A Guide To The Financial Services Industry

The past few months have been a turbulent time for the financial services industry. With all that’s going on, I thought I’d give the confused, perplexed, and uninitiated a simple way to figure out who’s who in the industry.

Fundamentally, there are four types of firms in the industry. Those that:

1) Were banks, are still banks, but don’t want to be banks.
2) Weren’t banks, but now want to be banks.
3) Weren’t banks, don’t want to be banks, but tell the regulators that they are banks.
4) Aren’t banks, don’t want to be banks, but are told by regulators that they’re banks.

Firms in Category 1 include Bank of America and JP Morgan Chase who were banks (and still are), but through acquisitions of firms like Bear Stearns and Merrill Lynch (not to mention Countrywide) clearly don’t want to be banks.

We used to know Category 2 firms as investment banking, brokerage, and credit card firms. Everybody from Goldman Sachs to American Express is applying to be a bank, so they too, can get in on the deposits gold rush of  ’08.

Category 3 firms are sometimes called credit unions. While they tell consumers that they’re not banks, they tell the regulators that they are, so they can get some of that juicy TARP money.

Firms in the fourth category are sometimes known as P2P lenders. Maybe you’ve heard of Prosper and Lending Club. While they say they’re not banks, the regulators aren’t buying that for a New York second.

Any questions?

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PFM: The New New Year’s Resolution

NetBanker notes that for personal financial management (PFM) sites:

Total September traffic was 1.2 million unique visitors compared to less than 400,000 a year ago. The big three newcomers last year: Mint, Wesabe, and Geezeo saw combined traffic increase by 450,000 users, up nearly three-fold increase from 2007. Geezeo was the star percentage-wise growing more than six-fold. But Mint accounted for three-fourths of the net gain across the existing players with 330,000 more visitors.”

My take: It used to be that come the end of December, we’d make New Year’s resolutions to lose weight, get in shape, stop smoking, etc. The increasing PFM traffic is a reflection of a new resolution to add to the list: Get one’s finances in order (or maybe start budgeting, or something like that).

OK, maybe this isn’t a truly new resolution for some people. But the number of sites that offer PFM functionality is growing, and there’s a confluence of forces coming together to make the firms offering these tools feel like this is their time: 1) the economy sucks; 2) entering account data into the PFM tools is less labor-intensive than in the past; and 3) Gen Yers are coming of age.

The combination of these forces is bringing us the new year a few months early — at least as far as making the PFM resolution is concerned.

Will the online traffic for the PFM continue to see strong growth? Sure. While the number are strong, there are still plenty of people who have yet to make their PFM resolution.

But as I’ve implied in a previous post, raw site traffic is a deceiving measure. The real key to this market is how many people keep to their resolution.

Over time, factor #1 will have a seesaw impact on this market. As the economy improves (which it will, it’s just a matter of when), people will feel less pressure to watch every penny — and be less inclined to use PFM tools.

The impact of factor #2 has a short-term effect. Ease of data entry (through account aggregation) makes it easy for people to start using the tool, but I believe that the gee-whiz impact of graphing and charting everything to death will wear off for many people, leading to diminished use.

Factor #3 is the key to success for the PFM market. Gen Yers display a much stronger desire to manage their finances than Boomers or Seniors did at that age. And research from one of the analyst firms found that a suprisingly high percentage of Gen Yers are already saving for retirement — something a lot few Boomers did at that age.

In the end, the winners in this space will be the ones that help the greatest number of people keep their PFM resolution. Not necessarily the ones with highest site traffic.

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Math By Mint

Someone once said that there are lies, damn lies, and statistics.

Personally, I think that there’s a hierarchy there. Anybody can lie. If you’re good, you can tell a damn lie. But you have to be really good to use statistics. Alas, I don’t think Mint.com makes it to the top tier.

At the Finovate conference in NY, Mint.com presented and shared some numbers that piqued my interest. It claims that it “manages over $12 billion in transactions” and that 50% of its users have changed their spending behavior by using Mint.

Manages transactions? Perhaps “tracks” would be the more accurate word. And how does Mint know that the behavioral changes have come as a result of its tools — and not the general economic conditions?

