Customers, Communities, and Collaboration

WHITE PAPER Sponsored by: SAP Alex Kwiatkowsk i Ju ne 2 011

www.idc-fi.com

IDC OPINION Improving the relationship with account holders is a perennial objective for financial institutions, the importance of which has undoubtedly been heightened in the post-crisis rehabilitation period as banks and to a lesser extent insurers make strenuous efforts to demonstrate why and how they genuinely care about meeting the changing needs of their customers and prospects. However, true customer-centricity is far more than skin-deep, and requires extensive, fundamental operational, technological and cultural change at every level, and in every corner, of an organization. While the outcomes are theoretically desirable, the expenditure is high and delivering significant forecast benefits cannot be guaranteed. And with new interaction mechanisms most notably mobile and social appearing alongside established channels, institutions are facing difficult tactical and strategic decisions which will determine their future composition and ultimate prosperity. In 2011, IDC Financial Insights believes innovative steps must be taken to craft a channel distribution strategy that it is not only capable of meeting the needs of account holders, but can protect and drive revenues in a decade that will be characterized by difficult macroeconomic conditions in most parts of the world. METHODOLOGY IDC Financial Insights conducted 30 structured interviews with senior banking and insurance executives from institutions in Europe, the Americas, and Asia-Pacific. The individual responses were collated into a single dataset, before being analyzed and the findings used to inform the content in this white paper. IN THIS WHITE PAPER The purpose of this white paper is to provide a detailed understanding of the operational and technological strategies being used to improve channel effectiveness and the management of customers in the banking and insurance sectors. It explores areas such as planned levels of investment in customer channels; the influence of new consumer-led devices and interaction methods; integration challenges associated
June 2011, IDC Financial Insights #IDCWP25T

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with supporting multiple channels; the steps being taken to improve cost/income ratios; how institutions are managing and measuring customer profitability; and perceived innovations in the financial services sector. Rather than focusing just on executing existing business practices better such as faster onboarding, single customer view, more sophisticated multichannel services, better complaints/dispute handling and a more proactive anticipation of needs this white paper also answers the following questions in the course of discussion: Can banks dismantle existing P&L structures and start to measure customer profitability better? If banks are serious about managing customers better, can they drive ROI by measuring profits by customer instead of products and channels? How will banks act innovatively with their distribution strategy while simultaneously ensuring value to both the external customer and internal business units? How can banks leverage the power of 'social' to better understand the sentiments and requirements of their customers and ultimately improve their net promoter scores? Is existing technology infrastructure capable of meeting the operational objectives of business-side users, and what new approaches may be required to achieve goals? SITUATION OVERVIEW
The Rehabilitation of Institutions Continues

It is impossible to discuss operational and technological developments in the financial services sector without first providing market context at both the global and regional levels. The ongoing rehabilitation of institutions is taking place in a difficult macroeconomic environment, characterized by weak GDP growth in the majority of developed countries, and by increasing commodity prices, above-target inflation, rising long-term unemployment, and a housing market with foundations that remain decidedly soft. While the recent quarterly result of leading banks and to a lesser extent insurers, who were spared the worst ravages of the industry crisis indicate a cautiously optimistic return to health (note: there are exceptions to this rule, as PPI-related losses of $5.6 billion for Lloyds Banking Group and $854 million for RBS in the first quarter of 2011 illustrates), an air of fragility remains where trading conditions are specifically concerned. Pulses may beat stronger, but hearts remain sensitive to further shocks. The path to recovery is a long one, and although institutions have navigated through the darkest depths of the forest they found

