LET POP-UPS CROP UP
As fans of temporary tattoos and non-permanent hair dye can attest, sometimes people want to try a new look without making a commitment. It was in that spirit of experimentation that PNC opened an orange-and-blue pop-up branch on the sidewalk of a busy Atlanta outdoor mall last summer.
Having recently expanded into the region, Pittsburgh-based PNC used the portable pop-up branch as a way of planting a brand flag in a high-traffic hub, says Todd Barnhart, executive vice president of branch banking at PNC.
The 20-by-8-foot steel container, dressed up with, windows, flat-panel monitors, a walk-up ATM and other comforts of a bricks-and-mortar branch, served as an eye-catching ambassador for the company. Two iPad-wielding employees helped customers open new accounts and apply for personal loans while providing referrals for mortgages and other products.
People are naturally inclined to respond to innovation, Barnhart says of the unusual temporary branch. For us it was really intriguing to see how open people are to discussing their financial well-being and engaging with us on the street on a day when theyre out to shop or eat lunch.
PNC is still evaluating the results of the pilot branch, which closed in November. One early takeaway, according to company officials, is the benefit of keeping extended hours. The pop-up branch was open seven days a week and kept the lights on until 7:30 pm on weekdays.
Temporary branches may become part of a larger trend as banks look for ways cut back on overhead without neglecting customer service, according to Sherief Meleis, a partner at management consulting firm Novantas.
The premise for this is basically that branches are too expensive, Meleis says. The transportable pop-up branches are a way to get the perception of convenience much more cheaply.
Compared with the more familiar idea of mobile branches, pop-ups impart a greater sense of stability, says Ethan Teas,a principal at Novantas. A pop-up branch is more permanent in terms of both the feelit doesnt have wheels on it, so theres not the awkwardness of a mobile branchand in terms of intention, Teas says. A mobile branch is something you bring to a farmers market. A pop-up branch might be there only three to six months, but its got an address, so to speak.
Pop-ups also can enable banks to reach customers in disaster areas. Australias Commonwealth Bank cited its experience working with customers in the state of Victoria after bushfires devastated the region in 2009 as the inspiration for its decision last year to refashion shipping containers into branches that could be loaded onto a truck and deployed quickly in an emergency.
The ability to have a pop-up presence can be equally handy during special events of a more positive nature. "The Olympics are six weeks, but you don't want to build something permanent," Meleis says.
"So you take the idea of going to the customer rather than waiting for the customer to come to you." Sarah Todd
GO ALL IN WITH CUTTING COSTS OR BOOSING REVENUE -- JUST NOT AT THE SAME TIME
Listen to any bank earnings call these days and odds are that, at some point, executives will discuss how they are addressing the persistent lack of revenue growth by simultaneously cutting expenses and investing in new business lines. McKinsey & Co.'s Fritz Nauck has a suggestion for any bank taking this two pronged approach: pick one or the other and stick with it. Citing recent McKinsey research, Nauck says that only about 20% of the world's 500 largest banks have been successful in recent years at both cutting costs and growing revenue. He says most banks would be better off putting growth plans on hold until they have meaningfully cut expenses, or investing in growth first with the cost cuts coming later.
"There's got to be a sequencing," says Nauck, a senior partner in McKinsey's financial institutions group. "It's very tough to sell the message that you are growing and you are cutting. Which is it?"
The message can be especially confusing to employees tasked with carrying out the strategy. "It's very hard to ask front-line employees to sell more to current customers and gather new business at the same time you're telling them that two tellers and two platform bankers will be going away," Nauck says.
Publicly traded banks in particular are under immense pressure to cut costs, and unless they are hitting it out of the park on the revenue side analysts don't want to hear much about investments in new business lines.
On its third-quarter earnings call in October, Regions Financial highlighted investments it is making in wealth management and other businesses, but analysts mainly wanted to ask about plans for trimming overhead and improving the efficiency ratio. KeyCorp, Synovus Financial and other regionals with growth ambitions were similarly grilled about their cost-cutting plans.
Nauck says that if cost cuts are the primary goal, banks need to make clear decisions on how they intend to streamline processes and reduce headcount, and then use quarterly earnings calls to detail their progress. Not until they have made sufficient headway should they start focusing on revenue expansion, he says.
Conversely, if revenue growth is the goal, then banks that have sufficient capital should pursue it wholeheartedly. After all, if revenues are growing rapidly enough, investors are unlikely to squawk about rising expenses. A case in point is Signature Bank in New York. Its expenses have been increasing by double digits each quarter as it continues to invest heavily in hiring teams of bankers away from rival banks, but analysts and investors aren't complaining because the bank has posted record profits for 16 straight quarters. Alan Kline
DITCH THE PROMO PRICING
Why should strangers get something from you that your most loyal patrons cant? If youre serious about building stronger relationships with existing customers, it may be time to do away with promotional pricing for first-time customers.
