The Future Of Movenbank

If you need a refresher course on what Movenbank is, allow me to steal this passage from TheNextWeb:

It’s an exclusively online, new model of bank that uses social, mobile and gamification technology. To create a bank focused on utility and customer engagement, Movenbank created an ecosystem called CRED, which uses a combination of mobile technology, social media and behavioral game theory to help consumers save, spend and live smarter when it comes to their finances with a built-in reward system.

Here’s how the Movenbank story is going to play out:

Act I: Start-up generates positive press and attention for promising to create new banking model. New firm takes precautions to not get overhyped (like a previous new banking startup) too far in advance of its launch. Fledgling firm signs up 100,000 potentially interested customers.

Act II: With much fanfare, Movenbank launches, but small percentage of interested prospects sign-on. Management team is undaunted as they know full well that too many customers on day one might be more detrimental than helpful. After all, on day one Federal Express flew one plane, not thousands. 

Act III: The dark and lonely times. Movenbank works diligently to acquire new customers. Slowly but steadily new customers come on board. People begin to question the firm’s business model. 

Act IV: Movenbank prospers. Customers find that they can earn their way to better rates and fees, and grow with their existing account instead of switching. More importantly, customers are profitable. While other (i.e., traditional) banks have varying degrees of success driving up account profitability, Movenbank is able to do so through a blend of interchange, merchant-funded incentives, and yes, account fees. As the new model is validated, kinks are worked out, and word of the success of a new banking model spreads, helping to drive new customer growth at a much more effective and efficient rate. 

Act V: A megabank acquires Movenbank.

Huh? What? Why would a big bank acquire Movenbank? 

It’s a classic innovator’s dilemma. Today’s banks would desperately like to reinvent their business model. But, as they say in Maine, “you can’t get there from here.”

But why will Movenbank succeed?

It’s not because it’s a mobile-dominant plastic-less approach (I predict that Movenbank will one day issue plastic cards).

Movenbank will succeed because the product offer is more appealing, simpler, more transparent, and more fair than the [checking account] product structures on the market today.

The OccupyWallStreet people might not like to believe this, but the real 99% of people in the U.S. are OK with paying fees for the products and services they receive. What this majority wants, however, is perceived value for the fees paid. THAT’S the problem with the banking model today — mismatch between between fees paid and value received– and the problem that Movenbank is trying to solve for.  

In addition, the timing helps. While it’s always the right time for some firm to introduce innovation into the market, now is a particularly good time. It’s the perfect storm of economic conditions (producing strong consumer dissatisfaction with banks in general), technology development and — most importantly — demographics. 

Ten years ago, even if the economic conditions and technology had been in place, the demographics wouldn’t have been there. Today’s Gen Yers were just too young ten years ago to make a Movenbank possible.

Which isn’t to say that Movenbank’s only customers will be Gen Yers (just ask PNC about the demographics of its Virtual Wallet customer base). But Gen Yers need more than mobile access to their accounts, or a pretty interface. They need a new product. A product that reflects the fact that their spending and credit needs are rapidly changing.

The organizational walls between debit and credit products in most established financial institutions prevent them from creating and developing new solutions like the one that Movenbank is promising to bring to market.

By Act IV, big banks will take notice of Movenbank and realize that Movenbank is:

  1. The “starter” account they should have created for entry-level customers, and
  2. A platform and business model upon which they can migrate their stale and tired business model.

This, by the way, is why I don’t think Bank Simple’s path is similar. Bank Simple may succeed at creating a new interface for banking customers, but the underlying structure and business model of banking products remains in place. Maybe I’ll be proven wrong here, but I see Bank Simple as simply (pun intended) putting lipstick on the pig.

With that said, I may be wrong about Movenbank, as well. There are a number of failure triggers:

1. Model failure. CRED might not work. From two angles, actually. One is that Movenbank may not be able to collect a sufficient amount of data to validate the CRED concept. The other potential failure angle is that Movenbank may not be able to recalibrate CRED over time. This is what happened with FICO. A 600 score was significantly more risky in 2009 than a 600 score was in 2002. 

2. Technology failure. Movenbank is putting a lot of faith in the mobile channel. Not that it’s misguided faith. But the mobile channel– most importantly mobile payments and mobile customer service — has yet to face its toughest performance, reliability, and risk/fraud management tests. 

3. Service failure. You know why ING Direct succeeded as a primarily online-only bank? Because savings accounts require little customer service on an ongoing basis. That’s not the path Movenbank is taking, however. Quite the contrary — it wants to be the provider of the primary spending account. And with a heavy-transaction product comes heavy-customer support needs. Will Movenbank have the customer service capabilities to support a sizable customer base? We’ll see.

