CHAPTER 13
The Long View
It is not the strongest of the species that survives, or the most intelligent that survives. It is the one that is most adaptable to change.
–Charles Darwin
Many organizations find it daunting to keep up with digital changes. This chapter aims to provide some perspective on the incremental changes your organization can make to prepare for threats and take advantage of upcoming trends. Before doing this, it's important to understand the threats and opportunities that exist.
The Problem: Banking and Financial Competitors
For many years, banks and credit unions have considered the behemoth banks to be their biggest competitors. Names like JPMorgan Chase and USAA come to mind right away. Both of those players, JPMorgan Chase in particular, are very large organizations that have a lot of money and resources to invest in digital technology. USAA is well known for delivering all services via technology, and they rank #34 in banks. USAA has 28,000+ employees and JPMorgan Chase 258,965 employees globally at the end of 2012. When people hear those familiar names, they think about their products and, especially, the breadth of services they offer. Most importantly, we think about the amount of resources they have to throw at various projects.
There's no doubt about it; big banks are tough competition, but local banks and credit unions are facing another problem as well. Other players are coming into our space. I don't mean other banks or credit unions. I mean entirely new types of financial organizations. For instance, Venmo, a person-to-person payment service owned by PayPal, which continues to infringe on traditional banking, has become known as the new $20 bill. As a matter of fact, I recently read an article with the title “Is PayPal the New MasterCard or Visa?”
When these new nonbanks move into this space, they don't have to jump through the same hoops that smaller, traditional financial institutions need to. Additionally, they are not under the same regulatory scrutiny. It is important to understand what these new competitors are doing. Every one of them looks at a small section of what you do and digitizes it to the best of their ability.
One example of this is Kabbage. Kabbage (www.kabbage.com) is a company that took advantage of the fact that most small business loans are incredibly difficult to get. The application and approval process takes a very long time and, as a business owner myself, I can tell you, it's not easy. However, Kabbage promises that within 24 hours of filling out their forms, you can have up to a $100,000 line of credit. This beats every institution that I'm aware of in the market right now. Also consider Intuit's Rocket Mortgage product. If you have ever watched a TV or glanced at one for more than 30 seconds, you likely have seen a commercial for this product. The product points out the complexity and length of time it takes to conduct a mortgage transaction with other institutions and simplifies the process. This simplification is built on digital interactions and digitizing paperwork and workflow. The end result is a mortgage application that can be completed quickly and is processed within minutes not days.
So, what does that mean? It means that many banks are being taken apart one little piece at a time. Brett King, author of Breaking Banks, described it as “death by 4,000 cuts.”1 It's the struggle for adoption of new financial technologies and how we have lagged behind in the United States.
How do we keep up? Well, one plan of action is to keep a close eye on the European Union (EU). In Europe you see mass innovation in the financial space: the revised Payment Services Directive (PSD2) and the General Data Protection Regulation (GDPR) are two EU regulations that work to guide and accelerate the adoption of new technology. Even when the United Kingdom leaves the EU, it will still share a common banking system.
Threats: The –tions
Let's take a minute and talk about the threats that we face. I like to call these the –TIONS (pronounced shuns) because they all end in –sion or –tion.
Interchange Compression
The first of the –TIONS is interchange compression. Notice that I did not say “interchange disappearance” or “interchange goes away.” This phenomenon is compression, and we will continue to see it. For example, we are seeing the rise of the merchant wallet, an app-based payment method that links to a customer's credit card or bank account. In less than a year, Dunkin' Donuts, Taco Bell, and Chick-fil-A all debuted merchant wallets, and these services have been gaining adoption.
There are many reasons why merchants want you to use their app:
- They want you to have the best experience possible. When you use something like Apple Pay, you bypass loyalty points, in-app ordering, and other exclusive features. A specialized wallet app dedicated to their brand vastly expands their control of the experience.
- Single-sale revenue growth: Taco Bell claims that it sees 20 percent higher purchase totals from merchant wallet purchases.
- The application fosters engagement—having the app on your phone is kind of like having a magnet for that merchant on your refrigerator. Whenever you open your phone and flip through the screens, you will see the app. Especially services like “order ahead” and “repeat last order.”
- They also collect data from the applications:
- Location-based data: Have you been close to one of their stores?
