SUMMER 2018
THE FUTURE OF BANKING
Deposit Funding Challenge
The Widening LIBOR-OIS Spread
Faster Payments for Commercial SUMMERCustomers 2018 | 1 THE FUTURE OF BANKING IS ALREADY HERE This is the third in a series of thought pieces related to Novantas’ views on sustainable transformation efforts, particularly with a focus on evolving the revenue 4 generation side of the equation. 7 | SITTING DOWN WITH NOVANTAS 9 | BANKS CAN EASE DEPOSIT WOES BY TAKING CUE FROM CARD ISSUERS 11 | DEEP DIVE: WIDENING LIBOR-OIS SPREAD BEARS WATCHING, BUT NO CAUSE FOR ALARM 13 | WHEN FUNCTIONALITY ISN’T ENOUGH: TAPPING YOUR CUSTOMERS’ EMOTIONAL NEEDS 16 | BANKS SHOULD PURSUE EFFICIENT AND SCALABLE “MODEL FACTORY” MANAGEMENT 19 | SNAP AND TAP: MILLENNIAL BANKING TRENDS 20 | FASTER PAYMENTS SPEED TOWARD COMMERCIAL BANKING 22 | BANKS NEED WORKFORCE OVERHAUL AS BIG STAFFING CHURN LOOMS 26 | AT THE PODIUM WITH NOVANTAS 30 | NEWS YOU MAY HAVE MISSED
2 | EDITORIAL Director, Novantas Center for the Future of Banking A Note from the CEOs Robin Sidel +1 212.901.2742 [email protected]
CONTRIBUTORS Kaushik Deka elcome to the Summer 2018 issue of the Novantas Review. Darryl Demos Marc Harrison We are all looking forward to some pool time and burgers on the grill, but we are Dale Johnson also looking to the future. And there’s a lot that bank executives must do to prepare Don Kumka for it. As uncertain as the future always is, there are a few things we can count on. Sherief Meleis Deposit betas are rising, competition is ferocious, and technology is changing the Leo Rinaldi world faster than we ever expected. Matthew Sharp Robin Sidel Steve Turner In this issue, we tackle some key topics that you will face as you look to the future of Bob Warnock banking. We guide you through some strategic choices that you will likely have to Jonathan 'Wes' West make, such as developing a thin-branch network or launching a direct bank. We also examine the significant amount of churn that will hit your workforce and provide guidance about figuring out which deposit customers are most valuable to you. DESIGN Art Direction and Production We are also introducing another new feature as part of the Review’s overhaul. “Deep Adrienne Cohen Dive” will analyze timely financial topics for the banking industry. In this issue, we explore the widening LIBOR-OIS spread — from why it is happening to what it means for your business. NOVANTAS, INC. Co-CEOs and Managing Directors Dave Kaytes As always, we welcome your feedback on the Novantas Review. Feel free to reach out Rick Spitler to Robin Sidel at [email protected] with suggestions and comments. Corporate Headquarters So put on some sunscreen and start reading! 485 Lexington Avenue New York, NY 10017 Phone: +1 212.953.4444 Fax: +1 212.972.4602 [email protected] Dave Kaytes Rick Spitler www.novantas.com Co-CEO Co-CEO Offices Charlotte Chicago New York San Francisco Sydney Toronto
SUMMER 2018 | 3 COVER STORY THE FUTURE OF BANKING IS ALREADY HERE BY SHERIEF MELEIS
he U.S. banking industry has always ings reports shows this clearly — banks followed a very simple formula: are experiencing challenged deposit Intermediation 101 calls for banks growth and there are warning signs to gather deposits from local that deposit betas are rising. Novantas Tdepositors (primarily retail) and lend to believes this phenomenon and the asso- local borrowers (primarily businesses). ciated funding challenge are secular, not But over the past few years, Novantas cyclical, trends. has been warning that this formula is fundamentally at risk. Deposit-gathering SOLVE THE RETAIL DEPOSIT FUNDING has become a national business that is CHALLENGE…OR FIND A BUYER dominated by a few national banks and This issue isn’t only a retail-banking direct banks. The most recent set of earn- matter, but a concern for the very top
4 | THE FUTURE OF BANKING IS ALREADY HERE
of the house — from the executive floor hundred years (see Figure 1). But Indeed, a slew of banks have recently to the boardroom. Retail deposits will the evolution of deposit-gathering, announced merger plans. be the primary limiter of growth, while occurring against a backdrop of rising One possible outcome is the cre- commercial DDA and sleepy wealth rates, means banks must consider a ation of several more ‘mega-banks’ (if deposits, will dry up. wide range of choices. That means regulators allow it) that can compete better with marketing and technology scale. Banks that don’t solve their deposit funding challenges will have no choice but to sell out.
RETAIL DEPOSIT STRATEGIC PLAYS Banks need to sort out which one (or combination) of retail strategic plays will address their funding needs. The first option to be considered is to double down on the local franchise and take share from competitors. To do this, banks need a distinctive value proposition (“Why bank with us?”); very few banks have one today. The days of getting ‘fair share’ based on convenient local branches are in the past as more consumers pursue dig- ital formats. That means banks must move from distribution-led strategies to customer-level ones by developing a value proposition, distinctive prod- ucts, and additional marketing spend. But for many regional banks, there FUTURE simply isn’t enough opportunity in OF BANKING IS ALREADY HERE Banks are starting to address the thinking about a thin-branch network, the current footprint. Banks that find issue by considering the right side of launching a direct bank or pursuing themselves in this position should the balance sheet, looking at how fast partnerships to extend geographic consider one of several types of out- they can grow stable, low-cost deposits and/or product reach. In May, Citizens of-footprint plays. and assessing lending capacity. This Financial became one of the latest National banks like Bank of Amer- marks a change from the traditional banks to pursue a new strategy when it ica and Chase have pursued well-doc- way that banks tackled strategic plan- announced plans to launch a national umented approaches to “attach” new ning by considering the left side of the direct-to-consumer digital platform markets (Minneapolis for Bank of balance sheet to determine how fast that will offer deposit accounts. America and Jacksonville, Fla. for a bank can profitably and prudently The stakes are high. Novantas Chase) to their existing footprint grow lending, and how those loans believes that funding pressures will with thin-market plays that involve should be funded. increasingly drive M&A activity as limited physical footprint, ‘feet on As of now, too many institutions the scale advantages on the deposit the street’ marketing, and new digital still haven’t laid out a comprehensive side will drive many community and products. plan to adjust to the demise of the regional banks to combine because Another option is to take a local local retail-banking model that has their required betas to drive deposit segment play national. Because dominated this country for the last growth have become untenable. banking is becoming an extremely
SUMMER 2018 | 5 COVER STORY
FIGURE 1: RETAIL DEPOSIT-GATHERING SHIFTS TO NATIONAL PLAYERS
National Purchase Rate Retail Deposit Growth Share of Deposit Growth ‘Power’ (% New Customer Acquisition) ($ bil, 2012 -2017) (Share of Branches) Ratio
46% 41% $541 40% (18%) 2.26
21% $272 20% (26%) 0.64 26%
$136 10% (18%) 0.43 26% 32% $232 17% (37%) 0.48
7% $184 14% (n/a) ∞ 0%
2016 2017
Power Ratio = % Share Acquisition / % Branch Share Source: FDIC, Novantas BranchScape. Novantas Shopper Survey (>45k respondents nationwide)
To support the development of the strategy, new tools are needed. Banks that don’t solve their Banks need scenario-based planning of different potential macro-economic deposit funding challenges will and funding environments to stress test their strategies. Will the proposed have no choice but to sell out. strategies work if betas are higher than expected, or five more direct national business, winning players Needless to say, the right play (or banks enter the fray? They also need may take a segment proposition that combination of plays) will vary for analysis to evaluate funding across the is distinctive in footprint, and take each bank based on footprint, value enterprise under different scenarios. it to other markets. These can be proposition and capabilities, and And they need ongoing enterprise-wide true in retail or commercial seg- funding needs. and retail deposit funding and price ments, as banks like USAA, First optimization tools that incorporate Republic and Silicon Valley Bank DEVELOPING A SUSTAINABLE sophisticated ‘marginal cost of deposits’ have demonstrated. FUNDING STRATEGY (mCOF) measurement to understand And of course there is the national While in the heat of the deposit the true marginal cost of different plays, direct bank option that has been pressure, banks may be tempted including the costs of ‘polluting’ the pursued by MUFG Union Bank with to be reactive and only use tactical back book. These tools will allow banks its PurePoint brand, among others. levers such as price and marketing to course-correct to determine where to While the up-front investment mar- campaigns to drive short-term growth. get the next $5B of deposits. keting costs and interest rate may But these levers may well run out Banks that figure this out will be be high, it still may be cheaper than of steam or become inordinately able to continue to grow and survive the high ‘marginal cost of funds’ of expensive as rates rise. Given this, in the new environment. Banks that pricing up in footprint balances and it is critical for banks to develop a don’t will need to combine with others ‘polluting’ the back book. A related proactive longer-term deposit growth and may become part of the next set of strategy is a national affinity play strategy, assessing a range of strate- super-regionals or even mega-banks. in which the banks teams up with gic options such as the ones laid out another brand to provide white-label above, to determine a viable path for Sherief Meleis deposits — as Webster has done in the generating adequate deposit growth EVP, San Francisco HSA business. at acceptable cost of funds. [email protected]
6 | The biggest surprise is how quickly it became so important. In 2008, the secu- ritization market shut down and so all of a sudden direct-to-consumer deposits became so much more important and SITTING became our largest funding source.
