insight vault - cornerstone advisors...redeem target gift cards with wallet.” what exactly is a...

INSIGHTVAULTfor Retail Banking

Q4 2017

Tech Trends

News Not Noise

Research Nuggets

Performance

Ideas

What’s Going On

2© 2018 Cornerstone Advisors. All rights reserved.

Q4 2017

TABLE OF CONTENTS

INSIGHT VAULT

What’s Going On .................................................................... 3Bitcoin Fever Takes Over.................................................................................3

News Not Noise ...................................................................... 5Disrupting Payday Lending (and the Paycheck) ..................................................5PFM, Prepaid and P2P from MasterCard ............................................................6Experian Q3 2017 State of the Auto Market ......................................................7Target Launches Digital Wallet ........................................................................9PayPal Launches Gift Cards ........................................................................... 10Older Americans Are Getting Smart(phone)er ................................................. 12Barclays Tests Digital Receipts ...................................................................... 13Big Banks Cut Retailer Lending ..................................................................... 14

Technology Trends ................................................................ 15Platform Service Providers: A New Breed of Vendors ........................................ 15

Performance ........................................................................ 19Mortgage Productivity Benchmarks ................................................................ 20Branch Sales Benchmarks ............................................................................ 20Debunking Payment Processor Selection Myths ............................................... 21

Ideas ...................................................................................22A New Metric to Replace Net Promoter Score .................................................. 22

Research Nuggets ................................................................. 27Purchase Consideration by Generation ........................................................... 27The Most Trusted and Influential Advertising Media .......................................... 30The Click-and-Mortar Customer Journey ......................................................... 32Misalignment in the C-Suite .......................................................................... 35


WHAT’S GOING ON

Bitcoin Fever Takes OverCharles Schwab has 10.6 million active brokerage accounts—2.7 million fewer than Coinbase, the leading U.S. platform for buying and selling bitcoin, currently has. According to data compiled by Alistair Milne of the Altana Digital Currency Fund, Coinbase added roughly 300,000 users in the last week alone.

FIGURE 1: COINBASE AND SCHWAB ACTIVE ACCOUNTS

Source: CNBC

Bespoke Investment Group said:

“The idea that crypto-currency’s users are just a fringe part of the financial universe is not accurate.”

Crypto-currency investors may not be a fringe part of the financial universe, but we’re not sure about the people using them. Sorry, just kidding. The wide fluctuations in the valuation of bitcoin this week brought bitcoin to the mainstream media’s attention, and begs the question what banks and credit unions should be doing about it.


Cornerstone’s view of the recent hype contains a bit of skepticism. Cornerstone Partner Steve Williams believes that:

“This is a near-term greater fool commodity bubble that is foreshadowing a real long-term trend. I think the value trajectory may look something like the NASDAQ over the past 20 years. The NASDAQ got over their skis at 4000 in the year 2000, but came back to realize a deserved 4000+ 15 years later.”

According to Cornerstone’s CEO, Scott Sommer:

“People use/trust the dollar because it is essentially underwritten by the full faith and credit of the U.S. There is a country with institutions literally standing there backing the currency. What if a herd mentality affects bitcoin holders and the general sentiment is that it is worthless? There is nothing standing behind the cryptocurrency, is there?”

Cornerstone Senior Director Joel Pruis weighed into the conversation with this:

“For banks and credit unions, the focus should be on cryptocurrency payment volume—not investment volume. That’s where the threat is here. It may not be a very big threat right now—and may never be—but it should be monitored. If the number of transactions done as a payment for goods and services starts to increase, we have an alternate “clearing house” that totally bypasses banks and credit unions. Venmo and Zelle provide alternate payment methods but they are still dollar-based and predominantly rely on the individuals or entities first having dollars in a bank or CU account. Once you convert the dollars to crypto currency, the banks are totally out of the picture.”

The level of investment activity does present a couple of questions for banks and credit unions to address, however:

Should they be providing their customers/members the capabilities to trade bitcoin?

Should they provide some sort of education around this? As Senior Director Sam Kilmer put it: “There’s a financial wellness angle here, even for the educated classes who seem to treat assets like sport. There’s too much confusion between investing or entrepreneurship and speculation.”

We can’t help but wonder, though, if banks and credit unions could start using branch tellers to do bitcoin mining in between branch visitors. Just kidding.

Ron ShevlinDirector of ResearchCornerstone Advisors


NEWS NOT NOISESOWHAT

Disrupting Payday Lending (and the Paycheck)Walmart announced that it is partnering with two fintech startups—Even Responsible Finance and PayActiv—to let U.S. workers get part of their salary paid before payday. Employees at the retailer will be able to get up to eight drawdowns (called Instapays—get it?) on their salary ahead of the scheduled payouts. The first eight drawdowns are free to the employees, and then in subsequent use, fees are levied across a personal finance app available through Even. The app links Walmart’s payroll system to the individual’s prepaid cards or bank accounts.

According to PYMNTS.com:

"Walmart said that the overarching theme is to promote financial well-being, ostensibly helping workers avoid cash crunches."

What Walmart didn’t say is that this is a way for it to make money on the money it has to payout to its employees. Seriously, though, this really is a benefit to Walmart employees, and a sign of how payday lending (and the paycheck itself) can and will be disrupted.deeper discussion of this changed behavior).

Why do we get paid just once or twice a month? Because before the digital age, it was too expensive to pay us every day. Now that we’re in the digital age, why don’t we get paid every day? Because our employers need that money to pay all the other suppliers they owe money to.

Now there’s a happy medium.

Fundamentally, PayActiv enables an employer’s employees to get a payday loan—from the employer, and for a fixed fee (not a usurious interest rate), which the employer can have waived (as Walmart is doing).

Community banks and credit unions should look into what the startup has to offer—first, for their own employees, and second, as something they can introduce to their commercial clients.


SOWHAT

When we spoke to PayActive a year ago, it was live with one credit union, under way with a pilot with a credit union service organization, and in discussions with about a dozen banks.