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themselves in at the end of the 2000s, it would be unwise to assume they are completely out of the woods. Major obstacles lie ahead. From a regulatory perspective, closer supervision has been an inevitable consequence of the abject failure of those previously charged with overseeing the safe function of the financial services sector. The Basel III accord demands new capital, leverage and liquidity standards, necessitating additional funding to create more comfortable cushions and attendant changes to existing business processes and IT infrastructure. This is not the only mandatory initiative for institutions to grapple with. In the US, the broad principles of the Dodd-Frank Act is in the process of being distilled into specific regulations, recently estimated by Alan Greenspan, the former chair of the Federal Reserve, to be in the region of 200 [new regulations] in total, all of which will undoubtedly have a varying degree of impact on banks and insurers. On the opposite side of the Atlantic, the European Banking Authority (EBA) recently unveiled the scenarios and methodology for its 2011 EU-wide stress test, which will be applied on a broad sample of institutions representing in excess of 60% of total banking assets in the region. With the previous round of stress tests considered too easy to pass, Europe's banks are braced for a more rigorous assessment of their ability to withstand hypothetical systemic shocks. From an operational perspective, fundamental challenges remain. Along with achieving and maintaining regulatory compliance, institutions must adequately identify, manage and mitigate risks; squeeze running costs downward while simultaneously pushing revenues upward; keep employees satisfied (retaining both the rising stars and the reliable bedrock upon which all organizations rest); combat the threats of traditional and non-traditional competitors; and deliver value typically in the form of an annual dividend to institutional, individual and [in certain instances] government/quasigovernment shareholders. Quite obviously, meeting the financial needs of existing customers, along with onboarding suitably attractive (i.e., profitable) new prospects, through the provision of appropriate products and accompanying supporting services delivered with consistency across multiple channels, also belongs on this list. However, let's be unequivocal, this is nothing new. That said, IDC Financial Insights believes that banking finds itself at an inflexion point in 2011, and new products, services and business models are required to ensure the continued flow and subsequent expansion of existing revenue streams. As Figure 1 demonstrates, the solid majority of respondent institutions in key country markets concur with this viewpoint.

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FIGURE 1
Q. Is Banking at an Inflexion Point in 2011?

100 83 80

(% of Banks)

60 40 20 0 Yes No 17

Respondents = 30
Source: IDC, 2011

Therefore, banks and insurers must not only continue to address the aforementioned fundamentals, but also identify and perform extensive tactical and strategic adjustments to the way(s) in which they operate both externally and internally. Will this ultimately lead to a radical reprofiling of the industry landscape during the 2010s? No. 'Radicalism' and 'financial services' makes a potent combination for a variety of reasons (not least from a risk management standpoint), and while it is tempting to prophesy the end of banking in its current guise, the reality will be decidedly more modest. We believe the decade to 2020 will be characterized by perceptible evolutionary shifts rather than a single, momentous 'big bang' event. But with many institutions recognizing they have reached a crucial stage in their own existence, it will be interesting to observe how they address the inherent need to refine their customer offerings, in all respects: products, marketing activities, business processes and most pertinently where this white paper is concerned sales and service channels. However, in our opinion any changes must extend far beyond a cosmetic makeover, and permeate all levels and corners of an organization. Why? Because improving the customer experience has been a key operational objective for many years, and assumed extra significance in the wake of the financial crisis as institutions sought to regain the trust of their account holders. Talking a good game is not enough, and to quote Benjamin Franklin "well done is better than well said." While there have undoubtedly been positive steps taken in the right direction by banks and insurers (such as the implementation of informational and transactional mobile services), material improvements remain a work in progress and deeply engrained internal cultural barriers still act as an impediment to achieving operational excellence. Furthermore, existing IT infrastructure also acts as a potential limiting factor to the aspirations of business-side users wishing to introduce the aforementioned refined customer offerings. This vital point is often

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overlooked, and it is imperative for the strategic roadmap to be carefully drawn, having given due consideration to the capability, condition, and capacity of hardware and software. If the underlying technology is incapable of adapting to new requirements or the introduction of a social media channel has a detrimental downstream impact on CRM and data warehousing solutions, for example, achieving stated service ambitions becomes impossible without significant investment of time, money, and resources. Each of these elements is a precious commodity in the financial services sector. Budgets remain under pressure and investments in new technology mandatory changes notwithstanding demand robust business cases to support them (as does the introduction of new products and the launch of dedicated marketing campaigns). We see nothing on the horizon that will disrupt the status quo.
Improving Cost/Income Ratios

In an environment where the spending of every cent and penny has to be justified, improving the cost/income ratio is essential. As Table 1 illustrates, institutions are taking multiple steps to reduce operating expenses and simultaneously increase operating income. As might be expected, achieving additional efficiencies in both the front- and backoffice ranks highest among the institutions interviewed for this white paper: academic studies have proven that the most efficient banks generate the highest profits, and banks and insurers have keenly embraced the concept of lean manufacturing in order to eke out savings wherever and whenever possible.
TABLE 1
Improving Cost/Income Ratio
Q. What steps are you taking to improve the cost/income ratio? Step Increased operational efficiency from front- to back-office Ensuring consistency between service levels provided and customer profitability Improved timeliness and accuracy of operational performance reporting Use of multichannel service delivery with consistent content and presentation Increase product ranges and introduce a greater degree of sophistication to offer targeted products to the correct user groups Introduce more profitable product and service bundles Provide real-time, context-sensitive cross-sell and up-sell offers Introduce or improve flexible product definition capabilities for tailored customer products Create an enhanced user experience through KYC initiatives Note: Respondents = 30
Source: IDC Financial Insights, 2011

