Description
This Digest offers a wide-ranging mix of articles: some topical, some tactical and others fundamental.
Financial Services
VOLUME IV – WINTER 2014
RETAIL BANKING
AMERICAS DIGEST
IN THIS ISSUE
1. DIGITAL CURRENCIES
The Path Forward
2. REINVENTING AFFLUENT BANKING
The Digital Opportunity
3. RETAIL BANKS & THE IRA
ROLLOVER OPPORTUNITY
The Road to Wealth (Management)
4. MAKING THE SWITCH
Checking Account Path to Purchase
5. THE DECISION-CENTERED BANK
Shaping Results by Deciding How to Approach
and Treat Each Customer
6. MORTGAGE CROSS-SELL
The Elusive Opportunity
7. LAYING THE FOUNDATIONS FOR RECOVERY
Transforming Small Business Banking &
Delivering Impact through Improved
Customer Experience
This Digest offers a wide-ranging mix of articles: some topical, some tactical and
others fundamental.
For topicality there is a review of digital currencies that compares and contrasts the better-
known “cryptography-based protocol” world of Bitcoin with the less-well-known “consensus-
based protocol” world of Ripple. Among other things, it argues that despite the far broader
current awareness of Bitcoin, the eventual winner is more likely to be based on an offering
from the consensus-based protocol world.
Tactically, there is a treatise on what it means to become a decision-centric bank. Given
the renewed interest in all things “data & analytical”, and the related interest in “big data”,
this is also fairly topical. Despite the advanced use of data in decision support processes in
the credit card and auto P&C businesses, we believe that there are opportunities to deploy
analytics more effectively in the rest of the industry; this article sets out a general approach to
becoming broadly effective in the deployment of data as a decision-centric bank.
Tactical proficiency is also central to separate articles on transforming small business
banking, improving the customer experience and upgrading mortgage cross-selling.
Some articles deal with fundamental banking issues. The article on reinventing affluent
banking tackles head on the dilemma of affluent consumers: they have more money but they
are costly to serve and special units set up to serve them often end up losing money. This
article describes how to approach and capture this customer segment in the digital age.
Similarly fundamental is the schematic illustration “Making the Switch” in banking. Our
recent in-depth research reveals some important basic facts about the purchase decision in
banking and lays them out in an appealing visual format.
As always, I hope you find them stimulating. Please let us know what you think.
Michael Zeltkevic
On behalf of the
Retail and Business Banking Practice
FOREWORD
TABLE OF CONTENTS
1. DIGITAL CURRENCIES 5
The Path Forward
Digital currencies like Bitcoin have been one of the hottest topics of 2014. Despite skepticism and legal concerns,
they have been gaining an increasingly solid footing among consumers, merchants and financial institutions.
But what will it take to achieve mainstream acceptance? To answer this question we assessed the main types of
digital currencies and identified use cases that can deliver improved customer costs and experience.
2. REINVENTING AFFLUENT BANKING 12
The Digital Opportunity
Affluent customers represent a conundrum for most providers. While their revenue potential should be much
better than a mass market customer’s, they often split their wallet across multiple providers and are demanding
and expensive to serve. However, new ways to exploit readily-available technologies offer the opportunity for
forward-looking competitors to break the linkage between high service and high cost and offer new ways to
capture share of wallet.
3. RETAIL BANKS & THE IRA ROLLOVER OPPORTUNITY 23
The Road to Wealth (Management)
Retail Banks & the IRA Rollover Opportunity looks at one specific “break-through” opportunity for banks: namely,
making themselves the preferred destination for customers rolling over their defined contribution plans into an
IRA. This is an approachable opportunity even for banks without large wealth management functions because it
is scalable without having to rely on a large, highly paid staff. We argue that this is one of the best ways for a bank
to build scale in, or even start, its wealth management business.
4. MAKING THE SWITCH 29
Checking Account Path to Purchase
Oliver Wyman and AOL used survey and clickstream data to understand how digital technology is reshaping the
consumer path-to-purchase for checking accounts.
5. THE DECISION-CENTERED BANK 33
Shaping Results by Deciding How to Approach and Treat Each Customer
It is the frequent decisions we make in the course of running a business that, to a large extent, determine how
profitable it will be. Some decisions are ‘strategic’ and frame the overall field of battle. But increasingly, it is the
myriad ‘micro-decisions’ – the ones controlling how we approach and treat each customer – that shape results.
This is how the world of ‘data & analytics’ can really have a powerful effect.
6. MORTGAGE CROSS-SELL 39
The Elusive Opportunity
Many banks are re-evaluating their commitment to residential mortgage lending in the face of the significant
investments required to meet regulatory and customer expectations. These investments would have a higher
return if mortgage could have a role in establishing and deepening customer relationships. Unfortunately, recent
Oliver Wyman research indicates that mortgage is not effective as a relationship-deepening platform outside of a
few niche areas. Banks should consider cross-sell tactics focused on these niches where returns justify the costs
to effectively pursue attractive pockets of opportunity.