Then there’s Mint’s boast that it has identified more than $100 million in potential savings for its users. This is ridiculous. Imagine if Capital One claimed that it has provided more that $100 gazillion in consumer financing by adding up the credit lines offered in the marketing offers it has sent to customers and prospects.

And finally, according to its CEO, Mint.com currently has 500,000 users, enjoying a sign up rate that has “more than doubled” in the past 3 weeks.

Sounds pretty impressive. When Aite Group spoke with Mint in April, it had 220,000 users, and (we were told) was signing up 10,000 people each week. In its August 18th press release, it said it had 400,000 users. So in the eight weeks leading up to the Finovate conference, it added 100,000 users. Which, my calculator tells me, is 12,500 users per week, and just 25% more than the weekly rate from April.

I’m not calling Mint.com a liar. I believe that it has doubled its sign up rate. After all, with the economy going the way it has, who isn’t more concerned about managing their finances? It doesn’t surprise me at all that the sign up rate is increasing. The enrollment rate might have dipped during the summer for all I know.

But let’s put Mint.com’s numbers in perspective. It may very well be the largest “online personal finance service.” Online. On Javelin Research’s blog, Mark Schwanhausser implies that there are 9 million Quicken users. If Mint.com grew by 40,000 users per week from here on out, its user base wouldn’t equal the Quicken population until we’re ready to throw the next president out of the White House at the end of October 2012. At 20,000 users per week, the 9 million figure will be attained while you eat your Thanksgiving turkey — in the year 2016.

But this is a silly discussion. Enrollment isn’t the critical statistic — the percent of enrollees that are active users is the critical factor (any online banking exec will tell you that). Intuit will tell you that, too — it has sold a lot of copies of Quicken to people who don’t use it. At least the firm got paid for each copy it sold.

Here’s my request of Mint.com: If you present at the next Finovate, please don’t share BS statistics (that’s not “Bachelor of Science” by the way). Instead, tell us, of the people who have enrolled, how many are active? How many use the site on a daily or weekly basis? How many site features do they use? How many accounts have they aggregated? How does usage change over time? How many of the saving offers that have been presented to users have been accepted? We’d be a lot more interested in finding out how much Mint users have realized in savings from Mint offers — not just those that the site has identified.

The reality of the PFM space is that while money is really really important to us — and getting even more important with the economic uncertainties of the day — the process of managing our money is something that few people want to do, or enjoy doing.

Quicken has succeeded by finding a segment of the population that likes to track, trend, graph, and forecast their financial lives. Mint.com has done a great job of replicating a lot of that functionality, and going beyond Quicken by making it easier to get data in (through aggregation), provide offers for savings, and engage users with its blog.

This segment is small. Mint.com is deluding itself (and trying to delude others) when it says its tools are for the masses, and sites like Wesabe are for the hardcore PFM users.

The key behavioral change that will determine the success of the PFM space is not how many dollars in transactions it “manages.” It’s getting more people to become more disciplined about managing their financial lives. There’s no doubt that tools like those offered by the PFM vendors can help people become more disciplined. But this is not an inconsequential change in behavior. Effecting this behavioral change is as tough as quitting smoking, losing weight, or something like that.

Which PFM site or business model will be the one that is most successful in helping to effect this behavioral change? I have my bet, which I won’t share here. But I will say this — for all of Mint.com’s chest thumping, the PFM game is far from over.

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What Should Banks Be Telling Their Customers?

Opinion  Research Corporation issued a press release highlighting the results of a survey it recently conducted. According to the release:

“Nearly half of those surveyed (46%) said the bank in which they have the most assets was not communicating with them enough. Mutual funds fared slightly better than banks, with 42 percent of respondents that hold the majority of assets there expressing disappointment in the level of communication from their provider.  Brokerage firms appeared to be doing the best job of keeping their customers informed, with sixty-two percent of respondents that hold the majority of assets there indicating that the level of communication has been good.”

My take: Look on the bright side: A majority of those surveyed (54%) did say that their banks was communicating with them enough. And nearly six in ten respondents said their mutual fund provider was doing a good job of communicating.

The problem here is that we have nothing to compare this to. In normal times, how many consumers think that their bank communicates with them enough? And how do we define “communicate” in this regard? Are blatant marketing messages considered “communication”?

