Advisors

COMMISSIONED BY

https://www.avoka.com/portfolio-items/white-paper-digital-identity-in-banking/?utm_source=Ron%20Shevlin&utm_medium=referral&utm_campaign=White%20Paper%20Digital%20ID&utm_term=White%20Paper&utm_content=Sponsored%20Content




As reported in Mobile Payments Today, a study from Auriemma Consulting Group found that user adoption of the “Pays”—Apple Pay, Google Pay and Samsung Pay—increased to 34% of smartphone users in Q1 2018, a five percentage point increase year-over-year.

Despite the increase, fewer users said they would recommend the services in 2018 than did in 2017. In 2017, 31% said they wouldn’t recommend the service they used. In this year’s survey, that percentage rose to 42%. Inactive users were far more negative to the service (87% wouldn’t recommend) than active users (6% wouldn’t recommend). Auriemma suggested that “developing the habit” is critical to mobile payment success but that merchant-branded mobile payments are better positioned than the Pays to drive more frequent use of mobile payments.

According to Jaclyn Holmes, Auriemma’s director of payment insights:

“The influx of new players makes the future of the Big Three uncertain. Being first to market hasn’t given Apple, Google, or Samsung a leg up on mobile payment newcomers. Providers who are able to deliver a more positive, reliable pay experience are most likely to encourage continued pay usage, while others may struggle in the years ahead.”

For consumers who regularly frequent or shop at Starbucks or Walmart, using those merchants’ mobile apps to pay, manage loyalty points, and store funds for future payments makes more sense than using the Pays, which don’t provide any of those benefits.

In fact, roughly half of Walmart Pay users rate the tool as “much better” than swiping a card when it comes to ease of use, speed, security and convenience (we wish InfoScout had asked how users rated Walmart Pay versus the other Pays).

Are the Mobile Pays—Apple, Android & Samsung—in Trouble?

RESEARCH NUGGETS

Cornerstone isn’t ready to call for the death (or even uncertain future) of the Big Three, but what’s going on here doesn’t bode well for the Pays. The Big Three’s problem isn’t that they don’t have a “positive, reliable pay experience”—it’s their inferior value proposition.

SO WHAT

How would you rate Walmart Pay versus swiping a card at checkout?

Source: InfoScout

Speed

Security

Convenience

Much better

About the same

Much worse

50% 48%

Ease of use 47% 53%

50%49%

42%

2%

1%

3%55%

https://www.mobilepaymentstoday.com/news/study-mobile-payment-users-unlikely-to-recommend-the-pays/


Not only are the merchants’ apps a threat to the Pays, so are the major P2P providers. In a consumer survey Cornerstone fielded in Q3 2017, we asked consumers, “How likely would you be to use a general use debit card from the major P2P providers?” Nearly half of Millennials said that not only would they be “very likely” to use PayPal, they might even make it their primary payment card. Or payment app.

The Pays—Samsung, in particular—have some catching up to do. A study from Kount, The Fraud Practice, CNP and PayPal found that nearly six in 10 merchants already accept PayPal—20 percentage points more than accept Android Pay, and 43 percentage points than take Samsung Pay.

Bottom line: It wasn’t too long ago that financial institutions (credit unions in particular) were scrambling to accept Apple Pay, anticipating big increases in payment volumes and (perhaps just as importantly to a lot of them) hoping to jump on the cool kids’ bandwagon. It hasn’t paid off. While it still might, realizing those benefits will require fighting off new threats to the FIs’ payments business.

How likely would you be to use a general use debit card from the following P2P providers? (% of Millennials responding “Very likely, might use it as primary card”)

Mobile Wars In a survey, 58% of merchants said they accepted PayPal last year

PayPal Apple Google Venmo

44%

25% 24% 20%


Source: Mobile Payments and Fraud 2017 Report, sponsored by Kount, the Fraud Practice, CNP and PayPal

PayPal

Apple Pay

Android Pay

Visa Checkout

Masterpass

Samsung Pay

AmEx Express Checkout

58%

48%

26%

16%

15%

9%

Alipay

Chase Pay

8%

6%

38%


Forrester Research estimates that mobile commerce sales reached $153 billion in 2017—one-third of all online retail revenue—a 29% increase over 2016. About half of online adults in the US shopped on their phone at least once in 2017.

Looking ahead, Forrester foresees 53 million new smartphone shoppers over the next five years and projects 13% annual growth in mobile commerce through 2022, which will put it at half of online retail sales at that point. Retail sales made on tablets will see 6% annual growth, while smartphone-based purchases will increase 16% year-over-year through 2022.

Forrester concludes that “more than two-thirds of today’s online buyers are already mobile buyers, leaving less room for growth.”

Total retail sales in the United States were roughly $5 trillion in 2017, which works out to a little more than $15,000 per American. If half of the online population (of 272 million people) rang up $153 billion in mobile sales, that’s $1,125 per person, 7.3% of all their retail purchases. If mobile retail sales grow 13% per year through 2022, mobile purchasers will be spending 13.5% of their total retail spend through the mobile channel.