7. LAYING THE FOUNDATIONS FOR RECOVERY 45
Transforming Small Business Banking & Delivering Impact through
Improved Customer Experience
Thematic Perspectives from Oliver Wyman’s 2014 European Retail and Business Banking Report: views on emerging
best practices in two of the major challenges facing European retail banks in the next 3-5 years:
• Transforming small business banking
• Delivering impact via improved customer experience
Digital currencies, loosely defined as electronic mediums
of exchange not subject to the control of a central
authority, have been one of the hottest topics of 2014.
Despite skepticism and legal concerns, they have been
gaining an increasingly solid footing among consumers,
merchants and financial institutions. But what will it take
to achieve mainstream acceptance?
To answer this question we looked at digital currencies
beyond the current market leader, Bitcoin, and
identified two broad types of digital currency protocols:
cryptography-based (e.g. Bitcoin) and consensus-
based (e.g. Ripple). We believe consensus-based
protocols hold more potential than their cryptographic
counterparts, as they promise lower long-term
transaction fees and support real-time transactions in
any currency, whether fiat or digital. There are at least
three use cases for which customer costs and experience
could improve from Ripple or a similar solution in the
near term: international remittances, peer-to-peer
transfers and business-to-business payments.
Given the potential, banks, networks, merchants and
other relevant stakeholder should educate themselves
on these solutions, without necessarily plunging into
implementation. Constant monitoring of the landscape,
engaging in conversations with start-ups and even
pilots should be on the radar screen of companies that
stand to gain from digital currencies – lest they end up
scrambling to catch up later.
Digital currencies have transitioned from a relatively
unknown “geek preserve” to a multi-billion dollar market
under the banner of Bitcoin. En route, they have sent
central banks, financial institutions, payment service
providers, merchants, and consumers worldwide into
rounds of wild speculation:
• Will digital currencies become the norm for
everyday purchases?
• Will payment costs shrink to near-zero?
• Is this the end of transaction fraud as we know it?
Bitcoin, the most successful digital currency, at one
point approached a $14 BN market value. Scores of “alt-
coins” jumped on the bandwagon trying to emulate its
success – over 500 to date. Some tried to legitimately
improve on the Bitcoin value proposition, others were
more questionable. Icelanders will certainly have fond
memories of Auroracoin, the alt-coin that was freely
distributed to the island-nation’s population in February.
At the time, Auroracoin’s market value surpassed
$400 MM, now it has all but vanished from existence. At
the time of writing, Bitcoin itself has been beaten down
to half its peak value.
On one hand, misinformation and speculation plague
the industry, which has become a target for law
enforcement and regulators. On the other, forward-
looking parties are increasingly seeing value in digital
currencies, and are moving fast to reap the benefits.
What better time to offer our perspective on the path
forward for digital currencies?
We will do so first by recapping what the year had in
store for digital currencies and the current state of the
1. DIGITAL CURRENCIES
THE PATH FORWARD
By Vanni Parmeggiani
Copyright © 2014 Oliver Wyman 5
market. Then we will explain the difference between the
two main types of digital currencies as we see it, focusing
on pros and cons. Finally, we will discuss where we see
the greatest opportunities for digital currencies – and
the challenges that need to be overcome.
A YEAR IN REVIEW
Many high-profile economists and bankers have
dismissed digital currencies as a passing fad. Despite
all the skepticism and semi-serious alt-coin attempts,
digital currencies do not seem to be going away.
By Q3 2014, the industry had attracted over $300 MM
in venture capital investment; for comparison, the
investment in internet start-ups in 1995 was 20% lower.
Well-known technology investors like Andreessen
Horowitz are supporting various digital currency
start-ups. Google itself backs Ripple, a leading digital
payments protocol and currency.
Some notable merchants and payment service providers
have started accepting bitcoins. Overstock.com,
one of Bitcoin’s early champions, claims bitcoin sales
approached $8 MM in its first year as a Bitcoin merchant.
Most recently, PayPal has declared it will start processing
bitcoin payments through its Braintree subsidiary.
Several sizeable hacks shook the industry throughout
the year, but companies seem to have learned from
them. After Mt. Gox, the largest digital currency
exchange in the world, lost nearly half a billion of
customer funds to cyber-attacks, audits and enterprise-
grade security have become increasingly prevalent.
However, aside from a cadre of enthusiasts, digital
currencies still raise more questions than acceptance.
Bitcoin, far and away the largest digital currency
worldwide with around 90% market share, persists in
being extremely volatile. The price of a bitcoin in the
past year ranged from a high of over $1,000 to a low of
less than $350. Volatility has made bitcoin more of a
speculative investment asset than a robust medium of
exchange: over the past year, bitcoin exchange-traded
volumes have been 10-15 times higher than transaction
volumes
1
(Exhibit 1).
