Ruminations: Durbin and Debit

Time for a blog with many questions and few answers. My natural perspective is that of a banker. Banks are created to act as trusted intermediaries of commerce, and I’m concerned when their ability to act on this charter changes. I want banks to win and to create products that satisfy the customer, build trust, and effectively serve in commerce.

Will Merchants loose sleep if debit goes away? Answer probably rests with what will take its place.

13 Aug 2010

Time for a blog with many questions and few answers. My natural perspective is that of a banker. Banks are created to act as trusted intermediaries of commerce, and I’m concerned when their ability to act on this charter changes. I want banks to win and to create products that satisfy the customer, build trust, and effectively serve in commerce.

A friend and I were discussing the impact of Durbin’s 2 tier debit structure (Excellent analysis by Mercator here) on the incentives for large banks to continue to issue debit. My perspective (as a banker) has been greatly altered from my time at 41st parameter working with the largest retailers in the world. I’ve developed a new view and a new appreciation for the pain felt by merchants. It would not be too extreme a statement to say that there is a deep hatred of the cards networks. The feeling is both visceral and reasoned. I remember when a senior executive from Wal*Mart came to Wachovia for a presentation and was asked what he thought were appropriate interchange rates for credit and debit. He said “0” dead pan.. then during the quiet of the audience, he said “actually we think we should be paid for accepting your cards” and emphasized that this was not a joke.  

Will Merchants loose sleep if debit goes away? Answer probably rests with what will take its place. The retail banks are very unorganized around payments. With few exceptions (Chase, WFC, USAA, ..) bank payment executives do not get the focus of their retail organizations.  In general, retail banks are challenged to relate payments to profitability (and hence the overall retail strategy). Debit was a clear exception to this challenge and a “killer product” for cash/check replacement.

The bank value proposition for debit was clear. However, what was the merchant value proposition? Certainly reduction in check fraud, funds availability… but at what costs? The federal reserve studied interchange rates in graph to the right. What exactly drove this step creep? How did it drive value? What were the economic forces that pushed back against it? What additional investments did Visa/MA make in their network?

Will banks develop a debit replacement? Clearly Durbin has reduced banks incentives to push debit (w/ assets over $10B). I project that the market is ripe for a merchant friendly payment method that is much different than the products available today. Instead of funding the card product on merchant interchange.. perhaps mobile advertising?

Can banks/cards regain the trust of merchants as intermediaries of retail commerce? Could the wholesale or merchant acquisition business which drives a new payment product (ie Amex Revolution Money)?

 Thoughts appreciated

CitiGold in NA – Kudos to Manuel

Manuel’s US CitiGold strategy is an excellent approach. Citi’s international retail franchise is a star globally: an affluent bank strategy with minimal branch footprint. Citi’s breadth of products and expertise was an original goal of the Sandy Weill’s supermarket. While loosing significant wealth talent and capability at the top end (with SSB’s $2.7 spin out), Citi still retains products and capabilities globally to serve the affluent segment in the US (just as it does internationally).

27 July 2010

Admittedly I’ve been critical of Citi’s recent NA efforts (Bank of the Future, Bundle, …), but I’m a big fan of Manuel and the new Citigold strategy described in the FT Article above. This blog is addressed to companies looking to partner w/ Citi (insight into the labyrinth), as it is one of the most complex organizations to understand globally. If it makes you feel any better, its hard for people inside the organization as well.

For you outsiders.. Banamex is not a poor stepsister to anyone in retail. As a proof point, in Citi’s most recent quarter (2Q10) LATAM alone provided 2x the earnings of Citi North America. The BOD (and most in Citi) consider Manuel to be a banker’s banker, and in Citi’s Banamex franchise excellence attracts excellence. Over the last 3 years retail strategy has been stunted by the churn of executives in its top ranks, the loss of Ajay Banga was a particularly hard blow. Manuel’s experience combined with that of the LATAM team (and BOD support) position him well to “turn around” Citi NA; an audacious goal that will enhance Manuel’s position as successor to Vikram.

Under Teri Dial, thousands of man hours were spent by every Citi retail (and card) executive planning for “bank of the future”. While customer servicing, touch screens and iPhone apps are important.. you first need to get the customer into the store and sold on your products (in person or remotely).  Bank of the Future was an effort that frustrated Citi’s cadre of excellent business leaders; an empty strategy that gave no near term focus to BAU.. nor a “profitability” for the “future” end state.

