Financial & Economic Blog

In the American Banker last week, there was an article called Web Simplicity Initiative Bearing Fruit for Wamu. As an example of Washington Mutual's (WaMu's) focus on simplicity, the article described changes that WaMu made to the online application for its free checking account-- cutting the process from 8 pages & 15 minutes to 3 steps & 6 minutes. And to eliminate the need for mailing forms to new customers, WaMu uses the first check as a signature card.

I really, really, really liked the this quote from Richard Blunck, a senior vice president and WaMu's director of e-commerce:

Simple, for us, is critical

My take: Simple is critical for just about every bank (along with just about every investment firm and every insurer). Many customer-facing processes are based on outdated requirements, overly complex business rules, old technology, and organizational silos that discourage innovation. The result: A complicated experience for customers.  That's why there's enormous opportunity for financial services firms to apply a principle that I call ultrasimplicity, which is one of the Five Distruptive Customer Experience Strategies that I've written about in previous posts. 

The bottom line: When it comes to financial services, simpler is almost always better.

The trio of private-equity firms buying Home Depot's wholesale supply unit decided to stay with the deal, but they could have walked away from the negotiations - for a modest fee.

By Matt

For me, the word innovation brings to mind things like the iPhone, velcro, biofuels and defibrillators. Banking and trading stocks does not rank too high on this list.

Financial services, as an industry, is traditional and competitive around a couple key metrics like transactional costs, assets under management and rates of retention. While the insurance channel may be an extreme example, aversion to risk is the general rule and taking chances on new products or new approaches to services is generally not part of the culture. There are some large companies initiating innovative new programs, like ING, Citizen's Bank of Canada and BofA, but they are largely the exception.

A recent Boston Consulting Group/BusinessWeek survey on innovation in the financial services industry underscored the disconnect:

• Only 53% of respondents in the financial services industry said innovation is a priority, compared with 67% from all other industries.

• Also, 48% of banking executives said failing to innovate is an industry weakness, compared with 40% for all other industries. The bankers cited not moving quickly enough to change as one specific weakness.
• However, about 25% said lack of management support is a "major obstacle" to developing products and services, compared with just 18% of respondents from all other industries.
• Only 41% of financial executives said they believe their organizations are as innovative as competitors, versus 51% from other industries.
• Among bankers, 45% of respondents said their industry's "risk-averse culture" cramps creativity, compared with 37% from other industries.

Some banks, though, are innovating by drawing inspiration from other industries. Umpqua Bank, based in the Northwest, looked to leading edge companies in the hospitality and retail industries including Nordstoms, Victoria's Secret and Ritz-Carlton and then revamped their branches to focus on customer lifestyle and experience. By breaking the rules in their industry (and getting branded as revolutionaries), Umpqua Bank grew from 6 to 120 branches in just 11 years.

So what role is technology playing in innovation in the financial services industry. Is technology relegated to security and cost cutting solutions, or is it being used to enhance customer expereince and deliver more personalized services to a greater number of people? Are banks looking at adopting social networking features or tapping into network effects that happen on the web or are they building walls to keep this sort of behavior outside of their business model? What do consumer's really want (convenience and personalized service probably aren't too far down on the list) and how can technology deliver this?

Let's looks at what's happening in the banking industry:

Banks are facing a highly competitive environment with the following key challenges:

1. Inverted yield curve leading to reduced profitability
2. Intense competition for loans and deposits
3. Specialized business focus, which limits additional sources of revenue
4. Increased competition from non-banks

Banks can increase revenue and market share by capitalizing on the following trends:

1. Leveraging websites to create non-interest income
   Banks are making websites more of a delivery channel for products, services and solutions, since it is the first touch point for potential customers and the most utilized place for present customers
2. Improving their Online Customer Experience
   The convenience and personalization of online interactions are accelerating the movement away from personal contacts, making customers' online experience not only a key aspect of any retention strategy, but also a fundamental factor for long-term survival
3. Enhance on-boarding programs to retain current customers and expand product mix
   Engage customers around financial literacy by consistently delivering valuable content and help them identify their financial priorities and aspirations. Communicate customer goals to bank staff who can then better serve them.

* Trends are drawn from recent articles of the American Bankers Association publication Bank Marketing.

So what out-of-the-box kind of thinking are banks doing to address their unique challenges? The answer appears to be not much, unless you count follow-ons like blogging or MySpace pages and even then it's very few who have actually implemented these. It may be that innovation in the financial services industry has to come from outside, since companies probably don't have the stomach to throw out an established and profitable revenue generator for an untested and risky concept, even though that idea could propel them ahead of their competition. This gets back to the issue of a culture of innovation that rewards risk takers, which I would argue that startups and visionary companies like Apple and Toyota are inherently better suited to address.