Elizabeth Glagowski of 1to1 magazine was right on with her comment on the 1:1 blog:

“At this point, even a simple mass email or direct mail piece to reassure (or prepare) customers would definitely go a long way. am a customer of many financial institutions. Only one has sent me any type of communication explaining its role in the financial landscape. It really made a difference to me as a customer.”

I did a quick check of the largest banks’ Web sites to see if any had posted a message online. The result: Only a few have posted anything. One example: Wells Fargo.

It’s a shame that few banks have established a blog — each day brings new news (is that redundant?) that is great blog fodder for banks to communicate with their customers about.

It’s too late for banks to start a blog now (for the purpose of communicating about the crisis, not in general). But it’s not too late for them to put up a message on their Web sites (especially with nearly of some banks’ customers coming online to check account balances or pay bills on a regular basis).

Not to take WF to task here, but I would suggest writing a letter a little different from what it published. My suggestion would be to publish a letter that talked a little more about the situation itself. Help customers understand how the industry got into this situation in the first place, why other banks are having trouble and — this is the tricky part — how to know whether or not they should pull their money out of the other banks they do business with.

This last part is the one that most banks will struggle with. With some firms running full-page ads touting their newly superior rates, it leaves one consumer (me) with the impression that they’re vultures picking over the newly killed. Banks have got to recognize that few customers put all their eggs in one basket (or bank), and that consumers have a lot of reasons for doing so. It would be nice for my bank to assure me that the piddly amount of money I putin a CD with the bank across the street from them (which was opened because it offered me a better rate for the next 6 months than my primary bank did) is OK to keep there.

The end result of this financial crisis is not going to be the consolidation of accounts with the banks left standing. It’s going to be the opposite — further dispersion of assets across institutions. We Boomers are already of the mindset that we would never have all of our accounts with one bank. This crisis is going to lead a lot Gen Yers and Xers to feel the same way.

So what should banks be telling their customers? The answer is simple: The truth. The truth about what’s going on in the industry, and what customers should do about it (that’s best for the customer, and not necessarily the bank).

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Update: For more on this, go here and here.

How Not To Earn Banking Customers’ Trust

I opened up today’s Boston Globe, and on the front page of one the sections was a full-page for a bank that contained the following headline:

“Confidence is good. Earning it is better.”

The ad then displays a big blue box that highlights the bank’s higher-than-average rate on a 6-month CD. The rest of the ad goes on to say “At XXX Bank, you can feel confident with a short-term CD at a great rate. All from a bank you can trust.”

My take: Yes, confidence is good, and earning it is better. But you do not earn confidence by simply offering a good rate. This is true even in normal times. But what what makes this ad so insulting is that these are not normal times.

Is there nobody at this bank who understands what’s going on out there and who can communicate it to the ad agency? Is the ad agency itself that clueless? Do they really believe that simply offering a superior rate is the way to earning [back] the public’s confidence? Is there nobody at either the bank or ad agency who understands that this is not the right time for “marketing as usual”?

My advice to the CMO of that bank: “Ms. CMO, tear down that ad.”

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Pavlov’s Bankers

An article in American Banker about the JP Morgan Chase/WaMu deal quoted one consultant as saying:

“JPMorgan must be salivating at the opportunity to cross-sell products to Wamu’s customers to really deepen the relationships.”

My take: The consultant may be right about his assessment of JPMC’s reaction to the deal — and if he is, then the firm is seriously deluding itself. On the other hand, my bet is that the folks at JPMC are hardly describing their reaction in term of salivating.

First of all, the reality is that JPMC has been selling to WaMu customers for years. Every large financial institution spends a good deal of money building and using prospect databases to drive their acquisition marketing activities.

How will JPMC’s offers change as a result of having access to WaMu’s customer databases? In the short-term, nothing. And in the medium term, maybe nothing. The scope, scale, and cost of integrating the firms’ customer databases is huge, and will take years to accomplish.

Second, the “cross-sell opportunity” is the Pavlovian reaction that every acquiring bank has given when describing its rationale for merging with another institution. But take a moment to think about the deals that have occurred and which ones have delivered on this cross-sell promise.

Done thinking? How many did you come up with? None? What a coincidence! That’s how many I came up with.