Citi’s international retail franchise is a star globally: an affluent bank strategy with minimal branch footprint. Citi’s breadth of products and expertise was an original goal of the Sandy Weill’s supermarket. While loosing significant wealth talent and capability at the top end (with SSB’s $2.7 spin out), Citi still retains products and capabilities globally to serve the affluent segment in the US (just as it does internationally).

Manuel’s US CitiGold strategy is an excellent approach.  Citi is already an affluent bank (as shown in 2006 Comscore data below), maintaining average balances twice that of their nearest competitor (my rule of thumb is that the average BAC customer has twice the products, and the average Citi customer has twice the balances).

Re: US CitiGold, the international team has long questioned why the US continued to push sand up hill in a mass market focus given its minimal branch footprint (#9 as stated in WSJ article above). A new affluent focus will drive marketing, product and most importantly sales.. Citi DOES have unique capability, internationally it also maintains a great brand, let’s see if it can dust itself off for a premium US debut.

This new affluent US focus will not be without challenges, from both existing banks and new start ups (like Bill Harris’ SafeCorp Financial).  However, Citi’s capabilities uniquely resonate with several high end demographics that are already customers of its other lines of business (CEOs, Investment bankers, hedge fund managers, expats/international executives, CFOs, …). Internationally CitiGold services normally started with clients of the institutional side and expanded to the expat community. My guess is that Citi’s decision management team would say that the ability to sell CitiGold in the US (absent these connections) is not well established. On the execution side we will probably see many more relationship managers (wealth lite) pop up in the branches that do exist, and focused marketing efforts outside of mass media. Affluent is about brand and service.. which does align with a few of the CitiForward initiatives.

On the innovation side the “Citi Forward” concept has been around the table for quite some time. Evolving over the last 4 years and piloting itself in Citi Australia.  This is all good stuff: integrated financial management tools, comparison and cross selling. However all of this servicing will not bring you customers if the products are not competitively priced, limited marketing and no sales team (discussed in my previous post – Citi/Bundle). Hope to see Manuel empower a strong US retail head with a focused strategy that will empower them to take the reins of all technology and innovation activity. Citi has fantastic technical capability, but the business needs to focus it (particularly after the bank of the future mess).

Random Thoughts

Banks that help educate customers stand a very good chance of building better relationships, and increasing wallet share. Today I’m left with an “apply” button on my brokerage tab for Wachovia, Citi, Chase, Wells.. the average customer doesn’t want to apply for an account until they understand how this “product” will serve them and gain insight into how BankX’s services compete.

7 June 2010

Rumor Mill

Paypal’s new virtual terminal may be just in time. Rumor is Visa is planning a slew of new product announcements in next month.. from NFC, to mobile coupons to bringing down the barriers of card acceptance. Perhaps this is the primary driver for the CYBS acquisition, there must have been a dependency given the multiple paid.

Thought for the day: What  is “banking innovation”?

How many times per day do you really want to check your bank balance? From how many different devices? Is comparing yourself to others innovation?

From my perspective a “killer” customer value proposition (in any market) is making “up market” premium services available to the masses. How would you like to be treated like a client of a private bank? Your bills are paid, your lawn is mowed and your dog is walked… You have a relationship with the banker, he is invited to your children’s wedding. He actually knows your name when you walk into the office or call him on the phone…. and he also consistently delivers superior market returns to your portfolio.

As a bank customer.. does your bank know who you are? your history with them? What your goals are? Is it any wonder that bank customers are rate driven? There is no relationship (or trust) in the average mass market portfolio of a large national bank. Why do customers select a bank today? (sorry for stale data)

Banks know that Customer Satisfaction strongly equates to profitability, and retention. Customer focused innovation starts with focusing on what your customers need… I’m surprised at the lack of effort here…. What would my top area be?  That’s easy.. financial education. Banks that help educate customers stand a very good chance of building better relationships, and increasing wallet share. Today I’m left with an “apply” button on my brokerage tab for Wachovia, Citi, Chase, Wells.. the average customer doesn’t want to apply for an account until they understand how this “product” will serve them and gain insight into how BankX’s services compete.

Who will take on financial education 301? I don’t really want banking to be “fun” (aka Virgin).. I want it to be serious and thoughtful.. US retail banking is just plain backward when it comes to innovative products (Foreign currency accounts, structured products, international equities, …). Perhaps there is a “catch 22” with our collective financial literacy.. or lack thereof.