Q: What are some of the biggest chal- lenges in building a bank that doesn’t DOWN WITH have branches? A: There are some overall challenges in the online deposit space — creating trust and credibility. As opposed to a credit card where someone is lending you NOVANTAS money or a personal loan, if you’re giv- BY ROBIN SIDEL ing someone your money, it’s a different degree of trust. Branches are a tangible element of that. Given the brand we have built over time, we do have a physical presence. People see a Discover logo 100 times a day. Discover Financial Services may be best known for Q: Most people would assume that online its credit cards and invention of cash-back rewards banks skew to a younger demographic. in 1986, but the company was also one of the first Who is your typical bank customer? big names to introduce an online savings account. A: If you think about CDs, they will skew As a growing number of banks explore launching a lot more toward Boomers. We see a a direct bank, The Novantas Review chatted with very mature base for CD and IRA prod- ucts. Online savings accounts start to Roger Hochschild, Discover’s president and chief skew more broadly, more Gen Xers. With operating officer, about the company’s experiences our re-launched checking product, that is skewing younger. More digital natives with its online offering. find that product easy and convenient. There is inertia around checking. People tend to not want to move their check- ing accounts. The beauty of checking accounts is how sticky they are, but it’s Q: Discover first introduced an online always a challenge if you are trying to savings product in 2007. What was get them. the online industry like then and what were some of the surprises that Q: Discover Bank has introduced some you encountered? creative features, such as the new fee for- giveness program. Is it more important to A: Prior to 2007, we had a small CD keep the brand fresh when you don’t have business. But our funding needs were branches to fall back on for awareness? changing dramatically after our separa- tion from Morgan Stanley. We needed a A: Innovation has been part of Discover’s more robust funding model as a stand- heritage from the beginning — from the alone. At that time, there were not that idea of giving rewards for purchases to many direct players and certainly not putting the FICO score on the statement that many direct players that had a to “Freeze It” (in which a credit-card well-known brand, so there was account can be frozen so that new pur- not much competition. chases, cash advances or balance trans-
SUMMER 2018 | 7 EXECUTIVE INTERVIEW
of the direct model. It is now starting to extend into checking, which was the last product to shift. We always viewed our competition as the branch banks. It doesn’t really change the competitive set. They are well-run organizations and will bring a lot of capabilities. It shows we are in the right place. But it is hard for a branch bank to operate with a direct model. It becomes very complex, confus- ing and challenging from a resource-al- location standpoint as opposed to us — we have the simplicity of the direct model. There is a real chance for channel conflict. You saw some of this with tra- ditional retailers. Trying to maintain one price in a branch with a different price in direct channels will be very challenging Roger Hochschild, president and chief operating officer and does not send the right message to your customers. fers won’t be authorized.) We try to bring customer service can be just as effective that heritage across all our products. The at dispute resolution in direct channels. Q: Do you think we will eventually see key advantage we have for it is on cost. A lot of banks see their call centers as a standalone online savings or check- We don’t have that high-cost branch pure cost and take strategies to move ing product from Amazon, Facebook, infrastructure. We are always looking for offshore or make it challenging for the Google or a fintech? Or do you think ways to create value and leverage that customer to get past the main menu. we will see more partnerships with cost advantage. We also have invested in Clearly, we don’t look at it that way. The traditional banks? a next-generation platform. I feel like we defining customer experience is talking have a very strong technology team and to one of our representatives. A: Partnerships between retailers and that also helps us. banks are not new. Unless the regulatory Q: What is the most effective way environment changes dramatically, I can’t Q: Why is Discover a better option for to attract new customers without a see any of these tech companies getting consumers than a traditional retail bank? branch presence? into banking and launching a product on their own. I don’t see any of them doing A: On the savings account, I would start A: For us, it’s really about direct mar- a stand-alone product. But yes to partner- with rate. If you look at the rate paid on keting. We have the advantage of being ships. A lot of them will have to make a savings by most branch banks, it is in the able to cross-sell. When you have done decision about whether they want a single single-digit basis points. You are going a good job serving a customer with one partnership or to establish themselves as to get a lot more value with Discover and product, they are eager to buy another a platform and I think you will see them better customer service. You want your product from you. But we never sell when trying to work through that. savings to work as hard as you do and you call our call center because people you’ll get a lot more for your money at are in a hurry. We present our other Q: When is the last time you were in a Discover. We try to offer a good value. If products online and it is a very effective bank branch? you are offering the highest rate in the channel for us. We have done some print market, you will get people for whom advertising, but most of the marketing is A: My wife owns a bookstore and so that is their only criteria and then your digital. It is very hard to build that type they have an account with a branch bank beta on your deposits will be off the of expertise from scratch. because they need cash for the drawers charts. And as soon as you don’t have the and then will deposit cash. Sometime last highest rate, those people will leave you. Q: A growing number of traditional banks week I took the cash in at the end of the are starting to launch or think about day for a deposit. But In terms of my per- Q: How important is the call center for a launching an online bank as a way to sonal business, I am very, very digital. direct bank versus a bank with branches? grow out of footprint. What do you think about the competitive environment? Robin Sidel A: With credit cards, we were the first Director, New York out with 24-7 customer service. I believe A: It’s neutral. On one hand, it is a validation [email protected]
8 | BANKS CAN EASE DEPOSIT WOES BY TAKING CUE FROM CARD ISSUERS BY DON KUMKA
t’s no secret that the need for low- identify which customers are most channels, and non-bank competition. cost, sticky deposits is one of the prone to rate shop, along with how Customers who have drifted away from most pressing issues in the industry much money is likely to move in line brick-and-mortar branches can easily today, particularly as interest rates with rate changes. The scores can also shop and compare prices across banks Iare set to keep rising. The use of deposit help identify balance retention or per- and geographic regions, choosing to scoring can help banks identify which sistence, as well as balance run-off. deposit funds in a bank that has the best customers they want to keep — and the The elasticity of deposit pricing value proposition for their needs. best ways to keep them. traditionally has been modeled within Banks will find themselves at a dis- Scoring, which uses an algorithm to segments that reflect products, markets, tinct pricing disadvantage unless they summarize customer behavior, has long balance tiers and potentially other can capture the individuality of these been a mainstay for credit-card port- macro factors. A bank’s ability to opti- decisions (see Figure 1). folio management. Novantas believes mally price and maximize spread, while these techniques also can help banks continuing to meet deposit goals, was IDENTIFYING RATE-SENSITIVE target their most valuable deposit cus- constrained only by the granularity of CUSTOMERS IS KEY tomers based on shopping frequency or segmented solution. The good news is that banks can propensity, rate sensitivity and balance But those traditional methods are manage the back book by determining persistence or retention. now being turned upside down due which customers are sensitive to price Banks can analyze the score to to the growth of online and mobile or those who are swayed by non-price