Digital wallet solutions are simply too many and too
confusing for mainstream adoption by consumers
or merchants. Ease of use is a particularly significant
concern: the mechanics behind digital currencies
already resemble black magic, so the lack of user-friendly
offerings does not help.
The use of digital currency for illicit purposes is still a
concern. Bitcoin is the currency of choice for online drug
and weapon marketplaces like Silk Road, even though
Exhibit 1: Digital currency market snapshot
600
1,200
Bitcoin
91%
Ripple
3%
Litecoin
2%
Next 7
2%
Others
2%
DIGITAL CURRENCY MARKET SHARE BREAKDOWN
TOTAL = $5.7 BN
BITCOIN PRICE VOLATILITY
NOVEMBER 2013 OCTOBER 2014
Nov
2013
Dec
2013
Jan
2013
Feb
2014
Mar
2014
Apr
2014
May
2014
Jun
2014
Jul
2014
Oct
2014
Sep
2014
Aug
2014
BITCOIN TRADETO
TRANSACTION RATIO
Ratio
Bitcoin unit
price ($)
900
300
10
0
20
15
5
0
Source coinmarketcap.com, blockchain.info, Oliver Wyman analysis
1 Transaction volumes include C2C, B2C, and B2B bitcoin transfers.
Copyright © 2014 Oliver Wyman 6
law enforcement agencies have stepped up capabilities
to identify transactions on these networks. Digital
currencies offer a high degree of transparency – fund
flows can be tracked since their inception on publicly
available ledgers – but institutions willing to provide
digital currency services need to set up AML controls
that go beyond established practices to pinpoint
suspicious activity.
Regulators are going through the five stages of grief
in dealing with digital currencies (denial, anger,
bargaining, depression, acceptance). Some countries,
like China and Russia, are enforcing outright bans;
others, like the UK and Australia, are treating digital
currencies just like any other foreign currency; most
countries, though, are still trying to figure out the
best regulatory framework. In the US, the IRS has
announced that digital currencies will be treated
as an investment asset rather than a currency, and
be subject to capital gains taxation. The New York
Department of Financial Services is spear-heading the
first effort at regulating digital currency businesses
under its much-awaited “BitLicense”. Early drafts laid
out requirements in terms of AML, capital, cyber-
security and consumer protection – and drew outcries
of stifling innovation from start-ups operating in the
space. Undeniably though, balanced regulations that
guarantee system stability are necessary to boost
user confidence.
Established financial institutions and payment service
providers, notoriously wary of any innovation that might
carry additional regulatory risk, have been unwilling to
get involved with digital currencies thus far – although
interest is increasing.
What will it take to get digital currencies to the next
level? To answer that question, we have assessed the
two main types of digital currencies to indicate where
we believe the market will head.
COMPETING SOLUTIONS
Although Bitcoin has been grabbing most of the headlines
and has essentially monopolistic market share so far,
digital currencies are more than just Bitcoin. There are
two main types of digital currency protocols, where
by protocol we mean the set of rules that govern a
digital currency:
• Cryptography-based protocols
• Consensus-based protocols
Both protocols are decentralized in nature, as they
rely on computers operated by individual users to
provide the power necessary to process transactions.
The rationale is that decentralized processing is more
cost-effective than centralized processing (e.g. operated
by a corporate or governmental entity) because it
works on free-market principles – transaction costs are
determined by demand rather than fixed. However,
beyond this similarity, there are fundamental differences
in how the two protocols work (Exhibit 2).
Cryptography-based protocols like Bitcoin rely on
sheer network computing power to operate efficiently
and remain secure. Transactions are broadcast to all
computers in the network, called “miners”. Miners
compete to confirm transactions by finding a key to
a cryptographic problem in exchange for a monetary
reward. Every 10 minutes, confirmed transactions are
stored in a publicly accessible ledger called a “block
chain”, which contains details of all transactions that
have ever occurred on the protocol. Once stored, funds
cannot be reversed or re-spent unless a malicious
user somehow manages to take control of more than
50% of network computing power and undo the block
chain – something out of reach for hackers and even for
most sovereign nations.
2
Consensus-based protocols, of which Ripple is the
most prominent example, rely on the “network of trust”
principle. In order to validate a transaction between users
who do not know each other, the protocol attempts to
find a path in which each node is between two users that
have a trusted relationship. Once 80% of the network
reaches a consensus on a set of trusted transactions
(every 2-3 seconds), they are confirmed and stored in a
public ledger. As the network grows so does the amount
of trusted relationships, making the system more efficient.
“Gateways” (e.g. banks) facilitate network-building by
providing access for a multitude of users, similar to the
way payments service providers allow access to existing
payment rails.
We believe consensus-based protocols hold more
potential than their cryptographic counterparts, as they
promise lower long-term transaction fees and support
real-time transactions in any fiat or digital currency.
