|The slow, bumpy evolution of mobile payments just got a revolutionary shot in the arm with the announcement of Apple Pay. So is this groundbreaking announcement good for community and small regional banks or does this represent yet another loss of the payments channel to the Big Banks and non-banks?
How Does Apple Pay Work?
||Consumer loads a debit or credit card into Apple’s Passbook app. They can do that by simply loading the credit card already assigned to their iTunes account into Passbook or by taking a photo of the card and adding into Passbook.
||In a store, the consumer holds their iphone 6 near the contactless reader and presses their finger on the home button which doubles as a fingerprint reader on the iPhone 6 (called Touch ID). A subtle vibration and beep will let them know the payment information was successfully sent. You don’t even need to wake up your phone.
||In an app-based purchase, the consumer selects Apple Pay as the payment method and confirms payment with TouchID.
Why Might Apple’s Approach Actually Drive Mass Mobile Payment Adoption?
Contactless payment has been around for 10 years. Google Wallet launched its mobile payment product in 2011 and Softcard (a joint venture between AT&T, T-Mobile and Verizon formerly known as ISIS Mobile Wallet) has been around since 2010, but consumers, merchants and app developers haven’t exactly flocked to mobile payments yet.
The mobile payments challenge in the US has been a chicken and the egg dilemma. Only an estimated 200,000 merchants are able to accept mobile/contactless payments at the point of sale (out of an estimated 9 million US merchants), and merchants haven’t been willing to accelerate their POS replacement without consumer demand. And consumers have yet to demand mobile payments because of a weak consumer experience, limited availability, and security concerns (ie, what happens if I lose my phone).
So why might Apple Pay finally drive wider adoption of mobile payment?
||Apple gets consumer experience better than anyone in the world. They have created a uniquely elegant and simple payment process.
||Apple has the potential to drive consumer demand for better merchant availability more than anyone in the world.
||Apple expects to sell 70 – 80 million iPhone 6s and 10 million Apple Watches in the first year meaning 1 in 3 US adults will have a mobile-enabled iPhone or watch in 2015.
||Apple grossed more revenue in the first quarter of 2014 than Google, Amazon and Facebook combined!
||Apple already has 800 million+ iPhone/iTunes credit and debit card holders in their system.
||Apple also announced an API for Apple Pay so developers can add the payment capability into the estimated 100,000 US-based ecommerce sites and the 1.2 million apps in Apple’s App Store.
||Apple consumer demographics are the most coveted for most retailers. The median iPhone user makes $85,000 per year (40% more than Android users), visits 50% more ecommerce sites than Android users and spends nearly twice as much per online order compared to Android users.
||No matter how you analyze the numbers, Apple is in a position to do what no one else can do.
||Apple has a great security story to tell. Apple has added a new secure element chip which generates a one-time code for the payment (tokenization). This token, Apple calls it a Device Account Number, is not stored on Apple servers and the actual debit/credit card information isn’t shared with Apple or the merchant. So even if a bad guy intercepts it and can decrypt it, it’s just a one-time use number with no value. Apple also uses a consumer’s fingerprint (biometrics) to authenticate the transaction in a very simple way. And if a consumer loses their phone, they can use Find My Phone to put their phone in Lost Mode so nothing is accessible or they can erase their phone completely. Whether that’s enough to overcome consumers’ fears, especially given the recent celebrity photo hacking, remains to be seen.
There are a few other important reasons.
||Do you think it is a coincidence that Apple is launching their mobile product exactly 12 months before virtually every US retailer will be replacing their POS hardware? The October 2015 EMV mandate will require the other 8.8 million merchants to update its POS devices and nearly all of those will include mobile/contactless capabilities. While Apple benefits from the inroads that Google, Softcard and the other first generation mobile payment providers paved, the EMV mandate will be the single biggest driver of mobile payments availability.
||Apple has the support of the Big Banks and major credit card networks. So why are the Biggies supporting Apple? Because Apple’s approach is much more bank friendly than the alternatives. In fact, the Big Banks are so supportive they are even willing to share some of their interchange with Apple (15 basis points for credit purchases and $0.005 for debit purchases). Here are the reasons Apple’s approach is friendlier than the alternatives:
||Big Banks are in an open war with the retailer-based (and decidedly bank unfriendly) Merchant Customer Exchange. MCX Merchant Customer Exchange (MCX) is creating a merchant friendly platform for smartphones called CurrenC. CurrenC works by allowing consumers to load cash into the app and generating a QR code that can be recognized by older POS systems. This is why the lead partners of MCX, Wal-Mart and Best Buy, immediately announced that they will not provide support for Apple Pay.
||Big Banks don’t want Bitcoin to gain any traction.
||Big Banks don’t like Google Wallet because of security and privacy concerns. Google uses a 4 digit PIN instead of Apple's fingerprint, and Google keeps records of every transaction. Banks, and others, fear Google wants to data mine those transactions looking for advertising and cross-selling opportunities. Apple doesn’t keep records of the purchase.
What Do Banks Need to Do Right Now to Enroll in Apple Pay?
