The Freemium Alternative to "Feeing Up"

In the last few days numerous financial institutions have backpedaled on their plans to implement fees for debit card usage. The general consensus since then is that banks will find other ways to levy fees with varying levels of transparency. In my first fee-related article last week, I questioned whether we've done all we can as an industry to avoid “feeing up”. I was joking about potential new sources of fee-based revenue in my Bank Stanky Raises Fees follow-up, but was serious in the latter half of the article about some alternatives presented to alleviate the need for additional fees.

One of the options I suggested in the follow-up article was a freemium model for delivery channels.

There’s something to be said for the freemium model when it comes to web and mobile applications. You can pay up for premium features and avoid advertising, or you can get many of the benefits of the premium version with a free, ad-supported version. Maybe it’s time for sponsored Internet and Mobile banking for customers that might otherwise be subject to fees. If a bank’s determined a customer is unlikely to buy an additional product, why not use the screen real estate to promote a third party product that’s of likely interest to the customer and take in some advertising revenue?

Think about it. You might not want to pay full price for Angry Birds, but you value the product so you don’t find the ad in the upper right corner to be too offensive (now the popup videos are a different story, but you get the idea…)

Banks and credit unions are running propensity-to-buy models that are good enough to understand whether or not customers are likely to buy another product. If there’s not another bank product on the horizon in the near future for the customer, why not promote another non-bank product that’s relevant instead? For non-premium (think unprofitable or marginally profitable) customer segments, this additional revenue could offset the potential need for fees to make the customer relationship profitable. Premium customers wouldn’t see the non-bank offers, instead seeing the bank cross-sell or informational banners as they do today.

I see several benefits to this kind of approach:

• Customers understand why free websites and apps are ad-supported today, so this model is familar to them already (unlike, say, a $X/month debit card fee)
• Merchant reward offers are presented by some institutions today and experience indicates customers will respond to relevant offers
• Customers that would otherwise be subject to additional fees get the benefit of lower-cost banking services
• Customers may benefit from an offer of a relevant product or service (I said relevant and presented relatively unobtrusively)
• Banks get the benefit of additional income from advertisers

Am I off base in thinking this kind of model could be part of the answer?

Posted by Quintin Sykes on Nov 02, 2011 with tags Retail Delivery

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A Big Data Primer

I realized after my post on big data last week that I probably needed to take a step backwards and define “big data” in the first place. What are the characteristics of big data?

• At a minimum, it’s a big data problem when the size of the data itself is part of the problem (Mike Loukides' definition), with potentially petabytes or exabytes of data to process. Raw transaction data over a long enough period of time can scale to this size.
• Frequently, the structure of the data is part of the problem as well. Unstructured data processes require technologies different from the relational database technologies we've been accustomed to working with in the past. The number of data sources and potential need to infer relationships among them also can come into play. Sentiment analysis leverages unstructured social media commentary, for example.

Big data technology has the potential to help on the revenue and risk management fronts in two ways:

• Decreasing the time it takes to perform disk and compute-intensive processes handled by traditional database and analytic technologies, such as customer profitability calculations. In-memory processing is an example of big data technology that greatly reduces processing time, with speed improvements of up to 1,000x (yes, 1,000).
• Increasing the amount and variety of information that can be used in these processes. New big data technologies can leverage real-time data as well as unstructured data to improve processes such as fraud detection (combining real-time transaction and geolocation data to score transactions, for example) as well as cross-sell (combining transaction history, propensity-to-buy models, and geolocation data to present mobile offers, for example)

Big data can also help answer unstructured questions, such as exploring at patterns of customer behavior to determine why customers buy additional products or leave the institution. Account history coupled with raw delivery channel data (teller/FSR visits, call center calls, ATM calls) and customer contact data (email) can be analyzed for patterns to determine if sales behaviors or offers are working and can identify potential sources of dissatisfaction as well.

My article last week explored the use of transaction data to target web advertising and merchant rewards. Traditional relational database and analytic technologies can do this, but big data improves the targeting by increasing the sources of potential inputs to these models and decreasing the amount of time it takes to run them (think real-time vs. overnight batch). I will be digging deeper into the underlying technologies as well as real-world applications of big data in coming posts and look forward to sharing some success stories.