2 See Appendix for detailed description of Bitcoin mining process.
Copyright © 2014 Oliver Wyman 7
The cryptographic transaction confirmation process,
commonly known as “mining”, is not conducive to
maintaining low transaction fees in the long term. Each
computer participating in the network is currently
motivated to mine via incentives: new bitcoins and
transaction fees are assigned to the miner that confirms
a transaction batch. Since incentives are assigned only
to one miner at a time, whoever has the most computing
power also has the highest likelihood of winning the
incentive. But what happens when new bitcoins are
exhausted? New bitcoin issuance is only meant to
encourage network diffusion; no new bitcoins will be
assigned once the maximum amount of 21 MM has been
reached. At that point, the system needs to self-sustain
through transaction fees, which are close to zero now but
will inevitably rise to pay for mining costs. Unfortunately,
most miners already struggle to break even given the
skyrocketing computing power required to have even a
remote chance of winning incentives, so transaction fees
may rise quite a bit. Hence the main selling point for the
ecosystem to adopt Bitcoin – low transaction fees – comes
under question. Ultimately, centralized processing
may be more cost-effective for a system based on raw
computing power.
Consensus-based protocols, on the other hand, do not
rely on incentives in a winner-takes-all mining system.
Instead, the system relies on “access” fees charged by
the protocol operator (e.g. Ripple) and transaction fees
charged by service providers operating on the network
(e.g. gateways). The protocol operator is responsible
for maintaining and updating the rules that govern the
system, and enabling access to service providers; we
expect these activities to command a small portion of
overall end user fees. In parallel, any number of service
providers can flourish as long as they provide services that
customers want and are willing to pay for. Failing that,
customers are free to switch to a competitor that offers
better service or a better price. There is also an indirect
incentive for service providers to host computing power
to process network transactions, so they can become
vertically integrated with transaction fees reflecting the
full cost of network operations. We believe this system
represents a more sustainable demand-based solution
than one highly dependent on computing power costs.
There are other advantages to Ripple over Bitcoin,
and to consensus- over cryptography-based protocols
generally: Ripple is currency-agnostic and real-time.
In other words, Ripple can be leveraged to transfer
any currency that can be digitized, as long as there is a
market maker willing to facilitate the transaction. Since
essentially all relevant currencies can be digitized, the
opportunity is vast and Ripple can be implemented on
top of existing payments infrastructure with relative
ease. In a more futuristic scenario, the system could
also be used to transfer any kind of asset that can be
digitized, from car ownership titles to equities. All
this would be available essentially in real-time, as
transactions are processed in 2-3 seconds.
Exhibit 2: Bitcoin-Ripple comparison
USD GATEWAY
(e.g. bank)
EUR GATEWAY
(e.g. bank)
USD
XRP
EUR
MARKET MAKERS
BTC WALLET BTC WALLET
USD EUR BTC
USD bank EUR bank
MINERS
BTC
BTC
• Open source cryptography-based digital currency and
payment protocol
• Transactions only in bitcoins (native currency)
• New bitcoins (BTC) issued as incentive for processing
transactions until maximum amount of 21 MM reached
• Optional transaction fees
• Transactions processed every ~10 minutes
• Open source consensus-based digital currency
and payment protocol
• Currency-agnostic (transactions in any ?at or
digital currency)
• 100 BN ripples (XRP) available as bridge currency
to facilitate illiquid transactions
• Optional transaction fees
• Transactions processed in 2-3 seconds
BITCOIN RIPPLE
Copyright © 2014 Oliver Wyman 8
In the Bitcoin world, on the other hand, transactions
need to occur in bitcoins. Normal payment rails, like
credit or debit, need to be used to move funds in
and out of Bitcoin wallets, and currency conversion
fees and FX risk may apply. This raises the problem
of currency acceptance, above and beyond payment
system acceptance: not only must you be connected to
a Bitcoin wallet or processor, you must also be willing
to store and be paid in bitcoins. Given bitcoin volatility,
even the most supportive merchants convert bitcoins
back to fiat currencies as soon as they receive them.
Furthermore, Bitcoin transactions proscess in 10 minutes
on average – the time required for miners to reach
consensus on a new transaction batch. While this may
not matter much for e-commerce, it poses issues for in-
person transactions.
Bitcoin derivatives and protocol enhancements are
in the works, but in the meantime a solution like
Ripple is already available on the market – making
it, or something similar to it, a frontrunner for
mainstream adoption.
THE FUTURE IS NOW(ISH)
By the end of 2014, three banks have announced adoption
of Ripple as a payments protocol: Fidor Bank in Germany
has been followed by Cross River Bank and CBW Bank
in the US. All banks were particularly enthusiastic about
the opportunity to reduce customer costs for electronic
payments. Most recently Earthport, a global provider of
white-label cross-border payment services, announced a
partnership with Ripple.