A recent article in the NY Times talked about how Marriot has partnered with boutique hotelier Ian Schrager. When asked about the partnership, Bill Marriot said “We’ve partnered with Ian because he is unique, and we don’t have anyone who can do what he does.” The financial services indsutry may find itself in the same predicament as Mr. Marriott. Innovation is happening in the industry, it's just not being driven by any of the established leaders. Instead companies like Prosper (peer to peer lending), Wesabe (community and personal finance) and Zecco (free stock trades + a community of active traders) are leading the pack. If these companies are any indication of the future, the value is in the network of members/customers. The big question for financial services companies is: will they allow themselves to let their customers interact and cede some level of control.

With a company's online presence increasingly becoming their real presence as a majority of Gen X and Gen Y bank online, can financial services companies afford to defer technological innovations that improve customer experience or reach a key market? According to reserach by Javelin Strategy, 20% of US consumers read blogs, rising to 34% for affluent, tech-savvy ones. However, less than 1% of all financial institutions have their own blogs ( however, the objectives of a company blog should be taken into account as this post points out).

Just one more reason why financial services companies won't be sharing top billing space with the Toyota Prius anytime soon.

You'd think it was 1999 all over again.

I was visited by a couple of friends this week from Maine.  John and Ben work for a technology company that provides full data center processing for financial institutions in the New England area.

 

The purpose of their visit was to talk shop, specifically to discuss best practices in regards to application development, project management lifecycles, IT security, and a project that my team implemented this year (in less than 90 days!) at one of the Springs finest Universities.

 

The result of their trip proved extremely valuable for both my guests and for my team.  The informational exchange and sharing of ideas was awesome!  I am fortunate to work an in industry that encourages and allows that sharing of ideas…this is not the case in most other like industries.

 

Observing others’ processes, hearing new ideas, and simply seeing how others apply practices to their workdays can spark new and fresh ideas.  I highly recommend networking with peers whenever the opportunity presents itself.

 

Investors are expected to hit hedge funds with a flood of redemption requests this fall, but those who try to withdraw their money may be in for an unpleasant surprise.

Once high-flying initial public offerings may be grounded as they become a tough sell amid market turmoil.

Mortgage companies have dominated the headlines lately, and the news has been uniformly bad, so it might be a bit of a surprise to some investors that the best performer in the S&P 500 the last month is a lender.

 

Sir Alexander Belloc-Brayne reflects on Providence's assault on the Nation's real estate and paper assets, and rumbles a palace coup.

Readers who feel the need to respond are invited to scroll to the bottom of the page and attack the Comments button.

July 2007

Now is the summer of our discontent… I shall spare you the full detail of my plaint other than to say that Lady Belloc-Brayne’s dream of a vacation in Venice has lost its singular appeal. They we I see it, we might as well remain at home and watch the waters rise and the financial markets fall. Strictly entre nous, I now repent my ridiculing of the clergy for detecting the anti-materialistic hand of the Almighty in last month’s Yorkshire floods – a revelation that rings truer with every seemingly co-ordinated attack on our real estate and paper assets. It’s a hard rain…

Word from the ONS is that as much as 60% of our national wealth lies in residential property, which suggests that the summer of 2007 may be a greater social leveller than anything yet devised by the Socialists. More alarmingly, a Joseph Rowntree Foundation study says that the “average” household is disappearing – a statistical anomaly discovered by project-leader Professor Danny Dorling, along with the revelation that rising wealth does not make us happier - a point contested by Nurse who notes that a pay rise would not necessarily make her any unhappier either.

Lady Belloc-Brayne is more sanguine about the state of the financial markets and is confident that the Federal Reserve chairman will live up to his claim that the United States is deflation-proof by virtue of his power to print money – a boast that earned him the nickname of “Weimar” Bernanke in 2002. Her Ladyship draws comfort from the hovering presence of the China Development Bank with its unique know-how that has kept the Shanghai Composite Index at record levels. I confess to some unease at the prospect of the Chinese Communist Party and its proxies taking positions along the commanding heights of our economy. While we may baulk at selling them the rope with which to hang us, the same cannot confidently be said for the shares in the Manila hemp factory if the hedge funds have any say in the matter.

I must say that I was quietly impressed by Mr Brown’s appropriation of the Queen’s Speech – clearly the first shoots of the promised constitutional reform. I can’t say that I was surprised by Her Majesty’s subsequent tantrum during the royal photographic shoot, which the BBC passed off as a tiff over a tiara rather than as a protest against a de facto de-coronation. Lady Belloc-Brayne has given me a copy of Tom Bower’s biography of Gordon Brown, Prime Minister. A bit quick on the draw is Mr Bower, though I could not resist skipping to the end in a vain search for the obituary. Her Ladyship says that Mr Brown has extended his political longevity indefinitely by conscripting key ideological opponents to his government. The way I see it, the strategy seems not so much to neutralise the Tories and LibDems but to bury all traces of his predecessor in an unmarked grave, not least by backtracking on 24-hour drinking, gambling, cannabis consumption and other hallmarks of the Blair legacy.

Her Ladyship laments the lacklustre form of David Cameron and questions his visit to a Conservative aid project in Rwanda when he might have been posing with flood victims in his Witney constituency. The way I see it, Mr Cameron is conducting an authentic dry run for the repair of “our broken society” and is learning from the real experts about survival without clean water, fuel, shelter and livelihood – skills that may be needed back home on present environmental trends. On the brighter side, word on the bush telegraph is that Tory aid workers are teaching Rwandan children to play cricket. That’s more like it! Give a Tutsi a fish and you have fed him for but a day. Give him a cricket bat, and he can fend off a Hutu for the rest of his days. Tough love!