SUMMER 2018 | 9 DEPOSITS
FIGURE 1: A HISTORICAL LOOK AT THE FED FUNDS RATE
20.0 17.5 15.0 12.5 10.0 Percent 7.5 5.0 2.5 0.0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Source: Board of Governors of the Federal Reserve System (US) treatments and communications. Cus- shoppers makes them much more of observation (time periods used for tomer-level information that is built valuable to the bank than their chronic score development) and performance on a library of treatments and is honed shopping counterparts. (time period used to define outcomes through a rigorous and continuous to be modeled). While all the scores rely test-and-learn process will define best- WHAT DOES THE CUSTOMER DO upon DLB, there are different views of in-class deposit book management. As WITH THOSE DEPOSITS? the metric required for each. more banks develop these capabilities, Novantas has studied customer ten- the ability to harness customer data dencies, developing a library of behav- MAKING THE RIGHT CHOICES for modeling and managing deposits ioral metrics to capture the underlying A bank needs to figure out how to iden- at the customer level will only grow dynamics of customer-level deposit tify and target rate-sensitive shoppers in importance. management. Key to these scores is with the right approach. Is it a give-to- For example, some of the least valu- understanding how customers use their get proposition that acknowledges the able customers are chronic rate shoppers deposits — how much is dedicated to customer’s banking relationship, while — customers who respond to a rate offer, monthly cash flow management (funds shifting the value proposition from rate deposit money in the bank and demand a that aren’t in play because they are used to other non-rate rewards such as credit better rate as soon as the rate promotion to pay bills, etc.) and how much excess card-related merchant offers? Other ends, withdrawing their money if they cash flow is held in liquid products such options include launching a targeted aren’t accommodated. These customers as checking, savings and money market acquisition program, providing more can only be propped up by rate. accounts. Novantas refers to the liquid support to employees who negotiate In contrast to chronic shoppers, funds that are in excess of cash flow as rate with customers, or improving the episodic rate shoppers are driven “discretionary liquid balance (DLB)”, pricing of the back book. by events and attitudes. (Individual meaning they are deposits that aren’t While deposit scores can provide a personality plays a large role, too.) A earmarked or committed for a specific considerable amount of value, Novantas tax refund, for example, triggers rate purpose and can be easily accessed doesn’t believe a bank should just aban- awareness and new shopping behavior and moved. The specific accounts don its existing deposit management from a consumer who seldom if ever, where these deposits are held are less framework. The ideal score implemen- follows price trends. Once an accept- important than the amount retained by tation takes place in conjunction with able rate is found and the money is the customer and its variance over time. a bank’s existing deposit-management deposited, the episodic customer’s rate These DLB metrics serve as the basis for dimensions. This provides continuity awareness often disappears; the money defining modeling criteria for scoring. with past management efforts and allows is out of sight and out of mind. The Novantas’ score development pro- a bank to test and learn its way into life or persistence of these deposits gram follows best practices from credit customer-level pricing treatments. reflects the behavioral tendencies of scoring and governance as outlined by these customers and doesn’t require the OCC. Like all behavior scores, his- Don Kumka on-going rate support. The lack of rate torical customer level data (three-years Director, New York sensitivity and persistence of episodic minimum) is required to define points [email protected]
10 | EEP Financial analysis for financial services
IVEThe LIBOR-OIS (London interbank offer rate-overnight index swap) spread has widened dramatically this year, prompting speculation that the next crisis is on the horizon. A close examination shows, however, that the wider spread (which typically is viewed as an indicator of risk in the financial system) doesn’t indicate any undue amount of economic stress. Still, the spread bears watching because it can hold significant implications for bank balance sheets, both in terms of credit performance and funding costs. The spread widened from about 10 bps in late 2017 to an April peak of 59 WIDENING LIBOR-OIS bps, reflecting a level that hasn’t been seen since the European debt crisis in 2011. The spread retreated to about 41 SPREAD BEARS WATCHING, bps by early June. WHY IT MATTERS In general, LIBOR is the rate at which BUT NO CAUSE FOR ALARM banks indicate they are willing to lend to other banks for a specified term of the BY BOB WARNOCK loan. The OIS is the rate on a derivatives contract that swaps out the overnight rate index for a fixed rate, which in the U.S., is usually the effective Fed Funds Rate. The LIBOR-OIS spread, therefore, is a gauge of the health of financial markets and financial institutions. It is important for banks to examine the spread and
SUMMER 2018 | 11 ANALYSIS
FIGURE 1: LIBOR-OIS
0.65 0.60 0.55 0.50 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Oct-13 Oct-14 Oct-15 Oct-16 Feb-14 Feb-15 Feb-16 Feb-18 Oct-17 Feb-17 Dec-13 Dec-14 Dec-15 Dec-16 Apr-14 Apr-15 Apr-16 Apr-18 Dec-17 Apr-17 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Source: Bloomberg, Novantas Analysis consider why it has recently widened as 3. The Fed’s quantitative tightening ahead of 2017 levels. The big question for they pursue day-to-day operations. is reducing liquidity the market: is FRA-OIS reflecting future The last period of LIBOR-OIS wid- First, repatriation and BEAT require trends (as it is supposed to do) or is it ening occurred as the result of money that corporations alter their liquid just being impacted by the same forces market fund (MMF) reform that began asset and liability profiles in a way that are affecting LIBOR-OIS spreads? in 2014 and took effect in 2016. Over that increases issuance of corporate the course of 2016, $900B flowed out of (and bank-related) paper, which widens FUNDING PROFILES MAY BE AFFECTED prime funds into government-focused spreads. Second, as a result of the tax bill As long as financial conditions continue funds, causing the spread to widen 29 that was signed into law in late 2017, the to tighten on their own (i.e. the flattening bps to 53 bps. As market forces nor- US Treasury is forced to issue a larger yield curve), more bank management malized over the following months and supply of T-Bills to cover the $1.5 T in tax teams need to keep an eye on LIBOR-OIS flows normalized, the spread returned cuts than is typical for current seasonal- and FRA-OIS. Yes, it can be explained for to a more “normal” post-crisis level of ity. Finally, after an extended period of now, but the longer these spreads remain approximately 30 bps. accommodation, the Fed is reducing elevated, the more repercussions there its balance sheet holdings of USTs and is for funding profiles of both banks and THE REASON BEHIND THE SPREAD MBS, which are expected to increase corporates alike. Like the initial impact of MMF reform, funding costs across the system. Goldman recently estimated that the Novantas doesn’t believe that the While the jury is still out on whether balance of household and business debt current spread is actually telegraphing LIBOR-OIS spreads will normalize soon, tied to LIBOR was ~$1.8 T. Banks would any particular level of stress, either at as they did in the wake of MMF regula- be wise to prepare for the recent increas- the bank or macro level. While there tion, it is expected that T-Bill issuance es in funding costs to have ramifications are myriad factors impacting the should trail off, which should provide for both credit and business activity over current spread level, we believe that some level of relief. Indeed, that has the next six to nine months, especially the current drivers are a mix of three already started to happen. Still, the pre- if economic growth accelerates and separate stories: dictor of LIBOR-OIS, which is known as increases funding betas for banks. 1. The impact from repatriation and FRA-OIS, isn’t indicating any significant the new base erosion and anti- level of narrowing. It shows two-month Bob Warnock abuse tax (BEAT) levels at only 2-3 bps of further tightening, VP of Industry Analysis, Chicago 2. A significant level of T-Bill issuance which would keep the spread still way [email protected]