There’s huge potential here for PayActiv to disrupt payday lending and the paycheck process itself. While that promises big benefits to employees and even to employers (higher employee retention and attendance), there is, ironically, a slight downside for financial institutions: As accrued salaries are siphoned off from the paycheck itself, fewer deposits are going into FIs thru the payroll process—yet another example of deposit displacement.

PFM, Prepaid and P2P from MasterCardMasterCard announced a new service called Assemble, which it calls:

“A prepaid innovation hub that issuers and partners will offer to customers with holistic money management capabilities including checking balances, budgeting, setting savings goals and making near-real time payments to almost anyone in the U.S. with a valid debit card via a P2P service powered by MasterCard Send. Issuers and partners can choose to deploy a white-label version of the solution or to integrate specific functions into their current user interfaces through APIs.”

The first product available from Assemble will be specifically targeted to Millennials and will offer a digital prepaid account, a mobile app and a payment card (virtual or physical).

In other news, Barack Obama and John McCain are shaping up to be the front-runners in next year’s presidential election. Oh wait—that was 10 years ago. Which is when this (confusing) announcement from MasterCard should have come out.

As Cornerstone Partner Steve Williams put it: “10 years too late, but also over-engineered for today’s ADD consumer.”

There are three things going on in this announcement—PFM, prepaid, and P2P—and all three of them are way too late to the game:


• PFM. If there’s anything the last 10 years should have taught us, it’s that the majority of consumers just don’t care about budgeting and goal setting. Even the leading PFM providers like Geezeo and MX know this. Real-time, contextual feedback and advice is what’s valued by a growing segment of consumers.

• Prepaid. The idea of a prepaid card as a “starter” account for young consumers has come and gone. According to the Fed’s payments study, “The number of non-prepaid debit card payments grew 12.4 billion with a value of $0.42 trillion from 2012 to 2015.” In contrast, annual growth in prepaid debit card payments dropped to 2.3% between 2012 and 2015. WalletHub recently reported that credit card debt is expected to reach $1 trillion by the end of 2017. Who’s driving that debt up? Millennials with credit cards.

• P2P. What the world needs now, is love sweet love—not another P2P service. We don’t believe that the P2P space is a winner-take-all game. But with the introduction—and supposedly growing momentum—of Zelle, a “near real-time” proposition is not likely to cut it in the crowded P2P space.

Bottom line: MasterCard’s “holistic” money management offering has some... uh... holes in it.

Experian Q3 2017 State of the Auto MarketAccording to Experian’s Q3 report on the state of the auto market, lenders have started to pull back on sub-prime originations and have increased lending to prime borrowers. Findings included:

• Portfolio balances reached record levels, with credit unions leading the charge, turning in a 15% increase year-over-year.

• Leasing remains strong, accounting for 29% of the market (record off-lease returns still expected for 2018).

• Loan terms continue to extend, positive growth in 61-72 months range for new autos.

• A slight increase in loans 60+ days past due. Sub-prime delinquency is still around 4.5% for banks and CUs.


SOWHAT

FIGURE 2: AUTOMOTIVE LOAN BALANCES

Source: Experian

Experian painted this as a sign of strength in the market, but we think lenders know what’s coming and are trying to reel things in a bit. One credit union told us that it was winding back on indirect, but was scared to move away from the market because it’s become so reliant on it. Banks and credit unions are using the tools and data available to them to keep their finger on the pulse of the market and make adjustments when needed.

Lenders should still keep an eye on delinquencies and portfolio performance over next 12 to 18 months. As underwriting standards tighten and yields shrink, FIs should take a strategic look at where the next area of opportunity exists.


SOWHAT

Target Launches Digital WalletPYMNTS.com reported that:

“Target announced the launch of a digital wallet in the Target app. Using the Wallet feature in Target’s mobile app, customers can pay using their Target REDcard and save money with Cartwheel with a scan of their mobile device at checkout. The goal is to make checkout quicker, and to offer convenient digital savings by including Cartwheel offers and weekly ad coupons, along with the 5% REDcard discount. Coming soon, Target said guests will also be able to store and redeem Target gift cards with Wallet.”

What exactly is a digital (or mobile wallet)? At a recent conference we attended, that question was put forth to attendees, prompting a robust discussion among a fairly tech- and payments-savvy group of individuals. There was no consensus.

Forget (for the moment) what industry insiders think. What’s the consumer perspective on mobile wallets? McKinsey surveyed consumers and found that consumers want to use:

• Mobile wallets to pay-with-points, get targeted deals and offers, and integrate their payments options. According to McKinsey, “A winning wallet should provide an enhanced shopping experience with seamless loyalty integration, offer redemption, and shopping tools.”

• One mobile wallet. McKinsey’s survey revealed that 62% of respondents don’t anticipate using multiple wallets.

Target’s digital wallet plans certainly fit in with the first of these two points. The second point presents the challenge: There’s no way that consumers will make a Target digital wallet their only digital wallet.

But is consumers’ predilection to not use multiple digital wallets realistic? I don’t think so. The problem is that consumers don’t know what a mobile wallet is and isn’t. And I don’t believe that consumers will even think of what Target is doing as a “mobile wallet.”

To consumers, they’ll think they’re using Target’s mobile app. That’s it. There are features and functionality associated with that app, some of which enable them to redeem rewards, see and track offers, and manage their gift cards.

Is that a mobile wallet? If you want to call it that, fine. But consumers won’t.


PayPal Launches Gift CardsPaymentWeek reported that PayPal Takes An Odd Step Into P2P Gift Cards. According to the article:

“The program allows users to log into a PayPal account, select the ‘Send Money’ option, fill in the necessary contact information, set the amount desired, click the gift box, and pick an eCard greeting to go along with it, complete with personalized message.”

The only odd thing here is that PaymentWeek would call this an “odd step.” It’s anything but odd. First of all, gifting is the most prevalent form of P2P payments, both in terms of dollar and transaction volume. Second, PayPal is sure to see some account growth from recipients opening accounts in order to claim their gifts (granted, how active these accounts will be remains to be seen).

But the beauty of this announcement is the merchant deal. PayPal is leveraging its position as a leading P2P payments provider to get into retail.

