Business Strategy: Consumerization's Impact on Retail Banking

Business Strategy: Consumerization's Impact on Retail Banking IDC Financial Insights: Consumer Banking Strategies BUSINESS STRATEGY #FIN243117 Marc DeCastro Global Headquarters: 5 Speen Street Framingham, MA 01701 USA P.508.620.5533 F.508.988.6761 www.idc-fi.com IDC FINANCIAL INSIGHTS OPINION Today's consumer is more connected than ever. No matter where or when, access to information and services seems to be readily available. This has implications for everything, from "bring your own device" (BYOD) in the enterprise to "bring your own software" for the consumer. In addition, social media continues to play an important role in communicating and shaping consumers' opinions on the financial services industry. In fact, digital technologies, specifically mobile, Web, and social, are leading a transformation in how financial institutions need to interact with their prospects and customers. Therefore, in this report: We dive into the various components of the consumers' digital touch points with financial institutions and highlight where this trend is having the biggest impact. We explore the various technologies available and provide our taxonomy for defining "consumerization." We provide current satisfaction levels of the digital channels, with analysis on how demographics like age, income, and where someone banks impact their overall satisfaction levels. September 2013, IDC Financial Insights #FIN243117 IDC Financial Insights: Consumer Banking Strategies: Business Strategy

TABLE OF CONTENTS In This Study 1 Situation Overview 1 Transformation Is Happening... 1 Consumer and Financial Institution Touch Points... 2 The Approach 9 Future Outlook 9 Consumer Digital Channel Satisfaction Breakdown... 9 Essential Guidance 13 Actions to Consider... 13 Learn More 14 Related Research... 14 P #FIN243117 2013 IDC Financial Insights

LIST OF TABLES P 1 Discovery Touch Point Taxonomy... 4 2 Onboarding Touch Point Taxonomy... 5 3 Consumption Touch Point Taxonomy... 6 4 Customer Service Touch Point Taxonomy... 7 5 Advocacy Touch Point Taxonomy... 8 6 Peer Group Definitions... 9 2013 IDC Financial Insights #FIN243117

LIST OF FIGURES P 1 Consumer and Financial Institution Touch Points... 3 2 Digital Channel Satisfaction by Financial Institution... 10 3 Digital Channel Satisfaction by Age... 11 4 Digital Channel Satisfaction by U.S. Household Income... 13 #FIN243117 2013 IDC Financial Insights

IN THIS STUDY This report discusses the impact consumerization is having on retail banking and looks at current satisfaction levels for digital platforms offered today. The survey data is from the results of our U.S. Consumer Channel Preference Survey, which had quotas in place to best represent the U.S. age and household income distribution as per the 2010 U.S. Census. Note: All numbers in this study may not be exact due to rounding. SITUATION OVERVIEW This section defines the new digitized consumer's touch points with financial institutions and also provides our taxonomy for each area. Initially, however, we define this new environment. Transformation I s H appening The increase in and sophistication of digital technologies are highlighting the need for business model transformation in multiple industries including financial services. Leading this change is the ultimate consumer who is enabled by these digital technologies, especially mobile, to dictate when and how he/she will interact with the marketplace at large as well as specific organizations. This shift has profound implications for financial institutions in how they interact with customers, how employees deliver financial products and services and, ultimately, how IT needs to support both of these groups. The following highlight the impact of digital channels on each of these three areas. End-user transformation. The consumerization of IT is in full swing. The adoption of new technology is happening at an increasing rate, with the net result of mobile smart devices and apps touching most if not all commerce applications. In addition, end users today have higher expectations for the companies they choose to do business with, including bundled products, 24 x 7 cross-channel capability, consistent interactions, greater customization, and preference recognition. For organizations, these new expectations necessitate a redefining of numerous areas including customer centricity, customer service, and customer preferences. Ultimately, the challenge for companies is how to develop the products and services necessary to deliver value based on these new expectations. Therefore, companies need to think strategically about key areas of interaction impacted by digital technologies including their app strategy, OS environment, and cost-effective access management. In addition, companies need to determine the level of personalization and customization they will 2013 IDC Financial Insights #FIN243117 Page 1