Apple will launch Apple Pay in October with ten pre-selected issuers. Though Apple has made it clear that Apple Pay will be open to all issuers, they have not announced when that will happen. So the largest issuers will have a jump start on everyone else (sarcastic side note: thanks for the proactive leadership FIS, Fiserv and Jack Henry).
The other timing concern is when the processors and PIN networks will be ready. Fiserv has announced that tokenization capabilities will be available to all Fiserv processed debit and credit issuers, but they haven’t said when or even if they will play nice with Apple. Jack Henry has announced their tokenization capabilities and their Apple Pay plans though the timeline is also undetermined as they are dependent on a software vendor that supports jhaPassport (not to be confused with Apple Passbook) and that vendor hasn’t determined whether any upgrades will be required. I couldn’t find any announcements from FIS, and my request for information was not returned. FIS is the primary payments provider to the competing (anti-bank) CurrenC product so perhaps they are still determining where their loyalties lie. I couldn’t find any announcements from the major PIN networks on their plans and availability.
So what do you need to do now? Here are some recommendations from this bank consultant:
||Talk with your debit and credit card processors about the enrollment process. To become part of Apple Pay, you will need to enable tokenization with your payment networks (Visa Token Service or MasterCard Digital Enablement Service), and it appears that both card brands will require you to work through your processor for that. So your first call should be to your processors.
||Develop your customer marketing and communication plan. While you won’t be able to launch your Apple Pay product immediately, you probably want to communicate your plan to your customers. If nothing else, let them know you will be participating in Apple Pay.
||Decide how you are going to incent your customers to use your cards in Apple Pay. Consumers (Apple Pay is not yet open to business customers) have to decide which debit or credit cards to use for Apple Pay. If interchange is important to you, you want your customers using your cards so you need to incent and educate them to load your cards into Passbook. You also want to incent them to set your card as their default payment. Three suggestions for consideration…Develop a simple 10-20 second video that shows customers how to take a picture of your bank issued card, load it into Passbook and then set your bank issued card as their default. Be sure and communicate that when they pay with your First National Bank card using Apple Pay, they will still get all the rewards, benefits, and securities your card provides. And if you have a rewards program, offer bonus points for using Apple iPay (eg, 10,000 points after their third use of Apple Pay).
||Be prepared to discuss this briefly at your bank strategic planning meeting. Directors are likely going to ask about it and this bank consultant wants you to be prepared.
Apple Pay will likely revolutionize mobile payments, but mobile payments will remain a small piece of the total payments pie for a while (at least until there are widespread commercial mobile payment solutions and a solution to dead cell phones). But there is no doubt, mobile payments will continue to grow exponentially and Apple’s involvement will greatly accelerate that growth.
The best news for community and small regional banks and credit unions is that it appears Apple is pursuing a bank-friendly strategy. While paying Apple 15 basis points may seem like a lot to banks, 15 basis points on $1 billion in transactions amounts to only $150 million - Apple makes that every 6 hours. So Apple’s motivation appears to be more focused on making high margin hardware (phones, watches and who knows what’s next) than to steal the payments channel from banks.
It remains to be seen whether Apple is Big Bank friendly or all bank friendly. Citigroup, Bank of America, Wells Fargo, Chase and Capital One all played an important role in developing Apple Pay. So will Apple push consumers to use credit card instead of debit since both Apple and the Big Banks make more interchange? Will Apple allow the Big Banks to advertise inside the payments app? Are their secret benefits available only to the Big Banks that community and small regional banks won’t have access to? Only time will tell.
But hopefully, community banks, small regional banks and credit unions may finally have a friendly mobile payments partner in Apple Pay. Let’s hope so.
• Click for a free estimate of an assessment of your Payments Revenue Opportunity
• Click for our free archived webinar on the 5 Keys to Bank Payments Profitability or the 5 Keys to Credit Union Payments Profitabiliy
How to Choose a Bank Consultant
We have noticed a significant increase in the number of first time buyers looking for bank consultants as our industry becomes more and more complex and as the level of expertise required to be successful increases.
Before you hire Abound Resources, or any bank consulting firm, here are a few tips to help you find what you're looking for:
First, know what you want from a consultant
The more clarity and consensus you have on your project goals or the problem you're trying to address, the easier it is to evaluate bank consultants. Of course, good consultants can often help build clarity and consensus for project goals as part of their interview process (before you sign a contract), but you need to first have a starting point.
Here are some examples of project goals:
- Improve our bank's efficiency ratio
- Renegotiate our core processing contract
- Facilitate our bank strategic planning retreat
- Develop a new incentive compensation plan
- Provide an external data security review
It is also helpful to identify why you are considering engaging a consultant, instead of doing the project internally. The most common reasons for using a consultant are:
- Expertise- Like the rest of the US (primary care doctors now make up only 12% of physicians), the level of expertise needed in banking has increased while at the same time, banks have become leaner. It is very hard for small regional and community banks to justify having narrowly specialized employees on staff, especially when your bank may only need that specialty once a quarter, once a year, or once every few years. Thus the increased reliance on highly specialized consultants.
