Stories from the Vault: Real Insight from Real Bankers

In this year’s final installment of the BANKNXT exclusive series on innovation in banking, acclaimed financial technologist Bradley Leimer shares his thoughts on what the next wave of technology holds in store for banks in and beyond 2014.

This is the second installment of this interview.

Bradley Leimer, financial services industry technologist, consultant, and commentator, leads digital strategy for Northern California-based Mechanics Bank. His focus is on developing and integrating technology applications and partnerships geared toward improving the client experience and profitability of digital channels. He brings additional perspective from leading marketing and technology efforts within the bank and credit union industry and from a decade driving database marketing and analytic programs for more than 6,500 national, regional, and community bank clients. Bradley is a sought after adviser for startups entering the financial and payments space

“How you view the current environment likely correlates to your sense of urgency and overall disruption in the banking industry. While we may not all agree on the impact, the shift to digital will certainly have consequences. We’re moving toward an era of engagement banking – a marketing, sales and service model that deploys technology to achieve customer intimacy at scale.”

You’re recognized as a leading financial technologist – what are some of your over-arching goals in leveraging technology within financial services?

While people may associate me with fintech, I certainly tweet enough about it, I think I might be more of a social scientist or macro-economist at heart. I’ve always been very curious about consumer behavior and why people act the way they do. Especially why they buy what they buy, how they pay for goods and services, how the movement of goods reflect societal value, and what society gets in return for those exchanges. While there are certainly differences in delivery and scale across social and economic spectrums and geography, there are basic human needs that financial applications help fulfill. Whether that need is fulfilled by an existing bank today, or will be in the future is another story.

We shouldn’t be selling products and services; we’re facilitating daily human needs and enabling people’s dreams. My ultimate goal is to be part of making these functions more inclusive, to really improve the banking system as whole. I think the way we leverage technology in the future will have a lot to do with helping our industry move forward. I also think it’s critical that technologists, and everyone in banking really, strive to be perpetually curious and always working to understand how we can improve the lives of the people and businesses in our communities, to see the bigger picture of where dots are connecting a ways off into the distance. It’s a critical time for banks to review their place in society and in their communities, not just here in the U.S., but worldwide. The traditional banking model certainly has some cracks in it.

Is the difficulty banks have in embracing change one of their biggest obstacles in terms of innovating?

I think it’s about more than just embracing change. Our industry is overly fixated on regulation and risk. We’re too afraid to experiment. And at this point of history in financial services, FIs under twenty to fifty billion in assets don’t have the scale to screw around and not take additional risks to stand out. We start with ‘no’ as our default answer far too often. This mindset leads to a legacy of friction that disruptors are starting to exploit. Our model simply must adapt to changes more quickly. We must keep up with the simplicity, usability and transparency customers now demand. The disruptors see that the future of financial services will be won by removing traditional barriers and rapidly embracing the shift in consumer and business behavior. Things are moving incredibly fast.

Do you think that the digital channels could help community banks recreate that traditional ‘one-to-one relationship’ feeling that was previously the domain of small town bricks-and-mortar banks?

I think it’s incredibly valuable to have smaller, community based financial institutions as a natural economic hedge to promote financial inclusion and drive more equitable financial relationships with local businesses and consumers. I wrote a piece about this question earlier this year as part of American Banker’s Future Model of Banking series called “There Will Be Blood: The Era of Engagement Banking”. In this piece, I tried to make it perfectly clear: The rise of personalized digital financial and payment experiences are the likely death knell for community banking institutions. The next five to ten years is absolutely critical if you are a financial institution with under twenty to fifty billion in assets.

Decades ago financial relationships were much simpler. You put money in a local bank or credit union and you accessed your accounts in person or wrote checks. When credit and debit came along, you had cards linked to these accounts at that local bank and accessed cash through ATMs. We pushed people out of the branch and ‘Oops’, now they aren’t coming back (and branches aren’t convenient anyway, so why should they?). Now your financial life is much broader, your financial relationships have wider scope and are likely at seven or more institutions. With the rise of the app ecosystem, your financials decisions are becoming much more integrated with other decisions you make throughout the day. Decisions that are more likely driven by a national bank, credit card, or third party financial experience than anything else. While every industry is impacted by the rise of highly personalized digital experiences, it’s very hard for smaller banks to keep up without scale and agile development. Ask Blockbuster how they fared as Netflix and digital flipped the equation. The same will go for banking.

While there are an increasing number of digital opportunities to leverage financial decisions before, during, and after payment, which is becoming the crux of what many disruptors in financial services are targeting (the form and frequency of payment and the associated revenue of those decisions), there’s thankfully more to banking revenue than choosing a particular payment rail. In an industry where the top 150 banks control 81% of deposit relationships and 75% of lending relationships, scale is obviously critical. But there’s great revenue opportunity in niches if your technology can deliver, so even though I come across as pessimistic, I’m actually hopeful.

What should fintech companies be doing or focusing on to help banks achieve a more personalized banking model?