- Market segmentation data based on device
- Instant user feedback
- Stored value transactions: Starbucks has proven that consumers will put money in a stored value account associated with their brands. Stored value means that the money they transfer to Starbucks is no longer in your checking account.
With this in mind, say you're a loyal customer of Dunkin' Donuts. You roll through its drive-through every day and you use your credit card (issued by a local bank or credit union) to buy your morning coffee. Every once in a while you buy a dozen donuts to share at the office. One day, you're passing through the drive-thru and you notice that Dunkin' Donuts has an app. You also see that you can get free coffee and donut discounts by purchasing with their app. What do you do? Obviously, you download the app. Logic would dictate that you would enter information for the same credit card that you've been handing to the cashier every day. However, many people don't do this. Most people have what they consider to be a digital card that they use for apps and online purchases. Usually, it's issued by one of the big players: Chase, Citi, Capital One, you get the idea.
I have a theory as to why that is. Many years ago, when the internet first came on the scene, it was a dark, scary place to do business. Fearing fraud, most of the small credit unions and banks counseled their customers and members to not store their credit card numbers online. The big players didn't echo that message. As a result, they got a foothold on that beachhead and secured top-of-app status. Lately the big players have been taking it another level. American Express has added incentives for their customers if they use their Amex cards as their payment for Uber. This trend will continue; meanwhile, our smaller financial institutions don't even notice these losses.
If not addressed, these small defections from either the credit card or debit card portfolio will add up to larger losses. For many years the financial industry has talked about being top of wallet. Now it's time to become top of app. Later in the technology section we'll talk about the tools that you need to succeed at being top of app.
A local grocery store puts out an app that allows customers to pay with a stored card. Imagine a consumer with a family of four spends about $360 at the store every two weeks—and each time uses a debit card issued by their credit union. If this consumer gets the grocer's app and, instead of entering her trusty credit union card, inputs the number of a big player card, you're now out $720 a month worth of interchange.
More importantly, we've got to replace interchange. This leads me to the next –TION: cannibalization.
Cannibalization
We're seeing cannibalization, but we're not doing anything about it. For many years, PayPal has pushed its customers to create what it calls a bank draft account, which is really an ACH account. On average, ACH transactions cost most financial institutions $0.26 while creating no revenue. Many retailers offer their customers a ACH option to pay. Amazon is a great example of a retailer that has this option.
Are we cannibalizing our own business? Are we making it too easy for our customers to use services that do not benefit the bank and therefore benefit the customers? Is it too easy to use ACH to move money out of the financial institution into bill pay services like Mint Bills. Will we eventually have to charge for ACH? (More on this later.)
Digitization
Digitization is the process of reengineering processes, increasing communication, and reducing effort for both the consumer and the staff member by using state-of-the-art technologies like smartphone applications, data analytics, and enhanced workflow processing. When these technologies are used together, it shortens transaction times and reduces complexity for the consumers.
Companies like Kabbage and Intuit are leading the way in digitization. These companies take advantage of the fact that traditional banking processes are so cumbersome and take so long. They are working through these processes using experienced digital designers to create fluid workflows that are very easy and quick to get through. As a result, places like the Lending Club and Intuit's Rocket Mortgage are seeing spikes in their services because people are looking for simplicity, speed, efficiency, and service. Many think it's about having these services online or in an application on your phone. It would be a mistake to think that digitization is only about digitizing the application process. One of the main features of the Rocket Mortgage application is a chat helper on every page. If you linger on a page or stop moving your mouse for a while, you can be sure the Rocket Mortgage application is going to pop up with a chat asking, “Are you having an issue? Can we help you?”
The digitization process covers origination AND transaction completion. It's not about digitizing a single part of the process; it's about being digital from beginning to end, including out to the fringe players like title companies and car dealerships. Think about what it would look like if Apple sold you a house. What would its version of the transaction look like? That's what digitization is.
The world of marketing has changed considerably. New marketing paradigms like inbound marketing and data-driven marketing have pushed companies like Amazon and Zappos, and yet, we have not seen mass adoption of these new marketing techniques in the banking market. New approaches like inbound marketing and sites like HubSpot are revolutionizing the online sales process. The digitization of the marketing process is very prevalent; however, most banking sites have not employed any of these technologies.