Cornerstone recently surveyed U.S. consumers and asked: “If PayPal offered a general use debit card that you could use at retailers and to pay bills, how likely would you be to use it?”

Among Young Millennials (21 to 29 years old), 36% would be very likely to use one from PayPal, and another nearly four in 10 said they’d be somewhat likely to use it. Thirty-something year old Millennials were even more interested—half said they would be very likely to use it (and might make it their primary payment card), with another third saying they would be somewhat likely to use it.

SOWHAT


FIGURE 3: CONSUMER INTEREST IN A PAYPAL DEBIT CARD

Source: Cornerstone Advisors Survey of 2,015 U.S. Consumers, Q3 2017


Older Americans Are Getting Smart(phone)erThe percentage of Americans between the ages of 55 and 75 who own a smartphone grew from 53% in 2015 to 67% in 2017.

FIGURE 4: SMARTPHONE PENETRATION

Source: Deloitte

SOWHATMobile banking adoption won’t be far off. In fact, we’d bet mobile banking is one of the first activities older consumers start doing when they get their smartphone, since it’s an activity they’re already familiar with. Expect a lot more support calls coming in—and requests for mobile banking assistance when these consumers come into the branch. And while you’re at it, could you make it easier for us—uh, we mean them—to read those little screens?


Barclays Tests Digital ReceiptsBarclays Bank (U.K.) is testing digital receipt technology with 10,000 of its customers. The bank’s partner, Flux, links transaction data captured by a merchant’s point-of-sale system, with information consumers usually see on their bank statements. According to Mobile Payments Today:

“If a bank customer turns on Flux’s capability within the mobile banking app, they can see a more itemized receipt of a purchase from a partner merchant. Flux also has a partnership with Barclaycard to provide merchants the ability to integrate the system with POS devices to issue digital receipts to any customer.”

This is the kind of innovation that demonstrates why mobile payment adoption is so slow. Who cares if you have to swipe a card or wave a smartphone in front of a device in order to pay for something. The smartphone approach simply isn’t that much more of a convenience than a card swipe. But having a digital receipt instead of all that paper? Now we’re talking real convenience.

SOWHAT


Big Banks Cut Retailer LendingThree of the largest U.S. banks cut back on retail lending in Q3 2017. JPMorgan trimmed its total exposure to consumer and retail companies by 3.6% in Q3 to $87 billion; Bank of America slashed its exposure to retailing by 7.7%; and Citigroup pared consumer, retail and health loans and commitments to 16% of its overall corporate portfolio.

According to Moody’s Investor Services, “Smaller, highly leveraged retailers are struggling to keep up, which is pushing defaults and downgrades higher.”

This news is no surprise as the retail industry has been hit by a drop in consumer spending, and is struggling with a more fundamental shift in consumer behavior, as consumers increasingly prefer digital shopping to physical shopping.

But the reduction in retail lending is not good news for the banking industry. According to Moody’s, the retail industry represents 58% of banks’ total equity base. As lending to retailers decreases, what will fill the gap? As successful retailers shift strategies from physical to digital distribution, their borrowing needs shift, as well, from construction-related borrowing to more operational-related borrowing.

Amazon, in the past year, has issued more than $1 billion in cash advances to merchants competing on the Amazon platform. The company is well-positioned to determine who the most attractive borrowers—and most attractive retail segments—are, and it can acquire borrowers with a near-zero cost of acquisition.

SOWHAT


TECHNOLOGY TRENDS

Platform Service Providers: A New Breed of VendorsIn 2016, I predicted that “the most significant trend of the year will be the ‘platformification’ of banking, where both existing banks and startups begin a strategic shift toward becoming banking platforms, much like how Amazon is a platform in retail.”

A platform is “a plug-and-play business model that allows multiple participants (producers and consumers) to connect to it, interact with each other, and create and exchange value.” There are three important components in that definition:

• Business model. First and foremost, a platform is a type of business model.

• Plug-and-play. A platform must enable participants to easily engage — and disengage (which partnerships typically don’t).

• Create/exchange value. One plus one has to equal more than two, or there’s no

need for the platform.

The Elements of a Successful Platform StrategyThere are three elements to a successful platform strategy:

• Magnet. Without the ability to attract a meaningful number of the “right” participants, a platform cannot succeed. Simply having a lot of producers and consumers is no guarantee of success. The platform must attract the right producers (those with the most desirable products and services) and the right consumers (those who the producers in the platform want to do business with).

• Matchmaker. A platform requires a mechanism for matching consumers to the right producers, and for enabling producers to reach the right consumers who come to the platform. At its most basic level, a search engine can be matchmaking mechanism.

• Toolkit. A toolkit enables producers and consumers to easily plug and play. This is why APIs are so critical to firms pursuing platform strategies. A number of big banks have taken steps toward building the toolkit—BBVA, Capital One and Citibank have all launched API markets, exchanges or developer hubs.


The Marketplace Lender TransformationAs lending marketplaces hit speed bumps in their evolution, a few have aggressively turned to a platform strategy, including:

• Kabbage. Re-branding itself as Kabbage Platform, the small business lending marketplace is opening its platform to financial institutions, offering processing capabilities, and promising access to non-traditional data sources for underwriting. The firm's toolkit includes integrating data from a variety of sources including Ebay, Etsy, Amazon and PayPal.

• LendKey. The company provides demand generation, decisioning, origination, servicing and liquidity management services to banks and credit unions. At a recent conference, LendKey CEO Vince Passione commented, “We’re not a fintech company.” I interpreted this as underscoring the firm’s commitment to providing services to financial institutions versus competing with them for lending opportunities.

• Akouba. On Akouba’s platform, banks retain control over lending decisions, the pricing, the credit policy, the loan dollars, and the customer experience. Akouba configures the underwriting for each institution based on its credit policy and guidelines. Akouba integrates with the big three core systems, and integrates data from Experian, Transunion, Paynet and LexisNexis.

What's different about their new strategies? In their original strategies, marketplaces sought to attract (i.e., become magnets for) borrowers and non-FI lenders. In their new strategies, the marketplaces aren't just expanding to attract FIs, but they're providing a wider range of services (through their toolkits) to offload underwriting and processing from the FIs' workloads.