The Factors Accelerating Mobile Retail Sales

That’s roughly a doubling in spend in five years, which seems pretty reasonable, but there are factors that should help accelerate retail mobile sales:

• Demographics. Younger consumers account for a disproportionately high percentage of today’s mobile sales, but a disproportionately low percentage of total retail sales. Why? Twenty-somethings haven’t hit the prime of their earning power, nor have they reached the life stages that drive up sending, like getting married, having kids, needing bigger cars and buying houses. As the percentage of their retail spend increases, their total retail spend will be increasing significantly as well—driving growth in mobile sales.

Mobile Retail Sales Growth Projections Are Too Pessimistic

That’s an odd conclusion. If only one-third of today’s online buyers currently make mobile purchases, and the other two-thirds have no intention of doing so, then that might warrant lower growth projections. If every online buyer was already a mobile buyer, but had no intention of increasing the number of mobile purchases they make, then maybe that would justify lower growth forecasts. But neither of those scenarios seem likely, so why conclude “less room for growth?”

SO WHAT

https://www.mobilemarketer.com/news/forrester-us-mobile-sales-jumped-29-to-153b-last-year/521076/


100MSquare feet

25M

50M

75MSquare feet

Square feet

Square feet

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

YTD

• Online sales cannibalization. If Forrester’s estimates are correct, then online sales reached $459 billion in 2017, roughly $1,700 per online consumer. Assuming straight-line growth in the firm’s mobile sales estimate, mobile sales per consumer won’t reach that $1,700 until the third year of the five-year estimate. Any increase in the cannibalization of online sales (by mobile devices) will help accelerate mobile’s growth.

• Merchant mobile wallets. Starbucks’ customers spend a lot more than 7.3% of their total Starbucks spend through the mobile channel. Other merchants are finally following Starbucks’ lead. The fastest growing merchant mobile payment app? Walmart. The growing number of merchants that deploy mobile wallets will create more room for mobile payment growth, not less.

• New retail models. Amazon recently opened a test store called Amazon Go, which relies exclusively on mobile payments. Which do you think is the more likely scenario: a) Amazon will build hundreds or thousands of new Amazon Go stores, or b) Amazon will extend the Amazon Go concept to its existing Whole Foods locations? I’m betting on the latter, which will help accelerate retail mobile sales in the United States.

The Real Estate Paradox

If Forrester’s estimate of current mobile retail sales is correct—$153 billion representing one-third of online sales—then mobile sales account for 3.1% of total retail sales, and the online channel accounts for 9.2% (assuming Forrester treats these as two separate categories—if I’m wrong about that, no problem, because it only strengthens the argument I’m about the make). That means digital sales are 12.3% of total retail sales.

Think about that as you consider the following: More store closings were announced in 2017 than any other year on record, and, at its current pace, closings in 2018 will surpass the 105 million square feet announced last year.

Shakeout in Retail U.S. store closures announced this year have reached 77 million square feet

Source: CoStar; graphic by Bloomberg Businessweek


Doesn’t it seem odd that a relatively small percentage of sales (12%) is causing such a big upheaval in physical retail space?

The explanation for this must be that mobile’s share of sales varies widely across segments of the retail space, and certain segments are seeing a disproportionately high percentage of mobile sales.

Does that mean the other segments are safe from disruption? That’s a risky assumption—and another reason why mobile sales growth will accelerate.

What’s the Over/Under on This Forecast?

I’m not sniping at Forrester here. A conservative estimate is preferable to a wildly overoptimistic forecast. This wouldn’t be the first time that Forrester underestimated digital retail sales. In a January 2012 forecast, it projected online retail sales to reach $327 billion in 2016. With it’s new mobile sales numbers, it says that online sales for 2017 were $459 billion. Maybe they were expecting a 40% jump from 2016 to 2017, who knows?

eMarketer, on the other hand, has a far more aggressive mobile sales forecast. It’s 2016 and 2017 starting points are relatively close to Forrester’s estimates, but eMarketer expects mobile sales to approach $336 billion by 2020, nearly 50% more than Forrester’s projection for that year.

For the record, eMarketer wasn’t always so bullish. In its April 2014 forecast, it projected mobile commerce sales to only reach $114.5 billion in 2017, and $132.7 billion in 2018. Two-and-a-half years after that projection, it upwardly revised its 2018 mobile commerce forecast by 56%.

2015 2016

Tablet

2017 2018 2019 2020

Smartphone

Other

51.7%40.8%

34.0%28.7%

24.6% 21.6%

46.6% 58.0% 65.0% 70.5% 74.8% 77.9%

$80.94 $115.92 $156.43 $206.53 $267.26 $335.84

1.7% 1.3% 1.0% 0.8% 0.6% 0.5%

US Retail Mcommerce Sales Share, by Device 2015-2020 (% of total and billions)

Note: Includes products or services ordered using the internet via mobile devices, regardless of the method of payment or fulfillment; excludes travel and event tickets.