Sure, new account openings will probably drop, but so will the likelihood of attracting an unfaithful customer who will quickly move on after the sweeteners run out.
Youre initiating the relationship in a very transactional way if you get things focused on price from the very beginning, says Chris Malone, managing partner of Fidelum Partners, a consulting and research firm in Newtown Square, Pa.
In The Human Brand, Malones book about the way people relate to products and companies, he and coauthor Susan Fiske posit that our opinions about brands are shaped mainly by perceptions around warmth and competence. Discounts, they argue, do nothing to enhance either, and can even trigger negative perceptions. (Consider the case of a small caf? that tried out a Groupon and was overwhelmed by coupon holders who crowded out the regulars and drove the staff bananas with no indication that these customers would ever return as full-price patrons.)
Malone says that banks, too, would be much better off focusing on retaining and growing their relationships with existing customers rather than jumping through hoops for noncustomers.
Columbus, Ohio-based Huntington Bank determined as much after employees in the field told corporate they were uncomfortable seeing the bank hawk rates that werent available to longtime customers. Huntington hasnt advertised a promotional rate since August 2011.
With margin health under enough pressure now without the added impact of self-inflicted pain through promotional pricing, perhaps more banks will follow suit. Heather Landy
BUDGET FOR INNOVATION
(Just Dont Be So Sure You Know What Innovation You Need Yet)
If you asked Mike Fitzgerald last January whether State Bank and Trust Co. planned to develop an iPad app for commercial customers anytime soon, he would have said no. Yet the $2.5 billion-asset bank in Macon, Ga., did just that during the past year.
It swung the unexpected expense because of its fluid approach to budgeting for new technology.
Fitzgerald, the chief revenue and deposit officer, says State has a spending plan like most other businesses, but it reassesses the plan as trends unfold or as customer needs change.
I cant overstate how important flexibility is in the budget, says Fitzgerald.
We listen to clients and get ahead of what we think is the demand curve in our marketplace by being very flexible in the way we apply those resources during the year.
He cites the iPad app as an example. Its a cash-management solution for commercial customers on the go, and State prioritized it over other plans because the need arose. We have a commercial client who is far more mobile and far more demanding of multiple points of access to the company than I think we had anticipated, Fitzgerald says.
This approach is radically different than the way most banks have operated in the past, but so much is changing so fast on the technology front that Fitzgerald says a fixed strategy just doesnt work anymore.
In this industry, we have written business plans forever, he says, and weve said, 'Gosh darn it, were going to do those things because we said were going to do them; we worked really hard on those plans.'
But now being nimble is far more important.
Paul Wiggins, a solutions specialist at the technology provider Jack Henry & Associates, says he has noticed a proliferation of innovation budgets at community banks lately. This money isnt earmarked for specific projects, instead giving banks the option to pursue whatever might pop up after their annual planning is over.
It is an approach that consulting firm McKinsey & Co. is recommending as well. Companies across all industries need to start allowing for critical decisions to be made on the fly, McKinsey advises. Those who do will capture business from the laggards who operate as if the future is still reasonably predictable.
Fitzgerald says collaboration is key for such discretionary budgeting to be a success. People in different departments of a bank have to work together to implement whatever makes the most sense for customers, rather than go to war over the money for new initiatives, as they might have done in the past.
Ultimately there is no other choice, Fitzgerald insists. Customers are demanding the latest technology, regardless of whether they bank with a small institution or a big one.
To be proactive, not just to be responsive, means that throughout the year you need that strategic collaboration among management that allows you to have the courage to change, and deviate from the business plan, to capitalize on market opportunity, he says. Bonnie McGeer
DON'T PATRONIZE THOSE WHO DON'T PATRONIZE BANKS
Regulators and advocacy groups have been steadily pushing traditional financial firms to bring lowincome consumers into the banking system or do more to keep them there. But are banks the best option for everyone?
Not by a long shot, says Lisa Servon, a professor of urban policy and management at The New School in New York. She refutes the argument that the poor would flock to banksand that they necessarily would be better off doing soif bank products could only be made more accessible somehow.
Instead, bad experiences with bank overdraft fees, a relative lack of transparency and a de-emphasis on face-to-face relationships, among other factors, have led many of these individuals to actively exclude themselves, she says.