We believe there are at least three prominent use cases
that could benefit from Ripple or one of its cousins in the
near term (Exhibit 3):
• International remittances
• Peer-to-peer (P2P) transfers
• Business-to-business (B2B) payments
International remittance volumes are huge: in 2014
close to $500 BN was sent overseas. Remittances are
also one of the most expensive payment ecosystems for
consumers worldwide: prices range from $10 to $20 per
transaction, while the average ticket size hovers around
$200. Considering the added costs and risks of having
to use physical locations and cash or checks to conduct
transactions, the market is ripe for disruption. Digital
currencies promise to support remittances at a fraction
of the cost, and allow users to leverage self-service
transaction solutions such as mobile phones or ATMs
alongside traditional physical locations. Notably, SMS-
based mobile solutions are being developed alongside
smartphone solutions, in order to effectively target
emerging markets. We have yet to see a substantially
successful service in this space, but the amount of
venture capital interest would definitely suggest 2015
Exhibit 3: High-potential digital currency use cases
USD REMITTANCE
GATEWAY
EUR REMITTANCE
GATEWAY
MARKET MAKER
DIGITAL CURRENCY PROTOCOL
USD EUR
BANK A
GATEWAY
BANK B
GATEWAY DIGITAL CURRENCY PROTOCOL
LOCAL
CURRENCY
BUYER
GATEWAY
SUPPLIER
GATEWAY S DIGITAL CURRENCY PROTOCOL
LOCAL
CURRENCY
INTERNATIONAL REMITTANCES
PEERTOPEER TRANSFERS
BUSINESSTOBUSINESS PAYMENTS
Copyright © 2014 Oliver Wyman 9
might bring disruption to one or more remittance
corridors in the form of new entrants or incumbents
adopting new technologies. Some new entrants have
been hinting at consumer prices around 1% of the
remitted amount – if that were the case, consumer
savings could range between $20-50 BN annually.
Compared to remittances, P2P funds transfers are more
sporadic and typically occur within a single country’s
borders. P2P transfers have already been the target of
disruption in certain sizeable markets – most notably,
in the US PayPal’s subsidiary Venmo grew to over $1 BN
in P2P payments in 2014. While most US banks allow
free transfers within the bank, inter-bank transfers are
relatively inefficient as they rely on ACH or wire rails.
ACH is inexpensive, but takes 1-2 business days to
process and can be revoked within up to 60 days; wire
transfers do not suffer these shortcomings, but they
come with a $10-20 price tag. Solutions like Venmo
can make things easier, but require consumer to open
separate accounts outside of their bank and link their
cards or checking accounts as funding mechanisms. If
banks were to become digital currency gateways, on the
other hand, they could facilitate real-time, nearly cost-
free transfers with minimal disruption to their existing
infrastructure and core systems. This could be even more
appealing to banks that have an established presence
in multiple countries (e.g. Citi, HSBC, BBVA), given the
high transfer time and costs for cross-border transfers,
even if they effectively occur within the walls of the same
institution.
B2B payments are typically large in nature and can be
recurring, especially in buyer-supplier relationships.
In Europe SEPA has established shared standards
and direct debit is essentially free, but in the US and
elsewhere the system is not as seamless. In the US for
example businesses use checks for around half of all
B2B transactions – even though by some accounts this
generates a staggering $50 BN annual processing cost
and high fraud risk. Converting to electronic payments
means incurring the aforementioned ACH or wire issues,
or facing card fees of 2-3% – sizeable for payments of
several thousands of dollars. So why not leverage a
digital payment protocol that is real-time and extremely
low-cost? Businesses could use a bank gateway or even
set up their own gateway and connect their suppliers to
it. Based on our understanding of the Ripple protocol,
participating in the network appears to be fairly
straightforward from an implementation perspective.
If Ripple or an alternative solution gains traction for
these use cases, it could pave the way for mainstream
consumer adoption for purchase of goods and services
as well, where merchants are faced with steep card
acceptance fees. Presumably the first applications would
be in e-commerce and m-commerce, to be followed by
in-store transactions. However, complexities increase:
merchant acquirers and device manufacturers would
have to adapt their processes and technology, and the
response of card issuers and networks is yet to be seen.
Given all the “ifs” influencing this scenario and the need
to first build critical mass, it is difficult to foresee the
time frames and modalities in which it will play out – but
billions of dollars are at stake.
CONCLUSIONS
Digital currencies are one of the most disruptive
innovations in the payments world since the invention
of credit cards over half a century ago. The amount
of interest by both the private and the public sector
signals how potentially far-reaching and game-changing
the implications are. Increasingly robust solutions
are emerging from the Wild West days of the Bitcoin
gold rush – and established merchants and financial
institutions are taking notice.
We believe it would be a mistake for companies not
to educate themselves on how these solutions could
improve their business, even if an implementable
solution may be years away. Network effects are critical
to reap benefits, so being a fast follower is probably
a good strategy; but being a fast follower requires
that companies understand solution pros and cons,
implementation complexities, investment requirements
and key success factors.