% of banks 90 83 80 77 70

70 60 60 60

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The second most popular step namely ensuring consistency between service levels provided and customer profitability is of greater interest, not least because taking accurate [profitability] measurements has become a complex science in its own right. Within the banking and insurance sector, profitability has traditionally been calculated on the financial returns generated by the provision of a specific product or service. While this method builds a picture based on historic events, it does not serve as a reliable indicator of future spending. Given the recent travails of the financial services sector, and the present trading conditions, this situation is far from ideal. Institutions need to have confidence in their forecast revenue predictions: IDC Financial Insights advocates the adoption of a customer lifetime value (CLV) model.
T he Tr ans it ion Fr om Est imat in g Pr od uct-Ce nt ric P r o f ita b i l it y t o C L V

CLV is the discounted value of the future profits that will be generated by an individual customer. As these future profits are uncertain, predictive models have to be developed and implemented, based on detailed data analytics. There is no uniform model for estimating CLV, and institutions can choose between the following types: RFM models, which create cells or groups of customers based on recent transactions, and frequency and monetary value of prior product purchases. The model is then estimated using decision trees or Markov chains. While this approach is simple, flexible, and useful for long-term predictions, many elements are required to create it. Probability models, which assume an underlying stochastic method (such as the Pareto/NBD model). They are the most statistically elegant, but such chic demands the greatest degree of complexity. Econometric models, which perform hazard functions and survival analysis. Vector autoregressive (VAR) persistence models, which are flexible and powerful but computationally expensive. The results of our interviews with financial institutions demonstrate that the shift to estimating CLV is occurring: 67% of respondents indicated that their banks have adopted this approach in order to achieve a greater degree of forecast revenue accuracy, as well as assessing the effectiveness of marketing campaigns in terms of ROI An illustrative example, based on the actual CLV model of a top tier (by asset value) European retail bank, can be seen in Figure 2.

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FIGURE 2
The Model Used to Estimate CLV in a European Retail Bank

Source: Deloitte

C a n In st itu t io ns Man ag e C us t o m er P rof it ab i l it y B et t er ?

Yes. We believe financial institutions can measure customer profitability with a greater degree of depth and accuracy by making the transition from profitability evaluation based on a product-centric approach to a sophisticated, scientific method of CLV calculation. Such a transformation undoubtedly requires specialist resources to perform the modeling (the formulaic equation can be seen in Figure 3) and demands robust input data to ensure a reliable output.
FIGURE 3
Formula for Calculating CLV

Note: see Appendix for specific algebraic values

Source: Deloitte

The transition to CLV cannot be accomplished overnight, and adoption does not come without a degree of pain: existing P&L
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optimize the 'usefulness' of CLV estimation, and IT processes and systems particularly those related to master data management (MDM) and associated analytics could require enhancements in order to produce optimal results. But with over half of interviewed institutions using this method, it is clear to IDC Financial Insights that those banks and insurers that continue to assess profitability based purely on the value of products previously sold will find themselves at a distinct competitive disadvantage as the decade unfolds. We believe estimating CLV is a component that all institutions should use as part of wider strategic efforts to operate with a greater degree of customer centricity, and fits alongside the evolution of multichannel interaction.
Channel Investment Priorities and Key Drivers

In the history of warfare, the fiercest battles have [often] been fought on the front line, with increasingly sophisticated weaponry and tactics developed and deployed in pursuit of long-term victory. Certain parallels can be made with the commercial world. Financial institutions run the risk of severely weakening both their defensive positions and offensive capabilities if they fail to invest adequately in channels as a response to key business and customer drivers and the direct threat posed by traditional and non-traditional rivals. The cache of arms has expanded over the previous four decades to the point where today it includes the branch estate; ATM network; contact center (inbound and outbound); secure Web site for online activities; informational and transactional mobile applications; real-time video; and the burgeoning, amorphous world of social media. Success hinges on making the most effective use of this extensive arsenal and choosing which customer segments and product categories to target in order to win and maintain market share. Despite difficult trading conditions, and a significant portion of IT budgets ring-fenced to perform technology transformation and change initiatives in conjunction with the introduction of new regulations, spending on channels will continue to increase. To emphasize this point, Table 2 shows our 20092014 forecast for channel investment.
TABLE 2
Global Banking IT Spending Forecast ($M)
Channel ATM network Branch estate Contact center Online (incl. mobile) 2009 4,910.77 12,881.90 6,715.65 4,007.99 2010 4,917.00 13,232.29 6,779.37 4,218.42 2011 5,087.59 14,035.08 7,062.54 4,583.70 2012 5,353.11 15,151.03 7,484.45 5,062.53 2013 5,643.39 16,359.25 7,942.14 5,588.38 2014 5,955.13 17,684.41 8,438.85 6,164.36 CAGR % 3.9% 6.5% 4.7% 9.0%