- Independence- Getting an independent perspective from a fresh set of eyes that has seen your situation in dozens, or even hundreds, of other banks can provide great value and help you avoid costly mistakes. Also, bank examiners are increasingly expecting independent reviews of areas beyond just loan review and bank IT audits. In addition to the recommendations for independent reviews of nearly every compliance function, many bank examiners now recommend independent consultants for strategic planning, technology planning, compensation planning, business continuity planning, ALCO / investment planning, etc. (seemingly 90% of a sound compliance management strategy these days can be summed up with two ideas - when in doubt, do a risk assessment and use a third party consultant).
- Process- Experienced bank consultants should bring a proven process (called a methodology) for tackling various types of projects. These methodologies greatly increase project success and should help keep the project on time and budget.
So, before you start looking for consultants, spend a little time discussing what your goals are and why you might want to engage a bank consultant.
Second, know what type of bank consultant to evaluate
There are a few thousand bank consultants in the US and at least 200 bank consulting firms- so how do you narrow down that list?
First, it's helpful to consider the three primary ways of categorizing bank consultants:
And likewise, bank consulting firms can be categorized as follows:
- Specialty area- The most important factor is the consultant's area of expertise, and there are three specialty types:
- Subject matter specialty- The list of subject matter specialties is long, but in general subject matter specialists include strategy, process, IT/technology, HR, financial, sales/marketing, product or risk/compliance consultants.
- Industry specialty- Are you looking for a consultant that specializes in the banking industry? Do you have a preference for a specialty in big banks, mid-size banks or community banks?
- Combination specialty- The most specialized is a combination of the two. For example: a community bank technology consultant to help with core vendor evaluation, a big bank HR consultant to help with a compensation plan, or a mid-size bank compliance consultant to perform a BSA review.
- Consulting firm vs. individual consultants- Bank consultants can be self-employed or they can work for a consulting firm.
- Location- Bank consultants may work locally, regionally, nationally, or internationally.
- Specialty areas- Bank consulting firms may specialize in one area (eg, streamlining loan processes or maximizing debit card revenue), or they may have multiple specialty areas (often called "practice lines").
- Bank consulting firm vs. consulting divisions of other companies- There are stand-alone consulting firms and there are consulting divisions of software companies, accounting firms and IT audit firms.
- Location- Just as individual consultants may work locally, regionally, nationally or internationally, so do consulting firms. The more specialized the consulting firm, the more likely they are to be a national firm.
Disclosure: Abound Resources is a national bank consulting firm with multiple specialty areas.
It is also important to understand the background of both the consulting firm and the consultants, and how that relates to your needs. As the saying goes, if the only tool you have is a hammer, every problem looks like a nail. In other words. If your consultant comes from an IT audit background, they probably aren't going to provide much value on big picture, strategic issues. Likewise, if your consultant comes from a strategic, executive-level background, they probably aren't going to provide much value on higly technical, IT security issues.
Third, know how to evaluate bank consultants
So now you generally know what your project goals are and what type of consultant or consulting firm you're going to evaluate. How then do you select the best consultant for the project?
You'll want to spend time discussing your project goals with potential consultants and understanding the consultant's expertise and process. This can be done in face-to-face meetings or, increasingly, it can be done via conference calls and web conferences. One lesson learned if you want to avoid "canned recommendations" is to be wary of consultants who shoot you a proposal without first learning about your needs. A prescription without a diagnosis is malpractice in medicine... and in consulting.
After a round or two of discussions, the consultant will put together a proposal. The essential elements of a bank consultant's proposal are:
- Project goals- This should state the objectives and end result of the project. The more measurable the goals are, the better.
- Project scope- This explains what is included and what is excluded in the project. For examples, is the consultant helping streamline "loan processes" or "all small business and commercial loan origination processes?" Scoping discussions with your potential consultant is one of the best ways to avoid "but I thought such and such would be included!" i.e. unmet expectations.
- Project approach- This includes the methodology and the actual worksteps the consultant will perform.
- Project deliverables- Deliverables are the end result of the consultant's project. It can be as simple as a "report of recommendations" or as involved as "install the new loan origination system and implement new loan origination processes."
- Project team- This identifies the actual consultant(s) performing the work. It is important to know whether you will be working with just one consultant or a team of consultants. If it's a team, you'll want to know what each of their roles and responsibilities are.
- Project timeline- You'll want to know the start and end date. If there is an important deadline for the project (eg, before October Board meeting or before the examiners are back next July), you'll want a commitment from the consultant to meet that deadline. On longer projects, you may want an interim milestone or two.
- Project fees- You need to understand how much you will be paying and how you will be paying. The three most common bank consultant billing methods are time and materials (hourly billing like an attorney), a fixed fee, or a contingency fee (a percentage of your savings or revenue improvement). You also need to understand if you will be paying for other expenses such as software or travel expenses.
- Legal terms and conditions- This includes the consultant's legal provisions, and among the normal legal questions you would have, you will want to pay particular attention to your exposure and your recourse if there is a problem with the project.
You should have a proposal review discussion with your potential consultant to ask lots of follow-up questions to help understand exactly what you are getting, what you are responsible for, what the consultant is responsible for, and exactly how much you will be paying. If you want clarification or if the project needs to be changed, ask for an updated proposal.
After you have firmed up the proposal, then you should do your due diligence. Consulting due diligence is most typically telephone reference checks with banks that have used the consultant for similar projects and/or talking with others in the industry (attorneys, trade association contacts, vendors, etc.) about the consultant's general reputation.