12 | WHEN FUNCTIONALITY ISN’T ENOUGH: TAPPING YOUR CUSTOMERS’ EMOTIONAL NEEDS BY MATTHEW SHARP
s consumers spend less time ing the gas bill to their desire to give out on opportunities to acquire new in branches and increasingly back to the community when they are primary customers. turn to non-bank providers for financially set. Such a strategy underscores the evo- day-to-day cash management, The upshot: people’s emotions lution of the traditional banking system Abanks must stay relevant by tapping from its initial role of being the ultimate over their finances run deep, but into the emotional and financial needs banks aren’t doing enough to connect financial intermediary that created value of their customers. their offerings to the way consumers by accepting and protecting deposits, New research conducted by Novan- feel about their money. As a result, facilitating payments and making loans. tas explored the way that money makes banks face imminent disruption to those Banks these days aren’t the only viable people feel — from anxiety about pay- existing relationships and are missing option; they are often bested by upstart
FIGURE 1: AI-POWERED QUALITATIVE RESEARCH METHODOLOGY
• 306 consumers were interviewed simultaneously by a human moderator via an AI-powered online platform (Remesh.ai) • Interviews lasted 60 minutes and covered the following topics: • Money pains and gains • Current primary banking relationship and experience • Ideal banking experience • Responses were measured on dimensions of consensus (most common unaided responses to each moderated question) and popularity (individual response themes most likely to be voted on by respondents) • Artificial intelligence analyzed and grouped individual responses in real-time, automating manual elements of the qualita- tive research process
SUMMER 2018 | 13 NOVANTAS RESEARCH SPOTLIGHT
needs on a day-to-day basis. SHOW ME YOU CARE Despite banks’ inability to deliver Have some sort of notes on my ac- value to customers beyond basic func- tional benefits, the reality is that money count, so [your bank employees] is a deeply-emotional part of people’s can address me by my preferred name, ask lives. Money (or the lack of money) has the power to trigger negative emotions about my kids, or hobbies, etc. like fear, anxiety, hopelessness and confusion, as well as positive feelings — FEMALE, 38-48, LESS THAN $25,000 INCOME of control, freedom, empowerment and accomplishment. financial services providers and tech- FIGURE 2: CONSUMERS’ ANSWERS TO THESE QUESTIONS ILLUMINATED THREE nology companies that are attractive IMPORTANT SETS OF VALUES THAT MONEY HAS THE POWER TO ENABLE because they make money-related tasks faster and easier to complete. As a result, it is incumbent on banks to achieve true differentiation Ability to Give Back in ways that are relevant to customers.
THE LINK BETWEEN MONEY AND EMOTIONS Novantas partnered with Sylver Con- Self Sufficiency sulting (a research and strategy firm based in the Chicago area) for the latest research, using an artificial intelligence-powered online platform to conduct qualitative interviews with Financially Comfortable 306 consumers. (see Figure 1). First, we dove into consumers’ mon- ey-related pains — what keeps them up Source: Novantas Customer Knowledge | 2018 Distinctiveness Research at night, where and how they feel held back in life, and, specifically, what a “bad money day” looks like for them. We paying the bills or having enough DISTINCTIVENESS IS KEY also explored the positive — how money money, are beginning to feel more The path for banks to differentiate from enables consumers, their aspirations, secure and stable financially, are one another will depend upon their how money helps them achieve those able to increase their discretionary ability to create and articulate emotional goals, and what makes them feel accom- spending, plan for future expenses, and social benefits, delivering them on plished day-to-day as it relates to money. and experience less stress overall. top of leading functional proof points. The responses fit into three cate- • Ability to give back: Ultimately, This isn’t a one-or-the-other proposi- gories of what the respondents believe consumers desire to invest in their tion: banks must still deliver adequate is important for money to enable own future and that of others’, functional benefits and create sufficient (see Figure 2): giving back to communities and perception of them in the marketplace, • Self-sufficiency: This is the lev- causes they care about and no lon- while at the same time connecting them el where consumers experience ger being as inward-focused and to consumers’ higher-order emotional the most basic and immediate worried about individual or family and social needs. financial needs (e.g. paying this month’s gas bill). Consumers are most concerned with being TEACH & EMPOWER ME independent and confident in I need help that makes me feel like their ability to take care of them- selves, contributing to a sense there's a real way I can dig myself of self-worth. and family out of a financial hole. • Financial comfort: Here con- sumers are less concerned about — FEMALE, 38-48, $100,000 TO LESS THAN $150,000
14 | WHEN FUNCTIONALITY ISN’T ENOUGH: TAPPING YOUR CUSTOMERS’ EMOTIONAL NEEDS
Meeting higher-order consumer MEET MY NEEDS needs means that banks commu- Transparency would help; regular nicate with customers in a way that builds trust and makes customers and public reports regarding confident the bank is serious about overall customer satisfaction and activity delivering on its promises. • Reward me: Consumers believe (e.g. percentage that overdraft, save a cer- their bank should be transparent about fees and rates. Banks can tain amount each quarter, etc). attract new customers by reward- — FEMALE, 30-37, $75,000 TO LESS THAN $100,000 ing them for loyalty, customizing rate and fee structures, and shar- ing in the bank’s success. If this was easy, we would see more unique, and acts as a partner whom • Bring the bank to me: At the least, examples of it. As it is, we only have their customers can count on. consumers expect banks to keep a couple. • Teach and empower me: Consum- up with technology and stay digi- Two of the best examples of ers want their banks to teach them tally relevant. Interestingly, having distinctiveness come from Huntington to be financially literate, a desire branches nationwide was men- and USAA, both of which have created that gives banks an opportunity to tioned frequently by consumers unique positions built on consumers’ differentiate themselves by offering as a value, but it wasn’t a priority non-functional needs and supported by educational opportunities that when they had to choose among market-leading products and service. empower customers to take charge other factors. This validates trends Huntington’s “Fair Play” initiative, of their finances. Banks must do Novantas has previously identified supported by the 24-hour grace period a better job connecting financial in other research projects. it provides customers before charging overdraft fees, is a good example of a REWARD ME bank leading with an emotional benefit and delivering on it functionally. From a A 'we succeed when you do' business perspective, that position has approach would be interesting. created a customer acquisition advantage for Huntington in its regional footprint. I'd like to know that I'm more than just an