I’d love to blame legacy technology partners for every problem we’re facing, but I can’t. Consumers have changed, technology has changed, and financial experiences have changed. We’re the ones that haven’t changed enough in response. The conservative nature of financial institutions’ is stopping them from embracing real innovation. But still, technology is a critical factor, and the smaller the FI, the more reliant they are on external technology partners bringing new innovations to the table. From core banking to digital service delivery, especially as API driven strategies multiply, we’re seeing entirely new business models emerge for building financial applications and legacy fintech players, just like their banking clients, are having a hard time keeping up. What used to take a year of development can now take months; what took months now can take weeks. Application development is becoming cheaper and faster. The fintech partners we choose to do business with need to be more agile and able to differentiate solutions from big bank services. They need to help the FIs drive more digital revenue to create opportunities to better compete.

How do you compete with Chase, or Wells Fargo, or Bank of America? We need to stop the process of just copying their technology and offer differentiation of value through innovative products and services. This sometimes starts with some navel gazing; clearly defining the type of financial services firm you are trying to be and who you are trying to serve. That done, you can begin to focus on serving customer needs by choosing the right technology and service partners, or continue to build out your own teams, in order to be more responsive to the market and your customer. It’s not rocket science, but we often get this step wrong.

You’re an advocate for incorporating social media and networks into banking, would you say that ‘social’ or ‘mobile’ has been the biggest disruptor to date?

It’s the proverbial chicken and the egg question in a digital context. Both social and mobile have fundamentally changed how we communicate and interact with our customers forever. Social and mobile financial applications have combined to form this perfect storm that is fundamentally shifting the financial relationship back to the consumer and in many ways away from banks themselves.

Banks really missed the initial opportunity in social, which was to drive more personal service relationships with their customers across the channel of their choice, along with the transparency and intimacy that goes along with that. Remember, social isn’t just about networks, it’s about something much bigger than that; the change of expectation that has arisen because of social activity. The industry is coming around to
these larger changes and embracing more socialized, personalized services and customer interactions. There are many great examples, from USAA to Fidor to Simple, where social is a primary component of a scalable business model… unless you’re HSBC and don’t know who Brett King is, and you missed the post about closing his account in the Huffington Post. The key is using social to help people understand their own financial picture, let their data tell a personal story. Help them in context when they need you, and work toward developing a deeper customer relationship through both digital and personal means. It can be done and it is being done today.

Mobile is a bit different, I think we’re a bit more evolved there, but I shudder to think that most bank customers think mobile deposit is our most innovative service. We need to get much better at designing more engaging financial experiences through our mobile applications before someone else does, namely payment providers with deep retail partnerships. As it is, less than half of financial institutions have a mobile banking app. Long term, I see the continued rise of financial applications dominated by non-bank providers – maybe permanently. You can see what type of social and mobile technology inspires me a bit here.

The other question around these two topics that I’m interested in is if the rising expectation of immediacy and intimacy will ever really butt heads with demands for security and privacy. Consumers seem destined to share more and more personal information, but is that starting to shift with the rise of temporary messaging and images like SnapChat? With all the NSA news around data snooping, and a perpetual stream of compromised financial data, are consumers going to put the genie that is social and mobile back in the bottle and choose privacy and transparency? I’m not sure they will, and I think there are many opportunities for banks to lead in these areas.

What is your vision for the future of banking, taking into account the rapid advancements we’ve seen in just the last few years?

Technology is simply accelerating an existing shift in traditional relationships with our customers and this is having an impact on the banking industry’s historical sources of revenue. While we may not all agree on the impact, the shift to digital will certainly have consequences. The banking model is moving towards a truly contextual, customer-centric view. Shifts in consumer behavior demand less intrusive authentication, social connectivity and crowd sourcing, hyper-personalization of everything from offers to usability, as well as tailored assistance and support at critical moments. We are now face-to-face with an engaged customer base that expects a completely frictionless experience. As we move further into the realm of digital experiences, the next decade will be even more incredibly disruptive than what we saw in the recent economic downturn. As I’ve said before: There will be blood.

Delivering contextually aware financial services in beautifully crafted experiences is becoming a necessity to maintain relevance with digital natives. Over the next decade we’ll see: an incredible focus on customizing financial data and personalizing interfaces for varied consumer segments; a focus on simplified authentication using multiple forms of bio-metrics and contextual assessments, from proximity to login patterns; attention shifting to real-time money movement at low or no-cost; further integration of social media into both marketing and banking applications; leveraging and connecting offline and online behavior to disrupt the payment and procurement paradigm to serve up personalized insights – just think of how we could use SKU level data; offering service alternatives through proximity awareness such as actionable notifications that prompt users through their mobile device to move money or pay bills to avoid fees or to better manage their current account spending, continuous assessments of financial wellness that prompt the consumer to take a specific action after a transaction, as well as delivering daily or on-demand personalized information around the customer’s financial health and aggregated account status. I could go on, the possibilities are practically endless.

The reality is that banking is no longer something customers just do. It’s becoming an experience they will completely control. We are moving away from a banking relationship defined by the goal of being a customer’s primary financial institution to one where we focus on becoming their primary financial application. It’s no longer about wallet share. It’s about app-driven mindshare – being ready for the moment our customers reach into their pockets for their mobile device, or their glasses, or other form of wearable technology, and start thinking about their financial relationship choices – before, during and after a financial moment of truth.

The question really is, how is your bank or credit union going to survive the next decade?