Examples

The banks above have obviously invested time thinking about this, however my guess is that few current customers know about (or use) any of these services.

What would a private banker do for a new relationship? He would probably try to find out my risk tolerance and develop a plan to better manage cash (ex sweep account) and investments with consideration for taxes and personal plans. Why are banks outsourcing this to a CFP?  Of course the answer is that banks are product focused (as opposed to customer focused), there is great margin in that 0.25% CD that grandma buys.. also a great source of liquidity which drives Tier 1 capital and my bond rating (cost of capital).  All of this seems to point to great opportunities for small banks, particularly those that cater to affluent (Aquestabank and their 1.2% CD).

It seems that the ABA and OCC are frowning on deposit competition right now, a heavy price for consumers.. take a look at rates in the UK this week (http://www.moneysupermarket.com/savings/) . The incentives for the large banks is to act as a “late follower”… after all until balance run off occurs there is little incentive to change.. US branches (and their sales teams) continue to excel in generating margin.. with consumers poorly equipped to evaluate options.

Make no mistake, the consumer market will change..  Will banks that depend on customer illiteracy for success will have adapting? US banks are very fortunate that the average consumer is not a British replica… where  consumer “rate hopping” is at an extreme … perhaps Mint, bank rate, and money supermarket will get more traction and bring greater transparency..

Thoughts appreciated.

Customer Sat Survey Released

Change Sciences also released a new report this week ranking online banks by “online experience”, in this report Ally bank is ranked #1. The sites usability is just fantastic.. and sets a new bar for the big guys to follow.

18 Feb 2010

ACSI just published results of the customer satisfaction survey.  Wells/Wachovia is #1.. keeping them in the spot for last 5 years (job well done guys).

Wells Fargo has emerged from its acquisition of Wachovia stronger in terms of customer service, rising slightly by 1% to an ACSI score of 73, which is the top score among measured banks in 2009. Wells Fargo seems to have benefitted from Wachovia’s legacy of strong customer satisfaction; for many years, Wachovia was the industry leader. By contrast, JPMorgan Chase has not performed nearly as well following its acquisition of Washington Mutual. The subsequent reorganization has been slow, and many Washington Mutual branches were still not rebranded as of the fourth quarter of 2009. Customer satisfaction with the new, larger JPMorgan Chase dropped sharply by 7% to an ACSI score of 68. To some extent, the story is the same for Bank of America. Its acquisition of Merrill Lynch made it the world’s largest financial services company, but massive losses have led to layoffs and substantial cost-cutting. Bank of America’s ACSI score dropped even further than JPMorgan Chase, tumbling 8% to an industry low of 67.

In addition to ACSI’s overall customer satisfaction report (all bank services) Change Sciences also released a new report this week ranking online banks by “online experience”, in this report Ally bank is ranked #1. The sites usability is just fantastic.. and sets a new bar for the big guys to follow.  Ally (was GMAC) is based in Charlotte and run by the former BAC internet management team. They were able to take the best and brightest from both BAC and Wachovia and have assembled a “dream team” of designers that have taken their game to a new level..  Congrats guys!

Bloomberg: Citi and MSFT to compete w/ Mint.com

Citigroup, Microsoft Said to Plan Challenge to Intuit, Mint.com http://www.bloomberg.com/apps/news?pid=20601103&sid=ajESsHMx7eYU

Hmmm… I believe Brian found me from my Mint/Intuit note below. Hope I don’t come off as a radical. Citi must be successful.. US taxpayers are shareholders. Jeff is a great guy, and one of the most talented people I have ever worked with. I have no idea how Citi keeps hold of him. Perhaps it’s like joining the Army.

Citi/MSFT will obviously look to provide services to non customers and industry sources tell me that the account aggregation will be provided by Yodlee.  There is some amount of irony here, as Citi’s customer’s had access to Yodlee’s services until September 2005. During my time at Wachovia customers loved the Yodlee service, but we had to end it due to cost and risk issues. 

For Citi/MSFT a central challenge will be moving customers away from their bank to engage in activities such as budgeting and paying bills… and then transacting. (Remember Transpoint from MSFT…. it was close to the date when Gates said Banks were dinosaurs in 1994…) In the US, MSFT, Mint.com and INTU had trouble getting customers engaged seperate from their Banks. In the US, Mint had the fastest growth rate with a total of just over 400,000 customers. A figure not likely to strike fear in the heart of many banks, this combined with the Mint demographic seems to indicate that the customer base of “spenders” vs “savers” (hence the need for budgeting). This would seem to indicate a card focus for Citi.