GIVING CUSTOMERS WHAT THEY NEED account number to a bank. That I matter and Our qualitative research also revealed so do the choices I make. five key themes of benefits consum- — FEMALE, 38-48, $100,000 TO LESS THAN $150,000 ers want banks to deliver, with each being strongly tied to the values that money enables. education efforts to higher-order To deliver true value to consumers — • Show me you care: Consumers emotional needs of consumers, ulti- not to mention differentiated value — banks require that banks treat them mately helping them achieve their must decide which set of core money goals with respect and demonstrate personal and financial goals. they want to help consumers achieve. appreciation for being a customer. • Meet my needs: Consumers want to Banks’ ability to align themselves first with To prompt consumers to switch, feel secure and protected financially. consumers’ goals and values, while also a bank must convey that it under- They want their bank to be easy to delivering top products and services, will stands its customers and their work with, and they demand access determine which providers will experience individual goals, makes them feel to products tailored to their needs. success in the new world of retail banking. Banks that don’t align with con- BRING THE BANK TO ME sumers’ emotional needs risk being usurped by technology-first providers Digital banking is the future. that merely provide a more seamless Having great online tools is most banking experience. important to me now and in the future. Matthew Sharp VP of Market Research, Chicago — MALE, 38-48, $25,000 TO LESS THAN $50,000 [email protected]
SUMMER 2018 | 15 RISK
BANKS SHOULD PURSUE EFFICIENT AND SCALABLE “MODEL FACTORY” MANAGEMENT
BY STEVE TURNER, WES WEST, AND KAUSHIK DEKA
lthough regulator-driven at the by using sophisticated technology, for oversight, inventory management, outset, quantitative thinking including machine learning, to auto- and maintenance (see Figure 1). is now firmly in the DNA of mate the process. The number of models in use varies many banks. As a result, many A growing number of banks are dramatically according to the specific Aare struggling to manage hundreds already using a “factory” approach for institution. A bank with 150 models can of models that require an increasing managing their models, but the process have more than 600 model monitoring number of resources. is still daunting and demands a signifi- runs a year. Novantas believes that such model cant amount of technical expertise. New A traditional reaction would be to management can become more efficient approaches address this growing need pile on more bodies — modelers, data
16 | BANKS SHOULD PURSUE EFFICIENT AND SCALABLE “MODEL FACTORY” MANAGEMENT
FIGURE 1: ESTIMATED INCREASES IN VOLUME OF MODEL REFRESHES PER YEAR
Volume drivers: • Moving from annually to quarterly and, in some cases, monthly refreshes for most models (~3x-4x) • Adding new models into the process (e.g., CECL/ IFRS 9 models) With current processes most banks would have to add a matching multiple of 3x—5x resource to meet this need
Current Future
Source: Novantas Analysis managers, validators — to take on the that has distinct and rigorously-defined And once in production, source data tasks of data review and validation, stages: “architect”, “data scientist”, “data is often maintained in multiple data model refreshes and reruns, and test engineers”, “modelers”, and “model vali- store — each with separate rules, refresh results reviews. These demands would dators.” This “factory” environment struc- routines, and validation processes. Even require three to five times the staff used tures the approach, eliminates unnec- banks that are rolling out an enterprise today. Most banks don’t want to grow essary redundancies, and decreases data lake as a single source of truth are their teams by this magnitude and, even the amount of rework. Many banks struggling to operationalize their data if they did, the ability to find and keep a are benefiting from this streamlined assets and build scalable processes. qualified team is nearly impossible. and consistently-conducted process, Seldom is there complete registry and Instead, they can ease the burden but the number of monitoring events lineage to sources making validation a by leveraging capabilities that are keeps increasing. Most teams will cumbersome process. Further, the data available to the industry and, in some be swamped in the next 24 months used to build models are often not the cases, using artificial intelligence to without a radical re-evaluation of same data used in production. speed the process. their workflow. To solve this conundrum, advanced banks are investing in high-perfor- TURNING DOWN THE HEAT TAKING THE POT OFF THE STOVE mance models that position the data to As a first step, some banks have created Banks have done everything “humanly be centrally managed and curated and a more structured model management possible” to improve upon this situa- usable for modeling and production process we describe as a “model factory.” tion. Now banks need to take advantage with automated checks and balances in In a model factory, bankers focus on of technology to improve this process in place (see Figure 2). All data is cleaned, efficiency and effectiveness by looking three dimensions. mapped and harmonized on first time at each stage of the planned process: Data. It is surprising that the big- ingestion. Subsequent refreshes can determine what needs to be done, figure gest challenge banks continue to face is then be fully automated with rules in out ways to do it with the least effort, set getting and maintaining data in usable place for verifying sourcing and vali- rules on data source usage, and estab- condition for modeling. There are no dating each element. As a result, the lish common development standards. guardrails to direct modelers into where dream of validating a model without This aligns processes to reduce a and what data can be used allowing for the lengthy and low-value debate on complex set of production tasks into variations in sourcing that then requires data viability is quickly becoming what we visualize as a “model factory” separate validation processes. a reality.
SUMMER 2018 | 17 RISK
FIGURE 2: HIGH PERFORMANCE DATA MANAGEMENT
Bank Data Third Party Public Data Other Data?
Standard Ingestion Format
Standard Data Model
Analytic Datasets
All data put into standard field All data cleaned, mapped and names and types harmonized
Some data put into fast storage for high value retrieval and usage
Source: Novantas Technolgy Schematic
Modeling. Establishing rules up processes for data management and quickly, and move on. Alternatively, front for model families, acceptance model monitoring. using lower quality resources is highly criteria, validation tests, and driver Monitoring. This is the primary procedural dependent and midstream preferences significantly decrease the source of the massive increases of problems will often go unnoticed. range of decisions required to develop model management. It also is the In the new world, the repetitive a model. Models can then be developed place where all the data, model family, tasks are automated, new tasks are using machine-learning processes with- and processing rules come together machine learned, and reporting in imposed constraints for many CCAR to create significant improvements in occurs without human intervention. and ALM-type models, resulting in the efficiency and effectiveness. Machine High value resources are only called best 100 or so models being generated learning can be harnessed to create upon when models break, and new mod- at a push of a button. They can then be automated efficiencies for integrating el solutions are needed. The result is served up for higher order review by an newly-created models into the moni- higher quality outcomes, lower cost to experienced modeler. toring process. When a bank combines maintain, and happier model manage- Most banks adhere to model devel- automated data ingestion, standardized ment teams. opment paths where modelers play development, and optimized reporting decisive roles in identifying preferred within an integrated operational frame- Steve Turner models. Supervised machine learning, work that supports multiple constituen- Managing Director, New York which cuts down the number of viable cies, efficiency results are exponentially [email protected] models, fits into this path. A separate greater than the sum of the parts. type of machine learning occurs in Jonathan 'Wes' West unconstrained modeling processes, e.g., THE BIG COOLDOWN Managing Director, New York fraud detection, where the driver vari- In the current environment, the model [email protected] ables are unknown, changing over time, management process is a set of tedious or both. Both approaches — supervised and repetitive rote tasks. High-value Kaushik Deka and unsupervised machine learn- resources are often needed to ensure Director, New York ing — can be dropped into structure effective task completion, but will tire [email protected]
18 | SNAP AND TAP: MILLENNIAL BANKING TRENDS
As more Millennials* seek “must have” mobile banking services, they increasingly want to be untethered from their bank’s physical locations. More than three-quarters of them would consider a bank that doesn’t have branches.