Note: Forecast includes hardware, software, services and internal costs

Source: Worldwide IT Spending 20092014: Worldwide Banking Spending Guide, IDC FI #FIN228011

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Improving the Effectiveness of Online Banking is a High Priority

With a CAGR of 9.0%, IDC Financial Insights predicts that online will witness the greatest growth. Importantly, the results of our institutional interviews appear to firmly corroborate this notion, with 90% of respondents making investments in their Internet banking services in 2011.
FIGURE 4
Institutions Are Investing in a Wide Range of Channels
Q. Which channels are you investing in during 2011?

100 80

90

(% of Banks)

60 60 40 20 0
Online Contact Branch Mobile Contact center (self center (in) service) (out) ATM Social Mobile (sales) Video Other

53 43 40 40 30 20 17 10

Note: Respondents = 30
Source: IDC Financial Insights, 2011

Significant developments to online banking operations are taking place in 2011: this includes the addition of personal financial management (PFM) tools to help customers take greater control of their spending and saving habits and, in certain cases, the comprehensive rearchitecting of legacy Internet banking platforms and replacement of aging underlying infrastructure deemed incapable of meeting business needs. Although Web-based account servicing does not have the longevity of the branch or ATM network, it has rightly become an intrinsic component in the distribution strategy of retail banks and insurers. IDC Financial Insights believes it will perpetually remain so on the grounds of being able to deliver an ever-improving end user experience (through greater personalization for instance) while simultaneously reducing the total cost to serve (by allowing customers to perform an increased range of activities themselves). Moreover, Figure 4 also shows that spending is not purely confined to online. Varying degrees of investments are being made in all the different interaction mechanisms, from the long-standing functional areas of branches, ATMs, and contact centers, to mobile services, and most recently the nascent conduits of social and video. We discuss the rise of mobile and social in greater depth later in this paper.
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The Influence of Business and Customer Drivers on Channel Investment

Banks and insurers must successfully refine channel distribution in response to a number of key drivers relevant to the market conditions in a given period. Table 3 summarizes the business-related factors currently influencing investment strategies.
TABLE 3
Business drivers
Q. What are the main drivers influencing your channel investment strategy in 2011? Driver Ensure consistency across all channels to engage with customers and increase satisfaction/advocacy Keep pace with competitors Shorten the time to onboard new customers Increase the volume of sales achieved through service Improve the ability to measure customer value and profitability Reduce the total cost to serve Seek competitive differentiation Improve management, integration and quality of data Improve the ability to predict increased risk of customer delinquency Introduce a greater degree of customer segmentation for new products and services Unify and integrate systems and processes following M&A activity
Source: IDC Financial Insights, 2011

% of banks 93 83 80 80 80 77 73 73 67 60 37

IDC Financial Insights is interested to see that ensuring consistency across channels in order to better engage with customers and increase satisfaction and advocacy levels is the primary driver. While this could be interpreted as a tacit admission that institutions have largely failed to deliver against promised service standards in previous years, it is nevertheless encouraging to observe that 93% of respondents have recognized the need to take remedial action in 2011. With customers using a combination of different channels to perform transactions (e.g., in the branch, at an ATM, or online) or receive an answer to a question (e.g., from a contact center agent or FAQ page on a Web site), it is essential for banks and insurers to ensure a consistent experience regardless of the touch-point. To be clear, this requirement is by no means 'all-new for 2011', but strengthening the relationship with account holders whose financial needs are evolving in line with their lifestyle changes (such as entering the labor market, purchasing a property, starting a business/family or taking retirement) remains of paramount importance.