Hope this helps and good luck on your future projects!
Improving Customer Experience is Now Bankers' Top Priority: Survey
Brad Smith, bank consultant with Abound Resources, is quoted in this American Banker article written by Jackie Stewart.
Since the end of the financial crisis, bankers have routinely complained that the implementation of new regulations was taking time and resources away from what they do best: serving customers.
Lately, though, their focus has shifted back to improving the customer experience.
Though satisfying examiners remains a priority, their decisions about how and where to deploy resources — such as investing in technology — are being mostly driven by the desire to meet customers' changing demands, according to a new survey from the advisory firm KPMG....
The Top Five Reasons
for Banks to Conduct Remote Vulnerability Assessments
and Quarterly External Vulnerability Testing
Too many banks and credit unions rely on annual or semi-annual vulnerability testing from third-parties that do not specialize in the unique security needs of financial institutions. Here are the Top 5 reasons why a financial institution should consider remote vulnerability assessments and quarterly external testing by a third party that specializes in security testing and audits specifically for financial institutions:
Security - The landscape changes every day. Newly discovered vulnerabilities can create a huge impact on all businesses, but financial institutions face extra scrutiny from both consumer protection groups and from regulators due to the unique risks posed by ever-evolving threats to IT security. Because of this, only third parties that specialize in financial institutions should be relied upon to perform security audits.
Visibility / “Show me” - It’s one thing to review the patch logs on systems and have a feeling of safety and security, but how do you know they work? Contracting for independent, third-party testing to confirm whether all patches were installed correctly and are working as expected increases security integration and can prevent hidden problems in the future.
Trending Analysis - Do you compare your current results to your previous results? A trending analysis is a quick way to discover if your enterprise patch management solution is working effectively, and can help you identify potential security vulnerabilities.
Initiative - Regulators are typically pleased when financial institutions take the initiative to promote security above and beyond the minimum requirement. This also may raise the confidence of account holders and potential clients.
Cost - Removing the expenses and hassles of travel creates a positive impact on the bottom line for the financial institute. Remote assessments can be performed at any time, resulting in final reports that can be produced in a more timely and efficient manner.
So why don’t more banks and credit unions conduct quarterly external assessments and remote vulnerability tests?
Cost- Most financial institutions believe that the cost of quarterly assessments- even remotely- would exceed that of a single annual assessment. Interestingly, because the more frequent tests involve less work, the cost of four quarterly tests often does not exceed the cost of a single annual test.
Awareness- Because not all companies offer a remote assessment and quarterly external solution, many banks and credit unions are unaware that this service is even an option. As a result, too many banks and credit unions develop security vulnerabilities between annual assessments that they are not even aware of.
Time- Today’s IT departments are busy enough as it is. The words “assessment” or “audit” typically mean that IT managers have to spend more time than they generally have, just on the auditing process.
Outsourcing- Many financial institutions are lulled into a false sense of security when they outsource applications such as internet banking and website hosting to managed or core application providers. They sometimes forget that by doing so, they lose focus on the bigger picture- airtight security across all platforms- including other internal and perimeter systems which may be left vulnerable to attack.
Understanding- Some executives do not understand the importance of a proper vulnerability management program. They depend on their IT department to “handle” the issue, yet they do not seek validation through checks and balances. With quarterly vulnerability testing, executives can easily view the status and overall posture of the institution without needing an extensive background or understanding of vulnerability management.
With every breach in security there is a renewed interest in reviewing a financial institution’s patch management program. Examiners depend on the results of the vulnerability assessments to score an organization’s patch management program. ROI in this sense cannot be measured directly in a dollar amount; however, if a security breach were to occur due to a poor vulnerability management program, the monetary and reputational damages to the financial institute can potentially be astronomical or even devastating.
We recently worked with an organization that was served with a Memorandum of Understanding (MOU) from the OCC because they had a poor patch management program (among other IT issues). They were repeat offenders. As it turns out, there was a barrier between the executive management team and the IT department. Had this organization implemented external quarterly vulnerability tests, executive management would have been able to track the progress of the program and make corrective action without the need of IT. Instead, they depended on an annual assessment which provided inadequate results.
AUSTIN, Texas (March 7, 2014) –Abound Resources, a leading credit union consulting firm, today released the results of its annual survey of credit union executives. The results highlight that credit union CEOs remain optimistic for 2014, an attitude that appears to be fueled by ongoing credit union profitability.
Credit union CEOs are feeling more optimistic about the year ahead, with 48% stating that they feel either somewhat or very optimistic, a jump in confidence from 2013.
"Even with a tough interest rate environment, credit unions have reason to be optimistic," says Brad Smith, Abound Resources' President & CEO. "In our conversations with credit union CEOs, the majority realize that they can do even more to position their credit union to rise above economic and regulatory challenges and remain profitable and relevant in 2014 and beyond."
Among its list of concerns, credit unions are focusing more on membership growth, with 25% naming it a priority, up from 17% in 2013. This makes sense, since the credit union membership is aging and credit unions are struggling to replace this aging base with Generation Y consumers.