In effect, these marketplaces are no longer competitors to banks and credit unions—they're partners and/or vendors. They're platform service providers.


The New Fintech Vendors: Platform Service ProvidersNew providers aren’t limited to lending marketplaces. Other examples include platforms for:

• Avoka. Avoka’s Exchange™ is a catalog of pre-integrated applications that integrates pre-built connectors for more than 30 services, including fraud detection, identity verification and digital signatures from companies like FIS, Mitek, Yodlee, Salesforce and eSignLive to enable account opening and onboarding.

• Constellation. Constellation’s Digital Services Platform gives credit unions the ability to create, provision and integrate digital banking services from various providers. Constellation recently received a patent for the provisioning of secure services via an application container model.

• Fidor Solutions. The Fidor solution provides FIs with two ways to utilize the firm's platform: 1) Choose a pre-integrated core banking system that performs general ledger functions to enable a core transformation, or 2) Plug it into the existing core banking infrastructure.

• FI.SPAN. FI.SPAN is a services management platform that allows banks to deploy new business banking products. The firm recently partnered with Beanworks to provide mid-market corporate business customers with vendor payment capabilities. FI.SPAN will pre-integrate third-party solutions into the Beanworks hub for a full suite of accessible banking services and will handle all payments processing through API connections.

• NICE Actimize. NICE Actimize recently announced Autonomous Financial Crime Management to aggregate AML, financial crime and other compliance solutions on a single platform.

• Sandbox Banking. Sandbox Banking is a software integration and deployment platform that has created an app store to integrate apps and tools from third-party providers for automated financial statement analysis for lending, FX and trade analysis, international money transfer and other services.

Platform services providers are creating platforms in which, unlike an Amazon where consumers are the primary buyers, financial services firms are the primary buyers.


The Platformification of BankingThe platformification of banking will evolve over the next 20 years. Platform service providers will emerge—and are emerging—to provide new distribution channels, new processing capabilities, and new sources of data to help create platforms in banking.

As search engines became the battlefield of the initial era of eCommerce, platforms will become the battlefield of the next era. What will be different for banks and credit unions this time around is that they won't just be selling their products and services on platforms, they'll be buying technology solutions and services from these platforms, as well.

FIGURE 5: PLATFORMS: THE NEW BANKING BATTLEFIELD

Source: Cornerstone Advisors

Similar to how the big three core vendors have grown through acquisition over the past 10 years to provide a full suite of banking applications across functions and channels, platform services providers will grow through acquisition, acquiring API providers and specialized fintech firms to fulfill a platform services vision.


PERFORMANCE

Mortgage Productivity BenchmarksCornerstone's 2017 Performance Report for Banks revealed challenges facing financial institutions regarding mortgage productivity, specifically for metrics like:

• Mortgage closings per origination FTE. Mortgage closings per origination FTE grew 17% between 2015 and 2017 to 2.08 closings, but is still way below the 2013 level of more than three closings per FTE per month. For 2017, even high performers at the 75th percentile are below the 2013 median.

• Originator compensation % of production volume. Originator compensation has risen from the traditional 50 basis points to 73 basis points. Our take: Banks aren't exploring new ways to originate at lower costs via direct channels, and the marketing function needs to be tied to the mortgage business in a more meaningful way.

• Mortgage apps per processing FTE. Banks at the 75th percentile process twice as many mortgage apps per processing FTE as banks at the 25th percentile. Banks at all three levels of performance, however, are under-performing on this metric compared to 2015 levels.

TABLE A: MORTGAGE PRODUCTIVITY BENCHMARKS

Median 25th

Percentile 75th

Percentile

Monthly mortgage closings per origination FTE 2.08 1.65 2.69

Originator compensation % of production volume 0.73% 0.54% 0.91%

Mortgage applications per processing FTE 15 10 20

Source: 2017 Cornerstone Performance Report for Banks


Branch Sales BenchmarksCornerstone's 2017 Performance Report for Banks revealed challenges facing financial institutions regarding branch sales, specifically for metrics like:

• Deposits per branch. Compared to our last reporting period in 2015, deposits per branch rose by 6% to $56.7 million. Overall, the FDIC reported 12.1% growth in overall banking deposits over the same period. High performers at the 75th percentile attracted twice as many deposits per branch as banks at the 25th percentile.

• Monthly new checking accounts per branch. Despite the hype, even high-performing banks opened fewer than one checking account per branch per day. Banks at the 25th percentile opened half as many accounts per branch as the high performers did.

• Consumer loans closed per month per branch. At the median, consumer loans closed per branch per month dropped 23% between 2015 and 2017 and fell 14% for banks at the 75th percentile.

TABLE B: BRANCH SALES BENCHMARKS


Median

25th Percentile

75th Percentile

Deposits per branch ($ millions) $56.7 $47.9 $96.5

Monthly new checking accounts per branch 14 10 20

Consumer loans closed per branch per month 3.2 2.4 5.5


Debunking Payment Processor Selection MythsThree themes surface again and again among financial institutions regarding payment processor selections. These themes are entirely mythical, and we’d like to take this opportunity to bust these system selection myths.

Myth 1: “There is no strategic advantage in one processor over another.”This just isn’t true—the advantage is unique and specific to each financial institution based on its business needs. For example, if an FI's core processor is also a card processor, the institution should evaluate the card processing solution to learn what is available. If data analytics is a top priority, the institution should align itself with a vendor that has a very strong data strategy.

Myth 2: “Moving processors is a major effort.”With all the work that FIs did to introduce EMV—including cleaning up card databases and getting PINs off the mag stripe—a debit card conversion can be done with very little interruption to cardholders. A credit card conversion has a bit more complexity, but with appropriate processor support and planning, it isn’t an impossible undertaking. Fraud is the biggest disruptor in a conversion, but what used to take 180 days now takes just 30 to 45. Bottom line: The effort involved in a conversion should never be a reason to avoid exploring change.