Vanni Parmeggiani is a Principal at Oliver Wyman.
Copyright © 2014 Oliver Wyman 10
APPENDIX: BITCOIN MINING PROCESS
TRANSACTION PROCESSING
1) TRANSACTION CONFIRMATION 2) BLOCK CHAIN RECORDING 3) MINER INCENTIVE DISTRIBUTION
Block chain
Transactions New block
Block chain
Orphaned
block
Block chain
• New bitcoins
• Transaction fees
• Transactions are broadcast to all miner nodes
in the network for confirmation
• Each miner node bundles transactions into
a block and competes to confirm the block
by solving a cryptographic proof-of-work
problem (details on following figure)
• When a node finds a proof-of-work, it
broadcasts the block to the whole network by
adding it to the block chain
• Other nodes confirm the block by re-running
the winning node’s solution to the proof-of-
work problem
• Confirmed blocks are time-stamped in the
block chain, creating a public and sequential
database of all bitcoin transactions
• Nodes express their acceptance of the block
by working on creating the next block in the
chain, using the identifier of the confirmed
block as a starting point
• New bitcoins and transaction fees are
collected by the node which found the proof-
of-work confirmed by the network (“winner
takes all”)
• As long as the incentive to mine for new
blocks is higher than the incentive to disrupt
the block chain, the majority of network
computing power will be non-malicious and
Bitcoin will be secure
CRYPTOGRAPHIC PROOF-OF-WORK PROBLEM-SOLVING
1) INPUTS 2) HASH FUNCTION RESOLUTION 3) OUTPUT
Previous block
reference
Metadata
Transactions
Nonce
Block in
progress
+
Nonce
(solution)
Resulting
hash
…
New
block
Con?rmed
block
… … …
• Inputs to the hash function for a new block
always include:
? Hash reference to the previous block
? Metadata (e.g. a timestamp)
? All transactions included in the new block
? A random number called a nonce
• Miners repeatedly increase the nonce until the
hash function yields an output with a certain
number of leading zeroes
? More leading zeroes mean fewer possible
solutions/more time required to solve
the problem
? Every 2,016 blocks (~2 weeks), proof-
of-work difficulty is reset so that miners
employ ~10 minutes to confirm a block
on average
• When a nonce that works is identified, it is
appended to the end of the block with the
resulting hash reference
• Every other miner in the network can run
the hash function with the winner’s nonce to
verify the solution
• If the solution is accepted by a majority of
miners the winner gets the reward and a new
block is started, using the previous block’s
hash as a reference
Copyright © 2014 Oliver Wyman 11
Affluent customers represent a conundrum for most
providers. While their revenue potential should be
much better than a mass customer’s, profit is typically
compromised by high cost to serve, driven by the
perceived need to respond to demands for higher
service levels utilizing expensive personal advisors.
However, new ways to exploit readily-available
technologies offer the opportunity for forward-looking
competitors to break the linkage between high service
and high cost. The competitive landscape of the
Affluent segment will be redrawn over the next few
years as leaders adopt better and cheaper ways to serve
these clients and disrupt the businesses of laggards,
leaving them with leadership only in the high cost, low
profit segment.
To grow or even maintain share in this segment,
competitors need to address three issues:
1. How and where to substitute digital offerings for
personal service, both face-to-face and voice-based.
2. How to develop effective mechanisms to drive
sales through digital channels, shifting from “push”
to “pull”.
3. How to align the organization around this
new, digitally-enabled model, embracing new
opportunities and letting go of legacy approaches
that will compromise the new business.
In this article, we look primarily at a subset of the first
issue – how to introduce digital offerings into the
investment product and service arena. We provide
examples of ten potentially game-changing digital
innovations in this space that are live or about to appear
in the market – they are not theoretical concepts, but
competitive offers that providers are likely to face soon if
they are not already.
As a starting point, we begin by describing the economic
challenges of affluent banking and how a customer-
oriented digital approach may become a game changer
by reviewing the digital trends in affluent banking.
We then present ten digital innovations across the
investment product value chain and discuss three steps
that all banks should take to develop a successful digital
strategy. We conclude by considering why banks have
been slow to adopt these innovations and how different
choices will influence the future winners and losers.
Digital is now moving from a relatively simple problem
of adding new channels and features – what we call
“Digital Featurism” – to the more complex issue of
becoming a core part of financial services business
models. Managing substitution is the new challenge
and will define who wins and who loses in both Affluent
and beyond.