There are three additional failure triggers that I can define, but won’t talk about here. If Movenbank wants to know what they are, it knows where to find me. 

Bottom line: I’m bullish on the Movenbank concept. Sadly (for the industry) there aren’t enough people thinking about how to (constructively) reinvent the banking model. Too much focus is on improving the “customer experience” without fixing the underlying cause of the experience problems. Or blowing it up completely.

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Check out Snarketing 2.0: A Humorous Look at the World of Marketing in the Age of Social Media (print or Kindle format):

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Stop The Banking SMadness

The “logic” behind the justification of social media as some new emerging “power” channel in banking is so twisted and misguided, that it just HAS TO STOP.

In an article titled Mobile and social to emerge as power channels for banking, Finextra recently wrote:

“Social networking is becoming more popular, with 57% of adult Internet users [in the UK] using online social networks in 2011, up from 43% in 2010. The UK data is in line with international trends. A just-published survey of 12,000+ Canadian consumers issued by JD Power & Associates finds social media emerging as an increasingly important alternative to traditional retail banking channels. More than 60% of retail banking customers responding to the poll say they use social media. Among customers who use social media for banking purposes, 24% indicate they use it to discuss their banking experience or inform their bank of a customer service issue.”

First off, the last sentence is completely misleading. Sixty percent may be using social media, but that doesn’t mean that all use if for banking purposes. So when the last sentence says that “among those who use SM for banking purposes,” we have no idea how many that actually is.

If it’s 10% of the 60%, then 24% of that means that only 1.5% of Canadians use social media to discuss their banking experiences or for service issues. Ooooh….1.5%!

More importantly, however, is the false logic behind the claims. Just because a large percentage of people use a technology doesn’t make that technology relevant to all applications. 

Using the logic from Finextra (yes, I’m singling them out, but let’s get real — they’re hardly the only ones singing this tune), the following would be true:

McDonald’s to become “power” channel for banking!

Everyday, 27 million Americans — nearly 10% of the total population — visit a McDonald’s location. And that number is growing by 1 million every year. Over the course of the year, on average, Americans visit McDonald’s 33 times! Among Americans who visit McDonald’s, 99.9% make a payment (some just use the restroom) while they’re there. 

But wait, you say, the two examples aren’t analogous. After all, banks can’t take a customer service question at a McDonald’s.

True enough, but they can leverage McDonald’s to influence consumers’ choice of payment mechanisms (and you better believe that, as a result of the recent interchange regulations, this is going to happen a lot more frequently).  And with 27 million Americans visiting McDonald’s every day (and making a payment there every day) which channel — social media or McDonald’s — is more likely to emerge as “an increasingly important alternative to traditional [marketing] channels”?

I’m not arguing that social media isn’t important. Just trying to bring a little perspective to the situation. And trying — probably in vain — to turn down the volume a notch or two on the social media hype.

Do Bank Branches Matter? Why The Fed Is Wrong

In a recent Economic Commentary titled Do Bank Branches Matter Anymore?, the Federal Reserve Bank of Cleveland wrote that bank branches matter because a local presence in a market — i.e., bank branches — enables a bank to gather better data about local conditions and make better lending decisions. The authors wrote:

“Bank-customer relationships can overcome [adverse selection in lending decisions]. For banks, interactions with customers allow them to gather information on a customer, so-called soft information, which is not easily captured in a credit score. Banks operating in a local market are also more likely to have information on the local economy, giving them a context from which they can evaluate the future prospects of a borrower that is not readily available to an out-of-market lender. 

Because the gathering of soft information is difficult to do without a physical presence in a local market, the closing of a bank branch is different from the closing of a grocery store. One can still buy oranges, perhaps at a higher cost, by traveling farther to a different grocery store. But one cannot always get a loan by traveling to a distant lender.

We find that low-income homebuyers who obtain their mortgages from banks with branches in their neighborhoods are less likely to default than homebuyers who use banks without a branch in the area or mortgage brokers. These findings suggest that a physical presence gives banks the opportunity to get to know distressed areas better and channel resources to people who can manage them best.”

My take: The Fed is wrong about:

1) Knowing a market. “Knowing” a market doesn’t come from having physical offices (or branches) in a particular market. “Knowing” a market comes from developing a systemic business capability that captures data about a market, and on the impact and results of business decisions made in that market over a period of time.