Myth 3: “A lower price is reason enough to choose a new processor.”This may be the most important myth to bust. FIs often want to change processors to save money. We advise against that, because price is the easiest thing to negotiate with a card processor, provided the FI has both leverage and the data intelligence to get to a market price. If an institution is getting the desired service and functionality with its current vendor but wants to pay less, it should negotiate price with the vendor. If the vendor isn't meeting the FI's needs on product delivery, changing to a new processor for a better product with increased functionality will probably mean a higher price. Bottom line: FIs should always look to the market to learn the right price for desired service and functionality.

For more information on this topic, contact Brandi Gregory at [email protected].

mailto:bgregory%40crnrstone.com?subject=Payment%20Processor%20Selection%20Myths%20Query


IDEAS

A New Metric to Replace Net Promotor ScoreIn our Cornerstone Performance Report benchmark database, 34 of 98 banks and credit unions report that they use the Net Promoter Score metric to measure their marketing and relationship-building success. I've got a metric that these (as well as all) FIs should be using to replace NPS.

Why Replace the NPS?Before introducing that metric, why should the NPS be replaced? While there have plenty of reasons put forth over the past 10 years pointing out the weaknesses of the metric, the best reason is this: We live in a time when we can track behavior, which is an infinitely more reliable measure than intention.

I intended to lose weight and get in better shape this year. How about you? What good did that intention do? Maybe you can convince my boss that my intention to sell a billion dollars worth of research this year warrants a better bonus and raise than I'm going to get based on the actual amount of research I sold.

What good are your customers' and members' intentions to refer you to family and friends if they don't actually provide those referrals (and expand their relationships) with your organization?

Referral and Relationship Growth BehaviorIf behavior is preferable to intention, and referral and relationship expansion behavior is the desired activity, then why not measure that?

We did.

In a survey of 2,015 U.S. consumers ages 21 to 72 with a smartphone and a checking account, Cornerstone asked: 1) In the past 12 months, how many of your friends and family have you referred to your primary financial institution? and 2) From this list of financial products, which have you added with your primary FI in the past 12 months?

Roughly one in five consumers (21%) referred family/friends and added non-deposit products (i.e., grew their relationship) with their primary FI in 2017. Although FIs routinely report NPS scores in the 80s and 90s, we found that not even half (47%) of consumers provided a reference. In addition, three in 10 consumers grew their relationship with their primary FI by adding non-deposit products, with the vast majority of them also providing a referral. Overall, slightly less than half (44%) neither grew their relationship nor provided a referral.


TABLE C: REFERRAL AND PRODUCT GROWTH BEHAVIOR


We discovered differences in behaviors across the generations. Six in 10 millennials referred family/friends, in contrast to 44% of Gen Xers, and just a third of Baby Boomers. Nearly half of Old Millennials (those in their 30s) added non-deposit products, 10 percentage points higher than Young Millennials (in their 20s) and 20 percentage points higher than Gen Xers.

TABLE D: REFERRAL AND PRODUCT GROWTH BEHAVIOR BY GENERATION


The difference in behaviors by generation produces differences by type of financial institution. More than half of Millennials consider a megabank (Bank of America, Wells Fargo, JP Morgan Chase, and Citibank) to be their primary FI, in contrast to 44% of Gen Xers and just 36% of Baby Boomers.

Referred family/friends?

No Yes

Added non-deposit products? Yes 9% 21%

No 44% 26%

Young

Millennials (1988-1996)

Old Millennials (1980-1987)

Gen Xers (1964-1979)

Boomers (1945-1963)

Referred family/friends 59% 61% 44% 32%

Added non-deposit products 36% 46% 26% 20%


TABLE E: PRIMARY FI BY GENERATION


As a result, referral and relationship behavior for megabanks is higher than at other types of institution. Among customers of megabanks, 53% referred family/friends and 42% added non-deposit products. Credit unions were the second-best performers, with 43% of members referring, and 30% of members growing their relationships.

TABLE F: REFERRAL AND PRODUCT GROWTH BEHAVIOR BY TYPE OF PRIMARY FI


Which type of FI do you consider to be your primary FI?

Young

Millennials (1988-1996)

Old Millennials (1980-1987)

Gen Xers (1964-1979)

Boomers (1945-1963)

Megabank 54% 59% 44% 36%

Large regional bank 16% 18% 19% 19%

Community bank 7% 5% 13% 12%

Credit union 14% 12% 15% 21%

Other 10% 6% 10% 11%

Megabanks Regional

Banks Community

Banks Credit Unions

Referred family/friends 37% 31% 41% 48%

Added non-deposit products 16% 15% 8% 13%


The Referral Performance ScoreHow can FIs turn this data into a performance metric? By:

• Internally tracking referrals and product up-sell (i.e., relationship growth)

• Multiplying the percentages of consumers who referred and who added new products over some time period by 100, add the two numbers together, and then divide by two

• Segmenting customers/members by existing segmentation approaches (e.g., age, gender) and comparing the resulting Referral Performance Score across segments

• Analyzing trends in the Referral Performance Score over time to gauge strategic success

Based on research done by Aite Group in 2012, we were able to compare 2012 and 2017 Referral Performance Scores across types of FIs.

TABLE G: REFERRAL AND PRODUCT GROWTH BEHAVIOR BY TYPE OF PRIMARY FI

Source: Cornerstone Advisors Survey of 2,015 U.S. Consumers, Q3 2017, and Aite Group

Referred family/friends

Added non-deposit

products

Referral Performance

Score

2012 2017 2012 2017 2012 2017 % Change

Megabanks 37% 53% 16% 42% 26.5 47.5 79%

Regional banks 31% 39% 15% 25% 23.0 32.0 39%

Community banks 41% 43% 8% 18% 24.5 30.5 24%

Credit unions 48% 43% 13% 30% 30.5 36.5 20%


The changes over the five-year period show that all categories of FIs improved their scores—but none nearly as much as megabanks did. Megabanks saw an increase in referral activity from 37% of customers in 2012 to 53% in 2017. But the big growth—driven by their capturing a disproportionate share of the Millennial market—came from the increase in customers adding non-deposit products from 16% to 42%.