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Furthermore, although the list and ranking of drivers in Table 3 does not contain any great surprises or anomalies, we believe it is worth highlighting that: Shortening the time associated with onboarding new customers continues to be a prime target Improving the ability to measure value and profitability is deemed important, which correlates with the shift towards CLV modeling described earlier Institutions view channels (and associated service standards) as a means of differentiating themselves from their rivals Along with the aforementioned business factors, banks and insurers are also shaping their channel investments in response to the customer drivers cited in Table 4.
TABLE 4
Customer Drivers
Q. What are the main customer drivers influencing your channel investment strategy in 2011? Driver Customers wishing to add/subscribe to new products and services Customers emerging from new demographic groups with different financial needs Customers wishing to receive information via new channels Customers wishing to perform payment and transfer activities via mobile devices Customers wishing to use the ATM network to perform additional activities (e.g. make a loan request)
Source: IDC Financial Insights, 2011

% of banks 77 63 57 53 33

Customers want their financial provider to treat them fairly, with products and services that are simple, straightforward, and transparent and can be added or subscribed to with ease. New demographic groups are undoubtedly emerging, and IDC Financial Insights believes that as the decade unfolds, successful institutions will be those that are comfortable engaging with all customers (and prospects) via all available and relevant channels. However, it is a fallacy to assume that it is all about catering to Generation Y (i.e. those currently aged between 10 and 24 in 2011). Rather, banks and insurers need to meet the needs of Generation X (age 25 to 44), boomers (45 to 64) and seniors (age 65-plus). This can be achieved by the creation and continual refinement of carefully-composed product bundles, and supplemented through the provision of relevant, accurate information and build-out of online communities where account holders can discuss shared interests and resolve queries with other like-minded individuals.

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Unintegrated Channels Limit Banks' Ambitions

It is also a fallacy to assume that seamlessly integrating channels is straightforward. As Figure 5 illustrates, only a minority (30%) of the institutions interviewed by IDC Financial Insights have achieved full integration. Of greater significance not to mention concern for the banks involved are the 60% whose channels are partially integrated and the frankly disturbing 10% still operating in distinct silos.
FIGURE 5
Channel Integration
Q. To what extent are your channels integrated today?

100 80

(% of Banks)

60 60 40 20 0 Partially Fully Unintegrated 30 10

Note: Respondents = 30
Source: IDC Financial Insights, 2011

This situation acts as a major barrier to delivering the consistent user experience that institutions desire in order to improve cost/income ratios and in response to business drivers. Moreover, although as Figure 4 indicates funding is available to enhance existing interaction mechanisms and introduce new methods, there are finite funding limits and budget parameters to work within. The challenge for institutions, therefore, is to make these enhancements and introductions while simultaneously tightening the integration between channels. If banks and insurers fail to create a holistic structure, their ambitions [for service excellence] will remain unfulfilled and obtaining an accurate profile of individual customers based on their historic interactions, preferences and behaviors will prove impossible. Ergo, any related investments in BI and analytics will also fail to deliver their full business value, and there is the very real danger of a false picture being created. However, integration as the current situation in Figure 5 shows has proved difficult to achieve, and legacy operational and technological issues have stymied efforts to create the blended environment desired by banks and insurers. IDC Financial Insights believes these issues must be addressed as a priority: it is senseless to

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add new methods for customer interaction if these are going to operate as standalone (or semi-standalone) entities. In 2011, institutions will spend approximately 12% of their IT budgets with systems integrators (and are likely to invest a similar amount in 2012): we feel it is therefore entirely appropriate for banks and insurers to ask their chosen SI(s) to apply focus on the hardware and software powering the channel infrastructure. In summation, identifying ways to improve integration is essential, particularly in light of new interaction mechanisms most notably mobile and social coming to the fore.
Mobilizing and Socializing Financial Services

In the last three years, an ever-increasing number of institutions have embraced the concept of mobile banking to deliver informational (e.g., balance enquiries and account alerts) and transactional (e.g., payments and remittances) services to customers via handheld devices. This has been made possible as a result of significant technological advancements: for example, wireless operators' provision of highspeed mobile data networks and the release of sophisticated smartphones and tablets capable of running dedicated applications in a secure environment. Where the apps are concerned, these have typically been developed by independent software vendors of which there is a myriad focused specifically on m-banking and supplied to institutions as a white label product (which can be rebranded accordingly) before being released to customers. While there is nothing inherently wrong with this approach, in our opinion the downside is a general lack of differentiation between offerings. IDC Financial Insights believes that having opened the mobile channel, additional developments are required to further improve the customer experience. Encouragingly, examples of technological innovation are beginning to emerge, such as the case of the Spanish retail bank BBVA.
BBVA at the Leading-Edge of Developments in Banking