The “soft” information that the authors refer to — information about spending habits of individual borrowers — is no more accessible to a bank with a physical presence in a market than to a bank without a physical presence.

In fact, I would argue that an Internet-only bank whose customers are heavy users of debit cards actually have better “soft” data regarding their customers financial lives than a branch-oriented bank who customers still rely heavily on cash and checks. Why? Banks’ ability to categorize debit card transactions is more advanced than their ability to analyze check transactions.

2. Correlation and causation. The Fed is confusing correlation with causation. Iit might be true that “low-income homebuyers who obtain mortgages from banks with branches in their neighborhoods are less likely to default than homebuyers who use banks without a branch in the area or mortgage brokers.”

But the only way that the absence of bank branches would be the cause of the default is if applicants applied to both brick-and-mortar and Internet-only banks, and were turned down by the b&m banks and accepted by the branchless ones. This doesn’t seem very likely. 

It’s hard for me to tell from the article, but it appears that the authors looked at data from a selected number of counties in Ohio, comparing 2002 to 2010. Had they looked at California, Florida, or Texas, my bet is that they would have found very different results. In addition, as the authors note, bank branches “have been disappearing in some major metropolitan areas.”

With the economic conditions that existed between 2008 and 2010, it’s hard to conclude that the increase in loan defaults is caused by branch disappearances.

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If the purpose of the article is to convince banks that in order to improve their lending business they need to expand their branch presence, I have to disagree. 

Looking ahead, the opportunity for banks to gather “soft” information about customers and markets will not come from a branch presence. Instead, it will come from the growth in the use of mobile technology — specifically for mobile banking and mobile payments will give the banks much greater insight into spending habits and trends in the markets they do business in. 

So do — or should I say — will bank branches matter? If banks use branches to distribute smartphones to their customers, then the answer is yes. 

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. 

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.

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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.

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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.

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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.”

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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.

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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?

The Faulty Logic Of Dropping Debit Rewards Programs

Following the announcement that a number of large banks plan to discontinue their debit rewards, it would seem to be a foregone conclusion that these programs will be dropped by a lot more banks.

Unfortunately, the logic behind the discontinuation of these programs is based on short-sighted, if not faulty, logic.

To help you understand why, let’s play Sesame Street’s Which of These Things is Not Like the Other?

A. Airlines
B. Hotels
C. Banks

The answer is C. All three of these industries rely heavily on rewards programs, but only banks deceive themselves into thinking that their programs have to be funded by something called an interchange fee.

If airlines and hotels can justify rewards programs by changing customer behavior (i.e., getting customers to buy more and/or not leave) then why can’t banks?

The answer is: They can.

I’m willing to bet that there’s a segment of banking customers that couldn’t care less about their bank’s branch locations and that don’t stay with their banks because of their “superior customer services” (stop laughing), but instead, stay with the bank because they rack up points when they use their debit card.

These customers might not switch banks, but they’re the group most likely to, if debit rewards programs get killed.

And guess what? This might be hard for the banks to understand, but this segment of banking customers might actually be the more profitable segment of customers. Why?

1) Few banks have a significant share of their checking account customers’ credit card business. If switching purchase behavior from a debit rewards card to a credit rewards card is even an option for consumers who value their debit rewards, the switch in card behavior does most banks little good.

2) Consumers who aren’t in this segment are only more profitable if they’re carrying high balances, and are low cost to serve. High-balance, non-debit card users are generally Boomers and Seniors who are more likely to rely on credit cards than debit cards. While the banks aren’t making diddly-squat on these customers’ credit card activity, they do enjoy the high balances these customers bring. But on the other hand, the future potential of cross-selling these customer retail banking products is limited — Boomers and Seniors account for a disproportionately low share of the demand for banking products.

3) Low-balance, non-debit card users write checks. And the interchange revenue from checks is….?  Oh yeah. ZERO. Last time I looked — and please correct me if I’m wrong — $0.12 per transaction was better than $0.00 per transaction.

So what should the banks be doing (you might want to sit down for this)?

They should be RAISING the rewards on debit cards. They should be giving major incentives to check-writing customers to stop writing checks and start using debit cards. They should be giving online bill payers incentives to pay with debit cards (and working with billers to accept debit cards).  They should give their customers absolutely no reason for switching to credit cards.

Yeah, I know what you’re thinking: Those Gen Yers who make heavy use of debit cards don’t have an option to switch to credit cards. Either their limits are too low, or they’re not getting pre-approved for good offers, or they’ve stopped using credit cards in order to avoid running balances and incurring interest charges.