As part of her research, Servon spent four months as a teller at a check-cashing business in the South Bronx and three weeks working at a payday lenderin Oakland, Calif. She found that people who use nonbank financial services like these havent necessarily been locked out of the banking system.
During her weekly, eight-hour shifts at the check-cashing outlet, she observed an unusual closeness in the relationships her fellow tellers had with customers, and when she interviewed customers after her stint as a teller, she learned that many believed they saved money by avoiding banks and, thus, their fees for bounced checks or late payments.
Poor people arent stupid, Servon says. They have pretty good reasons for patronizing places like check cashers or payday loan outlets, despite the reputation these nonbank alternatives have for being predatory lenders.
As a result, Servon and others suggest, conversations around financial inclusion have become outdated and often misguided.
The idea that banks somehow need to do something about the unbanked is mind-boggling, says Ron Shevlin, senior analyst at Aite Group, which also has done research in this area. These are people who are choosing not to do business with banks.
That may be just as well as far as the banks are concerned. Industry trends such as branch closures, punitive fee structures and a move to smartphone-based mobile services are putting traditional financial services providers widely out of step with the needs of many unbanked and underbanked consumers, according to Servon. To successfully serve these demographics, banks would have to significantly alter their business model. They would have to be willing to innovate and to fail, Servon says.
Thats a tall order for banks these days, given the pressure on margins and the heightened reputational and regulatory risks around products targeting low-income consumers. In any case, Servon notes, banks never said they were social enterprises.
If regulators were serious enough about making the banking system more inclusive, they could perhaps set and enforce price controls on products for consumers below a certain income threshold. But as Shevlin points out, nobody tells Mercedes- Benz you have to sell a car for $5,000 to people who cannot afford a car for $75,000. And its easy to see how price controls in banking could backfire. Says Shevlin, The people who can pay for the checking accounts will be charged even more. Then what happens? That will drive more people who are banked to become unbanked.
TIE COMPENSATION TO REPUTATION
Rey Ocanas is BBVA Compass director of corporate responsibility and reputation, but hes far from the only BBVA executive paid to keep both on the up and up. The bank and its Spanish-owned parent recently tied a portion of its executives variable compensation directly to public perceptions of the brand.
In a sense, everyone who works at any bank is financially motivated to preserve a good reputationor to strengthen a weak one. If reputational troubles trigger a decline in business or, at the extreme end, a run on the bank, thats not good for anyones performance-based pay. But even with their heightened awareness about the importance of reputation, how many industry executiveshave considered making a portion of their annual pay conditional on the way their bank is regarded by the public?
Its hard to compute compensation based on reputation without solid metrics. BBVA, for example, works with a consulting firm that produces a monthly reputational score based on consumer surveys. The data reflects attitudes not just on corporate citizenship, but governance, financial performance, workplace environment, and products and services, among other factors. If you accept that reputation involves all of those things, then it follows that human resources managers would have a direct impact on a measurable component of reputation (perceptions about the workplace environment), as would business line executives (products and services) and financial executives (financial performance). Perhaps its time to actually hold them accountable for it.
GIVE BORROWERS A PAYOFF NUDGE
By the look of things, the consumer creditcard business is getting healthier.
Revolving loan balances fell for a fourth straight month in September, at an annual pace of 2.9%, according to Federal Reserve data. Delinquencies also shrunk last year, according to the New York Federal Reserve, and personal bankruptcies were off the previous years pace by as much as 13%, according to Epiq Systems, a technology provider to the legal industry.
Does all the good news herald a new era of consumer responsibility in the credit card space?
Not exactly. Though the trends are favorable now, the youngest population of cardholders has some poor habits settling in. The under- 30 set is four times more likely than senior citizens to make late payments on card debt despite having fewer cards and lower average balances, according to Experian. And their utilization of available credit is high. Along with consumers age 30 to 46, the millennials are revolving 37% of their monthly credit limits, compared to just 14% for the Greatest Generation.
What banks may be faced with in the years to come is a young customer base increasingly challenged to maintain healthy credit, potentially becoming a weak source of revenue as they struggle to pay off higher balances or qualify for mortgages as they age. Banks may need to consider steps now to encourage healthier behavior to maintain viable customer segments in the years to come.
A working paper published in September by the National Bureau of Economic Research showed what a little effort in this regard might accomplish. Examining card data from the eight largest U.S. banks, the researchers, including economists from New York University, the University of Chicago Booth School of Business and the Office of the Comptroller of the Currency, found that a payoff nudge could be induced in at least some cardholders, in the form of increased awareness about the substantial, long-term financial penalty for making only minimum payments on cards.
