Bank Board Letter — August 2015
Mark Vipond

The promise of lower fixed costs and better efficiency ratios that heralded the introduction of online banking was based on the belief that the Internet could be used to create a self-service environment that would reduce staffing and technology requirements. In fact, adoption of online banking took longer than expected, and consumers did not abandon the other channels they used to access the services and products offered by their banks.

Just as online banking adoption was starting to reach a critical mass that might allow for the realization of some operational effectiveness, Apple introduced the smartphone, and then a tablet. To say that consumers fell in love with these devices is an understatement.The iPhone introduction marked the beginning of the age of ubiquity for smartphones, and adoption rates for the tablet were faster than for any other technology to date.

To retain customers and, hopefully, attract new ones, most financial institutions felt it necessary to respond as quickly as possible to the introduction of these new digital devices. To do so, many deployed separate mobile channels to service smartphone and tablet users.They aimed to satisfy customer appetite for all things digital with new features and services.The disparate channels and services resulted in an inconsistent customer experience, one that was often both inconvenient and frustrating.

Banks were not only battling the “rise of the devices,” but also a new level of customer expectation around the digital experience developed from a booming e-commerce market. Companies such as Amazon and Apple had been busy delivering a digital service experience that was user friendly, personalized and predictive.The fragmented, disparate channels and services that banks deployed seemed like a trip back in time to consumers who were more accustomed to the smooth, intuitive experience they had when shopping online.

In addition to disappointing customers on the user-experience front, this segmented digital approach raised costs and lowered efficiency ratios. In the process of establishing multiple digital delivery channels and licensing new and existing services, banks increased the number of vendors they had to manage, and multiplied the implementation, maintenance and use fees they had to pay. In short, banks were losing control of the customer experience on the digital landscape and paying more for the privilege.

The numbers speak for themselves. One community bank I spoke with pays $1.10 per month for each of its 70,000 online users, plus an average of 50 cents for bill pay transactions and an additional $1.50 for mobile banking users and transactions. After adding additional costs for personal finance management, person-to-person and account-to-account services, the bank pays more than $4 per user per month. An executive from the bank remarked to me, “It is cheaper to service the customer in the branch than online.”This bank is not an exception to the rule; many community banks are in similar situations, some of which have never even calculated the costs.

With digital banking adoption continuing to grow, branch traffic dropping and digital devices proliferating, the current approach is unsustainable for most institutions. That is why the results from the 2015 KPMG Community Banking Outlook Survey held few surprises. The study indicated that 46 percent of the banks that participated will increase their technology spending in the coming year. In addition, nearly 40 percent of the bank executives said they plan to make “significant” investments in IT related to online and mobile banking over the next one to three years.

Where that money is invested will be the difference between perpetuating the current tactical approach and establishing a strategic plan that can serve the institution for the next five to 10 years. Key indicators of a sustainable business model that will provide customers with the digital experience they demand include:

• Solutions that offer a single code base for digital banking and its many associated services, such as personal financial management;
• Highly configurable products that do not require banks to contract with the supplier (and pay additional fees) each time a simple change in the disclaimer or branding scheme is required; and
• Solutions that offer data analytics as a core feature and allow the bank to “own” its data. Then, banks can accumulate, categorize and segment information about their digital banking customers and use that data to help customers with personalized information, products and services.

How do you know if your bank is on the right track? The number of online users at your bank should be growing by at least 3 percent annually. Your mobile users should number no less than 30 percent of the online total. If this is not the case, there could be a major bottleneck in user interface, intuitive design, customer awareness and even technology effectiveness. If you decide to make a change, first go to the C-suite. Executives must understand and be actively supportive of any effort related to transforming a bank’s digital banking landscape. Gaining that support may not be as hard as many suspect, given that the C-suite is in the best position to understand the positive impact a modern digital banking solution can have on the institution’s performance.

Most banks must reevaluate their approaches to digital banking sooner rather than later. Rather than continuing to apply Band-Aids to the existing disparate channels and services already in place, they must step back and consider what their options are for building a five- to 10-year strategy that will address consumer digital demand, while delivering on the promise of lower fixed costs and better efficiency ratios. Business as usual will only assure that your bank is at a competitive disadvantage in the marketplace for the rest of its existence Ð which may be very short.

Mark Vipond is CEO of D3 Banking, a company that reduces the cost and complexity of digital banking by providing a single codebased solution that can be accessed via laptop, smartphone or tablets. Its Data Driven Digital banking leverages a powerful analytics engine that allows financial institutions to personalize their product and service offerings for each unique customer. Learn more about the company at