Mobilization
The next of the –TION is mobilization. Many of us have direct experience with this. At this point, it's table stakes for banks and credit unions to have a mobile app, but few smaller firms are looking beyond that. For example, what's going to happen when people start using wearable en masse? It is just a matter of time before augmented reality makes it way into our everyday lives via glasses or implants. Mobilization involves providing your entire digital offering in a mobile platform. This has been very challenging for many banking organizations who have struggled to provide all services in all channels. You can find complaints in all of the major mobile application stores about financial services applications that fail to provide access to real time credit card balances or allow a mortgage payment. The challenge with mobilization is that many financial institutions didn't anticipate the mobile shift, and as a result, their systems were not designed to support a mobile architecture. This leads to the missing feature symptoms described above.
Many financial institutions are trying to synchronize their mobile offerings with their online web-based offerings and as a result are falling behind in implementing the latest technologies.
Disintermediation
Disintermediation is the last of the –TIONS. There's never been a greater time for disruptors to get between you and your customer. It happens all of the time with organizations like Mint or Envelopes. These apps and sites get the customer to enter a user name and password, and all of a sudden, your clients spend all of their time on that site instead of on yours. As a result, you lose marketing share and eyeballs.
The Reality of Change
These are all real threats that we face, so we must change our path quickly. Despite being predicted many, many times, the big disruption wave hasn't hit yet. CUs and banks are still strong. However, the biggest catalyst for change is always a catastrophe. A serious threat leads to action, taking risks, and leaving comfort zones. How will financial institutions face these threats and adapt to the coming change?
Here's one of the reasons why fintech has become such a big threat. In 2000, according to CB Insights Upfront Ventures, it cost at least $5 million to launch a startup. You had to buy software, licenses, and firewalls. You had to hire engineers to run things. You had to have your own data center and so much other infrastructure to get off the ground that for most entrepreneurs it was out of the question to engage the financial services world.
Now take a look at financial startup costs in 2005. By then, it was only half a million dollars. We saw the rise of open source. Technology also came into play for horizontal scaling, which was the ability to scale out as opposed to having to buy bigger machines. You could now just add more, cheaper machines. Five hundred thousand is still a lot of money, but it's a tenth of what it took just five years earlier.
Now fast forward to 2009. The price tag has fallen to $50,000. Thanks to cloud services, all of a sudden a data center wasn't necessary. A startup could pay for only the processing that it used. This ushered in a whole new era. Suddenly, a startup could buy a small office somewhere. It didn't need a costly tier-four data center with signal coming in from two different directions and fire suppression and air conditioning. Now, the startup could just focus on what it did best: the business, the programming, and the creation of new things.
Fast forward yet again to 2011. Now anyone can start a startup for a mere $5,000. Why? First, you can see the introduction of open APIs. You can use all these products—Twilio, Office365, Salesforce, and other software as a service (SaaS). You don't have to rebuild the foundation when you start a new business, and if you don't like the existing footprint, you can change that easily. You get to create your own experience within these platforms.
This advancement enables the ability to globalize your workforce. You can be sitting in Colorado Springs and you can have people working for you in India or Los Angeles. I found my own assistant on a site called Upwork.com. I sorted through the marketplace and I found someone who wanted to work. We have met in person only once in two years—and everything's run smoothly. These are the reasons why people are starting these platforms, and why disruption gets easier day by day.
One of the great examples of a technology company that delivers financial services is USAA. It is second to none in its digital and online platforms. They're incredibly innovative and they're clearly organized like a technology company. Umpqua is a great example of the second type of organization, a financial services company that delivers via technology. Umpqua is a fantastic bank in the Pacific Northwest.
When comparing USAA and Umpqua at face value, you'd say there's not much difference. It's not about what they deliver on the front end. As a matter of fact, both approaches are equally effective. However, after drilling down into their organizational structures and methods, you will notice major differences. At the core of this book is determining what it means to organize your institution into one of these two structures—and how to implement and break your digital gridlock regardless of whether you want to be a technology company or a financial services company.