deliver to their end users and how their overall strategy will affect the usability and design of as well as users' experience with digital applications. Enterprise transformation. Once organizations have decided how they will address the external end-user demands driven by mobile and other digital technologies, a key next step is to look inwardly at their ability to deliver. This includes a review of crucial departments such as operations, customer support, marketing, product management, and policy administration to make sure they are aligned to support the new digital end user. A critical component of this review is the ability of the employees themselves who must have the skills and tools to deliver quality and service to their customers. For example, in some departments, this might dictate the need to use smart mobile devices, either employee owned or supplied by the organization. This bring-yourown-device debate is currently taking place in most if not all financial institutions today and has a profound impact on how IT can and should support both current and future employees, especially at the pace at which digital technology is changing. IT transformation. The increasing number of access channels, mobile devices, and end-user/employee expectations presents particular challenges for IT. For companies to be successful today, IT can no longer dictate how end users and the enterprise interact but instead must understand the changing dynamics brought about by mobile and adjust accordingly. This takes true IT and business alignment, which starts with understanding the changing business issues brought about by mobile. Once IT has this knowledge and understands the value of supporting this model within the enterprise, it can review the organization's policies, tools, and technology decisions to differentiate the company in the marketplace. Key areas to review include security tools and policies, app and device management, app development, data governance/privacy, analytics, and infrastructure. C onsumer and Financial Institution Touch Points Given the points discussed in the Transformation Is Happening section, gone are the days of controlling the customer's user experience from beginning to end. Today, many consumers are doing research about financial institutions well before they even visit a branch or bank Web site. Understanding the drivers and influencers of these channels of interaction is important in helping deliver strategic approaches to attracting and retaining the new digitized consumer. Figure 1 shows the five areas where the consumer and the financial institution intersect. These interactions can be one way or bidirectional. Page 2 #FIN243117 2013 IDC Financial Insights

FIGURE 1 Consumer and Financial Institution Touch Points Source: IDC Financial Insights, September 2013 Phase 1: Discovery The discovery stage is where the consumer starts his/her data gathering for making a financial decision. Oftentimes, this occurs well before the consumer has even thought about a particular institution. It may be as simple as talking to a friend or coworker about refinancing, or perhaps accessing a social networking site and noticing a friend rave about a new product or service that he/she just got from his/her financial institution. Either way, it is a whole new world where this information is no longer only gathered from print and electronic media advertisements, and more and more is gathered from influencers outside of the control of the financial institution. Discovery Taxonomy Table 1 lists our taxonomy for the discovery phase in the customer life cycle and includes a description for each attribute. The discovery part of the customer life cycle touches both prospects and current clients. During the discovery phase, individuals are doing their research and gathering information. We have listed four attributes that are an important part of the discovery stage: convenience, customer value, messaging, and social. With each of these attributes, there are various sources of data; some sources can be controlled by the institution, while other sources are out of the institution's control. Social sites that provide avenues for customer feedback for example may be areas where institutions want to review and respond yet are currently unaware how to or are unable to monitor. 2013 IDC Financial Insights #FIN243117 Page 3

TABLE 1 Discovery Touch Point Taxonomy Attribute Convenience Customer value Messaging Social Description How easy is it to find information and data about the institution? How relevant are the services and pricing, and does the institution offer targeted offers? How effectively does the institution communicate its value proposition to prospects and current clients? Does the institution appeal to like-minded groups and individuals? Source: IDC Financial Insights, September 2013 Discovery Satisfaction Components As we begin to dissect what makes a customer satisfied, we will be utilizing the following approach to gather feedback about the discovery process and what makes a customer or prospect become satisfied: Traditional channel approach: How are the traditional channels being used by financial institutions to attract new clients? Is there a connection between the physical and the digital world? Are prospects aware of this connection? Is there a unified approach? Role of social: Is the financial institution utilizing social more as a customer service tool or a marketing tool? How is the financial institution gathering social content? Is it being effectively used to provide targeted messages? Measurement: How are financial institutions measuring the success of digital and physical campaigns? How quickly can content be modified based on the success or lack of success of a particular campaign? How is traditional marketing impacted? What are the tools being used to gather and analyze this information? Customer delivery: What has been the acceptance rate on marketing messages across alternative channels? Is one channel more successful than the other? What do customers expect from their financial institution in regard to the proper amount of marketing versus customer service? Page 4 #FIN243117 2013 IDC Financial Insights