In terms of setting growth priorities for 2014, CEOs are firmly committed to the notion that consumer lending is critical to their growth strategy. In 2013, 88% of CEOs named consumer lending as a growth priority. In 2014, it’s a resounding 94%.
A complimentary copy of a White Paper analyzing the complete survey results and Abound Resources’ top five strategies for 2014 is available for download at http://www.aboundresources.com/credit-union-insights-into-2014-survey-results/
About Abound Resources
Abound Resources is a full service credit union consulting firm with the sole purpose of helping credit unions achieve their goals - whether those goals are for growth, efficiency, technology or risk management. In fact, we guarantee it.
Abound Resources offers an array of services designed to improve performance and profitability and help credit unions cope with an increasingly stringent regulatory environment.
Our seven practice areas are each headed by an experienced practice leader:
Technology – credit union technology plans, credit union vendor evaluations, core vendor RFPs, credit union contract negotiations, credit union vendor management
Performance Management – credit union workflow improvement, revenue enhancement, credit union efficiency improvement
Lending – loan process improvement, loan origination vendor evaluations and implementations
Small Business and Commercial – small business deposit and fee income growth programs, credit union cash management programs
Strategic Planning – credit union strategic plans, risk tolerance planning, one page strategic plans, competitive differentiation
Sales and Marketing – branch performance improvement, sales coaching and training, e-marketing strategies and campaign management
Risk Management and Compliance – ERM, credit union IT audits, information security assessments, credit union compliance, BSA review
When we asked community bank CEOs where their growth focus would be in 2014, 85% of them said commercial lending (their #1 growth strategy). Tied for second was improving small business market share.
So why the interest in small business?
It is a very large and growing market. There are nearly 27 million businesses in the United States with revenues less than $5 million, representing 99% of all US businesses.
Small businesses are profitable to banks. The average small business owner contributes 6-7 times more profit to banks than the average consumer.
Small businesses are very loyal to community banks. Small business owners take great pride in their business and they want to be appreciated. This is why so many small business owners feel underserved by the Big Banks. They also have very long memories and remember the Big Banks largely abandoned them in 2010 and 2011. Community banks never left them.
But I think there are two big reasons small business shot up in priority this year; fee income and the need to lower banks’ cost of funds.
As the CFPB continues its assault on consumer fees and as debit income drops, community banks are looking to grow fee income from the commercial side of the house. Thankfully, small businesses have proven a willingness to pay for valuable products and services and the Consumer Financial Protection Bureau (CFPB) has little to no governance over small businesses.
Additionally, at a time when interest rates are flat and Big Banks are offering 2.5% commercial loans, community bank CEOs are realizing it may be easier to gain 50-80 basis points by lowering their cost of funds than by raising loan rates. Commercial deposits have become very appealing again.
So if so many community banks are interested in the small business segment, why have so few been able to capitalize on it?
In our experience, the two biggest culprits are the lack of a sales model and me-too product packaging.
In many banks, the ownership of the small business segment is fragmented. Small business accounts generally fall to branch managers that are now too buried in paperwork to ever proactively call on their small business customers. And the commercial lenders generally only want to talk to small business owners when there is an immediate loan need.
This approach typically leaves a lot to be desired as the proven small business success model is to get the deposit account first, then the payments and then be positioned for when they need a loan.
That is why we recommend the dedicated business banker model to many of our clients. This role is typically an out of the branch sales and relationship officer that visits customers and prospects at their place of business (and scheduled branch appointments). The business banker typically has a geographic territory and is armed with the list of every small business in their territory. They have deposit, fee and loan referral goals and are equipped with iPads to open new accounts at a place of business or at lunch or rotary, etc. They are typically not lenders, though they are trained to identify credit opportunities and they can either approve simple loans that can be auto-decisioned or refer loans to commercial lenders.
In addition to a winning sales and marketing model, banks also have to get their products and product packaging and pricing right.
We did a competitive study of 28 community and regional banks in a large metro market for a client. The only difference we found in 28 banks’ primary business checking account was how many items they got for free.
We typically recommend that a community bank should have a free business checking account with lots of payments-based fee add-ons, a packaged account with valuable services at a fixed price and an account on analysis. Look for the intersection of value to the customer, account profitability and differentiation from your competition.
Regardless of the packaging you choose, be sure and pay attention to what should be three of your most profitable small business products; business debit card, business credit card and merchant services.
Most community banks have had success driving consumer debit activation and usage, yet have largely ignored business debit card. Business debit card interchange drives 2-3 times more revenue than consumer debit so it is worth some marketing efforts to drive usage.
Business credit card can be the single most profitable small business product for you so you might want to reconsider issuing your own business credit cards. There are many more vendor options now so you can, for example, have a single vendor that lets you outsource your entire program but let you make the credit decisions for business applications and keep all the business interchange income. Or if issuing isn’t an option, structure your agency contract so you’re getting a one-time sign up bonus and a decent percentage on the interchange, fees and interest revenue sharing. Remember, the money is in interchange and fees, not the interest. That’s exactly the opposite of the way most vendor contracts work.
Many community banks have lukewarm merchant services programs. But they can be a very profitable part of your small business offering. A couple of best practice metrics to help you analyze your program:
You should be averaging about $600 per year in merchant fees per merchant customer. If you’re not, you’ve got a bad contract or you’re targeting the wrong accounts.