Source: eMarketer, Sept. 2016

http://slideplayer.com/slide/11779550/

https://www.emarketer.com/Article/Listen-In-Five-Mobile-Commerce-Predictions-2017/1014667


The Impact on Financial Institutions

This is a cautionary tale for banks and credit unions, but not about branches. Instead, it’s about payments-related revenue. Mobile sales growth is a threat to banks’ interchange revenue and their credit card-related interest income.

There’s no easy response. Banks’ best approach may be to reinvent the checking account and create new sources of value that consumers are willing to pay for (versus relying on interchange interest to monetize the accounts).


The Fed released the results from its 2017 survey of small businesses, and Cornerstone’s commercial banking experts Joel Pruis and Joe Ganzelli weighed in on what the survey results mean. The study found that:

Demand for financing fell, with 40% of companies seeking funding, down from 45% a year earlier.

Joel: “This is fairly typical as the old rule of thumb is that half to two-thirds of all small businesses simply don’t borrow or use credit so this metric is in line with the norm.”

Sixty-four percent reported they had financial challenges.

Joe: “Two-thirds of this 64% did not seek business financing but instead relied on personal funds, which is noteworthy. Why? Their perception of tight credit, or their business’ lack of credit worthiness, contributed to their financial challenges.”

Joel: “There is no capital planning for small businesses. The personal checkbook is the same as the business checkbook—it’s all the owner’s money, so they should expect to put money back into the business periodically. Sometimes this is only short term, but the challenge—and opportunity for banks—is when the funding is more permanent.”

Forty percent said paying operating expenses was a challenge.

Joel: “This is a problem when the business is not growing or is in the startup phase. Operating expenses are a challenge if the business is growing and has a building balance of accounts receivables. Business is profitable but is funding the growing expenses and has to wait for the cash to come in from the customers. This is a great financing opportunity for banks.”

Thirty percent said it was difficult to get credit.

Joel: “This may be an expression of both the ability to actually get approved and the difficult loan process by most banks for small businesses. The difficult process would involve: 1) Requiring too much information relative to the size of the credit request (asking for three years’ personal and business tax returns for a $50K line of credit), which many small business owners would find it difficult to submit all the paper, and 2) Asking small business owners to meet with a banker during the small business’ primary operating hours—i.e., during prime income-producing times for the business.”

Joe: “Banks should be aware of these borrower perceptions and attempt to address them upfront in some fashion where possible (e.g., business credit card offerings, SBA vehicles, liquid collateral secured or payment reserve products for borrowers that require them).”

The State of Small Business Borrowing


Forty-eight sought loans from large banks, 47% from small banks, 24% from online lenders. As a point of comparison, in 2015, the percentages were 42% from large banks, 52% from small banks and 20% from online lenders.

Joel: “If you break down the percentages here, one out of four businesses applying for credit did so via an online application. This was unheard of five-plus years ago. It means small business owners are comfortable with online applications, and they like that it’s available 24/7 so the small business owner can apply when he/she has the time versus the small business owner being forced to work when it is convenient for the bank.”

Joe: “Large banks and online lenders realized increases at the expense of small banks, likely attributable to delivery speed and more diverse product.”

More businesses were successful in obtaining financing than in 2016, with 46% versus 40% getting approvals. In addition, 58% of loan and credit applications were successful, getting all the funds they requested, up from 53% in 2016.

Joe: “This contradicts the first and third bullets, which could point to borrowers’ perceptions regarding the difficulty in obtaining credit versus a tightening of lenders’ credit standards.”

Joel: “This is another big stat. Banks are getting more aggressive in pursuing small business financing, which is reflected in the increase in the percentage of small businesses that applied with large banks between 2015 and 2017.”


Cornerstone Advisors’ multidisciplinary team is backed by the experience that comes from hundreds of thousands of in-the-trenches client hours. We live by the philosophy that you can’t improve what you don’t measure. With laser-focus measurement, financial institutions can develop more meaningful business strategies, make smarter technology decisions, and strategically re-engineer processes.

Cornerstone Advisors provides an array of Solutions offerings, including Strategy and Execution, Vendor Research, Contracts and Technology.

Cornerstone publishes GonzoBanker, our blog; the Insight Vault, a digital platform that draws on Cornerstone’s exclusive research, operational benchmark data, and real-world experience; the Cornerstone Performance Report, a series of annual benchmarking studies; and a variety of white papers. Cornerstone hosts invitation-only roundtables for bank and credit union executives.

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Have questions about this report? Contact:

Ron Shevlin, Director of Research, Cornerstone Advisors

[email protected] 480.424.5849

www.crnrstone.com

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