The researchers were studying the effect of disclosure requirements in the 2009 CARD Act. The requirements include providing cardholders with information about the interest savings that would accrue by paying off balances in three years, rather than the lengthier period (often decades) needed to clear balances making only minimum payments.
The finding was that approximately half a percent of all borrowers shifted their behavior toward this payoff that would allow them to pay off within 36 months, says Johannes Stroebel, an NYU assistant professor of finance who worked on the study. And it also looks as if most of those people had previously been making payments of smaller amounts.
That 0.5% doesnt sound significant, but it supports an argument in a 2011 study published in the Journal of Market Research that presenting the 36-month payment amount might be taken by consumers as a recommendation, prompting them to anchor their repayment plans to this level. And the findings of the more recent study could turn out to be an undercount of the impact given the number of consumers (Stroebel says he is among them) who make their card payments online, where the 36-month payoff disclosure typically is not displayed.
Many institutions are drawing more attention to the minimum payment penalty already. The websites of U.S. Bank and New Yorks SEFCU credit union, for example, include financial calculators that lets cardholders set their own payoff goals (defaulted at 24 months) and compare the effects with what would happen if only the minimum payoff were made each month. BB&T offers a detailed explanation of the effect of having regular additional charges on cards, where even a $100 difference in additional spending per month can extend twofold or more the balance payoff date.
Stroebel says he and his research team purposefully did not set out to suggest banks take specific actions, such as boosting minimum payments, or to make explicit recommendations for a 36-month or shorter payoff schedule.
Without making additional assumptions, its not necessarily clear whether people making larger repayments are necessarily better off, he says. Theres always the possibility that they might now repay credit cards faster but they are doing that at the expense of keeping more expensive debt. What we do want to show, he says, is if you do make disclosures like that, it has the ability to affect consumer repayment decisions. Glen Fest
GET READY FOR FAST PROCESSING
Send a bill payment across the automated clearing house network on a Thursday night and it might arrive in the recipients account by Monday. Or not. Either way, its a snails pace versus what happens in countries such as Sweden and the United Kingdom, where electronic payments are closed almost in real time.
Here in the United States, an industry proposal to speed up settlement times got torpedoed 18 months ago by big banks with a stake in maintaining the status quo. But make no mistake: its time to get ready for samet-day settlement.
In the wake of the failed proposal by Nacha, the industry-owned group that sets ACH rules, the nations Federal Reserve banks established a 10-year roadmap calling for an eventual shift to near-real-time payments. Although its not clear how far the Fed will go in nudging the industry toward that goal, it would be na?ve for bankers to ignore the need forand the long-term inevitability ofa faster payments system.
The most immediate choice banks face is whether to join one of the faster, closed-loop payments networks that have emerged of late. The proprietary networks include PayNet, built by the technology provider FIS, which has more than 180 banks participating; and PopMoney, developed by Fiserv, which is processing person-to-person payments for a number of the nations largest banks. Theres also clearXchange, developed jointly by JPMorgan Chase, Wells Fargo and Bank of America. It recently announced that Lakewood, Colo.- based FirstBank is joining the network.
But the closed-loop networks still suffer from a lack of ubiquity. A network that lets people send money to customers of 200 other banks is far less useful than one that lets them send cash to customers of any of the 14,000 banks and credit unions nationwide.
So does it make sense to align your bank with one of these systems as they work toward achieving critical mass? That depends in part on who your customers are.
More than likely this is going to be a retail initiative, so banks that rely on retail customers may see value in being an early adopter, says Gene Neyer, senior vice president of global payments at the technology firm Fundtech. Corporate banks, on the other hand, may want to wait until the dust settles, although some of themespecially banks that cater to the technology sectormay prefer to get ahead of the curve.
But even banks that choose to sit on the sidelines can take steps now, preparing for systems upgrades for example, in anticipation of the eventual arrival of faster payments. Take this as an opportunity to look at the modern technology, Neyer advises. Because in the brave new world of fast processing, the same old technology just wont do. Kevin Wack
KEEP BRANCH TALENT IN THE BRANCH
In retail banking, success is a double-edged sword. A branch can benefit greatly from a strong manager or terrific teller, and its only natural to reward these star performers with promotions to bigger branches, or roles at the district or regional level. But recognizing top talent this way exacerbates the high rate of turnover in the branches and potentially puts your best customer relationships into limbo. Heres one solution: keep those valuable staffers right where they are. The trick is to do so without sacrificing their professional growth or earnings potential. And for that, you have to completely rethink the branch banking career path.
