Giving Away iPads Doesn't Solve PFM Challenges

In about 20 words, NetBanker takes a machete to PFM, cutting it down with three swipes:

  1. It’s hard to get started
  2. It’s a pain to keep up
  3. It’s disconcerting to view spending summaries

But, as NetBanker notes — and I agree with both the swipes and the rebuttal — there are “obvious benefits” to PFM use.

NetBanker goes on to say that “one way to tackle the first problem is to offer a sweepstakes or bonus to induce trial,” and highlights Truliant Federal Credit Union’s attempt to do just that by giving away iPads to members who sign up for using PFM.

My take: Truliant is wasting its money.

If you need to lose weight, you can: 1) Read up on which foods to eat; 2) Eat those foods; and 3) Exercise more. Doing only #1 — reading up on which foods to eat — will do little good in actually reducing your weight. Step #1, without #2 and #3, is a failed strategy.

This is analogous to what Truliant is doing: Trying to solve the three-pronged PFM problem by addressing just the first prong. 

PFM is the new New Year’s resolution. It used to be that when the new year came around, we resolved to lose weight and/or stop smoking. Now we resolve to get our financial lives in order. And just as we used to join a gym to realize our weight loss resolution, we sign up for a PFM to to realize our financial resolution. 

When March rolls around, we’re not going to the gym as often, and not long after we start using a PFM tool, our enthusiasm and commitment wanes, and we stop using it. 

Realizing the “obvious benefits” of PFM requires committed use of the tool over some period of time. Simply incenting people to sign up for using the tool does absolutely nothing to encourage or ensure continued use. 

In fact, if you read the fine print of Truliant’s contest, members don’t actually have to enroll in PFM to participate. (I’m tempted to enter the contest to see if they even really limit it to members). 

My prediction: A large percentage of Truliant’s online banking members will enter the contest and sign up for PFM. Truliant will then boast about their high PFM enrollment numbers. And then we’ll never hear again whether or not those members continued to use the tool and reaped the benefits. 

What should Truliant do?

Think Foursquare for PFM. 

Despite what a lot of people think, Foursquare isn’t about location awareness or the mobile channel. It’s about gamification. It’s about earning badges and becoming mayor. And if there are rewards for doing those things, great.

People like to play games. We like friendly competition, and we like to turn routine things into games to spice them up, and make them more interesting.

And that’s what banks and credit unions need to do with PFM — make a game out of it. Points for setting up a budget, points for categorizing your spending, even more points for keeping to your budget. Points for sharing tips and tricks regarding the management of one’s financial life with other PFM users.  And giving away iPads to the people who amass the most points.

In other words, incenting customers and members to deal with the “pain of keeping up” with the use of PFM.

If you can address challenge #2, challenge #1 takes care of itself. 

As for the disconcerting nature of seeing your spending patterns, I can’t help you. I’m a consultant — not a miracle worker.

P2P Lending — The Bank And Credit Union Way

I’ve often thought that banks could easily squash P2P “lenders” like Prosper and Lending Club by creating an online lending marketplace of their own. In addition to the organic traffic they could drive to the site, they could refer loans they decide to pass on themselves, and give the option to investors/savers looking for higher rates of return than they’d get with CDs to lend money in the marketplace.

Lending Club charges a processing fee ranging from 2.25% to 4.5% of the loan amount, and hits investors with a service charge of 1% of each payment received from a borrower. Seems to me that banks could easily underprice that.

But there’s another P2P lending opportunity for banks and credit unions to capitalize on.

Do you know how much money is lent between family, friends, and acquaintances? I doubt that you do, because, as far as I know, Aite Group is the only firm to have estimated the volume of P2P transactions that occur in the US.

We’ve estimated that US consumers borrow (and presumably, repay) nearly $75 billion from each other (and not from financial institutions or other types of businesses, legal or otherwise) each year. On average, every household in the US makes two loan payments to other people for money they’ve borrowed.

That last number is actually pretty useless, since a large percentage of households don’t make any P2P transactions for the purpose of repaying loans. But in our research on consumers who use alternative financial services (e.g.,  payday loans, check cashing services, etc.), borrowing from family and friends is the second most popular source of funds (after overdrawing on their checking accounts, which might not count).

In fact, of the alternative financial services customers that Aite Group surveyed, one in four borrowed from family or friends three or more times in 2010, and more than one-third did so more often in2010 than they did in 2009.

This is a huge P2P payment opportunity for banks. Note that I didn’t say it was a P2P lending opportunity.

How are these loans and agreements documented? I have no idea, but my bet is that in many cases they’re not documented at all. After all, among friends, verbal agreement is just fine, right?

But if there was a cheap (i.e., free) and convenient way to capture the details of that loan, and a way to actually transfer the money between participants — cheaply and conveniently — don’t you think a lot of people would use it?