2018 MUST HAVE 28.3%
2016 MOBILE BANKING 24.9% 2018 2016 21.1% 19.9%
2016 2017 2018 47% 54% 58%
% "Must % Only Have" ATM Willing to MUST HAVE Benefits Consider Bank With MOBILE CHECK DEPOSITS Branches
2016 2017 2018 25% 30% 34%
*Millennials defined as between ages 18—34
For more information, contact: Rob Rubin, Director | [email protected] | +1 212.401.5277 COMMERCIAL BANKING FASTER PAYMENTS SPEED TOWARD COMMERCIAL BANKING
BY MARC HARRISON
uch of the buzz about real-time signed up to participate in Zelle, a REAL-TIME PAYMENTS OFFER payments innovation has bank-sponsored P2P money-movement OPPORTUNITIES TO DELIVER VALUE focused on retail banking, but app that competes with PayPal’s Venmo. BEYOND MONEY MOVEMENT the new technology has broad Both are aimed at users who want to zap Banks historically deliver value to com- Mimplications for commercial businesses money instantly to someone else; Zelle mercial customers by helping manage as well. users moved more than $25 billion in 85 payables, receivables and account informa- Banks are starting to recognize that million transactions through the network tion. This is a good and highly profitable the adoption of retail solutions from in the first quarter of 2018. business for banks to defend against industry-based Zelle and other providers Even Morgan Stanley has signed onto technology providers that are looking to can drive the way companies prefer to Zelle for its wealth-management clients, automate and routinize these processes. pay consumers and receive payment from allowing them to send money to and from Nonetheless, there are also pain points them. As a result, commercial customers their accounts. for commercial customers that extend more are slowly starting to make the transition to The Clearing House began piloting deeply into the financial supply chain. For more immediate payments, though still at a its real-time payments (RTP) solution last example, commercial customers receive far slower pace than consumers. summer and launched it in November with and must prioritize bills for payment and Banks need to develop a playbook for B2B, B2C and C2B use cases that range communicating with vendors. RTP solu- this change or they risk losing customers from request for payment in corporate tions can help a customer electronically — and as much as roughly $500 million in markets to emergency payments when receive a request for payment, and sched- treasury-management fees. At the same certainty and nonrepudiation are critical. ule and approve the payment in a single time, they should also recognize that real- The Clearing House solution provides a workflow. This dramatically simplifies time payment (RTP) schemes have the 24-hour, seven-day-a-week, 365 days a year the customer experience and reduces the potential to facilitate value creation that operation based on ISO 20022, a rich data number of steps involved in receiving an extends beyond the movement of money. standard that has been launched in other invoice, matching invoice information with countries (see Figure 1). a purchase order, updating accounting REAL-TIME PAYMENTS COME IN MANY Novantas believes commercial packages/ERP solutions, etc. SHAPES AND SIZES payments will increasingly shift toward This is a busy time in the evolution of real-time methods to help remove friction FAILURE TO DEVELOP RTP PRODUCTS real-time payments, with a slew of devel- from the payments process and reduce WILL BE COSTLY oping technologies that both compete or eliminate fraud. For example, a recent The UK and other countries launched RTP with each other and work together. The Fiserv study estimates that 62% of pol- schemes a decade ago or more. Based on shift may also unleash questions about icyholders received a paper check for the UK’s experience, Novantas predicts the role that payments will continue to insurance claims in the past year. Checks that banks in the US could lose roughly hold at banks in the future. are inefficient and often require manual $500 million in treasury-management fees In an increasingly cashless world, reconciliation, can get lost in the mail and in the next five years, representing 5% or consumers (not just Millennials) crave are the predominant target for fraudsters, more of total fees, from the adoption of the simplicity of using person-to-person yet they persist. If more consumers are on real-time payments (see Figure 2). This payment tools and ride-hailing apps like Zelle and indicate it as the preferred meth- level of revenue at risk is a tough pill to Uber and Lyft due to the effortless payment od to be reimbursed for claims, insurers swallow in an industry where margins are experience. At the point of sale, contactless will need to adapt. tightening due to competitive pressures payments through NFC and solutions from RTP for commercial customers have from banks and fintechs. Square and LevelUp improve the customer existed for decades (during business While treasury-management fees experience and have further eroded the hours) in the form of real-time gross are at risk, Novantas expects ACH fee share of cash payments. settlement systems and wire transfer, but revenue to be more steady due to recent So far, more than 100 banks have these solutions can be cost-prohibitive. technology upgrades that have made
20 | FASTER PAYMENTS SPEED TOWARD COMMERCIAL BANKING
FIGURE 1: GLOBAL IMPLEMENTATION OF FASTER PAYMENT SYSTEMS 1973-2017 Late Majority
Australia Bahrain Singapore Early Majority Denmark Sri Lanka United Kingdom Turkey Chile Sweden South Africa Poland Mexico Nigeria Brazil India Early Adopters South Korea China Iceland Switzerland Japan
1973–1987 2000–2008 2010–2017
Source: Novantas Analysis
FIGURE 2: RESULTING PAYMENTS FEES ($ BILLION) ACH more immediate and data-rich. The transition will be a slow one. Based 9 7 on Novantas projections, RTP may account 9 0 % for approximately 2% (base case) to 5% 1 8% 8 9 (aggressive case) of total commercial pay- 19 0% % ment revenues by 2022, primarily at the 7 8 1 % expense of wire transfer and per-check RTP 0 0% 11 % fees. (Those don’t include P2P or consum- 11 % er-to-business payments.) 11 9% Wire 20 7% 12 % Novantas believes that consumer adop- tion of solutions like Zelle is an important precursor to broad adoption of real-time 11 9% ACH payments for commercial customers. Banks must respond to commercial customer expectations for faster, information-rich and more efficient payment schemes. 9 % 0 7% As use cases for RTP expand and 2 8% Card 8% develop (e.g., request for payment to streamline the payments process), banks will need to create strong programs to communicate how the solutions increase the value delivered to commercial custom- ers. Although RTP will likely result in the 12 % Check 9 % 9 1% 7 9% loss of some fee revenue, the improved efficiency that it provides can attract new 2017 2022 2022 2022 commercial customers and keep banks Conservative Base Aggressive competitive in a changing landscape. Note: Prices are based on actual observed average prices: 0.31% per $1 for card, ACH $0.07, Wire $8.36, Check $0.11. RTP assumed to be $0.10 per transaction. Marc Harrison Source: Novantas Analysis Director, New York [email protected]
SUMMER 2018 | 21 TECHNOLOGY
BANKS NEED WORKFORCE
OVERHAULBY DALE JOHNSON, LEO RINALDI AND DARRYL DEMOS
s consumers change the way of their staff turn over in the next four they approach their banking years as the shift to digital banking needs, institutions must make creates upheaval in traditional staff- some tough decisions about ing and labor markets tighten with Ahow to staff branches and manage economic growth. other parts of the workforce. Banks But this major challenge should need to start overhauling traditional also be viewed as an opportunity for staffing models because mere tweaks branch workforce strategy. Stronger to existing workforce strategies just talent, fresh strategies and new tools won’t be enough. are needed to keep the field workforce It is a pressing need: Novantas pre- performing at high levels. The changes dicts that banks will see three-quarters won’t be easy, especially since tra-
22 | BANKS NEED WORKFORCE OVERHAUL AS BIG STAFFING CHURN LOOMS
