The Revenue Power of Emerging Financial Services

With interest rates remaining low and traditional fee income impacted by recent government regulations, banks and credit unions are increasingly looking for new ways to make up the shortfall in revenues.

Despite continued pressure from consumers around 'fee anxiety' and our industry's habit of giving most services away for free, there are still opportunities to promote customer loyalty and generate new non-interest sources of income according to new research.

In the most comprehensive fee optimization study of its kind from Market Rates Insight, Inc. entitled, 'Growth and Revenue Potential of Emerging Financial Services', the importance and value of new financial services are evaluated to determine new revenue sources as well as ways to attract and retain customers. In the study, it was found that there is a willingness from consumers to accept 'value-added fees' for services that are viewed as valuable.

"For the foreseeable future, deposit rates will remain flat and loan demand will be soft, so financial institutions will need to rely on fee revenues for income growth," states Dan Geller, EVP of research at Market Rates Insight. "To convert services from 'free' to 'fee', banks and credit unions will have to identify new services that consumers want and are willing to pay for. The study shows organizations how to use service fees to expand profits and penetration with both new and existing customers."

The 150-page study (available here) examines 13 emerging financial services and includes a competitive survey of 10 financial institutions, assessing the importance and value of each service, segmenting banks and credit unions as well as demographic segments for variances. The highlights of the study include:

• Financial institutions can sell four times the number of financial services they currently do by offering more 'leading edge' services consumers find valuable
• Only 13.1 percent of consumers receive emerging financial services from their financial institution, yet 54.6 percent of consumers who don't have these services find them important
• The highest potential from growth in revenue from emerging services is with larger organizations
• The highest ranking services in terms of potential growth are credit score reporting (71.4%), identity theft alerts (70.8%), payment protection services (64.6%) and same-day bill pay (58.7%).
• The value placed on emerging financial services is inversely correlated to the age segment of consumers, with younger consumers placing higher values on the new services evaluated
• Consumers value and will pay a premium for specific bundles of services more than they value individual services, but there is a point of diminishing return for the revenue potential of bundles relative to the expense of additional services
• The mid-range revenue potential for an optimal bundle of emerging services is $10.12 per month.

Banks Need To Reassess Cross-Selling Efforts

For decades, cross-selling has been a strategic priority of banks and credit unions since earning more business from current customers is the most efficient way to achieve growth. Despite this focus, a new study indicates that many financial institutions may be far from realizing the full potential of cross-selling.

In fact, according to the study, only 19 percent of retail bank customers owned three or more products in addition to a checking account with their primary bank compared to 49 percent who have three or more products with other financial institutions.

A just released Deloitte report entitled, 'Kicking It Up a Notch: Taking Retail Bank Cross-Selling to the Next Level' supports the view that success in cross-selling targeting may need to move beyond traditional product ownership, satisfaction and tenure parameters to include a behavior segmentation approach that takes into account perceptions based on total account holdings. 

While the Deloitte survey shows that banks have generally achieved long tenure and a high degree of satisfaction with customers, this success has not translated into multiple product relationships. In fact, the study found that there is a positive correlation between the number of products a customer uses and their desire to use multiple institutions.

Source: Deloitte Center for Financial Services

According to the study, customers only turned to their primary financial institution for a savings account on a consistent basis. In fact, while 75 percent of respondents owned credit cards, only 33 percent had one that was issued by their primary bank. Obviously, this could be the result of an inferior offer, poor marketing and/or the absence of a primary bank offered credit card, but it still illustrates a major opportunity gap.

Some of the other 'opportunity gaps' may be caused by poor cross-selling at the time of account initiation, poor customer education on the benefits of relationship consolidation or even beliefs that a primary bank is not the best place to build a specific relationship (wealth management or insurance products).

Source: Deloitte Center for Financial Services

Understanding the Mobile Banking Consumer

In order to unlock the vast potential of mobile banking, banks and credit unions must better understand mobile banking preferences of current users while alleviating the fears and lack of understanding of non-users. Broadly speaking, while convenience is the primary benefit cited by mobile banking customers, security fears remain the number one barrier to mobile banking growth.

As opposed to a 'one-size-fits-all' approach, financial institutions should consider segmenting the mobile banking universe for improved resource allocation and to optimize customer acquisition, utilization, retention and differentiation.