The money in the P2P lending space for banks isn’t from loan processing fees or from taking a cut on the interest rates. The money is in the movement of funds.

To date, banks, as a whole, have floundered with their P2P payment offerings. CashEdge and Zashpay have gained some traction, but have hardly become household names. PayPal is a household name, but the vast majority of their business isn’t P2P.

Why haven’t P2P payments taken off?

Banks are marketing it all wrong. They’re pitching the “electronic” aspect. Big deal. People don’t care about channels and methods. They simply care about what’s the most convenient thing to do when they want to do it.

Instead, banks should be marketing convenient alternatives to transacting certain types of P2P payments — repaying loans to other people being one type.

Banks could provide an online capability for the parties to document the terms of the agreement, establish repayment parameters, and enable either the automatic or manual transfer of funds. All for the low fee of a P2P transaction, and not a cut on the loan. No future disagreements about the terms of the agreement, and proof of payment.

In addition to improve the way existing customers transact P2P loans between family/friends, this approach might help attract un- and under-banked consumers who could fund an account that could either be a savings account or take the form of a prepaid card account. 

The real winner, though, will be P2P payments. By driving trial of the service, consumers may find it convenient for other use cases. 

How To Differentiate Your Credit Union

On the CU Water Cooler site, William Azaroff wrote:

“When I look at many credit unions, I’m troubled by their blandness, their inoffensiveness. They used to stand for something, but now they’re moving away from differentiation and towards sameness. And many credit unions are doing this at the precise moment when differentiation is a necessity. The question is: do some people hate your brand? If some do, then I would say you’re doing something right. If not, then I’m guessing your organization is trying to be all things to all people, and should take a stand for something and embed that into your brand.”

My take: To quote former President Clinton: “I did not have sex…” No, wait, that’s the wrong quote. I meant this one: “I feel your pain.”

William is spot on that many credit unions aren’t differentiated in the marketplace. What William didn’t get into, however, is why few credit unions are effectively differentiated. There are (at least) three reasons why undifferentiated credit unions are that way:

  1. They don’t know how to differentiate themselves.
  2. They think they’re differentiated, but don’t know better.
  3. They don’t want to be differentiated.

The last reason might surprise you, or strike you as wrong. But after 25 years of being a consultant, I can’t even begin to count the number of times I’ve made a recommendation to a client to do something, only to be met with the following question: “Who else is doing that?” Risk adversity runs deep in the financial service business.

There are also a fair number of CU execs who think that their CU is differentiated. Almost to a man/woman they give the same description of what differentiates their CU: “Our service.” This is often — I’m inclined to say always — wishful thinking. Why? First, service may be what your firm does best, but it doesn’t mean your service is comparatively better. And second, because service means different things to different people.

The most prevalent reason why so many CUs are undifferentiated, however, is probably the first reason: They don’t know how to differentiate themselves. 

I’m not looking to pick a fight with William — I suspect he would agree with me here — but approaching the topic of differentiation from the perspective “what can we do to tick people off and be hated by some of them?” is not the right way to go about it. 

And with all due respect to my friends in the advertising business, the last thing a credit union should do is bring in the advertising people to help them figure out how to differentiate the CU. 

Why? Because there’s a prevalent — but misguided — mindset among advertising people that differentiation comes from “the story you tell.” (If you need proof, go read Seth Godin).

But the story you tell doesn’t differentiate you. What differentiates you is the story that your members tell. That they tell to themselves inside their head, and that they tell verbally to their family and friends. And those stories only come from their experiences with the credit union, not the advertising. 

Which means this: Differentiation comes from something you do

That “something” must be meaningful to members. And that something must be something that: 1) only you do; 2) you do measurably better than anyone else; or 3) you do measurably more often than anyone else.

Differentiation doesn’t come from standing for something, and it doesn’t come from your branding efforts (your differentiation drives your brand, not the other way around).

William’s credit union Vancity “stands” for community development and improvement.  So do plenty of other CUs. What differentiates Vancity is that — time and again — they do something about it. They can count the number of times they’ve done something about it, and they can measure the impact of what they’ve done.

Differentiating on service is tenuous. What does that mean? That you fix your mistakes better than anyone else? That the lines in your branch aren’t as long as they are in the mega-banks down the street? That Sally at one of your branches greets everyone by name and with a smile when they come in?

If you’re going to differentiate your credit union, you have to do something. Different, better, or more. None of those options is particularly easy to do. Technology initiatives intended to gain a competitive advantage — mobile banking, remote deposit capture, etc — are often easily (I didn’t say cheaply) copied. Better is hard to prove. And “more” requires strong commitment from the management team for an extended period of time.