ditional bank staffing models aren’t AN EVOLVING BUSINESS MODEL It isn’t as if banks aren’t already terribly sophisticated. The need to modernize field staffing trying to adjust for the changes in cus- First, banks need to upgrade and comes against a backdrop of signif- tomer behavior. Indeed, the industry rethink everything about traditional staff- icant changes in the way consumers has seen a continual decline in average ing models. As fewer people use branches, pursue traditional banking needs. With branch FTE over the past four years. needs are shifting from “peak-and-valley” accelerated adoption of digital technol- The FTE decline in branches has been transaction management to a focus on the ogies, customers are looking at their 5-7% per year over the last several years. appropriate use of the sales force. bank differently. At the same time, banks have expanded WORKFORCE AS BIG STAFFING CHURN LOOMS their non-branch personnel, espe- cially in segment-based, non-branch sales staff. Still, banks are expected to see a 70-80% turnover of personnel over the next four years, according to Novantas Second, they must provide support For example, online account open- estimates. And the remaining workforce for skilled bankers in the field so they ing is increasing to more than 20% will look totally different as banks move OVERHAULcan be more productive. of bank sales at some leading banks to universal bankers from tellers and Third, they must balance the work- — and could potentially rise to 40% or shift to market-centric specialists from force availability so that employees more in the next five years, depending branch-centric sales generalists. can be utilized appropriately. That on the pace of consumer adoption. may mean having the employee visit Branch-based product sales stand ADAPTIVE STAFFING MODELS ARE KEY a customer’s home or workplace, at the lowest levels in four years, down Banks have always grappled with or use technology to re-route calls 6.2% from 2016, according to Novantas high labor costs, but just cutting those that come into a busy location to research. There are also fewer and fewer expenses won’t be enough this time. In a less-busy office in order to limit teller transactions taking place in the fact, traditional staffing models heavily customer holdtime. branch each year, while digital trans- focused on historical workloads and Banks must also position them- actions are growing at a rapid pace. transaction forecasts shouldn’t dominate selves to be the employer of choice Conventional wisdom has always been a bank’s investment in staffing tools. A if they want to win the war for talent. that there would be a floor to the num- better view into day-to-day and week-to- Novantas is seeing a growing number ber of transactions in the branches, but week dynamic activities, such as sales of banks recognize that embracing a it now looks like that floor may fall to volume and short-term staff disruptions, flexible workforce can be used as a tool ‘near zero’ with only the most complex multi-dimensional activities, will be to attract strong candidates. transactions requiring a branch visit. much more important.
SUMMER 2018 | 23 TECHNOLOGY
FIGURE 1: OVER-ALL SALES AND PRODUCTIVITY Over-all Sales and Productivity
85 8 . 1.30 8 .0 81.7 1.25 1.20 80 1.18 1.20 1.16 78.
1.12 1.15
75 1.10
1.05
70 1.00 2014 2015 2016 2017
Monthly Sales per branch Sales per non-teller FTE/Day Source: Novatans SalesScape™ Comparative Analytics
Source: Novantas SalesScape™ Comparative Analytics
Novantas anticipates a migration challenges that a more flexible role begun to focus on actively recruiting of the historical “static” staffing and introduces into the branch. We expect members of the military. Providing scheduling methods to more dynamic banks to place more emphasis on the military-specific resources, such as and adaptive tools. Imagine being able importance of this role, which can also the flexibility to fulfill military obli- to respond to common weekly schedul- educate and migrate customers to gations, are hallmarks of the program. ing needs with automated, intelligent digital channels. We see this as part of a larger trend response models that can manage Novantas also expects specialists, to identify attractive sub-segments of unanticipated turnover or sales that are who are typically untethered to a the population to target for employee running behind plan, or sudden pricing single branch location, to proliferate recruitment, much as companies changes that impact sales. as the focus on advice and proactive traditionally segment customers for Some forecasts of workload in the sales grows. marketing purposes. branch, such as transaction declines, A clear understanding of the cur- As banks develop more precise already are very reliable. Many banks rent and future needs of both roles will methods of workforce management, are starting to take a harder look at “the guide HR teams to pursue appropriate employee skills need to become more long tail” of other branch activities, such local recruiting tactics. specialized in order to achieve the ulti- as account maintenance. On the sales mate goal: getting the right associate side, we see an emerging shift of basic WINNING THE TALENT WAR in front of the right customer at the products like checking account sales Given the emerging focus of advice right time. to online account opening. As a result activities in the branch, it’s obvious of all these changes, complex sales and that keeping and attracting good Dale Johnson advice will be a growing proportion of people will be required to fill the roles Director, Chicago the work in the branch. of the future. The bank’s brand and [email protected] reputation will be critical to success, OVERHAULING WORKFORCE ROLES especially as many talented young Leo Rinaldi Universal bankers, who are able to prospects think that branch banking Director, New York flexibly shift from service to simple is a dying business. To manage the [email protected] sales, represent up to 50% of branch change, banks need to become a pre- workforce now and that is likely to ferred employer. Basic HR programs Darryl Demos rise. But many banks are still working to fill vacancies won’t be sufficient. EVP, New York through the staffing and choreography For example, banks like Chase have [email protected]
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SUMMER 2018 | 25
For agenda updates and to register, visit BankDirector.com or call our events department at (877) 397-7595. AT THE PODIUM WITH NOVANTAS
Authenticity. Story-telling. Distinctiveness. Credibility. TOP BANK Those are some of the goals for top bank marketing executives who attended a “Prag- matic Marketing Leadership” forum that Novantas recently hosted in San Antonio. MARKETING The two-day event in April brought together representatives of major U.S. banks with marketing executives from other industries, as well as experts in artificial intelli- EXECS EYE gence and brand building. The importance of creating a distinctive brand in a sea of lookalike competitors was NEW WAYS a key theme throughout the event. It is especially difficult in an industry that has long focused on being merely functional, not tapping the consumers’ emotional sides. TO REACH “This is tricky territory for banks that may not be comfortable in this area,” said Paul Kadin, a managing director at Novantas. CUSTOMERS The bank executives were soon introduced to non-traditional ways of branding by BY ROBIN SIDEL Tom Punch, global chief creative and commercial officer at Vice Media, a New York- based digital and media broadcasting company that is known for creative content that can shock and inspire its audience. “You have to create your own vernacular, your own tone. What will be your original storytelling point of view?” he asked the audience after showing a series of videos that Vice made with financial institutions. In “Tax Spa,” a four-part playful series that Vice created with insurer Geico, white-coated Eve answers common questions about taxes in a soothing tone and a spa-like setting that is “your relaxation and taxation destination.” Mr. Punch also noted that companies need to refresh their messaging more fre- quently than in the past, especially to attract millennial customers who are regularly bombarded with creative and fast-moving types of advertising. “You need to be on this on a more regular basis rather than just checking in once a year,” he said. Novantas released the latest results of its distinctiveness research at the event, again focusing on the emotional and social benefits that a bank can deliver to its customers rath- er than just functional attributes that are now table stakes in the industry. (See Why Should Consumers Choose Your Bank? Distinctiveness in the New World of Retail Banking.) “The CMO is in the right position to rally the bank around distinctiveness,” said Matthew Sharp, head of market research for Novantas. The forum took place at a time when marketing is becoming even more important in the banking industry. The shift to digital banking means that banks have fewer opportunities for face-to-face interactions in a branch, forcing them to reach customers in other ways. “The brand needs to reflect who you are. There can be aspiration elements, but if it’s not reflecting who you are, it doesn’t come across as authentic,” said David Thuma, chief marketing officer at PNC Financial Services Group. One executive attending the forum noted that it is difficult for banks to think about significantly changing their approach to customers when it seems like custom- ers aren’t terribly interested in their banks in the first place. Other attendees also noted that many banks don’t embrace a marketing vision, making it difficult for senior management to appreciate the need to be distinctive to prospective customers. And even when the bank’s other leaders support the market- ing efforts, they often resort to a “what have you done for me lately?” or “show me the ROI” way of determining success. They also noted that it is sometimes difficult to convince senior leaders that market- ing investment is an ongoing effort and that “we can’t just ride the brand for a bit.” The marketing executives at the conference also brainstormed on ways that market- ing can help make a bank more distinct to its customers, such as developing automated messaging that makes a customer think about their financial life when, for example, their checking account is higher than normal. Banks can also find ways to create a deeper engagement with their customers by sending fraud messages or even a birthday message. “It takes courage to be unique,” said Drew Neisser, founder and CEO of Renegade LLC, a marketing firm. Indeed, effective marketing can tell a story, be empathetic, and contain an element of surprise, he said, citing a commercial for Angel Soft toilet tissue that only showed the product in the background.