Third, the current situation will actually exacerbate JPMC’s — and other large banks’ — ability to consolidate accounts.

One of the most prevalent reasons why consumers don’t consolidate accounts, and do business with just one bank, is that they “don’t want all their eggs in one basket.” I’ve wondered whether this sentiment will be prevalent among Gen Yers, and if the feeling would change among older consumers. The current financial crisis convinces me that the “eggs in one basket” reason for not consolidating will become even more prevalent over the next few years.

Given the failures of some this country’s largest banks, few consumers can really feel comfortable that any one bank — regardless of whether or not it has “too big to fail” status — is a good place to have all of their accounts.

More importantly though, this is really the time for banks (and credit unions) to really evaluate what it means to have a “customer relationship” in the financial services world. Towards the bottom of the list of things that Citibank and JP Morgan Chase should be doing with Wachovia and WaMu customers is “cross-selling” them.

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Discrimination In P2P Lending?

A couple of economics professors have published a fascinating report, that raises a lot of questions about P2P lending.

The authors analyzed all loan applications listed during a one-year period on Prosper.com. They found that listings submitted with a picture of a African-American person — or no picture at all — were significantly less likely to get funded than listings from whites with similar financial information. If funded, African-Americans were subject to a slightly higher rate.

They also discovered some discrimination against older borrowers, overweight borrowers, and borrowers that they considered to be unattractive. They did find, however, that lenders discriminated in favor of members of the military and women (especially single women).

What complicates this picture, though, is that the site’s black borrowers were more likely to default (by 36%) than the white borrowers with similar financial information. In addition, members of the military were 49% more likely than non-military borrowers to default.

My take: I’ve commented before on what I consider to be the disingenuous marketing of P2P lending sites. Prosper’s claim that it was “created to make consumer lending more financially and socially rewarding for everyone” isn’t exactly supported by the professors’ findings.

Beyond this, though, the study raises legal issues (I think — I might be wrong here. I’m not sure what the legal requirements are regarding Prosper and other P2P sites). Banks are prevented from redlining — should P2P lenders be prohibited from discriminating, as well? And if there truly is discrimination happening, what is (or should be) Prosper.com’s role in identifying it or preventing it?

Seems to me that Prosper (and possibly other P2P lending sites) runs the risk of becoming just a way for the affluent to lend to the affluent. According to the study, while borrowers with a credit grade of at least 640 accounted for just 17% all listings, they comprised 46% of all funded listings. Is this really all that different from traditional banks?

I remain somewhat skeptical that P2P sites are going to make a big dent in the banks’ lending businesses, and even more skeptical of the sites’ claims to be providing a social service.

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Where Are You On The S-Curve (And Which Curve Are You On)?

Thanks, as always, to Bankwatch, for finding this from Doc Searls:

Amazon and other excellent online retailers have improved the online shopping experience as far as a retailer can. Yes, there is always room for improvement, but there is only so much improvement you can carry out only on the sell side, even if you’re equipping buyers to do a better and better job. At a certain point the improvements need to happen on the buy side. You need better buyers, not just better sellers.

My take: I don’t know if online retailers have improved the online shopping experience as far as they can or not. But there’s an underlying message buried in the comment above, regarding the evolution of technological development and implementation.

Years ago, I worked for a consulting firm called Nlolan, Norton. One of the founders, Dick Nolan, had formulated a theory of the stages by which information technology is leveraged by organizations. His theory (see the diagram below) was that the rate at which technology was deployed could be depicted by a series of S-curves. The time periods between the s-curves were periods of discontinuity — first, technological discontinuity, and then organizational discontinuity.

Nolan formulated his Stages Theory more than 30 years ago, and it still holds up today. Amazon (and perhaps other online retailers) may very well be in that stage of organizational discontinuity — and that’s why Searls says “we need better buyers.”

A former colleague of mine asked me recently if I thought technology vendors were draggind down firms’ ability to implement new technologies. I said it was the other way around — vendors have developed new technologies that are ahead of firms’ ability to implement them.

Another beauty of Nolan’s Stages Theory is that an industry can be characterized as being somewhere along the S-curves, a single organization can be plotted on the curves, and even a line of business within a company can be positoned on the graph.

I tried to put Searls’ comment in the context of the banking industry: Has retail banking (and online banking, more narrowly) improved as far as it can?