Phase 2: Onboarding Onboarding is the process of a prospect becoming a customer, or adding a new product or service for an existing customer. Too often the onboarding process is overlooked simply because it happens infrequently and the customer has already made up its mind to add a service or become a client. We feel that there should be further investments into the onboarding process. For a consumer who wants a cradle-to-grave self-service relationship, onboarding is as critical to the process as the experience one would get working with a customer service representative in a branch. This is also is the only process and touch point where the financial institution has complete control of the customer experience. Onboarding Taxonomy Table 2 lists our onboarding phase in the customer life cycle and includes a description for each attribute. The customer onboarding phase is one of the only phases where the institution controls the entire process. It is for that reason that onboarding is important as first impressions lay the foundation for ongoing relationships. TABLE 2 Onboarding Touch Point Taxonomy Attribute Convenience Simplicity Timeliness Description Is onboarding channel agnostic? How much time and effort are required by the customer? When can I start transacting with a new account or service? Source: IDC Financial Insights, September 2013 Phase 3: Consumption Consumption is how the customer interacts with the various channels offered by the financial institution. This may or may not be selfservice, so there is also a human element involved. For the purpose of this report, we focus primarily on the digital channels online, mobile, and social. For the most part, financial institutions have fully controlled the consumption phase, but this too is under attack. As more and more options become available for "front ending" a relationship into a financial institution, banks may have to be content with giving up some of their control here. 2013 IDC Financial Insights #FIN243117 Page 5

Two examples of this change are the development of financial aggregation and personal financial management tools like Intuit's Mint and Yodlee. With these tools, customers may have already given up on using the interface provided by the financial institution in lieu of a more streamlined and aggregated look. This is an area where financial institutions have the technology available but have not done a great job deploying these tools to customers. While the acceptance rate of financial aggregation has been slow, we feel that over time, financial institutions will continue to make advances in attracting more customers. With the explosion of social networking sites such as Facebook, there are new challenges for financial institutions. Facebook, and whatever the next social juggernaut may be called, is all about convenience. Since it is well documented that Facebook users check their pages multiple times a day, it would not be a stretch to get these individuals to also demand integration with their financial accounts through a social site. Putting security concerns aside for the moment, this will once again provide an erosion of control the financial institution has over the customer experience. Consumption Taxonomy Table 3 lists our consumption phase in the customer life cycle and includes a description for each attribute. The consumption page is the most important touch point during the customer life cycle. As noted, there are numerous opportunities for institutions to lose customers during the consumption phase because of competitive alternatives. Measuring and benchmarking satisfaction with the customer's consumption is critical to keep ahead of the competition and provide customers with the latest relevant technological changes. TABLE 3 Consumption Touch Point Taxonomy Attribute Description Availability How is the uptime perceived for digital channels? Choices/flexibility How many channels are offered, and how easily can a customer move from one channel to the next? Consistency How consistent is the customer experience between channels? Usability How much knowledge is required to use the digital channels? Source: IDC Financial Insights, September 2013 Page 6 #FIN243117 2013 IDC Financial Insights