You should expect roughly 10% penetration of your commercial account base.
You should also expect close to 100% of your merchant accounts to have a DDA with your bank.
If growing your small business market share is a priority, re-evaluate your sales and marketing model and your product packaging and pricing. And keep those small business owners loyal to community banks.
Approximately 60% of US Households have some relationship with one of the four largest banks – Bank of America, JP Morgan-Chase, CitiCorp and Wells Fargo. (Figure 1) In that same survey, however, 60% also indicated that they would prefer to do business with a Community Bank.
At the same time, current community bank customers are very loyal. 88% of non mega bank customers indicate they are “not very likely” or “not at all likely” to bank at one of the big banks in the future. (Figure 2)
As community bankers it may be good news that our Community Bank customers love us, and the mega bank customers would actually prefer us, the reality is most banking customers gravitate to the larger banks for two reasons: 1) The larger banks are perceived as technologically superior and 2) They are perceived to be more convenient.
And to make matters worse the mega banks have the more desirable customers. The have the customers with higher incomes, higher balances and who are more likely to utilize less costly electronic delivery channels. (Figure 3)
So the good news is that as a community institution our customer base appears to be stable, at least as it pertains to the mega banks. The bad news is that 60% of potential financial institution customers think the mega banks are more convenient and more technologically advanced.
In today’s technological environment there is no reason a community institution can’t deliver the same level of sophistication and on line convenience provided by the mega banks and on line only providers. At the same time the current political and economic environment -- that has resulted in adverse publicity and public reaction to the mega banks – provides an opportunity go to the market place with a message that capitalizes on the preference for community institutions. Here are seven areas we recommend community banks address to take maximum advantage of current market conditions and opportunities.
1. Have a state of the art web site complete with account opening and loan application capabilities. It should contain interactive navigation and should be Search Engine Optimized. Keep in mind that it is projected that nearly 40% of all checking accounts will be opened on line by 2015, and that nearly 85% of consumers and small businesses considering opening a bank account go to the internet first. This means potential customers are going to your web site before they come to your branch.
2. Ensure that the basic alternative delivery channels such as Bill Pay, E-Statements, email alerts, ACH, direct deposit, check imaging are in place and functioning in the most efficient manner from the customer’s perspective. All of these services are cost effectively available to community institutions and are expected by customers. Make sure you have them and that you communicate that you have them.
3. Install the emerging delivery channels as quickly as possible. At one point Mobile Banking was projected to have the fasted adoption rate of any financial service in history. The reason being that nearly everyone already has the delivery device…a cell phone. It hasn’t quite worked out that way, but mobile banking has become a fundamental service that is expected my most market segments. Likewise, remote deposit capture – deposits via a picture from your smart phone – is becoming requirement demanded by new customers. Don’t waste time and energy building financial based business cases around these services. They are becoming as fundamental as having a branch, if not more so.
You must break the paradigm that only younger customers are interested in electronic banking. Of the major market segments, the largest is The Baby Boomers, the oldest of whom were born in 1946. This group is driven by convenience and has experienced first hand the development of technology in our daily lives. As a group they are technologically savvy and they expect those who service them to be also. And Gen X and Gen Y don’t even think of our smart phones and computers as technology. To them they are merely appliances. And remember the older Gen Xers are in their 40’s. So technology usage is no longer a young person’s environment.
4. Free ATM usage. An account configuration that provides free access to any ATM can be strong component of competing with the enormous branch networks of the mega banks. Do some financial analysis and determine how much fee income is actually realized from your customers’ usage of foreign ATMs. In many cases you will find it is less significant than you think.
5. High performance institutions maintain a consistent marketing presence and a consistent marketing message. They create a marketing plan consistent with the institution’s strategic plan, create an implementation plan and stick to it. Institutions that are consistently presenting marketing messages within their markets are perceived to be financially stronger and more sound that those who do not.
6. A strong “sales culture.” This is arguably the most misused and misunderstood term in the financial services industry. It does not mean utilization of hard sell tactics. It means keeping customers fully informed of products and services that might be of value to them. 75% of financial institution customers say they expect their institution to provide them with information about products and services they may need. It is also not limited to sales training. It means establishing goals and objectives and implementing mechanisms to assist in reaching those goals, measuring results and recognizing high performers.
7. Understand how your branches are performing relative to market potential. Percentage or dollar growth may or may not be a good measure of performance depending on the market in which a branch is competing. Ranking branches relative to both key performance indicators and market potential can provide a clear direction for prioritization of marketing dollars and performance expectations.
Strong retail and marketing personnel working together to design and deliver a plan integrating these seven areas will provide definitive and significant return on investment as a result of increased market share, increased customer retention, a strong presence in your market(s).
For the last two decades, community banks could effectively differentiate themselves from their big bank competition based on two bedrocks; “we’re local” and “we give great customer service”. With today’s fickle customers, increased competition, ever growing technology developments and changing demographics, community banks need to redefine their value proposition.
To define your true competitive differentiation, you need to communicate, and execute, on a promise to your customers that passes the following tests:
- Does your promise matter to your customer?
- Is your promise different from what your competitors promise?