No way. My guess is that it’s somewhere in the middle of the middle curve. Many banks have clearly improved their online presence and capabilities beyond their initial efforts of 5 and 10 years ago. But they would be deluding themselves into thinking their sites are good as they can get from a technology perspective.

But from a broader perspective — an organizational perspective — few financial firms have confronted the organizational discontinuity that is caused as they transition from the middle to third curves.

The credit crisis is certainly causing some financial firms to rethink their business. But from what I can tell, most are reverting to [old-way-of-thinking] cost cutting measures, rather than the fundamental, gut-wrenching, strategic change that comes from technology development.

Despite all the attention that social media is getting within the financial services industry, I can’t think of a single firm that has truly confronted — let alone navigated through — the period of organizational discontinuity.

I do think, though, that some (if not many) will get there. And it won’t be pretty.

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Banks, Social Media, And Seinfeld

William Azaroff recently blogged about Vancity’s new Wilki. According to William:

I am pleased to announce the new wiki Vancity has launched. It is for the Microfinance community in Canada, and lives at microfinance.ca. Why did we launch a wiki? Well, in short, we are a longtime Microfinance practitioner wanting to expand knowledge amongst those who are involved with Microfinance in Canada. [W]e are deeply involved with the Microfinance model in Canada, and wanted to create a place where we could take the open source concept a little further. So we created and are hosting a wiki where anyone can add information as a practitioner, researcher or follower of Microfinance in Canada, with the aim of growing and evolving a central knowledge repository about the subject.”

To know Vancity is to know a financial institution that is deeply committed to improving its community and to what it purports to stand for. As a result, I can’t think of another financial institution that is more…..authentic…..in its use of social media to support its goals.

Which makes me wonder about all the other financial institutions’ jumping on the social marketing bandwagon.

In an effort to connect with customers and prospects — especially younger ones, like Gen Yers — many banks and credit unions are starting blogs, putting up Facebook pages, running user-generated content campaigns, and launching other social media-related efforts. Will they succeed? Or better yet:

Will social media make them cool (or at least cooler), or do they have to be cool (like Vancity) before they launch social media efforts?

I suspect that many firms think it’s the former — that jumping into the social media and social marketing pool will make them — ipso facto — more attractive to the younger crowd. I also suspect that they’ll be proven wrong (at least to a certain extent). The lack of authenticity of their efforts will be so apparent to their intended audience.

Large, established banks getting into the social media games conjures up the image of Elaine Benes (from Seinfeld) dancing. I guess you’d call it dancing, but it’s certainly not good dancing.



And so it is with some financial institutions’ forays into social media. It seems so forced and unnatural. The critical question, though is this: Will it become more natural through trial and error over time, or should they stop what they’re doing and first establish a stronger commitment to serving younger consumers?

I don’t know the answer to that, but I suspect that the right answer is neither — that what they need to do is not let their social meda efforts be the only thing they do in order to reach and serve a new audience.

p.s. Congrats to Vancity and to Currency Marketing (who helped develop the Wiki) on the launch of the Wiki. Great work.

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Top 10 Bank Slogans You’ll Never Hear

Hearing about how one Missouri bank changed it’s name to Tightwad Bank (named after the town of Tightwad, MO), got me thinking about other banks that should change their name to reflect the towns they’re located in.

Below are the top 10 bank names and slogans that — I’m afraid to say — you’ll probably not hear about:

10. Ding Dong Bank (TX): “Be a ding dong and bank with Ding Dong.”
9. Bank of Little Hope (TX): “If you want to get rich, there’s Little Hope for you.”
8. Uneedus (LA): “Uneedus. More than we need you.”
7. Whynot Bank (NC): “Why bank with us? Whynot.”
6. Stalker Bank (PA): “We watch your money like a hawk.”
5. Difficult Bank (TN): “The easiest bank to do business with.”
4. No Name Bank (CO): “We’re so good, we don’t need a name.”
3. Athol’s Bank (MA): “The bank for jerks with speech impediments.”
2. Bad Axe Bank (MI): “We’re one Bad Axe bank.”

And the number bank name and slogan that you’ll never hear about:

1. Bank of Mianus (CT): “[censored].”

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