Mobile devices, including smartphones and tablets continue to transform the way consumers bank, budget, make payments and shop. In fact, having a mobile banking offering is now considered 'table stakes' to consumers when selecting a financial institution. According to the 2013 Federal Reserve Consumers and Mobile Financial Services Report:

• 87% of the U.S. adult population has a mobile phone
• 52% of the mobile phones are smartphones (internet-enabled)
• 87% of smartphone users access the internet regularly (in the past week)
• 28% of mobile phone users have used mobile banking over past 12 months
• 48% of smartphone users have used mobile banking in past 12 months

While some financial institutions may be satisfied with this level of acceptance, mobile banking leaders understand that checking balances using a phone is not 'full engagement' and that growth of use beyond this level will require a better understanding of the mobile customer base and the barriers that keep non-users from using mobile banking. Banks and credit unions also realize how important this understanding will be as they try to optimize channels, reduce operating costs and identify new revenue sources.

According to a new report just released by Monitise and Cognizant entitled, 'Segment-Based Strategies for Mobile Banking', financial institutions need to better understand the mobile banking customer universe and may want to consider segmenting their customers based on mobile adoption, desired features and benefits, mobile devices and monetization potential. By segmenting the mobile customer base, the following questions could be answered:

• What is the best way to segment the mobile customer base?
• How do mobile adoption levels vary across consumer segments?
• What mobile banking features and applications are preferred and by whom?
• How do tablet users differ from smartphone users?
• What opportunities exist for further monetization?
• How can the mobile channel be leveraged for differentiation?

Understanding the Mobile Banking Consumer

Despite all of the industry discussion around the importance and growth of mobile banking, adoption levels still only average 33% across all segments and age categories. While younger, wealthier and more tech-savvy consumers are more engaged with the mobile channel, the challenge is to replicate these higher adoption levels with other segments.

Mobile Banking Adoption Across Age and Income Parameters

As can be seen above, the highest adoption rate for mobile banking is in the 25-34 age bracket with annual income above $75,000. Mobile banking is accessed primarily through mobile phones (32 percent) and tablets (7 percent), with 24 percent using both devices. As can be expected, the majority of consumers prefer smartphone and tablet apps as opposed to mobile banking web sites to access their accounts. The very oldest segment prefers text banking.

Banking Leaders Discuss 2014 Strategic Planning Priorities

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As we enter the planning season with a marginally better economy than last year, banks and credit unions are faced with margin compression, high operating expenses, new competitors and channel disruption that challenge even the most efficiently run organizations.

To assist with this year's strategic planning process, I asked some of the foremost global leaders in the banking and credit union industry to provide thoughts on what they believe are the 2014 strategic planning priorities. This blog post is a companion to the post done at the beginning of the year regarding trends expected in 2013.

Understanding that each financial institution and market is different, it was interesting the uniformity of priorities offered to bank and credit union management by the more than 30 industry leaders I interviewed for this post. And while the ability to execute against these strategic priorities may be impacted by size of organization and other dynamics, there was a consensus among those who I spoke with that 2014 may be one of the most important planning cycles ever.

Enhance the Customer Experience

Improving the customer experience was the foundation of almost all of the responses I received around 2014 strategic priorities. Whether we are talking about branch reconfiguration, mobile banking applications, back office operations, etc. banking industry leaders believe an improved customer experience is the key to growth. 

As was said by Mary Beth Sullivan and the team from Capital Performance Group in their May/June Newsletter, "Many banks have a long way to go to get the basics right, so banks and credit unions should focus first on the basics. Once the basics are humming, ask yourselves: What can we do to be sure that our customers are better off banking with us than with our competition? What will make our customers lives better? How can we help them solve specific problems they are dealing with? Answers to these questions will define the experience you seek to create."

Beyond 'the basics', other specific strategic initiatives were recommended by Steven J. Ramirez, CEO of Beyond the Arc. "Developing a proactive complain management process that goes beyond regulatory requirements can drive new customer experience projects", says Ramirez. He also believes financial institutions need to determine how they can be a finger swipe away from providing guidance and support through mobile devices.

Financial industry futurist and blogger Scott Bales believes bankers need to get out of the office and talk to real customers, developing empathy for their problems, behaviors and desires if they want to develop offerings that align with the needs of the market. According to Bales, "The goal is to build experiences, not products".

Sankar Krishnan from Sutherland Global sees customer experience as the 'X factor' across all channels and interactions the customer has with their financial institution. Comparing what banks need to strive for with customer experience leaders Apple, Amazon and Quicken Loans, Krishman believes banks need to excel at aligning people, process and technology. 

Sam Maule from Carlisle & Gallagher Consulting Group believes that recent start-upssuch as Moven and Simple (and perennial cx leader USAA) are the best at visual engagement and customer experience. He quoted one of his banking clients as saying, "I would pay $500K for ONE great user experience designer. FSI's are horrible at this. We have massive data systems, huge BI tools, and more, but none of that means jack for consumers if there isn't an amazing user experience."

Finally, best selling author and acclaimed management advisor Joe Pine believes banks and credit unions must go beyond providing just checking accounts and loans.