BBVA is a good example of a financial institution making extensive use of innovative technologies to better serve its customers. The purpose of the bank's Innovation & Development (I+D) department is to identify and launch new lines of business for the bank, and ensure that any exploration of a growth opportunity supports one of the following main objectives: Increasing the loyalty of customers in markets where BBVA has a large penetration. Customer loyalty is supported by providing nonfinancial services that have a distinct value for individuals and SMEs (such as tourism, leisure, healthcare, and housing). Capturing customers in new segments and markets. Capitalizing on group assets by exploring new sources of revenue based on BBVA's existing portfolio (brand, branch network, processing capacity, etc.). Significantly, this also applies to
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emerging technologies of localization.

mobility,

biometrics,

and geo-

The bank identifies opportunities through research on the needs of individuals and SMEs and their consumer habits, through analyzing markets and sectors and by understanding the capabilities of the group's assets. After finding a new opportunity, a priority is assigned and an implementation schedule created, as part of I+D's strategic plan. Following the unit's formation, BBVA stopped thinking exclusively in terms of financial services and started to view its customers as people with specific needs in a range of different areas (housing, banking, healthcare, education, recreation, etc.) who require an integrated solution tailored for their particular personal circumstances and lifestyle.
B B VA is U s i ng I nn o va t i on t o Imp ro ve t he C ust o mer Ex pe rien ce

Where mobile banking is specifically concerned, BBVA is able to deliver personalized services and contextual marketing promotions using a combination of a customer's physical location and the bank's CRM system. When BBVA's app which is available on the iPhone, Android, and Windows Phone 7 operating systems is opened, this automatically triggers an alert on the proprietary Mobile Application Tracking (MAT) system. MAT has an interface with Google Maps to identify [and display onscreen] where the customer is, not only Spain, but anywhere in the world. Having established the location, MAT queries the CRM system to see if any messages should be pushed to the device. The following two examples help to illustrate the benefits of MAT from a customer-centric perspective: If the customer is travelling outside their home country, a message appears on the device screen reminding them to activate credit card spending alerts to flag any suspicious transactions (note: as part of its commitment to delivering a superior service, BBVA provides this service free of charge for seven days). If a new credit card is ready for collection from a branch, and MAT identifies the customer as being within a predetermined distance (e.g., <1KM), a message will appear advising them to visit [as they are in close proximity]. If the customer is further away, a message will not be sent. The transactional element of BBVA's mobile solution also includes the ability to make peer-to-peer (P2P) payments, complete with a dedicated tool that solves the oft-encountered problem of splitting a restaurant bill between diners. Crucially, and in contrast to many of their industry peers, all of BBVA's channels are tightly integrated. A customer can walk into a branch, and the teller is able to see a previous interaction via both physical (i.e., branches, ATMs, and contact centers) and virtual

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(online, mobile, and social) means. This, in our opinion, constitutes industry best practice, and BBVA has transitioned from traditional CRM into social CRM (SCRM). What do we mean by this? CRM is a philosophy and business strategy supported by an appropriate technology platform, business rules and predefined workflow. As its name implies, SCRM is an extension of SCRM, and involves an organization monitoring, engaging, and managing interactions with existing (and prospective) customers across the internet, digital and social spheres. The 'social' element is a major supporting pillar in BBVA's customercentric strategy, and the bank recognizes an implicit need to engage with customers and prospects via social sites. Sharing content, capturing interactions and encouraging users to rate products and services is a core objective. It is worth expanding on this last point to illustrate how BBVA is leveraging social to its advantage. If a customer gives a low rating to one of the bank's products such as a personal loan during the process of [competitor] comparison and selection, this is recorded and registered by the CRM system and a pop-up appears on the screen of an outbound agent in BBVA's sales team. A call is then immediately placed to the prospective product purchaser, and in the ensuing conversation a special, personalized offer such as a more favorable APR percentage can potentially be offered as an incentive. And with funds transfers performed via Facebook due to be launched in or around June 2011, it is clear that BBVA is pushing the boundaries where the utilization of social is concerned. Importantly, BBVA's technology-enabled, customer-centric strategy has resonated with account holders, thereby justifying the investment and development made in the mobile and social channels. We believe other institutions would be well-advised to examine BBVA's approach and learn valuable lessons in the adaptation of new routes to revenue. As Table 5 shows, the respondents interviewed by IDC Financial Insights did not display an overtly ravenous appetite to use social sites, such as Facebook and Twitter, for marketing or customer services purposes, either currently or in the future.

