Where's your canary in the coal mine?

Last month James Gardner inspired our audience of bankers at CXFS09 with one question: Does your institution have a canary in the coal mine?

Gardner reminded us the landscape financial institutions currently operate in is defined by a vast threat surface. “Every single critical business line we have at the bank is under threat. We have peer- to-peer lending which is potentially touching our core lending practices, we have PayPal, which is likely to take quite significant share from us, and we have a whole pile of web and experience innovations which are stealing our eyeballs.”

For Gardner, this means a new kind of response is required. A fan of the Cluetrain Manifesto, Gardner believes there’s never been a better time to harness the power of crowds. “Crowds of people will usually exceed the ability of any large organisation to respond and usually they will exceed the smarts of any large corporation.”

So it’s time to harness the crowd. Gardner and his team have already done so, by launching an innovation ideas trading market, by encouraging customers to mash-up the advertising of the bank he works for, and by crowdsourcing the book he is about to release on innovation and the future-proof bank.

The idea of handing over power to customers or less senior staff is often viewed with horror by senior management within banks, particularly those that believe in the command and control approach to running a business.

But let’s not forget it’s already happening. Gardner gave the example of PayPal as a disruptive innovation in its purest sense, since PayPal was initially dismissed by banks as being of little value and therefore low on the threat matrix. Today it has more accounts than the three largest banks in the world.

This week it was revealed PayPal plans to open up its platform to third party developers. The Adaptive Payments interface will allow anyone to build applications that enable payments from PayPal account holders to anyone with a web presence, be it a mainstream retailer or someone with a widget running on their Facebook page to collect donations.

Can you imagine if a bank opened up development in such a way? What if customers could design their own widgets for desktop banking using your Internet banking platform? How about the capability to set up a mobile banking tool that brings in transactions from all your bank accounts? Again, it’s already happening, albeit without the permission of the bank and security issues being addressed.

The time is rapidly approaching when banks will be forced to rethink the role of platforms. Jeff Carter, founder of the Centre for Future Banking also echoed this thought in our recent interview. Carter says platform providers like PayPal, Google and Facebook are not so much interested in being the next bank as they are completely restructuring how we think about payments and how we think about financial services.

“In my mind what Google is trying to do is not try to control payments, they’re trying to control everything before and everything after the payment, thus rendering the payment itself really irrelevant and really just a commodity.”

So where is your canary in the coal mine, and what is it doing to make sure what your bank offers doesn’t become just another commodity?

Banking Review podcast with Jeff Carter

Jeff Carter is a former Bank of America executive who founded the Centre for Future Banking with MIT in April 2008. Jeff is currently the CEO of Azigo, a start-up specialising in electronic identity management.

Jeff recently visited Australia for Amplify, an internal innovation event run by AMP. I was lucky enough to see Jeff's presentation and was fascinated by his discussion on how banks will evolve in an environment where every person, place and thing is connected.

In this 15 minite podcast we discuss what the future proof bank will look like, and where the next disruptive innovation is likely to come from in financial services.

Jeff raised the interesting point that Facebook has 100,000 developers working for it, and questioned how banks will be able to respond to platform providers like Facebook, Google & PayPal when they are doing such a good job of turning the services banks provide into commodities.

This got me thinking, what if a bank were to open up development to others in the same way Facebook does? Is this even feasible? And if it was, where would you apply it? To Internet or mobile banking apps perhaps?

To everything, churn, churn, churn...

Many organisations operate on the premise that it is better to save an existing customer than it is to find a new one. The theory being that the time and cost to discover, convince and convert new customers is far more expensive than keeping an existing customer.

After several decades with one bank that had 100% share of my wallet, I moved to a new bank. Oddly it was only when I wanted to cancel the credit card that I received a call from the bank to discuss ways to keep me as a customer.

What triggered the bank to call to save me over the comparatively lower value credit card compared to the high value home loans remains a mystery. I accepted the offer of zero fees on the card for the rest of my life; yet the card sits unused in a drawer six years later. I was saved from churning but at what cost to the bank? Zero balance accounts for the card are sent in paper form every quarter, new cards are issued every two years. Was it worth it?

In line with the thinking of Frederick F. Reichheld about good and bad profits, rewarding unhappy customers and not rewarding contented ones seems illogical. It is puzzling that failing to renew a magazine subscription results in special offers and free gifts to encourage re-subscription. Why are customers being encouraged to let their subscriptions lapse just so they can be rewarded with gifts and better offers?

Recently I decided that I needed to upgrade my mobile phone. This task has proved to be an interesting customer experience. It begins badly by having to wade through the plethora of mobile phone plans on offer. This requires patience, diligence and sharp actuarial skills to make an informed decision. It was more frustrating than comparing insurance policies.

Aggregator services such as youcompare made it easier but as with insurance, not every Teleco wants to be a part of that market. Yet if the value proposition was obvious in the first place, aggregators would not have a market. And yet aggregators thrive in both telecommunications and financial services.

After hours of research, I began the experience of being a churning customer. Despite being a Telstra customer for more than a decade nothing was offered that was worth staying for. Until yesterday I was not unhappy with Telstra; simply my needs had changed and there was no immediate solution. However I needed information from Telstra to complete the changeover.
I endured a seemingly endless loop on the IVR system unable, despite even mashing the phone keypad, to speak to a real person. I resorted to going in store for assistance only to be told the information could not be retrieved and was given a number to call on Monday. It was midday Saturday.

In the end I established the account with the new Telco and had to phone in the missing information after retrieving it from the depths of the filing cabinet. So now I join the ranks of many others unhappy former Telstra customers. Previously I would have considered returning at a later date if the offer was right. Now, the company has been removed from my consideration list.