- Can you prove you deliver on your promise to prospective customers?
In most markets, a “we’re local” differentiating strategy fails at least one of those tests. Customers and prospective customers hear the “we’re local” from many of your banking and credit union competitors. Even Wells Fargo’s advertising tries to position them as a local community bank. While we all know that’s laughable, many consumers do not. I also need to point out that “we’re local” may not matter much to many of your customer segments. Despite “buy local” campaigns across the country, consumers continue to support Wal-Mart and Costco even understanding that it hurts local businesses.
The “we give great customer service” strategy also fails at least one of those tests. Again, many of your banking and credit union competitors say the same thing so it is very difficult to compel prospective customers to leave their current bank to come to yours based on a potential of better service. It is also very difficult to prove to prospective customers. Unless you’ve been recognized by independent organizations (e.g., local paper, Greenwich Associates, Yelp reviews, etc.) for your great service or you offer service guarantees, many consumers will hear it as an empty slogan.
The other challenge with “great customer service” is how your core customer defines it. For some customers, it simply means being recognized when they come into the branch. For others, it means someone can answer their questions at 10:00 pm. For others, it means no surprise fees. Many business customers define it as hassle-free, as in, “don’t keep asking me for more information.” So unless you understand their needs and you set their expectations, it is very difficult to consistently meet, much less, exceed your customers’ service expectations.
So, then, how do you define your competitive differentiation? Here are the four key steps:
1. Define your core customer
It is exceedingly difficult, and expensive, to differentiate your bank across all consumer segments, all small business segments and all commercial segments. You want to laser focus your target market as much as possible. Often, it’s as simple as thinking of some of your “best” customers and asking yourself, “Who do we need more of to achieve our strategic goals?” Then name them as in, “if we had 25 more ABC Industries” or “1,000 more John and Susan Does applying for mortgages,” etc. “then we could achieve our goals.”
2. Determine what matters most to your core customers
Once you’ve defined your core customer, you need to determine what matters most to them when it comes to choosing a financial service provider. You can do this with customer surveys and ask them why they chose your bank or from first-hand knowledge from your sales and service people.
It’s important to ask insightful questions to avoid getting the lazy one word answers of “location” or “fees”.
3. Determine what need you can meet for those core customers that none of your competitors can
Once you’ve defined your core customer and what matters most to them, you now need to spend some time discussing what it is that you can do better for them than anyone else. This is the heart of differentiation. Can you provide a product that meets a need like no competitor can? Can you save them money? Can you bring industry knowledge that allows you to get harder deals approved? Can you offer a simpler, hassle-free experience than your competitors?
Spend some time on this and be honest about your ability to beat your competitors. Many of your competitors are successful in many areas. You’re looking for their Achilles heel.
4. Determine how you can prove that you can deliver on that promise
Lastly, you need to identify proof points for your promise. We’re not looking for a slogan; we’re looking for a promise that can be consistently delivered on.
How can you prove your promise? Can you offer a free financial review and promise them $100 if you can’t find ways to save them money? Can you guarantee a 25-day mortgage or pay them $500? Or can you simply list out the last 10 hospitals you financed or state that you bank more professional services firms than any other bank in the market? Can you point to 300 positive Yelp reviews?
The key is that you have to be able to prove your promise to your prospective customers. They are the ones you have to convince to go through the hassle of changing.
To avoid the commoditization trap, a unique and compelling value proposition is needed that both matters to your customers and differentiates you from your competitors. Get started today on defining your value proposition and then ruthlessly deliver on that promise.
For more information, http://www.aboundresources.com/bank-competitive-advantage/
AUSTIN, Texas (January 27, 2014) –Abound Resources, a leading bank consulting firm, today released the results of its recent survey of community bank executives. The results highlight that community and small regional bank CEOs are cautiously optimistic for 2014, despite ongoing challenges in the regulatory and economic environments.
In 2013, only 28% of CEOs were “somewhat or very optimistic” about the upcoming year in banking. However, heading into 2014, 59% of respondents indicated they felt “somewhat or very optimistic” about the coming year even in the face of an increased regulatory burden and an uncertain interest rate environment.
“This year bank CEOs are decidedly more optimistic than they have been since 2011,” said Brad Smith, President and CEO of Abound Resources. “In our conversations with bank CEOs, the majority realize that they can do even more to position their bank to rise above economic and regulatory challenges and remain profitable and relevant in 2014 and beyond.”
The regulatory burden and the interest rate environment lead the list of major concerns for 2014. The list of major concerns also included weak loan demand, efficiency, non-interest income, and credit quality, although credit quality ranked at the bottom of that list for the first time since 2010.
In terms of setting growth priorities for 2014, growing commercial loans remained at the top of the list from 2013, followed by expanding the online presence and improving the small business market share.
On the operating side of the equation, streamlining workflow for greater efficiency remains the top priority for the third year in a row.
2014 promises to be another year when banks continue to try and use their technology for greater efficiencies. Bank officers expect to spend slightly more on technology in 2014 than 2013, and enterprise risk management (ERM) is again the top planned technology purchase.