2. REINVENTING
AFFLUENT BANKING
THE DIGITAL OPPORTUNITY
By Ashley Cunnington, Paul Mee and Mike Harding
Copyright © 2014 Oliver Wyman 12
1. SERVING THE AFFLUENT
The affluent banking segment traditionally presents
a quandary for retail banks. On the one hand, affluent
customers are attractive for a number of reasons – they
represent a large and growing segment, hold more
products than the average retail customer and hold a
greater nominal value within these products. On the
other hand, it is a difficult segment to serve effectively
in order to differentiate and win. Affluent customers
typically have their financial holdings spread across a
number of different providers, in order to find the best
price, the best experience, or the best advice. Being the
main transactional bank does not necessarily correlate
with securing the customer’s total value, but does carry
much of the cost-to-serve.
Digital technology has transformed many large
industries over the last decade, leading to new
business models and new dominant market players. In
comparison, the pace of change and broad impact of
digital technology on the banking industry has thus far
been limited. Whilst we have seen rapid developments in
some areas (e.g. adoption of online and mobile banking
for simple transactions and sales), digital has thus far
failed to deliver the long-promised improvements
in customer experience and cost efficiency. This is,
currently, no less true in affluent banking. But things
are changing.
Traditional FS providers face a difficult future. Since the
crisis, the banking industry suffers from a poor image
and unhappy customers are increasingly looking for
and offered more attractive alternatives. We observe a
strong influence of non-banking sectors on customers’
expectations and behaviors. Banks and others need to
“raise their game” to reflect their weakened positions
and higher customer expectations. Despite growth in
the segment, there will be downward pressure on pricing
and revenue as customers become less willing to pay
for “inferior” service and as price comparison platforms
erode the potential to charge premium prices.
At the same time, the scale and nature of investment
needed in the digital space can be substantial, and will
affect the overall cost base and banks’ already squeezed
profitability. Providers must face this double threat of
declining revenue and higher costs not just by adding
new digital services, but by using them in a smart way to
replace higher cost assets and services. In so doing, they
need to learn new skills rapidly including addressing
such difficult questions as:
• How to recruit customers through digital channels?
• How to use digital to cross-sell and up-sell products
amongst affluent customers?
• How to build “stickiness” into the offering to counter
the threat of attrition and tendency to multi-bank?
By way of example, consider the total economics of a
“typical” affluent customer, as shown in Exhibit 1. In
this simplified case we break the financial holdings into
three parts:
• The primary banking relationship – €25,000 deposits
at 2% NIM
1
, fee income of €250, cost-to-serve of
€550 based on an RM-based model.
• The residential mortgage – €300,000 mortgage with
1.5% NIM and fees, 0.5% opex and 0.25% cost of
credit (losses and capital).
• Investments – €200,000 AuM with 1% income, 0.3%
distribution cost and 0.3% platform cost.
This simple example highlights three areas where digital
investments can help to enhance overall customer value:
1. Capturing a larger share of the customer’s wallet
through a better understanding of the client and
more targeted, more relevant and more proactive
contacts. All this to increase service quality and
expand the offering, as well as develop platforms
that aggregate all of customer’s assets in one place
and provide the benefit of a single view.
2. Reducing servicing costs by replacing low-value
Relationship Manager contacts with online, self-
service tools, and opening up a full range of new
advisory models.
3. Providing new ways to acquire customers online,
often at significantly lower costs compared to today.
1 Including benefits of term and liquidity premia in transfer pricing.
Copyright © 2014 Oliver Wyman 13
2. DIGITAL TRENDS
While much remains uncertain, with banks adopting
different approaches to digital technology in affluent
banking, four key trends are clear:
1. Digital channel presence is non-negotiable. All
customer segments increasingly rely on online and
mobile access to banking services. Experience in
the US suggests that demand for digital services
will be particularly strong among mass affluent and
high-net worth customers. This trend will strengthen
with the increasing importance of Generation Y,
characterized by greater uptake of smartphones
and reliance on digital technologies. Hence, some
competitors are already positioning their products
and services to attract future affluent clients at an
early stage by expanding their use of the digital
servicing channel.
2. Digital clients are concentrating banking and wealth
management services onto single platforms. This
is reflected by a proliferation of aggregated portal
solutions in this space, such as Mint.com or Personal
Capital. Traditional banks are reacting by expanding
their product offerings and redesigning their
platforms to meet the clients’ need for a “one-stop
shop”. The aim is to provide a single customer view
both internally and to the customer. Market leaders
in this respect, such as Chase in the US, operate one
portal integrating standard banking functionality
(person-to-person transfers, bill payments, etc.)
and wealth management functionality (asset
allocation data, financial planning, etc.) with uniform
navigation, branding and user experience across
all areas.
3. The digital channel is becoming an integral part of
getting advice. This trend has three facets. Firstly,
digital tools are increasingly used to improve the
quality of interaction between customers and
Relationship Managers (RMs). For example, Groupe
Generali France developed a mobile advisor tool for
RMs, which allows them to show clients portfolio
summaries, analytics and charts on the go. Secondly,
in the aftermath of the crisis, clients believe more in
getting advice from their peers – who are considered
more credible than Relationship Managers
commissioned on sales – and are more and more
looking for “People like you” approaches to see
how real people similar to them behave or invest.