This isn’t to say that aren’t opportunities for differentiation, just that they require commitment — and a lot of it.

So what can you do to differentiate your CU? I think it comes from committing to differentiate in one — and only one — of the following areas:

1. Advice. Managing our financial lives is tough and getting tougher. People need help making smart financial choices. But the advice available in the market tends to be focused on asset allocation and stock picking for the relatively affluent, or focused at the very lowest end of the income spectrum for people who need help with serious debt problems. What about everybody else in the middle? What about providing help with all those everyday/week/year decisions that have to be made? PFM holds the potential to provide and deliver this kind of advice, but the tools aren’t quite there yet. If this is the path you choose, you’re going to have to make some investments to develop them and get them to point where they can deliver on this promise.

2. Convenience. There’s one bank in the Boston marketplace that advertises itself  as the “most convenient” bank. Hooey. Having extended branch hours and free checking isn’t “convenience.” Making people’s financial lives easier — i.e. more convenient — to manage is a complex and difficult proposition. But when you’re really doing it, people know it. And you’ll be differentiated.

3. Performance. You might not be the easiest FI in the market for me to deal with, and you might not provide me with any advice (maybe because I don’t want any), but if the performance of my financial life — that is, the interest I earn, the fees I pay, and the rewards I get and earn, are superior to everyone else out there, than I will consider you to be differentiated in the marketplace.

I didn’t say differentiation is easy.

Is Multi-Channel Banking Just A Bunch Of Hot Air?

Not long ago, a client asked me to give a presentation to his management team on the topic of multi-channel (or cross-channel) banking. I declined the request because I don’t have a lot of research to show what banks were doing about the topic, nor do I have any great examples or case studies of successful multi-channel banking (I don’t have examples of unsuccessful efforts, either).

I also declined the request for a reason I didn’t verbalize: I think multi-channel banking is a meaningless term. One of those fluffy generalities we like to throw out there to make us look smart and well-intentioned, like “customer-centricity.”

Which, I think, is the reason why I don’t have any great examples of it. Oh sure, I’ve seen a report from one of my competitors describing one European bank’s multi-channel banking success (you don’t really think I’m going to provide a link, do you?).  But as I read through the report, I honestly can’t figure out what makes it a multi-channel or cross-channel example — it’s fundamentally about the bank’s effort to improve customer self-service. 

Today, I was on a call with the head of the financial services practice for a very large IT vendor. There was very little mention — no, make that “absolutely no mention” — of CRM, so I asked him what he’s been seeing in the way of demand for CRM applications among banks. His response was:

“Regarding CRM, it’s all about the channels. We’re focusing on providing real-time intelligence to the front-line.”

What he confirmed for me was that bank’s CRM spending is stovepiped and siloed within the channels. The online channel is spending to increase its effectiveness, the branch is investing to increase its effectiveness, and the contact center focuses on improving its effectiveness.

I’ve come to believe that the all the talk about multi-channel banking is just that — talk. One of those motherhood and apple pie aspirational things that bankers like to talk about, because it makes them sound like they’re talking about the things that other people think they should be talking.

Is multi-channel banking just a bunch of hot air?

I’m inclined to believe so, but I’m ready and willing to change my opinion if presented with compelling evidence and proof of the concept. 

Setting The Record Straight On Banks' Daily Deals Killer

ReadWriteWeb writes:

“The banking industry has launched a new initiative that will bring deals and discounts to consumers through the banks themselves. Banks have begun selling consumers’ personalized information to merchants who in turn offer deals based on spending habits or other criteria.”

I think it was CNN Money that first reported that consumers’ data was being “sold” by banks to merchants and retailers. Unfortunately, this is nowhere near the truth.

Here’s how it — what Aite Group calls merchant-funded incentives — works:

1. Retailers and merchants tell banks what kind of customers/prospects they want to reach. For example, Staples might want to reach consumers who have spent a certain amount of money within a given time frame at competitors like Office Depot. Or a QSR might want to reward existing customers who have eaten at the restaurant a certain times in the past 30 days with a discount on the next meal purchased at the restaurant.

2. Offers are extended when consumers login to their bank accounts online. Increasingly, the offers will be made through mobile devices, as well. Consumers can opt to view the offer, accept it, then redeem it with the retailer/merchant. Consumers can opt-out of seeing the offers. And if not available right now, I’m sure that sometime soon, they’ll be able to choose which product categories they want to see offers for and which ones they don’t want offers for.

You’ll note that nowhere in the description of how this works is there any reference to data being sold by the bank.