The resulting RPS for megabanks grew 79% from 26.5 in 2012 to 47.5 in 2017, catapulting this category of FIs to the top of list, displacing credit unions, whose RPS increased 20% to 36.5 in 2017, from the top spot.

SOWHATWould you pay your employees based on what they intended to do, instead of what they actually did, and actually accomplished? Of course not. Then why are you measuring your marketing results based on what a small percentage of your customers said they intend to do? FIs need a better metric than Net Promoter Score. The Referral Performance Score can be that metric over the next five years, as this trend toward deposit displacement accelerates.


RESEARCH NUGGETS

Purchase Consideration by GenerationCommunity banks and credit unions: You have some work to do. In a recent survey of 2,015 U.S. consumers between the ages of 21 and 72 with a bank account and a smartphone conducted by Cornerstone Advisors, respondents were asked:

“If you were looking for a new checking account, of the following FIs (or type of FI) which would you be most likely to choose from (select up to 3).”

Here are the results by generation:

TABLE H: FI PURCHASE CONSIDERATION BY GENERATION

Young Millennial

(1988-1996) Old Millennial (1980-1987)

Gen X (1964-1979)

Boomer (1945-1963)

Bank of America 43% 49% 32% 21%

Wells Fargo 35% 31% 26% 18%

A credit union 29% 31% 36% 46%

Capital One 26% 28% 29% 23%

JP Morgan Chase 23% 28% 23% 22%

Citibank 21% 28% 20% 17%

A community bank 16% 15% 26% 28%

A large regional bank 14% 13% 18% 20%

US Bank 13% 14% 11% 8%

USAA 12% 12% 11% 12%

A digital bank 7% 6% 9% 7%

I don’t know 6% 3% 4% 7%

None of the above 1% 1% 3% 6%



The results aren’t an apples-to-apples comparison, of course, because not all of the named banks do business nationally. But there are still some important findings here regarding:

• Bank of America. Nearly half of all thirty-somethings would consider Bank of America if they were in the market for a checking account—two and a half times the percentage of Boomers that would consider the bank if they were looking for one. Younger Millennials (in their 20s) aren’t too far behind, with 43% of them indicating they’d consider BofA.

• Wells Fargo. Despite the bank’s recent account opening scandal, more than a third of Young Millennials said they’d consider the bank for their next checking account. We don’t have a pre-scandal number to compare that to, but 35% seems pretty high to us.

• Credit unions. Roughly three in 10 Millennials (29% of those in their 20s, 31% of those in their 30s) will consider a credit union for their next checking account, but that’s far below the 46% of Boomers who are likely to consider a credit union. Boomers who aren’t very likely to be looking for a checking account in the first place, that is.

• Community banks. The credit union pattern is similar for community banks—a far fewer percentage of Millennials will consider a community bank for their next checking account than Boomers will. Only problem for community banks is that the percentage of Millennials indicating consideration of community banks is half of the percentage it is for credit unions.

• Digital banks. For all the talk of disruption in the industry, and how young people supposedly hate the banks, very few Millennials said they plan to consider a digital bank for their next checking account, and surprisingly, the percentage of Boomers intending to do so is just as high as it is for Millennials.

Here’s another view, the generational composition of consumers who would consider the FI, or type of FI:


TABLE I: GENERATION COMPOSITION OF FI PURCHASE CONSIDERATION

"If you were looking for a new checking account, of the following FIs (or type of FI), which would you be most likely to choose (select up to 3)?"

Bank of America (n=698)

Wells Fargo

(n=532)

Community Bank (n=441)

Credit Union

(n=730)

Digital Bank

(n=147)

Young Millennial (1988-1996) 19% 21% 11% 13% 15%

Old Millennial (1980-1987) 33% 27% 15% 20% 20%

Gen X (1964-1979) 32% 35% 41% 35% 42%

Boomer (1945-1963) 16% 17% 33% 33% 23%


Among all the respondents who would consider Bank of America, more than half (52%) are Millennials. Among those that would a consider a credit union, only a third are Millennials, and just about a quarter (26%) of those who would consider a community bank are Millennials.

SOWHATDespite the gains that credit unions have made over the past few years in reducing the average age of their member base, purchase consideration among Millennials for credit unions—and particularly for community banks—is far lower than it is for the megabanks.

We know plenty of folks within credit unions who will look at this data and conclude that “we (the CUs) need to do a better job of getting our story out there.” We guess they could look at it that way, but there is another way to look at it: Maybe many Millennials know the story, but just don’t care—they’d prefer the digital tools being offered by the megabanks.


An acquaintance of ours told us not long ago:

“My daughter is so left-wing, Bernie Sanders isn’t liberal enough for her. I mention that so as to say, if there was anybody who should be a credit union member, it’s her. But she’s not—she banks with a megabank. When I asked her why, she said: ‘best mobile tools, Dad.’”

The research isn’t good news for community banks, either. With so many doubling down on the commercial side of the business and looking to retail as simply a source of funds, low consideration numbers among Millennials suggest future trouble.

And for the business that credit unions and community banks do bring in among the Millennial community, there’s still deposit displacement to be concerned with.

The Most Trusted and Influential Advertising MediaThe 2017 Cornerstone Performance Report for Banks benchmarks are in, and while the percentage of marketing dollars flowing to digital channels (at the median) nearly doubled from the prior reporting period, many people will tell you the percentage is still way too low. “You’ve got to put your money where the people are!” they’ll say.

TABLE J: MARKETING SPEND BENCHMARKS

2017 2015 2015 to 2017

Median 25th Percen�le

75th Percen�le Median Median

% Change

Marke�ng expense as a % of assets 0.07% 0.05% 0.09% 0.07% 0%

% of marke�ng expense in offline and direct mail channels 45% 30% 52% 44% 2%

% of marke�ng expense in online channels 12% 5% 16% 7% 71%



SOWHATWe’ll tell you something different. Marketing dollars shouldn’t go to where people go, but to where the dollars will have the biggest impact. Recent research from Clutch will help challenge the pundits who say things like “consumers spend 68% of their time on social media, therefore firms should put 68% of their ad budgets into social media.”