Changing Features or Services
Here's the difference between the two: Imagine these as two sides of a block (Figure 13.1). It's when you live in the middle that the problem presents itself. It's when you're not really a technology company and you're only kind of a financial services company, you're living in the middle. Living in the middle is akin to not knowing who you are as an organization; it causes confusion and fosters distrust. Read on to learn how this happens.
Figure 13.1 What type of organization are you?
Let me explain how you wake up one day and find yourself in the middle. Let's pretend you're the CEO of Ahead of the Curve Bank (ACB). Ahead of the Curve Bank is a $10 billion organization with 50 branches and is well-known in the community for great service. Now, Ahead of the Curve Bank is very dependent on its technology providers. It has chosen to purchase turnkey solutions from its banking technology provider. For the purposes of our discussion, let's call that big provider BigTek. BigTek is a very big technology provider that provides pretty much every product you could ever want if you're running a financial institution. It provides your core platform, which processes your general ledgers, your debit, and your credit services. It provides you home banking, a mobile platform, and a bill pay platform. In theory, all of these services are integrated because they come from the same company, meaning that they all function together in a holistic way that is seamless to your customers.
One day, as CEO of Ahead of the Curve Bank, your chief retail officer comes into your office, and he is livid. He's banging on your desk, saying, “Look, we can't work with BigTek's bill pay platform any more. We're falling behind. The competitors in the area are overtaking us.” He reminds you that it's an important product and was earmarked by the board as the centerpiece of the institution's growth plan. He says to you, “We need to look at something else!” You respond, “Well, tell me why we should move.”
For the next hour, he makes a compelling argument to move to a new platform. He points out the more enticing features in your competitors' platforms and has customer feedback from iTunes and Google Play that Ahead of the Curve customers are clamoring for these features. You agree that it would be wise to explore other bill pay products in the market.
Cost
Cost is the first reason why banks switch services or products. Many organizations believe they're paying too much for service based on industry comparisons. Most vendors I know would much rather work with you on cost than to lose you as a customer because it's very difficult to get a new customer. Unless your organization or the vendor is being unreasonable, the cost issue can usually be negotiated.
Service
Service is the second reason why banks switch products or services. Perhaps the service you are receiving from the vendor is bad or inconsistent. Maybe the product was unavailable to your customers for a whole week in the past quarter. Platform stability is a common complaint of platform services like bill pay. Unless your requests are unreasonable or the vendor is incompetent, most vendors will work very hard to solve your problem because it is likely a problem for the rest of their customers. However, if they do have some sort of systemic problem, then yes, the stability of the service would be a good reason to leave.
Security
Are there security issues with the vendor you are working with? Has it suffered a breach? That is another reason to move as well, and a very good reason. Security will be covered in depth later in this book, but for now, if your vendor or provider has had a security breach that has put your organization at risk of losing your reputation, then leaving that vendor is most definitely an option.
Features
Finally, features are a huge reason why banks make a change. While there could be many reasons to move between platforms or between services, the first reason is usually going to be features. Features are important because they often represent the sizzle that customers are looking for in a product and can often be a reason for a customer to move from one financial institution to another. Most products are about 85 percent the same and 15 percent different. Take bill pay as an example. All bill-paying platforms have payees, payments, and recurring payments as feature table stakes. These features are 85 percent of the stock features that make up a good bill pay platform. They are all pretty much the same between all other providers of this service. However, when we look at the different players out there, each one of those players may have some unique features that may fit the culture of your banks customers or have a benefit to your geographic area or be appealing to a particular demographic that your organization serves. Perhaps, for example, you have a large military group that really values the ability to utilize remote bill pay. This ability is the 15 percent of features that is different between each vendor offering and is what usually drives organizations to move from one product to another.
In this story, the CRO's most compelling point was the lack of features in the BigTek bill pay platform. However it must be noted that BigTek has a big investment in the bill pay that the organization is using. They have spent money integrating into their home banking and mobile platform, as well as channels like voice and Alexa. (More on that later. Chat is the new browser!)