A complimentary copy of a White Paper analyzing the complete survey results and Abound Resources’ top five strategies for 2014 is available for download at http://www.aboundresources.com/community-banks-insights-into-2014-survey-results/
About Abound Resources
Abound Resources is a full service bank consulting firm with the sole purpose of helping community banks achieve their goals - whether those goals are for growth, efficiency, technology or risk management. In fact, we guarantee it.
Abound Resources offers an array of services designed to improve performance and profitability and help community banks cope with an increasingly stringent regulatory environment.
Our seven practice areas are each headed by an experienced practice leader:
Technology – bank technology plans, bank vendor evaluations, core vendor RFPs, bank contract negotiations, bank vendor management
Performance Management – bank workflow improvement, revenue enhancement, bank efficiency improvement
Lending – loan process improvement, loan origination vendor evaluations and implementations
Small Business and Commercial – small business deposit and fee income growth programs, bank cash management programs
Strategic Planning – bank strategic plans, risk tolerance planning, one page strategic plans, competitive differentiation
Sales and Marketing – branch performance improvement, sales coaching and training, e-marketing strategies and campaign management
Risk Management and Compliance – ERM, bank IT audits, information security assessments, bank compliance, BSA review
One of the lessons learned from the 2009-2010 bank failures is the importance of the foundation of bank strategy – your core values and purpose.
In our experience, banks that are clear on its purpose and consistently live out a set of corporate values tend to deliver both consistent performance and strong employee satisfaction.
Alternatively, many banks that failed began to chase growth outside of its stated purpose and/or in conflict with its stated values. If a bank’s stated purpose is to be the economic engine in a certain community then you wouldn’t expect that half its portfolio would be in CRE two states away. And if teamwork was a core value, you wouldn’t expect it to hire a bunch of lone wolf super star performers.
Two other personal observations on values:
Customers (especially Gen Y) increasingly don’t care what you do until they know why and how you do it.
The next generation of Board members expects organizations to be both values-centered and performance-driven.
So let’s take a look at your values.
Documenting Your Values
Your bank’s values serve as the cornerstone for your bank culture and help you answer the basic question of “should we or shouldn’t we”. They typically are first defined by your founder though they may evolve over time. Jim Collins, author of Good to Great, has a great tool for defining and testing your values.
I encourage clients to identify three to seven core values with each core value being a single word (eg, teamwork) or short phrase (eg, do the right thing). Just make sure they are words or phrases your organization already uses daily. No “corporate speak”. Then for each core value, include a few brief descriptors to help employees understand the meaning. You can sometimes create an acronym of your values that reinforces a theme or your most important value (example here), but don’t alter your values just to create an acronym.
Regardless of format, values must be authentic to be believable. They are not aspirational. They need to already exist within your organization.
And most importantly, they must be alive in your organization. Otherwise, they will come off as a meaningless list of words from a leadership team that doesn’t understand what’s really going on.
Making Values Come Alive
Yes, you need to post your values on the walls, but you need to go beyond that to make them come alive. Just as parents use rituals to reinforce family values (eg, grace at dinner, prayers at bedtime, church on Sundays), leaders need to create opportunities to communicate and reinforce values so they become part of the fabric of your organization. Here are five ways to make your values come alive:
1. Recruit for values
You can’t train values. People either share yours or they don’t. Include your values in your job postings (eg, “are you a hard-working, team-oriented…”) to self-screen and then design your interview questions to determine whether the candidates align with each of your core values.
2. New employee orientation
Make sure your values are explained in your employee handbook and include them in your new employee onboarding process.
3. Performance reviews
Jack Welch, former CEO of General Electric, built a very simple performance review system. GE measures every employee on two scales; performance and alignment with company values. They learned that the most destructive person in their organization was the high performer that didn’t live by the company’s values. Because of their high performance, managers would often let these culture killers live by a different set of rules thereby undermining everything management was espousing to all the other employees.
The GE review process is a very effective way to hold people accountable for their behaviors. If “teamwork” is a value (for example), you will need to discipline the manager that routinely takes all the credit for his team’s performance.
4. Recognition and reward
Find ways to publicly recognize employees that live out your values. Before your next quarterly or annual all-employee meeting, invite employees to send in stories recognizing their peers for living out your values. Have a committee pick the best example and then recognize the winning employee at the meeting. Take a picture of the CEO presenting them with a gift and include it with a story in your annual shareholder report.
If you have a company newsletter, highlight a value in each issue and include stories of employees living out that value.
And a thoughtful email from an executive to an employee can go a long way…“Susan, I really appreciate the great “teamwork” you showed getting the Acme deal closed yesterday. You jumped in, stayed late and helped us deliver great service to our customer. That teamwork is what helps separate ABC Bank from everyone else.” Make sure you copy their manager, too.
5. Day to day management
Incorporate values into your meeting rhythms. Rotate values of the week and start your weekly meeting with a short story or example or a personal challenge around the value of that week. Even better, invite others to share their examples or stories.
When making difficult decisions, relate it to a value. When customer issues come up, discuss how it could have ideally been handled in accordance with your values. And continue to look for opportunities to reinforce your company values.
To become a values-centered, performance-driven bank, leaders must first hold themselves accountable to corporate values. They also must communicate and coach their team members on the bank’s values, reward those that live by the values and hold those that don’t accountable.