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TABLE 5
Use of Social Sites
Q. What are your plans regarding the use of social sites, such as Facebook and Twitter? Stage Monitoring social sites on ad hoc basis, but not actively participating in conversations No specific plans Will use social sites for marketing in the next 12 to 24 months Already using social sites for marketing purposes Already using social sites for customer enquiries Will use social sites for customer service in the next 12 to 24 months Note: Respondents = 30
Source: IDC Financial Insights, 2011

% of banks 43 37 27 13 13 10

We believe any reticence regarding the use of social is unwise. As BBVA's experiences demonstrate, a modern institution can be personal and socially connected in its approach to dealing with customers, while simultaneously retaining, refining and integrating traditional channels into a single entity for improved business intelligence and analytical purposes. Notably, this includes social networking analytics (which we abbreviate to 'socialytics'). With banking at an inflexion point in 2011, it is essential for institutions to understand their customers in as much depth and detail as possible. In our opinion, it is also important for banks and insurers to pay attention to two other areas where channels are specifically concerned.
The Influence of Consumer Technologies

Firstly, institutions should maintain a watching brief on the introduction of new consumer technologies (con-tech). History has shown that certain devices of which Apple's iPhone is perhaps the most obvious and prominent example have had a transformative effect in the business environment, and the financial services sector has certainly not been immune to this. While it is difficult to predict exactly where, when and from whom the next 'game-changer' will appear, it is equally hard to deny that further con-tech innovations will play an integral part in the way that customers manage their money and interact with their service provider(s). Encouragingly, and as Figure 6 demonstrates, the institutions interviewed for this white paper have their eyes and ears open to one extent or another. The results are in-line with our expectations: we would not expect banks to be highly influenced by con-tech, but in 2011, neither would we expect them to ignore it entirely. Thus, the 53% that are influenced to a medium degree fits with the overall

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market conditions at present. However, this may change over the next two to three years to the point where con-tech becomes a major influence. We will watch this space with interest.
FIGURE 6
Influence of Consumer Technologies
Q. To what extent are you influenced by new consumer technologies?

100 80

(% of Banks)

60 40 20 0

53 27

20

Medium

High

Low

Note: Respondents = 30
Source: IDC Financial Insights, 2011

The Influence of Other Vertical Sectors

Secondly, strategic channel developments in other vertical sectors should be taken into account. Why? In our considered opinion, institutions need to keep pace with organizations in industries such as telecoms and media and utilities, as they also operate with large and diverse customer bases. Retail banks and to a lesser extent insurers can also learn lessons from retailers, particularly when it comes to engendering loyalty, advocacy and the physical shopping experience. It is no coincidence that Dutch bank ING turned to Mood Media, a provider of retail marketing and sensorial marketing solutions whose clients number over 800 chains and include the likes of Nike, to completely regenerate its existing branch network into a state-of-theart environment. With over 200 'stores' transformed with new layouts and the use of digital media solutions (such as high definition screens for the purpose of targeted advertising and in-queue entertainment), ING has unquestionably been influenced by developments in modernday retailing. As Figure 7 illustrates, nearly two-thirds of respondents acknowledged a medium degree of influence exerted by other vertical sectors, which does not particularly surprise us. In the next 2 to 3 years, we may see a subtle shift, with those institutions currently in the 'low' category shifting into 'medium' as they become increasingly swayed by channel developments outside of the financial services.

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FIGURE 7
Influence of Other Verticals
Q. To what extent are you influenced by the channel strategies of organizations in other sectors?

100 80

(% of Banks)

63 60 40 20 20 0 Medium Low High 17

Note: Respondents = 30
Source: IDC Financial Insights, 2011

We believe it is valuable for banks and insurers to look beyond the borders of their own industry sector. And to that point, it is interesting to observe an influx of senior executives from external (i.e. non-FS) organizations to some of the world's largest banks, bringing with them new skills, experiences and a different mindset. Citibank's decision to hire Frank Eliason, who prior to joining was the director of Digital Care at Comcast (a provider of triple-play cable television, telephony, and broadband Internet services to residential US customers), is one such example. What Eliason lacks in banking industry expertise is cancelled-out by his knowledge of delivering an effective multichannel customer service.
Varied Interpretations of 'Innovation'

In researching this white paper, IDC Financial Insights was struck by the different interpretations of the word 'innovation'. Having asked each respondent to describe "the innovative approaches and technologies their institution is using in 2011 to improve the channel distribution strategy for an enhanced customer experience," the responses varied from the mundane to the predictable and managed by and large to avoid revealing anything genuinely exciting or revolutionary. By way of illustration, selected examples included: "We use mobile and Internet technology at the moment. We have also actively evaluated kiosk technology, and plan to use that." "Right now we are using Internet, [and] educating customers through our Web site. In the future we plan to venture into social networking sites to enhance the capabilities."

