Bank technology spending

Banking on creative retailing

Fleet of Foot and Playing the Whole Field (November 2003, US Banker)
"The novelty of Occasio as Wamu expands its footprint across the U.S is good for a little buzz. But the retail strategy, of which Occasio is just a component—and one a few years old at that—is also doing something else. It's working·"

Perspective
Washington Mutual (WaMu) is shaking up the staid world of retail banking, leveraging advances in technology and unconventional marketing to yield high growth and improved customer service. In fact, WaMu wouldn't mind losing the "bank" label—preferring instead to be mentioned with mass retailers such as Wal-Mart.

Traditional marketing has focused on the trusted, secure image of banking, and challenging time-honored customer expectations seems somewhat risky. Yet Wa-Mu's new-look branches (called Occasio, a Latin noun for "favorable opportunity") and inventive, aggressive marketing have proved a winning combination. The novel retail strategy, incorporating aesthetic changes to branches such as removing teller windows and adding play areas for children and sponsorship of community events important to the middle class, has yielded positive customer feedback and growth in new accounts. WaMu is not the only bank applying innovative marketing techniques. ING Direct has opened some cafŽs to complement its on-line offering, and Commerce Bancorp features a mascot (a "big red C") in the lobby. Life-size letters aside, many of these practices are a welcome wake-up-call in an industry that is largely lacking in customer focus.

Of course it takes more than gimmicks to succeed in retail banking. Products and services must be tailored to customers' needs and delivered flawlessly. Both ING Direct and WaMu understand mortgages are a core product for their target customers. ING is continually investing in website improvements to keep costs low and proactively answer customers' questions. In addition, ING ensures their savings products carry a high rate of interest, given that the offerings are complementary to a customer's core banking accounts with other institutions. WaMu places significant emphasis on customer research and hiring and training employees that fit the mass market, retail image being conveyed. Both providers understand serving customers when and where they want is critical, resulting in the need for integrated information across branch/cafŽ, Internet, and phone channels.

Diversified banks that were eliminating branch investment (and the associated personal touch) are now revisiting the importance of retail banking within their portfolio. Notwithstanding WaMu's focus on a market largely left untargeted by major retail banks, with continued success, WaMu and other creative retailers may force other banks to embrace creativity. Corporate bankers on the other hand are not likely to turn to mascots and Nintendo, so marketing mechanisms will evolve differently across already siloed business units. As a whole, innovations that improve banks' customer focus should produce positive results, assuming consumers are willing to accept creativity where little previously existed.

Growth is in the (debit) cards

Both PIN and Signature Debit Get Strong Support from Consumers (January 7, 2004, American Bankers Association)
"Combined with new applications and new users, the market for debit payments will continue to expand at double-digit rates for the foreseeable future."

Perspective
A nationwide consumer payment preferences study conducted by the American Bankers Association and Dove Consulting indicates that "for the first time electronic payments have surpassed cash and checks as consumers' preferred payment method for in-store purchases". With the use of credit cards remaining relatively static, consumers' increasing use of debit cards has propelled electronic payments past more traditional methods. Cash and checks have been losing share for several years, and the trend is expected to continue. The only question is at what pace?

A key attribute of debit cards is increased convenience—a reduction in the need to carry cash, dual use as an ATM card, and the ability to withdraw additional cash during a retail purchase (cashback option with PIN debit only). A built-in upper limit on spending and rewards programs similar to those offered with credit cards are also sited as appealing to consumers and contributing to increased usage.

According to the study, consumers support both types of debit cards—signature and PIN. Dynamics in the debit market are driven not only by consumer preference, but also by legal decisions regarding rules established by the dominant payment network providers Visa and MasterCard. The recent ruling in favor of the government's case to eliminate the "honor all cards" rule gives retailers more choice in determining which forms of card payment to accept. Retailers currently pay lower fees (to network services providers and indirectly to card issuers) for PIN debit transactions than for signature debit, though fees may converge over time (potentially lessening strong marketing of signature debit by bank card issuers). Other advantages of PIN debit to retailers are lower fraud costs and the potential for the cashback option to draw consumers into the store. Increased competition among network providers coupled with retailers' current preference, set the stage for the continued growth of debit.

Transferring value online

Small Players Leapfrog Big in Transfer (January 8, 2004, American Banker)
"·money transfers initiated through a primary depository institution can be cheaper, faster, and easier for customers than options such as a PayPal transaction, an online bill payment, or a money order."

Perspective
Consumers' use of online methods to transfer money has been widely anticipated and much discussed. Person-to-person (P2P) payments and account-to-account (A2A) transfers that utilize e-mail technology are growing, though still a relatively small portion of overall value transfer.

PayPal is the most recognizable name in P2P payments. The system run by eBay has amassed 40 million customers in over 30 countries by focusing on a niche market, online auctions. For P2P payment, consumers set up a virtual account with the P2P service (such as PayPal or Yahoo! PayDirect), and fund the account by credit card or bank account. Most payments made through PayPal are actually consumers paying businesses, allowing PayPal to make money by charging merchants. Some banks offer true P2P services, enabling transfer of money from one individual to another via e-mail. These services are designed to improve customer retention and relationship building, rather than directly generating revenue.

A2A transfer services have been building momentum in the past few months, particularly among smaller banks as indicated in the above article. Celent (Boston-based financial services research firm) contends that "It is no longer a question of whether banks will offer A2A, but a question of how they will configure the capability". The argument follows that, unlike P2P, banks can recognize significant cost savings and revenue opportunities through A2A services. A2A offers an alternative to checks, regains share of a revenue stream that is being eroded as banks are bypassed by payment methods such as PayPal's, and positions the bank as the hub of a customer's financial transaction activity, thus promoting loyalty.

Using e-mail technology for online money transfer will reach it's full potential not by increased consumer acceptance alone, but as businesses and governments adopt this means of transferring value. An article from FinanceAsia.com indicates, "replace person with company and extend e-mail to mobile phone number, and nearly every payment situation can be catered to". As technology purse strings loosen, look for online value transfer to extend beyond the consumer's pc.