Clutch asked consumers which advertising media’s ads they trusted and which ones influenced their purchase decisions. Despite the amount of time we all spend on social media these days, the results of the study don’t support putting a lot of your marketing dollars there.

FIGURE 6: MOST TRUSTED AND INFLUENTIAL ADVERTISING MEDIA

Source: Clutch

Roughly six in 10 consumers said they trusted TV ads. In contrast, only 41% of consumers said they trusted online ads, and just 38% trusted ads on social media.


The real test, though, is whether ads influence purchase decisions. For better or worse, we have to go with what consumers perceive, because actually measuring that is nearly (if not totally) impossible. On this criteria, TV still outperforms the other advertising media.

Interestingly, though, purchase influence of print isn’t much higher than the influence ratings of online and social media—both of which outperformed radio.

Bottom line: Don’t let any of these statistics influence how you allocate your marketing dollars. That has to come from a quantitative analysis of how to best achieve your strategic marketing objectives. However, these findings should influence your expectations on the performance of the dollars that go into various channels.

The Click-and-Mortar Customer JourneyForesee released consumer research showing consumers’ attitudes and behavior regarding banking channels. Here are some of the highlights, along with our analysis.

Finding: In response to the question, “If your bank’s online functionality was ideal, would you still want a branch?” Consumers were practically split down the middle—49% said yes, 51% said no.

Our take: Without a breakdown by age, it’s hard to draw firm conclusions about this. On one hand, if younger consumers were more likely than older ones to say “no,” then this doesn’t say much for the future of branches.

On the other hand, there is research out there that tries to show that younger consumers still want branches. If so, that would indicate that a surprisingly large percentage of older consumers (even Gen Xers) answered “no” to Foresee’s question.

The bottom line is this: Regardless of whatever the underlying generational differences, half of consumers saying they wouldn’t want a branch if online functionality was ideal is a huge number.


Finding: Roughly one in five consumers (19%) say they make weekly visits to a bank branch. Four in 10 say they visit monthly, and 62% said they’ve been to a branch in the past three months.

Our take: At first glance, we couldn’t believe our eyes—one in five consumers go to a branch every week? Then we realized that must include visits to the ATM. Does that really count as a branch visit?

Finding: Mobile apps score the highest in terms of customer experience, closely followed by the branch.

Our take: First off, only a minority of customers use a mobile app, so we’re getting a skewed picture here. More importantly, however, what’s the real difference between a score of 87 and 86 or 85? If the difference in ratings were 10 points or more, maybe we’d believe that one channel’s customer experience was really that much better than the rest.

Finding: All roads lead to the branch. Regardless of which channel an interaction starts in, a large percentage of them end up in the branch. At regional banks, 40% of interactions start in the branch, and nearly all of them (94%) end there. Of the 36% of transactions that start on the web, however, just 22% end in that channel—nearly three-quarters end up in the branch. Even two-thirds of contact center-initiated interactions end in the branch.

TABLE K: CHANNEL USE BY REGIONAL BANK CUSTOMERS

Regional Banks

Transaction ends in:

% of all transactions:

Transaction starts in: Branch Web Mobile Contact center

40% Branch 94% 3% 2% 1%

36% Web 73% 22% 4% 1%

18% Mobile 59% 7% 25% 9%

5% Contact center 67% 9% 10% 14%

Source: Foresee


The pattern isn’t very different at credit unions, although a higher percentage of digitally initiated interactions end in digital channels.

TABLE L: CHANNEL USE BY CREDIT UNION MEMBERS

Credit Unions

Transaction ends in:

% of all transactions:

Transaction starts in: Branch Web Mobile Contact center

35% Branch 91% 3% 3% 3%

37% Web 63% 31% 3% 3%

22% Mobile 58% 14% 26% 2%

6% Contact center 59% 8% 10% 23%

Source: Foresee

Our take: Considering that half of all consumers said they wouldn’t want a branch if online functionality was “ideal,” it’s clear—given the number of interactions that start in digital channels but end up in the branch—that online functionality isn’t ideal.

What troubles us about this is that, in Cornerstone’s annual What’s Going On in Banking study, we asked execs to rate the “future-readiness” of seven functional areas. The most future-ready area was digital banking, with 54% of bank execs and 61% of credit unions execs saying that their digital banking capabilities were “somewhat” or “very” future-ready.

The data from Foresee suggests that many of these execs should think twice about their assessments.


SOWHATForesee’s research demonstrates the pitfalls in asking consumers about channel use and preferences. Much of the research, it seems to us, has an agenda. It’s either trying to prove that branches are here to stay, or that branches are a thing of the past.

The true answer—and path—is different for every FI. Which consumers are you trying to attract? What do they value? What do you need to be good at?

Without answering those questions, you can’t effectively allocate investments across channels, nor can you answer the question about what role branches (and other channels) should have.

Misalignment in the C-SuiteRemember the Pushmi-pullyu from the 1967 movie Doctor Dolittle? With two heads on either side of its body, it found it hard to get anywhere as each head wanted to take the body in different directions.

The Pushmi-pullyu is a good analogy for what’s happening in many banks. According to a recent study by Bank Director, there are differences in opinions among senior bank executives regarding the impact of technology for:

• Cloud computing. If you thought the CIO would be the person in a bank most likely to think that cloud computing would have an impact on the institution, you’d be wrong. A higher percentage of both CEOs and other executives (e.g., COOs, CFOs and CMOs) said cloud computing will have an impact than CIOs did.

• Big data/analytics. Roughly nine in 10 “other” senior execs believe big data and analytics will impact their banks over the next five years, in contrast to just 56% of CEOs and half of chairmen/directors.

• APIs. Among CEOs, CIOs and directors, roughly four in 10 believe application programming interfaces (APIs) will have an impact on their institutions in the near future. That’s no where close to the seven in 10 other executives who think this technology will have an impact.

• AI. One of the most glaring differences in opinion relates to artificial intelligence (AI). More than half of CEOs believe this technology will impact their banks over the next five years. However just 10% of CIOs hold this opinion.