Assuming a card focus, a short term need to generate revenue, offering customers a way to transact with Yodlee as a service provider.. I would see card based bill payment as a key service to be offered in this new Citi/MSFT venture. During my time at Wachovia we piloted the Yodlee biller direct service. The UI was fantastic… and that was 4 years ago. This service leveraged cards as the vehicle for bill payment through aggregation of the billers online payment interface. BAC also evaluated this service as a way to generate interchange revenue off of bill payment. 

Hence, I would assume that Citi’s business case for NewCo is based upon the following:

  1. Transacting. Both leveraging credit cards for a bill payment, and purchases. (interchange)
  2. Market customers based upon transactional data (marketing)
  3. Cross sell Citi products 

There are several organizational, brand issues and customer support isssues with Citi’s approach. Citi’s customer may get confused, is this a Citi service? How can Citi’s current card customers leverage it? How do they leverage it? For example, it is hard for me to remember the 3 separate log ins that I have today with Citi today: Card, banking, Obopay… now I need a forth? Who do I call when I have a problem?

Globally, the only success model for aggregation and comparison that I am aware of is Egg.com, which Citi acquired May 2007 for just over $1B.  If you sit down with Paul Gratton, Egg’s first CEO he will tell you that their success was driven by a complete focus on delivering value to the customer, both in product and online services. It is the coupling of product and service value that creates challenges for large companies to replicate, particularly with respect to cannibalization of existing products.

In the UK, customers select their bank savings account through leading comparison sites like www.moneysupermarket.com. In the US, customers select their bank based upon the proximity to their house. The business premise with Mint.com, Intuit and its competitors is that customers will start with budgeting, and then move to select financial products (no retention play as these are not necessarily Citi Customers) or transact. Egg was successful because is first started with the most competitive product, establishing trust, and then moved to deliver the best services to surround it.  

Fortunately for banks, customers prefer to go to their bank directly to perform financial services. This “Trust Pattern” is something banks should want to reinforce. WFC exemplifies the alternate approach within its online banking services, with integrated budgeting tools, which is a great service and provides solid customer retention. Banks hold enormous control over the success of any aggregator’s site. Yodlee possesses no contractual right to the data, and the collection of customer information by any third party can be managed. If Mint, lowermybills.com or Microsoft/Citi start to gain traction with mainstream profitable customers.. expect banks to start charging Yodlee for access to their customer data, or eliminate it outright.  

http://tomnoyes.wordpress.com/2009/09/15/intuit-mint/

Delivering Value

I was in Orlando 2 years ago at what use to be retail banking seminal event: BAI. It wasn’t what it use to be… One speaker stood far above the crowd, it was Michael Porter the preeminent strategist from Harvard. For those not familiar with Porter, his books include “Competitive Strategy” the reference book which defines the subject. I was fortunate to hear him speak at the large forum, and at the round table following. His words have stuck with me for 2 years: ‘The time that you (bankers) spend trying to figure out how to make your products sticky, and increase your switching costs, is that much more time a competitor is going to develop a model that delivers value to your customers’.

 

Banks don’t spend enough time thinking about how to deliver value. Let me give another example of a “value” bank that probably has one of the better reputations in the US: ING Direct. I was with Arkadi Kullman (CEO ING Direct) in Oct 2004, he said his “model” wasn’t for everyone (customers or competitors). From a customer perspective according to Arkadi ‘if you want a relationship then go somewhere else, ING’s goal is to deliver value with minimal interaction’. Following this comment he continued ‘if you (customer) call me more the 3 times a year, I will cancel your account’. This is obviously not a customer centered message. Even banks known for delivering value are more focused internally (low cost in ING’s example) then on the customer. I believe that most successful large banks actually started with a strong customer focus; after all how can any company be successful without making customers happy?

 

Perhaps customer expectations of financial service providers has gotten so low that the industry needs a face lift. As the former CEO of Egg said to me (Egg has the highest customer satisfaction in the UK) “we are the best of the rats.. customers hate banks”. Most customers in the US choose their primary bank based upon its proximity to their home.

 

Is there another way? What are the keys to a successful financial services relationship? Lets explore this over the next few days.