There is one aspect of the reports from NPR, CNN Money, and RWW that is on the money: Merchant-funded incentives have the potential to take a good chunk out of the daily deals market. Here’s why:

  • Relevancy. When Sally’s Nail  Salon does a Groupon deal, all it knows is that its offer is going to go out to however many email subscribers Groupon has in that particular market. As a result, people like me — who have spent all of $0 at a salon in the past 30 years — get Sally’s offer. With merchant-funded incentives, Sally’s offers are only sent to consumers who either have purchased in that category, or if Sally believes that there are other product categories that are good predictors of salon purchase intention, offers can be made to consumers that make purchases in those other categories. 
  • Accountability. The beauty (get it?) of the merchant-funded incentives approach is that the bank can tell Sally how many consumers meet her offer criteria, and then track offers and redemption rates. 
  • Economics. It’s at least a few years out, but when merchant-funded incentives can reach a majority of consumers through financial institutions, merchants and retailers will be able to significantly reduce their marketing investments in other channels. They’ll be able to stop putting FSIs into newspapers, and they’ll be able to cut back on mass media advertising. Oh — and they won’t be giving 50% of the transaction value to the banks, like they do to Groupon.

I hope this clears things up. No data is “sold.” And while merchant-funded incentives might not “kill” daily deals, it will take a good chunk of the market.

Fact And Fiction In the Debit Interchange Fiasco

An article published in the New York Times regarding the new debit interchange regulations contains some statements that require a bit of scrutiny. Let’s take a look at some fact and fiction in the debit interchange fiasco.

———-

NYT statement: Merchants have complained that as the cost of debit fees has risen in recent years, they have had to add it to the prices they charge.

Fact or fiction? FICTION. There’s absolutely NO evidence that retail prices for any product or service has increased as a result of rising debit interchange fees. The reality of the situation is that, even though debit purchases as a percentage of all retail transactions has increased over the past few years, they don’t represent anywhere near a majority of total retail sales.

There’s no way for the average retailer or merchant to figure out what impact increases in debit interchange have had on prices.  Why? Because retail prices have little to do with the actual cost structure of a product, and a lot more to do with supply and demand.

———-

NYT statement: The new lower fees may eventually be reflected in lower retail prices for consumers or, most likely, in a slight slowing of price increases.

Fact or fiction? FICTION. Not a chance in hell that’s going to happen. Why? For the same exact reason described above explaining why the increase in interchange fees hasn’t resulted in an increase in retail prices. Retailers have simply no reason to pass on cost savings — where ever they may come from — in the absence of changes in supply and demand, or competitive pressures.

———-

NYT statement: In approving the lower fees, the Fed’s Board of Governors said there was no way of knowing what the effect of the new rules would be, although they will be watching the results closely.

Fact or fiction? FACT. Which is not good news. Our government is enacting a regulation, yet admits to not knowing what impact that regulation might have. If there’s logic behind that, it eludes me. It’s little comfort that the Fed will be “watching results closely.”

———-

NYT statement: “While Congress spoke clearly that fee-fat banks can no longer sneak billions of dollars in stealth charges from debit card users, it appears that the Federal Reserve buckled under the weight of the banking lobby,” Bartlett Naylor, a financial policy advocate for Public Citizen, said in a statement.

Fact or fiction? FICTION. Better yet: DELUSIONAL FICTION. There are enough errors in Mr. Naylor’s statement to render him a not-very-credible spokesperson. First: Interchange is hardly a “stealth” charge. Second: Debit card users don’t pay the interchange fee. Third: The Fed did not “buckle under the weight of the banking lobby” — it adjusted the fee based on more information regarding the cost of processing debit card transactions.

———-

As I have demonstrated, even if the original guidelines ($0.12/transaction) had been approved, the average household would see a benefit of less than $100/year — and only if retailers/merchants passed every last cent of the savings on the consumers. Surely, there are more important issues for Mr. Naylor and his group to focus on, no?

Are You Sure You Want To Invest More In Bank Branches?

In its investor presentation regarding its acquisition of ING Direct, Capital One included the following slide:

My take: Are you sure you want to invest more in your bank branches?

June 17 UPDATE: For kicks, I thought it would be interesting to see where the lines would go if the trends extended out to 2011:

Observations/thoughts:

  • Percentage of consumers banking at a branch (at least once in prior 12 months) dropped nearly 30 percentage points since the beginning of the century.
  • The growth rate in online banking leveled off in the mid-90s, then jumped in early 2000s. Why? My guess: The first crop of Gen Yers reaching adulthood.
  • The debit card percentage is misleading. Nine of ten checking account households might have a debit card, but that doesn’t mean that nine of ten uses a debit card.
  • There’s something wrong with these estimates. Why? The numbers I’ve seen from various sources suggests that the percentage of US households that are unbanked is anywhere from 5% to 15%. Even at the low end, that means that 100% of US households could not have been banking in a branch throughout the 80s and into the 90s. I think the chart would have been appropriately labeled “Percent of U.S. banking households.”