No longer, for example, could you tie compensation for branch employees to the size of the branchthat would only encourage movement to bigger and bigger outposts. And pay metrics focused on net customer growth would need to make room for separate measurements of acquisition and retention rates, the latter of which acknowledges the special role that tenured employees can play in keeping customers loyal.
One model for this approach is Union Bank, which made changes like these a few years ago to tackle an attrition problem at its branches, and to play up what it saw as a competitive advantage in the staff that stayed with the banktheir length of service. Pierre Habis, Unions senior executive vice president for community banking, says the changes halved the attrition rate and addressed a key concern of small-business clients especially: they want to see a familiar face when they go to a branch.
Whats more, Habis says, the prospect of a career path that does not require frequent relocations can be a quality-of-life perk that helps Union compete for talent with larger banks, where salaries often are higher but so are the chances of having to move around a lot.
At Union, proposed moves between branches are relatively rare, and require executive approval. If a move would result in a significant reduction in commute time for an employee, Habis says hed probably be inclined to approve it, but even then hed want to weigh the disruption for the branch that is losing the staffer and take steps to contain the impact. Heather Landy
OFFER REWARDS THAT MATTER
(i.e. Make Your Rewards Program Exactly What Customers Want)
Card reward programs are well past their S&H Green Stamps phase, where people redeem their rewards by picking items from a catalog that stays pretty much the same all the time. Consumers demand far more flexibility these days, and analysts say banks need to get creative about delivering it.
Wells Fargo is among those rising to the challenge. This fall it began giving credit card customers the option of using their rewards to pay down loans.
The idea is similar to its Home Rebate Card, which automatically puts the 1% cash back that cardholders earn toward the principal on their Wells Fargo home loan.
But now the rest of the companys 8 million cardholders are able to apply their rewards to other types of Wells loans if they want, including auto loans and home equity lines of credit. Participants can make changes at any time, opting to funnel the rewards into a savings account or a different loan product instead.
Brent Vallat, Wells Fargos head of consumer credit cards and personal lines and loans, says expanding what consumers can do with their rewards in a way that is relevant to them should pay off in increased loyalty.
It helps us engage the customers in a deeper way, because they know theres a connection between their rewards and their loans or their savings, Vallat says. We want to make that card have more value to the other products.
Wells Fargos program appears to be unique in the way it ties a card with a loan in an ongoing way. Michael Misasi, a senior analyst at Mercator Advisory Group, says it is an interesting idea because it not only gives cardholders flexibility for using their reward points, but introduces them to other bank products.
He says many banks are working to integrate reward programs across the entire banking relationship lately. But a one-time deal is a more common strategy, where cardholders receive bonus reward points for taking out a loan or signing up for a premium checking account.
Other banks also have started experimenting with allowing cardholders to put rewards directly into a savings or checking account, in some cases providing an extra incentive to do so. Both Bank of America and SunTrust give customers a 10% cash back bonus for depositing their rewards in an account with the institution. JPMorgan Chase awards cardholders a 10% bonus just for having a Chase checking account even if the rewards are not deposited there.
Misasi says issuers in general are adding to their list of redemption options, whether its giving points away for a donation to charity or being able to transfer points to hotel or airline programs.
Getting customers to use the card more in the short term is only part of the motivation, he says. Strengthening the customer relationship for the long term is the main goal.
Among Wells card customers, those with Home Rebate Cards do about three times more spending on their cards. Vallat says he thinks the mortgage rebate is an incentive that helps put the card in the coveted top-of-wallet position. So giving a similar incentive to other loan customers makes sense. Maybe someone is not a homeowner yet, or theyve paid their mortgage off already, Vallat says. That same principle can apply.
Citigroup and American Express also have made recent changes to give cardholders more flexibility. As of late November, Citi began letting customers use points from the Thank You Rewards program to pay for just about any online purchase. Though Citi already had offered thousands of rewards through its program, ranging from gift cards to travel, it says this new option for spending points essentially turns whatever someone wants to buy into their own personal reward.
Using reward points to pay for charges on an Amex bill got a lot easier in late November as well, when the company incorporated that option into its smartphone app. The points can be used for purchases as small as $1, making rewards more attainable and flexible, says David Yoo, Amexs senior vice president of mobile products and services. Membership rewards points can now be part of the everyday, and not an afterthought or something to use later.
Analysts say consumers are gravitating toward options like these, so banks should take note.
There is a trend of customers having greater control over reward redemptions, says MasterCards Bob Grothe, who sees an upside for banks that respond by offering more flexibility.
When you do this, you are going to move your program from close to what I want for customers to exactly what I want. So dont fight that customer control trend. Embrace it and use it to your advantage. Bonnie McGeer
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