Phase 4: Customer Service Customer service interactions are mostly controlled by the financial institutions; however, this too is changing. While there is no other way to get answers to questions about specific transactions or problems with an account than to go directly to the institution, there are ways of obtaining information about levels of customer service, and possibly ways around customer service to get resolution. Once again, social networking provides an enormous amount of data at the ready for customers looking to learn more about their current or future business partners as much as to learn about their level of customer support. In the retail space, particularly when dealing with unknown vendors on sites like Amazon Marketplace or ebay, the ranking of the vendors means everything. Knowing as much as possible about the organization fulfilling one's order is almost as important as the research one does prior to making a purchase. If customer service is poor, most customers' instincts are to stay away even if it means paying a little bit more. Customer Service Taxonomy Table 4 lists our customer service phase in the customer life cycle and includes a description for each attribute. Customer service in the digital world oftentimes requires physical interactions, primarily through the call center or at the branch. Being able to properly address the majority of customer service needs in an easy-to-use digital format will free up resources to focus on more complex issues and create a higher level of satisfaction. It is for that reason that the impact of customer service is second in importance in the customer life cycle, just behind consumption of products and services. TABLE 4 Customer Service Touch Point Taxonomy Attribute Availability Choices/flexibility Consistency Usability Description How easy is it to get questions answered or problems resolved at any time? How many customer service channels are offered, and how easily can a customer move from one channel to the next? Does the customer get a consistent experience when using customer service? How simple is getting resolution on issues using the digital channels? Source: IDC Financial Insights, September 2013 2013 IDC Financial Insights #FIN243117 Page 7

Phase 5: Advocacy Advocacy is the last touch point and really feeds back into the discovery touch point (refer back to Figure 1). The financial institution has little control over advocacy, outside of providing excellent onboarding tools, easy-to-use consumable applications, and outstanding customer service all of which should lead to providing apostles of the financial institution. One area that the financial institution can control is whether or not it offers a forum on its Web site for such feedback, or if it simply relies on tools to aggregate the information from other sites. Either way, it is imperative for institutions to know the feedback that they are getting and to make the appropriate investments in areas that appear to be providing the most negative testimonials. Advocacy Taxonomy Table 5 lists our advocacy phase in the customer life cycle and includes a description for each attribute. Being proactive on advocacy could give institutions an advantage by soliciting feedback early in the process. Feedback of both negative and positive comments will provide institutions the information that they need to measure satisfaction and drive future enhancements in a more meaningful manner. Too often, individuals wait until they are frustrated before providing feedback; thus oftentimes the feedback channel becomes overly negative. TABLE 5 Advocacy Touch Point Taxonomy Attribute Customer-specific awareness Feedback options Social awareness Description How well does the institution know its customers and understand their wants and needs? Does the institution provide necessary digital channels to create a customer feedback forum? How well does the institution know and support its local communities? Source: IDC Financial Insights, September 2013 Page 8 #FIN243117 2013 IDC Financial Insights

THE APPROACH In this section, we dissect current levels of satisfaction within the digital channels. Based on the results of our U.S. Consumer Channel Preference Survey, the breakout of tiers is defined in Table 6. Age and household income are self-explanatory, and the results in this report are from this survey, which had quotas in place to best represent the U.S. age and household income distribution as per the 2010 U.S. Census. TABLE 6 Peer Group Definitions Tier Examples Largest U.S. banks Specifically Bank of America, Citi, JPMorgan Chase, Wells Fargo Largest regional U.S. banks Specifically BB&T, BMO, Capital One, Citizens, Fifth Third, HSBC, PNC, Regions, SunTrust, TD Bank, U.S. Bank Community banks All other banks not listed in the largest and largest regional U.S. bank tiers Credit unions All credit unions Online-only banks ING Direct, Ally Bank, Simple Source: IDC Financial Insights, September 2013 FUTURE OUTLOOK Overall, the U.S. consumer is pretty content with financial institutions' digital platform offerings, which should equate to higher adoption and continued use in the long term. In this section, we look at how specific demographics rated their satisfaction with the digital channels. The results in the rest of this report are taken only from individuals who were active within either the online, mobile, or social channel. Consumer Digital Channel Satisfaction Breakdown By Financial Institution In Figure 2, the first breakout of satisfaction levels for digital channels is displayed based on the respondent's primary financial institution defined as where either his/her direct deposit goes or the majority of his/her deposits go. Of the three channels that make up the digital 2013 IDC Financial Insights #FIN243117 Page 9