How Solutions Can Fail
Now you're in the position to try to take the bill pay product from another company, we'll call them BankMax, and implement their bill pay product inside of BigTek's home banking and mobile platform. First, you have to ask yourself this question: What is in it for BigTek to allow BankMax's bill pay to function as well as their bill pay inside of their platform? Why would they allow a competitor to have as good or better implementation inside their platform? Yet, I know so many institutions that either have convinced themselves or been convinced by one or the other vendor, that, yes, they can integrate these two products seamlessly and successfully. The common dynamic is usually that the old vendor is hesitant about the change and whether or not it will be successful, and the new vendor is excited and confident that it can integrate their product successfully into other vendors' platform. When it comes down to it, you need BigTek's resources to fully implement and integrate BankMax's product, and it's not in BigTek's best interest to do a great job of implementing and integrating a competitor's product. What does that mean? It means you're now going to have to go and find someone or some entity to help you do integration. There are things that BankMax can't do because it needs access to the BigTek platform at a level that BigTek isn't willing to provide a competitor, and now your organization and ultimately your customers are caught in the middle.
What do you do? Well, the good news is that your CTO seems confident that he can solve this for the organization. In fact, the CTO knows a programmer from a previous job that he is confident can handle this integration. To be fair, the approach does seem to solve the problem. BigTek won't let BankMax fully integrate the product, but BigTek will allow your organization, as a customer (for a price, of course), to use its services to create your own integration. Begrudgingly, you (ACB CEO) approve a new full-time employee (FTE) and bring on a programmer that specializes in digital platform integration. That doesn't mean the organization didn't have programmers in the past. However, in the past, most financial institutions' programmers are programmers who have been dealing with balancing general ledgers or writing logic inside of spreadsheets or programming switches for debit/credit in the ISO 8583 standard. Most of the programmers we have in the financial services space are not disciplined digital platform integration programmers who are used to dealing with the rigors of creating or integrating online services. Integrating online services demands special skills with regard to digital security and platform ubiquity. What this ultimately means is that your organization wants its products and services to be secure and work on an IPhone as well as it works on an Android. This sort of work is not trivial—or cheap.
So, you bring this person in and he does a fantastic job of integrating the new bill pay. He still runs into roadblocks, but ultimately, the implementation turns out to be a success. Your team now gets the bill pay platform into production. Because it's the first implementation of this new platform, the new version just gets you back to parity. What I mean by parity is that you finally get BankMax's bill pay product implemented and all the organization has achieved is to have the exact same features as the previous bill pay platform from BigTek. As a result, the customers don't see any benefit from the upgrade but they have noticed the service degradation during the transition between the old and the new platform and complained in the iTunes and Google Play comments section. Since none of the new features the chief retail officer really wanted are in there, there isn't a perceivable business lift. On the bright side, the organization has been promised that, now that the hard part of integration is out of the way, the rest of the features for the new BankMax bill pay platform will be available to your customers in a matter of months.
Meanwhile back at the ranch, the organization's staff suddenly discovers this programmer is a powerful individual who is capable of many amazing miracles, and because he doesn't have the protection of a true digital governance policy, he is besieged by other departments that want similar miracles performed for their digital products and services—and of course, he can't keep up. Boom, all of the sudden, this person is fixing your internet and solving random problems all around the institution. With no digital governance in place to set his priorities and with no plan for long-term growth and sustainability in this newly established programming area, you have inadvertently unleashed a digital kraken into your world.
In the meantime, another vice president convinces the organization to implement yet another new product from a vendor that is also a competitor with your main provider BigTek.
A quick note: I'm not saying it's bad to go away from the BigTek model. Nor am I saying it's bad to use the BigTek model. The lesson here is that it's bad to just dip your toe in the water of technology without fully understanding the scope of what you're getting into, as Ahead of the Curve Bank did with the integration programmer.
This is the path to the middle. The organization purchases the second competitor's product and the miracle programmer implements yet another new platform into BigTek. The programmer now has two platforms to support. This is an important point, because your organization has implemented the integration for these two new platforms, so your organization is now responsible for the support of the integrations, and since this wasn't factored into the work plans of the programmer on staff, the programmer is now faced with making a choice of implementing the second platform or installing the new features for new bill pay integration that he was originally brought in to do. Worse yet, it's been nine months (amazing how fast time goes by in the digital world), and the organization still hasn't implemented the next update of BankMax's bill pay platform, and as a result, the chief retail officer is blaming your information services group for being unresponsive and your CIO is reminding you that the second platform update is what is causing the hold up.