That’s going to change over the next 10 years. Today’s hard-partying 25-year old, plunking down that debit card for pizza and beer today is tomorrow’s 30-year old, getting married, having kids and saving for their education, looking to buy a home,  needing a minivan to haul the little anklebiters around in, etc. They will have needs for credit cards, they’re just not there yet.

Banks should be driving responsible use of debit cards, with PFM tools to help customers track and manage their spending and their finances, and with merchant-funded rewards/offers driven by and linked to the customers’ debit card activity. Banks can’t do that if the spending shifts from debit to credit, checks, or — god forbid — cash.

At this point, there may still be some bankers who, having gotten this far in the story, will ask “but how will we pay for the rewards?”

To them, I’d like to offer my consulting services.

Stand Up For Your Right To Kill Checks

Followed a link I saw in my Twitter feed yesterday to a site called Stand Up For Your Right To Write Checks. According to the site, it’s a “consumer advocacy campaign designed to help you defend your right to pay your way.” The site’s About page says:

“According to a recent Ipsos survey of consumers across the country, three-quarters of Americans believe they should have the freedom to pay at stores or restaurants with whatever method of payment they prefer. And for millions of consumers, that preferred method is the reliable standby, the check.

Yet, it seems, retailers are hanging “no checks” signs on their windows and at their checkouts. This reliance on only cash and credit forms of payment severely limits consumer-spending power and creates problems for those who wish to carry checks.”

There’s a link to Facebook, which as best as I can tell simply redirects you back to the http://righttowritechecks.com URL. There’s a YouTube page for the campaign with a single 47-second video, and a Twitter handle, MrChecksAppeal, whose bio states:

“Duncan Steele is a man’s man, and a ladies man. He is fiscally responsible, and filled with checks appeal. Yes, he knows what it takes.”

(I couldn’t find any Duncan Steele on LinkedIn that fit the bill here, although — ironically, as you’ll see — there was a Duncan Steele who is the Coordinator, Ethics & Diversity Services at Fraser Health Authority in Canada).

There’s a page with “checks gear”, namely t-shirts with pro-check slogans, but the links to CafePress.com are all broken.

And then on the For Retailers page, you get a glimpse of who’s really behind this. The page tells about a Check-In and Win Sweepstakes where  retailers (and their customers) can win something for participating. I’m willing to bet that legally the site had to specify who sponsored the sweepstakes, because that was the only mention of Deluxe Corporation (a manufacturer of checks) on the entire site.

On the Consumer Tools page, there is a list of people who have signed the petition to “stand up for their right to write checks.” I’ve determined, by the way, that at least 8 of the first ten names listed are all associated with a single Minnesota-based PR firm (Deluxe is based in MN, btw), and found a few other names that match up to Deluxe employees.

Bottom line: This is anything BUT a “consumer advocacy” campaign. It’s a marketing campaign on the part of a perfectly respectable and reputable firm. But the lack of transparency here is particularly offensive.

Furthermore, let’s get something else straight: Writing checks is not a “right” that consumers have. It’s a convenience that banks provide. And, if we’re going to argue about “rights” — I can’t believe I’m actually going to say this — don’t retailers and merchants have the “right” to accept the forms of payment that are most convenient and profitable to them? It should be their decision to refuse forms of payments that their customers do or don’t want to use.

From the bank perspective, however, the time has come to kill checks.

Will people (or, as described above, companies masquerading as “consumer advocates”) complain? Absolutely. But there’s precedent here.

Thirtyish years ago, gas stations told customers they had to get out of their cars and pump their own gas. People whined, moaned, and complained. But did it. And got over it. And found that — except for when it’s really cold or raining — it’s actually a faster and better experience.

Same thing with checks. People will complain about the death of checks. But the infrastructure in place to process checks is a drag on bank profitability. And even though overall check volume is declining, the reality is that banks can’t dismantle this infrastructure. In other words, the fixed cost is high, and the variable cost is low. The only answer is to kill checks.

If the current volume of checks were to move to debit cards, banks would recoup some of the lost interchange revenue they’re facing. And if they can do that, and create synergies for marketing with retailers/merchants (i.e., what BillShrink or Cardlytics do), then further benefits can be passed on to consumers. And the last time I checked, by the way, consumers have never received rewards for writing checks.

Last point: I’m betting that somebody is going to cite SUFYRTWC as a great case study of a multi-channel campaign, because it utilizes a web site, contest, Facebook, Twitter, and videos. But if the campaign doesn’t reverse the trend away from check writing, then don’t buy into this line of reasoning.