Conventional wisdom is discounting a snap general election on considerations of the state of the ruling party’s finances. However, I hear that New Labour has entered into a money-spinning partnership deal with a leading law firm to sell discounted Home Inspection Packs to party members – the most likely explanation for the unexpected promotion of Yvette Cooper to the Cabinet. A woman of no ability is a blessing… as they say in China. Incidentally, I wonder whether anyone has considered tapping the China Development Bank for some petty cash in exchange for a share of our GDP, to replace the revenue stream that seems to be the sole casualty of the cash-for-honours investigation. Can’t think why the opposition parties have refrained from attacking the Crown Prosecution Service’s ruling that only the equivalent of a formal contract between donors and Downing Street would have been sufficient to mount a successful prosecution. Anyway, well spotted David Perry QC! Give that man a peerage.

Meanwhile, I am looking forward to publication of the unexpurgated European Reform Treaty, albeit in French only for now and rendered “unreadable” to all save born-again Europhiles. Word is that an official English translation will be distributed to MPs in August despite Parliament having risen for the summer. Frankly, I will not be drawn by EU President Juan Manuel Barroso’s depiction of the European Union as an “organisation of empire” – a phrase cynically calculated to resonate with British voters of my generation. Nor do I take at face value Europe Minister Jim Murphy’s denunciation of the case for a referendum as “frankly absurd”. The way I see it, Mr Brown is keeping a plebiscite in his pocket as a silver bullet for despatching the last surviving Conservative fox!

Glad to see some sanity returning to the retail financial services market with the dismissal of Tom Brennan’s High Court lawsuit over so-called “unfair” overdraft penalty charges. One naturally admires Mr Brennan’s principled rejection of NatWest’s £3,000 peace offering on the grounds that it was nothing more than a ruse to “force” money into his account. Can’t say that I would not have taken the bait myself. Well spotted, young Tom! You’ll make a fine lawyer! Incidentally, I was most encouraged to learn the details of the Economic Wellbeing element of the National Curriculum which will no doubt help youngsters to manage their debt by schooling them in the basics of raising mortgages, balancing credit cards, bouncing cheques and avoiding higher education like the plague.

Elsewhere on the regulatory front, word is that employees who have been wrongly advised (or bribed) to leave their final-salary pension schemes will no longer have recourse to the Financial Ombudsman Service. Apparently, the legal position is that an adviser engaged by the individual is accountable for his sins but not one hired by the boss to counsel staff en bloc. Well, that clears up another anomaly. Greatly encouraged, too, by the Young Review proposal to fund the Financial Assistance Scheme out of the £20bn “inherited estates” of our with-profits life assurance companies. Eternal thanks to AXA, by the way, for creating the precedent back in 2003 by persuading the Treasury to allow it to transfer two-thirds of its inherited estate to its shareholders. For some reason, the FSA has set its face against this worthy public-private partnership. I do hope that it is not now going to cut up rough over the Inland Revenue’s noble plan to seize assets without having to satisfy the courts that its tax assessments are accurate. After all, HMRC assures us that this measure will be used as a last resort – and that’s good enough for me!

By the way, congratulations to the public sector for breaking the £1tr pension liabilities barrier, which represents a £39,000 contribution per household towards the long-term security of our public servants. Who says that we don’t pay enough into pensions?

Must rush! Still time for a cigarette before Nurse clocks on for duty. I do declare that the workplace smoking ban has rekindled memories of my schooldays and the frisson of the illicit drag behind the bike sheds. Thar she blows….!

JP Rangaswami recently posted a series of interesting Musings on Facebook and Financial Services here, here, here, here, and here. Well worth the read - it is detailed, thoughtful, and thought provoking.

In his post from the airport today, he had the following table from the Financial Times and the following comments about it:

It listed a number of investment banks and showed the percentage of staff on FaceBook. The top five looked like this:

Goldmans 5510 employees or 19.7 per cent
Deutsche 7636 employees or 11.3 per cent
Lehmans 2951 employees or 10.4 per cent
UBS 8101 employees or 10.4 per cent
Morgan Stanley 5689 employees or 10.3 per cent.

My thanks to Financial News for the research.

It’s been a long nine months since I left investment banking, and much may have changed since then, it is a volatile industry. But when I left it, people like Goldmans were not known to employ large numbers of unintelligent time-wasters.

When one in five Goldman employees use FaceBook, it makes you sit up and think.

I accept the numbers may be flawed: they may include contractors, duplicate aliases with legitimate mail addresses, whatever.

Even if I discount the figures by 50 per cent, they remain formidable.

I haven’t the time to do the research now, but my gut feel is that the FaceBook usage league table looks remarkably similar to the M&A league tables.

Relationship before conversation before transaction.

Social Networking is not going away, and I don't see it as a bubble either.