It's at this point in the story that our hero (you, the CEO) usually throws up his hands and says something to the following effect:
“I give up. I bet my mailman or my meter reader doesn't have these problems; no one calls him at 3 a.m. about a bill pay platform” – Actual quote from a CEO
Welcome to the middle of the road. Your organization is not really a technology company because a technology company would have the following attributes:
- A true code review process, or at least a company to do this
- SDLC (System Development Life Cycle) Program
- Project managers who have experience with deploying and integrating digital software
- A team of programmers that would include architects, database developers, user experience specialist, and quality assurance engineers
- A platform to store and secure the code that is written by the programming team
- A system to track defects of the code that is written by the programmers
- A digital governance charter that outlines what the digital services are for the organization and captures and records technical debt
- A digital governance group that meets regularly to review the current digital offerings as it relates to the overall business strategy of the organization
When an organization chooses the technology company approach, it then focuses on best-of-breed platforms, top-of-line user experience, and omnichannel approaches. The technology company is NOT dependent on BigTek and has chosen to control its own digital destiny.
The organization is also not operating as a pure financial services company, either. The financial services organization wouldn't leave the BigTek model when faced with the bill pay platform decision. Instead, this organization would be focused on good pricing, sales, and service. In the organization's digital governance policy, there would be a provision that states that, as much as possible, all services and features will be provided by BigTek and its partners, and instead of buying a competitor's platform, the financial services organization would work hard to participate in the technology decision processes of BigTek by either serving on its advisory board or in some other capacity. These roles would allow the organization to influence the feature set of the platform so that the features that their customers want to have would be top of the list for the platform's next update. Failing that, the institution would partner with BigTek and pay it or an approved BigTek partner directly for the new features if necessary so as to guarantee ongoing support and growth in its platform of choice.
But when you live in the middle, you're neither. As a result, it makes it very difficult to proceed. You are trapped between two worlds. It's hard to spend the money necessary to create the technology company environment without a guaranteed return on investment and equally hard to be completely dependent on a partner for your digital services.
The one thing that I hope you walk away from this book understanding, and the most important thing to know in order to break digital gridlock, is that digital is not a product, it's a discipline. It doesn't matter which kind of financial company you want to be—in both cases, your digital services will require leadership and discipline if you are to succeed.
Let me explain what I mean. Every bank or credit union I work with has an accounting department. Now, if I watched enough educational YouTube videos on accounting and got good at QuickBooks, would you let me be your accountant? Probably not. Accountants bring knowledge and experience to the organization that is very important. The skills that accounting professionals provide to the organization go far beyond what any software can provide and are invaluable. The value of what they provide is so important to the everyday operation of the organization that they have their own department in almost every company, regardless of whether it's a financial company, a health care provider, or some other industry. In the end, it's not just about me knowing how to operate QuickBooks. It's about me understanding the rules and discipline behind accounting processes.
Sadly, most banks and credit unions have been buying a home banking or mobile platform and calling this their digital offering without regard to the discipline that it takes to create a good digital journey for your customers. Digital is not any single product or platform, it's a complex combination of platform integration, user experience, security, and stability. It takes discipline and experience to safely manage an environment that is as complex as even the most generic bank or credit union's home banking or mobile platform. This is not something to throw at your average IT department or put under your average CIO. I'm not even sure it's something you want to put under your CTO. Not to put the CIO or the CTO down, but they have other very important things to worry about, like your phones, your computers, your network, and your infrastructure.
Digital services need 24/7 focus, and not just of the technical kind; the discipline of digital includes reviewing how members are using services, reviewing security logs, and aligning the platform with the business plans of the institutions and constantly evolving your services and features. After all, most digital banking platforms serve many more members in a day than any one branch does in a week. Ultimately, the care and feeding for a digital platform is difficult and demands a myriad of skill. Digital is a unique and diverse collection of services with special needs, and it demands to be respected as a powerful entity within your organization.
So which type of organization are you? A technology company that provides financial services, or a financial services company that provides via technology? In the middle? Which one do you want to be? The key is to learn to adapt to the continuously changing digital environment and where to focus your finite and valuable resources.
Respecting your digital platform and understanding that it is a discipline are the first key adaptations you will need to make so that you can break the digital gridlock in your organization.