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 "Implementation of CRM solutions is the major achievement for 2011." "We are trying to see what we can do to enhance mobile banking and looking into service delivery through tablets and 4G devices." However, as the BBVA case study earlier in this white paper demonstrates, channel innovations are most definitely taking place, although they appear to be the exception rather than the rule. To be clear, BBVA is not the only institution pushing the boundaries where customer management and interaction is concerned, but we feel it is a minority of pioneers rather than the majority of the financial services sector that are exploring uncharted territories. FUTURE OUTLOOK
Scenario

While it is tempting to foretell a dramatic, industry-wide dismantling and reconstruction of existing customer channels, the reality is (highly) unlikely to bear testimony to this (although we are prepared to be proven wrong). IDC Financial Insights envisages that, like the interpretation of what constitutes innovation, strategic [channel] developments will vary between different banks and insurers. However, that's not to say significant change will not occur: there are already examples, some of which have been highlighted in this white paper, of institutions taking bold steps to improve the overall customer experience, reduce the total cost to serve and become far more scientific about the way in which profitability is measured. Today, banking and insurance is a relatively commoditized sector with small amounts of differentiation between products, services, and channels. By implementing appropriate (relative to the target segment) new technologies, blending them seamlessly with the channels already in existence and making full analytical use of the data gathered during each customer transaction or interaction, best-in-class industry leaders will emerge based on the effectiveness of their channel distribution strategy. Difficult decisions will need to be made. The shift to a CLV model gives far greater accuracy and insight into the 'importance' of each account holder (expressed in revenue terms). As a result, it may compel banks and insurers to concentrate on those the model deems profitable to a far greater degree than they do in 2011.

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CHALLENGES/OPPORTUNITIES
Channel Challenges for Institutions

We believe institutions must overcome the following channel challenges (note: these are not ranked in order of importance): Improve integration of channels, as this is essential from both an enhanced customer experience and business intelligence and analytics perspectives Persuade skeptical executives in both the business and IT that becoming socially connected is a positive step Overhaul legacy technology to ensure the capability, condition, and capacity of existing hardware and software is capable of meeting new operational and customer demands Redesign new business processes in line with the tighter integration of existing channels and implementation of new mechanisms (most notably social) Obtain executive buy-in and sponsorship in order to push through channel distribution improvements to a successful conclusion and avoid losing momentum Foster better engagement between business-side users and IT where the use of social sites is concerned Be prepared for closed regulatory scrutiny, particularly where the use of social media for sales and service initiatives is concerned Remove complacency over the adequacy of existing channels, such as mobile banking Deconstructing existing P&L structures may create internal schisms
Channel Opportunities for Institutions

We also believe that institutions can benefit from the following channel opportunities: Achieve a market leadership position by making use of new channel-related technologies Learn lessons from industry pioneers, not only in banking but also in other vertical sectors Make use of the increasing availability of open source tools (e.g., Google Web toolkit) to build rich Internet applications Shift to estimating profitability based on CLV in order to gain far greater confidence in predicted revenue per customer

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APPENDIX
Sources

Dodd-Frank fails to meet test of our times Financial Times, March 29, 2011 (http://www.ft.com/cms/s/0/14662fd8-5a28-11e0-86d300144feab49a.html#axzz1LIhDoGAk) EBA publishes details of its stress test scenarios and methodology EBA, March 18, 2011 (http://www.eba.europa.eu/News-Communications/Year/2011/The-EBA-publishes-details-of-its-stress-testscena.aspx)

Algebraic Values for Calculating CLV

Where: h is the horizon of the prediction (i.e., how far into the future) J is the number of products and business lines considered P I,j,t, is profit generated by the customer I at time t because of product usage j d is the discount rate Usually: h is taken via a business rule J is a trade-off between implementability and realism P I,j,t, is predicted using statistical models d is selected in agreement with business-side users and the finance department

Copyright Notice

Copyright 2011 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.
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