experience online, mobile, and social across the board, the highest satisfaction is with the online channel. Online banking is clearly the most mature of the three digital platforms and thus has had sufficient time to modify the offerings to achieve the highest level of satisfaction. The mobile channel also was rated well; however, overall satisfaction for mobile is not as high as it is for online. Many institutions are just rolling out their mobile solutions or have only recently rolled out their second-generation offering. As new features and functions are added into mobile, satisfaction levels should continue to rise. And finally, the social channel was consistently the lowest-rated channel in overall satisfaction, which is not surprising since many institutions and individuals are still trying to figure out the value-add of social with their financial activities. FIGURE 2 Digital Channel Satisfaction by Financial Institution Q. Rate your satisfaction with your financial institution's digital channels (5 = excellent, 1 = poor). n = 2,663 Source: IDC Financial Insights' U.S. Consumer Channel Preference Survey, September 2013 Macrolevel trends show that for the most part, larger institutions did score a bit better in mobile satisfaction than smaller institutions, but not by much. Online banking satisfaction for traditional brick-andmortar institutions was pretty much the same, with pure online banks scoring a higher level of satisfaction. Obviously, when you choose an online bank, you must be satisfied with the online offering otherwise you would choose to bank elsewhere. The fact that the smaller banks are on equal footing in satisfaction with the larger banks Page 10 #FIN243117 2013 IDC Financial Insights

is also a testament to the fact that the core providers have kept up and remained competitive with the online offerings of the pure-play online banking providers. By Age As discussed previously, the institutions did not have much deviation with regard to consumer satisfaction with digital platforms; however, as shown in Figure 3, age certainly tells a different story. The online banking satisfaction levels shown in Figure 3 indicate that the older the demographic, the more likely they are to be satisfied. On the flip side, mobile and social satisfaction acts the exact opposite as online: the older the demographic, the least likely they are to be satisfied. In fact, 5% of respondents over the age of 55 rated their mobile and social satisfaction levels as poor. FIGURE 3 Digital Channel Satisfaction by Age Q. Rate your satisfaction with your financial institution's digital channels (5 = excellent, 1 = poor) n = 2,663 Source: IDC Financial Insights' U.S. Consumer Channel Preference Survey, September 2013 The challenge business and product line managers will have is how to best appeal to the older demographic. There are some steps that institutions can take to help the older demographic become more comfortable with newer technology: Provide more features that may appeal to older demographics, like check reorder through mobile. 2013 IDC Financial Insights #FIN243117 Page 11

Stress the level of security around all the digital platforms. Use social as a tool to promote events focused to older demographics so that they can see the value. Offer workshops that teach older demographics how to use mobile and social technologies. Create additional value with mobile and social, including actionable advice tailored for the customer. By Household Income In Figure 4, digital satisfaction levels are displayed based on U.S. household income. As we saw with respondents' age, there is a definitive trend in regard to digital satisfaction levels and income. For the most part, as income levels rise, so does the satisfaction level for all the digital platforms. There is one exception that will be addressed, the $125,000 149,999 demographic. Once again, the online channel continues to dominate satisfaction levels through each of the various income ranges. This makes online banking a clean sweep in digital satisfaction, winning by institution, by age, and by household income. We have seen similar trends in previous studies, where age and income have opposite trends. Since satisfaction is lower with older demographics yet higher with income, younger, more affluent consumers are more satisfied with the technology. There is one rather consistent income range that requires some special consideration. The satisfaction levels of those in the $125,000 149,999 demographic were across the board the least satisfied with all the digital channels. Why would this demographic be so skeptical? It has to do with the fact that for now, digital channels have simply been replicating account information and transactional capabilities found in the branch. That is terrific; it saves time and allows the branches to best serve more complex transactions, but what we have yet to see is more actionable advice come from these solutions. In the United States, a typical family probably has two or three kids, both parents work, and life is pretty hectic. If one parent is making $80,000 and the other $50,000, then that family would fall within this unsatisfied demographic. This represents an opportunity for financial institutions to provide solutions that will make life easier for busy working parents on the go. As mobile and online solutions continue to grow and use better analytics to provide things like targeted offers and better advice to the consumer, the satisfaction levels for these working families are likely to increase. Page 12 #FIN243117 2013 IDC Financial Insights