TABLE M: TECHNOLOGY IMPACT BY ROLE

Which technologies do you believe will impact your institution over the next five years?

CEO CIO Board Other Exec

Mobile 78% 81% 70% 91%

Cloud 83% 76% 50% 79%

Big data/analytics 56% 67% 50% 91%

Automation 78% 57% 52% 71%

APIs 39% 43% 41% 71%

AI 56% 10% 43% 41%

Biometrics 44% 38% 28% 44%

Blockchain 39% 38% 30% 29%

VR/AR 22% 14% 17% 12%

Source: Bank Director

In addition, there is little agreement among senior bank executives regarding the analytics budget. Roughly a third of CIOs believe that their bank has not designated any money for data management or analytics, in contrast to about one in 10 CEOs, and two in 10 other executives.

TABLE N: TECHNOLOGY IMPACT BY ROLE


Has your bank dedicated a sufficient portion of its tech budget to data management and analytics?

CEO CIO Other Exec

Data analytics does not represent a sufficient portion of the tech budget 61% 53% 67%

We have not designated any money for data management or analytics 11% 32% 21%

Data analytics represents a sufficient portion of our technology budget 28% 16% 12%


Overall, you’ve got to wonder who’s running the technology show at many banks, because senior executives there don’t seem to agree on it. Just 17% of CEOs think that IT leads the process (with minimal or no contribution from the lines of business), in contrast to nearly half (45%) of CIOs who think their department leads.

TABLE O: LINE OF BUSINESS CONTRIBUTION TO IT

Do the business lines at your bank contribute to and understand the technology budget, or does IT lead and drive the process?

CEO CIO Other Exec

Business lines contribute, and IT is a partner in the process 78% 55% 70%

IT leads the process, with minimal or no contribution from business lines 17% 45% 26%

Business lines lead the process, with minimal or no contribution from IT 6% -% 4%


What We Have Here is a Failure to CommunicateA contributing factor to these differences in viewpoints is a failure to communicate. Consider the following findings from the study:

• 28% of respondents believe the board has a sufficient level of expertise regarding technology. That percentage is higher among respondents from banks with more than $5 billion in assets (47%), but is in mid- to upper twenties for banks below $5 billion in assets.

• 47% of banks discuss technology at every board meeting. Considering the perceived lack of technology expertise among board members, wouldn’t you expect this percentage to be higher?

• 24% of banks focus on the evaluation of new technologies in board meetings. Just 41% discuss implementing innovative customer-facing technology. In contrast, 94% focus on cybersecurity. How is the board going to learn more about technologies and their potential impact if all they’re talking about is security?


• 21% of banks have a technology committee that regularly presents to the board. When asked who the board has brought in to educate itself about technology, the most frequentlymentioned source was internal IT staff. Yet, just 24% of banks have a team or lab focused on innovation, and only 38% have brought on key technology talent to transform the bank. It’s like the blind leading the blind.

Regarding the question about which technologies would impact the bank over the next five years (see Table M), the percentage of directors mentioning a technology was lower than the percentage of CEOs citing that technology for every technology except one. And that technology was APIs, which frankly, it’s hard to believe that bank directors would be that knowledgeable about.

Clearly there’s a failure to communicate in many bank board meetings.

Who Jumps First?Just 27% of banks see themselves as first-movers technology-wise, with 62% describing themselves as fast-followers. These bankers are falling prey to the fast-follower fallacy.

One of my favorite comments about a fast-follower strategy comes from JP Nicols:

“Banking leaders often describe their approach to innovation as being a fast follower. They’re half-right. Most of them are definitely followers, but there usually isn’t anything fast about their approach.” Nicols goes on to say that being a fast-follower “is a great strategy when well executed.”

I would argue two things:

1) There isn’t a single good example of a bank that has successfully executed a “fast-follower” strategy in the past 20 years; and

2) Even thinking about pursuing a “fast-follower” strategy is a stupid endeavor.

The first point is easy to defend. When it comes to digital technologies — online and mobile — the rate of adoption among banks and credit unions is so similar that no one can really claim to have consciously and deliberately pursued and executed a fast-follower strategy.


In addition, an overwhelming percentage of banks and credit unions that have deployed digital products and services (e.g., online/mobile banking, online bill pay, eStatements) have done so at the speed with which their vendors have offered those services. Or slower.

To further prove my point, can you name one financial institution that has achieved any sustainable gains in market share or profitability as a result of being the second bank to launch a particular technology? I didn’t think so.

The reality is most financial institutions are hard-pressed to execute on a fast-follower strategy. To do it, you would need:

• A team of people evaluating technological developments in the market, [accurately] assessing the rates of adoptions, and the potential economic impact;

• A team of people to rapidly deploy the technological innovations after a “go” decision was made; and

• An agile, rapid planning process that took in the inputs from the team in point #1 and made the quick decision to fund the team from point #2.

You don’t really think that describes your financial institution, do you?


ABOUT CORNERSTONE ADVISORSAFTER 15 YEARS IN THIS BUSINESS, Cornerstone Advisors knows the financial services industry inside and out. We know that when banks and credit unions improve their strategies, technologies and operations, improved financial performance naturally follows. We live by the philosophy that you can’t improve what you don’t measure. With laser-focus measurement, financial institutions can develop more meaningful business strategies, make smarter technology decisions, and strategically reengineer critical processes.

Our comprehensive advisory services include:

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Facilitation; Strategic Execution; Organizational Alignment

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Merger Contract Negotiations; Debit & Credit Card Contract Negotiations; Data & Voice Contract Negotiations

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Branch & Call Center Performance; Consumer, Commercial & Mortgage Lending; Revenue Generation

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Contact Center Transformation; ATM & ITM Deployment; Digital Banking Selection & Implementation

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https://www.gonzobanker.com

www.crnrstone.com Cornerstone Advisors @gonzobanker 480.423.2030

FOR MORE INFORMATION ON THIS REPORT, CONTACT:

Ron ShevlinDirector of ResearchCornerstone [email protected](480) 424-5849

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