Not every churning customer is unhappy; yet making it difficult for them to leave will ensure that they are by the end of the process. If a customer cannot be saved, making it easy for them to leave is the least that can be done. Creating processes that seek to lock customers in only results in negative outcomes for both customers and the company.

So what is the answer to customer churn? Deliver great products at the right price and back it up with great service; and keep offering it, even to the ‘rusted on’ customers. They deserve rewards as much as the ones about to leave.

The future for payments - we'll discuss it at BarCampBank

If there’s one sector in banking that looks set to transform dramatically in the next few years it’s payments. The investors behind oneTXT and MoBank must agree, having gambled millions of dollars on start-ups seeking to capitalise on mobile and social network payments.

The mobile & social networking crowd (and it’s a rather large & growing crowd) demand speed. Why, they often ask, does it take so long for money to appear in a newly opened savings account, or for a new payment to an external party to process?

Real-time payments are now a reality in the UK, and that’s despite the regulatory compliance hurdles thrown up by AML legislation, and so often used as an excuse for slow payments.

A common theme emerging among new payments businesses is their role as middlemen between consumers and banks.

MoBank is working hard to build a brand that consumers can come to love, based on a simple interface and a solid service proposition – making what seems and sometimes is complex simple. The underlying banking infrastructure is still required for MoBank to operate, but customers will be forming a relationship with MoBank, not the bank that expedites the end payment.

This is where encumbent banks have been disintermediated in the past – by organisations like PayPal, ING Direct, and more recently Zopa.

Payments innovation by local banks is happening around the edges with pilots and other trials, but it’s those from outside the sector that we’re watching. Facebook continues to trial a virtual currency model, Centricom continues to sign up merchants for its online payments service, and Distra, (partly owned by NAB), is also developing

What do you think? Will local banks be disintermediated by new payments enablers? Will real-time payments come to be expected by more customers?

I’ve chosen faster payments and new business models as my discussion topics at this Friday’s BarCampBank in Sydney, an event where everyone that attends must contribute. More info here.

Peer-to-peer lending treading water in Australia?

Peer-to-peer lender Lending Hub launched this week, joining existing Australian players iGrin and Fosik.

Led by former investment banker Ivan Mantelli, Lending Hub has been in development since 2007, at the height of the gold rush towards peer-to-peer lending start-ups.

The financial world has changed significantly since then. Investment capital is difficult to come by, the spread between deposit and lending rates has tightened, and we’ve seen a flight to so-called quality that smacks in the face of those trying to compete with the major banks.

One casualty of the credit crunch is peer-to-peer start-up Peermint. Founder Scott Rigby says the group simply couldn’t raise the capital required to invest in licensing and marketing, two critical requirements for success.

“We came very close but in the end the legal hoops are tough to jump through and it was going to cost a significant amount of money.”

With new consumer credit legislation in development and consumers still jittery about where to invest their money, is the peer to peer lending model dead in the water in Australia?

Lending Hub does not appear to be licensed, so could face the spotlight of regulators as it grows.

In the US, peer to peer lending giant Prosper remains voluntarily suspended as it awaits regulatory approval from the SEC. In the UK things are looking a little rosier, with Zopa reporting strong growth in interest from investors who are now more wary of the major banks. Despite the closure of its US business, Zopa says it now has more than £2 million on offer to borrowers in the UK.

Microfinance leader Kiva has also been kicking goals, having to turn some donors away last year after every entrepreneur seeking funds through Kiva was funded. This month Kiva began offering loans to US entrepreneurs, partnering with not-for-profit group ACCION USA for loans of up to US$10,000.

Peer-to-peer lending makes sense for small business start-ups which can find it difficult to gain approval from banks. Entrepreneurs often turn to friends and family for funds, so why not widen the pool with a peer-to-peer platform? Virgin Group founder Richard Branson acknowledged this when he launched Virgin Money USA’s social lending offering last year.

Virgin claims to have facilitated more than US$370 million in loans between relatives and friends, taking care of the credit reporting, loan documentation, and regular statements.

It’s this type of model that I suspect is most likely to gain support in Australia. Fosik already offer a similar service. The question is, will an Australian financial institution seek to participate?

The Least Evil Bank in Australia - Episode 1

Episode 1 of Cameron Reilly's podcast, 'Why we hate banks' is now available.
To listen the MP3 Audio at the end of the post or download to listen offline.

The search for the least evil bank in Australia

After a few interesting customer experiences with banks in recent weeks, Cameron Reilly of The Podcast Network began a Twitter poll to find the least evil bank in Australia.

In early polling Bendigo Bank was ahead as the least evil bank. Since interviews began today with banks, commentators and other financial services groups, there has been an increase in Twitter activity.

At one point Cameron ponders if including the banks by name in one of his posts has resulted in an increased score for Bank of Queensland. Have the bank’s PR agencies and the like noticed the poll and begun to respond?

While the poll is a small sample it is a vocal one. As discussed in the current issue of Online Banking Review (June), Twitter and social media are vital for banks to obtain first hand insights into what customer are saying and needing.

It is no longer enough to hold focus groups and run customer satisfaction surveys. This is only part of the way to understanding customers and gaining insights that will leave to true innovation in the financial services sector.

The conversation that has begun around Australia’s least evil bank demonstrates the sophistication and levels of frustration customers are feeling with their banks. Current Net Promoter scores (NPS) for Australian banks also tell a bleak tale.

The concept of good profits versus bad profits as discussed in Frederick F. Reichheld book about Net Promoter – The Ultimate Question, is particularly pertinent to the discussion unfolding in Cameron Reilly’s Twitter conversation. Conversations about fees shows that banks may indeed be the first up against the wall come the revolution.

The power of the online channel for giving a voice to customers has never been more evident.