Posted by Quintin Sykes on Nov 01, 2011 with tags big data

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Zombie Technologies in Financial Services

With Zombie Fever in full swing, I was thinking about technologies in banks and credit unions we just can’t seem to kill. Five came to mind this afternoon:

• COBOL: Plenty of software used in financial services is still written in COBOL (and running on mainframes for that matter). The cool kids don’t want to learn COBOL these days, so it’s getting tougher to find talent to support these legacy applications.

• Internet Explorer 6 : Until recently, it seemed like there was always one vendor that’s holding financial services CIOs back from upgrading desktops to a later version of IE (and from Windows XP to Windows 7, for that matter)? Even my financial services blog with 8 readers still gets hits from IE6. What’s it going to take to kill this abomination?

• Voice Response Unit: Even in the age of Internet and mobile banking, it’s a rare financial institution that’s currently thinking about the day they can shut down the voice response unit. Nobody’s VRU call volumes are increasing, but volume isn’t dropping quickly enough in many places to make a case for retirement.

• DOS: You don’t see DOS a whole lot these days, but when you do it’s typically on the teller line where DOS-based teller applications are still alive and well (depending on your definition of “well”). With teller volume dropping, the upgrade to a web front-end isn’t easy for some to make a business case for, so DOS survives another year[1]…

• PBX: Here’s another telephony technology that’s tough to kill. Mass-conversion to voice-over-IP (VoIP) telephony for the sake of standardization is tough to justify when the PBX is still depreciating, working fine, and interoperating with other VoIP systems at the Bank. Once these things roll off of the books, all bets are off.

And don’t get me started on zombie payment technologies…

For fun, I checked to see if anyone else was posting about zombie technologies, and sure enough IT World had a piece last week. I definitely would have put fax machines on my list if I'd thought of it first. So what zombie technologies are surviving in your shop?

[1] PROTIP: A good way to reduce your life expectancy is to take a locally installed DOS-based app from an experienced teller and replace it with a web-based front-end with ANY NOTICEABLE LATENCY WHATEVER ;)

Posted by Quintin Sykes on Oct 31, 2011 with tags telephony

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Why Do I Still Have a Separate Savings Account?

I was thinking about the topic of multiple deposit accounts earlier in the week, and the Bank Simple demo that Fast Company posted yesterday prompted me to post.

Banks used to have a variety of reasons for offering separate savings products (I’ll include money market accounts in this bucket) including:

• Ability to offer higher rates in exchange for restrictions on withdrawals
• Lower deposit reserve requirements at the Fed
• No PFM or other equivalent functionality for customers to set aside money for savings goals
• Source of overdraft protection for customers

From the customer perspective, the separate savings account provided benefits including:

• Higher rates
• Ability to have money set aside to meet savings goals or cover emergencies and see that balance separately
• Source of funds for overdraft protection
• Ability to set aside money for the benefit of someone else (child’s savings account, for example)

The reserve requirements problem has largely been solved with automated deposit reclass functionality available in every core banking system I can think of. PFM tools are widely available. Having checking and savings combined in a single account would mitigate the need for overdraft protection.

So, unless there’s a legal reason customers would want money in a separate account (because the funds are actually a child’s, for example), why not just adjust the interest rate structure of checking accounts and put customers in a single transaction account? Customers can use the PFM tool to adjust money set aside for savings and see what’s left (which is the concept behind Bank Simple’s “safe to spend”). Some PFM tools allow multiple amounts to be set aside for different savings goals. Interest rate structures can be tiered with typical interest checking rates for lower balances and typical savings/money market rates in upper tiers.

Dealing with a single account where possible seems like a win for both the bank and the customer. I suppose the remaining hurdle is the historic differences in interest checking, savings, and money market rate tier structures and the fact that banks have enjoyed the spread on customers that don’t optimize their interest earned. Non-PFM users may have a hard time with the concept, too, but maybe there’s a way to get them to set aside the balance in online banking without them knowing they’re “using PFM” if they’re hesitant to do so.

Posted by Quintin Sykes on Oct 28, 2011 with tags delivery evolution

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