26 | AT THE PODIUM WITH NOVANTAS
Novantas executives are regular speakers at industry events. Here’s a look at what we have been talking about and where we have been.
WAYNE CUTLER, EXECUTIVE VICE PRESIDENT, presented at BISA’s annual convention in Hollywood, Fla. on March 8. The presentation, EXECUTIVE VICE PRESIDENTS SHERIEF MELEIS AND titled "Hal has finally arrived — it's PETE GILCHRIST AND VICE PRESIDENT OF INDUSTRY Man vs Machine," examined the ANALYSIS BOB WARNOCK presented “An Inside Look at growing interest in robo-advi- Deposits” at Citigroup’s “2018 Beyond the Basics” confer- sory services. He also moderat- ence in Yountville, Calif. on May 21-23. ed a panel on bank-owned broker dealers the following day.
MANAGING DIRECTORS CATHY GREGG AND TONY CARFANG, AND JEFF DIORIO, DIRECTOR, presented at HANK ISRAEL, DIRECTOR, participated in a workshop several sessions of the Treasury Management Association discussion called “Competing for Deposits in a High-Rate of New York’s New York Cash Exchange conference on Environment — One Customer at a Time” at the Consumer May 30-31. Gregg spoke with the treasurer of Rockefeller Bankers Association’s annual CBA Live conference in Or- Group on “Leveraging Your Account Analysis to Maximize lando, Fla. on March 12. The workshop was moderated by Bank Relationships,” Carfang spoke with Fitch Ratings DARRYL DEMOS, EXECUTIVE VICE PRESIDENT. on “Comparing New Investment Alternatives Products and Strategies in 2018,” and Diorio spoke about “Treasury Transformation in Light of 21st Century Challenges: Trea- sury Transformation in Light of 21st Century Challenges.” MANAGING DIRECTOR LISA BROWN AND DIRECTOR SARAH WELCH presented a CBA webi- nar titled “Customer Acquisition ADEL MAMHIKOFF, MANAGING MANAGING DIRECTOR GORDON in Deposits: How to Punch Above DIRECTOR, AND NICK YOUNG, DI- GOETZMANN, DIRECTOR ROB Your Weight” on April 24. RECTOR, participated in a panel dis- RUBIN AND PRINCIPAL BRAD cussion about customer-level deposit RESNIC, presented an MBCA webi- pricing in a rising-rate environment nar called “ Growing and Protecting at GFMI’s 4th Annual Retail Deposit Stable Deposits in an Increasingly Optimization and Strategic Manage- Volatile Environment” on May 16. ment in Toronto on April 26.
SUMMER 2018 | 27 COVER STORY
Novantas’ 2018 Finance Roundtable VALUATION | RISK | REVENUE
Novantas recently hosted a two-day roundtable in Charlotte for bank chief financial officers and other finance executives to tackle issues of valuation, risk and revenue. As part of the May event, Novantas Managing Director Steve Turner asked participants a series of questions about top-of-mind topics. Here are the results:
OF THE LEVERS IMPACTING BHC ROES, WHICH PROVIDE THE LARGEST IMPACT?
27% 18% 18% 27% 9%
Credit/Underwriting Average Earning Asset Fee Income Efficiency Ratio Other
WHAT IS THE BIGGEST RISK TO VALUATIONS OVER THE NEXT 12 MONTHS?
Fed Action / Quantitative Easing Unwind 18%
Flattening Yield Curve %
Credit / Recession 27%
Political 9%
Other 0 10 20 0 0 0 60 70
28 | WHEN FUNCTIONALITY ISN’T ENOUGH: TAPPING YOUR CUSTOMERS’ EMOTIONAL NEEDS
BLOCKCHAIN...
I wish I had bought Bitcoin three years ago 18%
Has the potential for massive disruptive change, but is a long way from having commercial applications %
Is simmering below the surface and will be an important financial disruptive force within three years 9%
Is over-hyped and is a long way from being an % important component of financial transactions 0 10 20 0 0 0 60 70
BRAND AWARENESS GENERATION (UPPER FUNNEL) MARKETING’S LINKAGE TO REVENUE GENERATION IS...
10% 70% 20%
0%
Not accepted or Understood intuitively, Quantified for certain Understood and quantified quantified but not quantified efforts, but not others in most key regards 0%
WILL THERE BE BANK RE-ENTRY IN LENDING / ADVANCING OPPORTUNITIES TO LOWER-END CONSUMERS?
No, banks will not choose to enter 20%
Yes, but generally not material to revenue growth 0%
Yes, and a material driver for many banks' revenue momentum 20%
0 10 20 0 0 0 60 70
SUMMER 2018 | 29 NEWS YOU MAY HAVE MISSED A snapshot of relevant MAY A growing number of companies are developments in recent months beginning to make loans that are backed by cryptocurrency collateral, according to website bitcoin.com. The efforts are based off peer-to-peer lending models. APRIL The Treasury Department issued Captial One bought Confyrm, a fraud recommendations to modernize the alert start-up that is based in San Community Reinvestment Act. “The Francisco. Confyrm founder and CEO U.S. banking industry has experienced Andrew Nash will lead Capital One’s substantial organizational and techno- consumer identity services team. logical changes; however, the regulatory and performance expectations under Joseph Otting, head of the Office of the CRA have not kept pace,” according to Comptroller of the Currency, said the the memo that was sent to regulators. agency expects to announce in July whether it will grant bank charters to Goldman Sachs bought Clarity Money, fintech firms. Separately, Mr. Otting a personal-finance app that will be inte- encouraged banks to offer short-term, grated into the investment bank’s Mar- small-dollar installment loans. cus consumer-banking operations.
The Financial Crimes Enforcement Net- JUNE work issued additional information to The bulk of the Dodd-Frank Act will be help financial institutions adopt new due staying in place, although there may be diligence rules for the beneficial owners some changes around the edges, accord- MARCH of new accounts. Initially announced in ing to Jay Clayton, chairman of the Personal-finance company Credit Kar- May 2016, banks had two years to imple- Securities and Exchange Commission. ma announced it received a $500 million ment the new rules. investment from private-equity firm Silver Lake. Credit Karma founder and CEO Kenneth Lin will remain the larg- est shareholder. Silver Lake Managing TODAY’S NEWS Partner Mike Bingle is joining Credit Karma’s board of directors.
The Financial Services Roundtable and the Clearing House Association announced plans to merge. TCH Asso- ciation president Greg Baer was named CEO of the combined organization.
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