FIGURE 4 Digital Channel Satisfaction by U.S. Household Income Q. Rate your satisfaction with your financial institution's digital channels (5 = excellent, 1 = poor). n = 2,663 Source: IDC Financial Insights' U.S. Consumer Channel Preference Survey, September 2013 ESSENTIAL GUIDANCE Actions to Consider Increasingly, digital technology is changing the way companies interact with their end-user clients as well as the skill sets and tools their employees need to provide a customer experience and value that separates their organization in the marketplace. IT is a critical partner in this transformation and needs to understand the changing dynamics that mobile is creating in order to: Change the IT operating model to support end users and employees by making more effective decisions around digital technology and IT choices Implement technology solutions that provide and support secure, integrated digital channels and a consistent experience Provide relevant business information and analytic systems within the digital channels for both end users and the enterprise The challenge for organizations overall is understanding that the transformation, especially for mobile, is well underway. The challenge for IT professionals is to support these systems today as the costs and risks will only go up with time. 2013 IDC Financial Insights #FIN243117 Page 13

LEARN MORE Related Research Business Strategy: IDC Financial Insights' U.S. Consumer Channel Preference Survey Social Isn't Satisfying, Not Yet (IDC Financial Insights #FIN242498, August 2013) Business Strategy: IDC Financial Insights' U.S. Consumer Channel Preference Survey What Is the Story Around Tablet Banking? (IDC Financial Insights #FIN241316, June 2013) Business Strategy: IDC Financial Insights' U.S. Consumer Channel Preference Survey Results Mobile Banking Becomes Mainstream (IDC Financial Insights #FIN240640, April 2013) Business Strategy: IDC Financial Insights' Consumer Channel Preference Survey Results Online Banking Usage Peaks: What Next? (IDC Financial Insights #FIN238957, January 2013) Worldwide Financial Services 2013 Top 10 Predictions: Leveraging Technology Disruptors Is Path for Success (IDC Financial Insights #FIN237980, December 2012) Business Strategy: Managing the IT Relationship Between Banks and Vendors Tough Love (IDC Financial Insights #FIN236550, August 2012) IDC MarketScape: U.S. Retail Online Banking 2012 Vendor Assessment (IDC Financial Insights #FIN234912, May 2012) Business Strategy: 2012 U.S. Banking Industry Update Failures Slow, Mergers to Grow (IDC Financial Insights #FIN233026, February 2012) Synopsis This IDC Financial Insights report discusses the impact consumerization is having on retail banking and looks at current satisfaction levels for digital platforms offered today. Consumerization, and the impact this is having across all industries, is here to stay, but within financial services, consumerization brings its own set of challenges. "Customers are still looking for more out of their newfound digital and mobile technology when it comes to banking," says Marc DeCastro, research director of customer-centric banking strategies at IDC Financial Insights. "The real benefit of the technology deployed over the past five years has really only begun to surface to the end user." Page 14 #FIN243117 2013 IDC Financial Insights

Financial institutions continue to look for ways to leverage investments already made in mobile and online banking, and most consumers are not even aware of the additional benefits that could be had using analytics to provide them more targeted offers and additional levels of security. Copyright Notice Copyright 2013 IDC Financial Insights. Reproduction without written permission is completely forbidden. External Publication of IDC Financial Insights Information and Data: Any IDC Financial Insights information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate IDC Financial Insights Vice President. A draft of the proposed document should accompany any such request. IDC Financial Insights reserves the right to deny approval of external usage for any reason. 2013 IDC Financial Insights #FIN243117 Page 15