Thirdly, more banks are leveraging digital solutions
in the background to enable RMs to use their time
more efficiently.
Exhibit 1: Affluent customer value across providers
Main bank
pro?t 200
Mortgage provider
pro?t 2,250
Investment providers
pro?t 800
Total
pro?t 3,250
Main bank
cost
Mortgage
provider income
Mortgage
provider cost
Investment
provider income
Investment
provider cost
750 550
4,500 2,250 2,000 1,200
3,250
Customer
pro?t
Main bank
income
Source Oliver Wyman analysis
Copyright © 2014 Oliver Wyman 14
4. Banks are increasingly deploying cutting-edge
advances in digital technology to better serve
customers across a range of areas. For example,
new security features, such as retinal scanning or
voice recognition are used to simplify customer
identification. New document sharing solutions,
such as secure online vaults, allow better back-
and-forth collaboration. New video platforms and
digital workshops are used to educate customers on
markets, products or usage of digital platforms.
3. INNOVATING IN AFFLUENT BANKING – TEN IDEAS
To illustrate how digital technology can make a
difference in affluent banking we have identified
ten examples of digital innovation across the whole
affluent banking value chain (Exhibit 2). Some of these
innovations have already been implemented by market-
leading traditional banks; others were introduced by
non-traditional FS providers; all could be adopted more
widely in the banking industry.
Exhibit 2: Selected digital innovations along the affluent banking value chain
PROSPECTING AND
ACQUISITION
ONBOARDING
AND PROFILING
ADVICE AND
IMPLEMENTATION
MONITORING
AND REPORTING
OPERATIONS
IMPROVE
THE
EXISTING
OFFERING
CREATE
NEW
OFFERING
1. Intuitive toolkit to determine/
validate portfolio strategy
2. “People like you” comparison
within client base
3. Investment simulator to access
risk-return of investment plans
4. Consolidated
?nancial reports
(incl. all assets)
5. Open architecture
with 3rd party
products/services
6. Social network for wealthy 45+ clients
7. Client preference-
based advisor
matching
8. Low-cost thematic investment ideas
9. Investment strategy
based on crowd
sourcing of ideas
10.Digital concierge
service with focus
on (pre-) retirees
Source Oliver Wyman analysis
Copyright © 2014 Oliver Wyman 15
IDEA 1: PORTFOLIO STRATEGY
Provide overview of possible investment strategies
using an intuitive toolkit, enticing new clients and
delivering better service
Strategic intent:
• Retain clients by fulfilling their need for
investment guidance.
• Help clients take better investment decisions driven
by their risk/reward tolerance.
Choosing an investment strategy depends on many
factors (risk and reward preferences, current age,
income, etc.) and inexperienced individuals are likely to
need help. Banks can partly fulfil this need by building
an intuitive, online tool to provide initial investment
guidance. Such a digital solution can be easily accessible
from all relevant areas of the bank’s website (including
the online banking portal), and allow customers to
obtain initial investment guidance more quickly and at
a lower cost than what could be provided by traditional
investment advisors. For example, E*Trade offers a free
“Online Portfolio Advisor” tool. First, the tool asks the
user to fill out a straightforward survey. Then, based
on submitted responses, it determines the user’s
investment profile and displays a sample portfolio
allocation. Users can complete the process online or
offline with the help of a professional advisor and initiate
the process of opening up an investment account.
IDEA 2: PEOPLE LIKE YOU
Use collaborative filtering to show clients how
anonymised people similar to them are investing and
managing their lifestyle
Strategic intent:
• Increase cross-selling and decrease advisor
involvement by obtaining a better understanding of
customer behavior.
• Increase client satisfaction by offering appropriate
products at the right time.
Collaborative filtering allows making recommendations
for “similar” items based on user’s own preferences. The
key idea is that if User one likes A, B and C, and a similar
User two likes A, B and D, then User one is more likely
to be interested in D than some alternative product.
Collaborative filtering is widely used by online retailers,
including Amazon.com or iTunes. More recently the
same approach has been implemented in finance. For
example, OCBC Bank in Singapore and NAB in Australia
both introduced simple “People like you” tools that allow
users to compare their spending patterns with others
in the same demographic. The same approach can be
used more widely in affluent banking. It is sufficient to
record initial information and on-going positions for
individual customers. Then monitor them against a
database of similar customers and provide anonymous
recommendations e.g. “users similar to you started doing
X at this point”.
IDEA 3: INVESTMENT SIMULATOR
Visualize the results of a retirement/investment plan
to improve client understanding and communication
Strategic intent:
• Help clients understand the impact of their decisions
now on their future investment successes and adjust
the asset allocation, risk level or time horizon.
• Sell more savings products.
• Avoid self-directed clients leaving the platform to
seek advice or complement an advised offering.
Choosing an investment strategy is affected by multiple
factors, including time horizon, risk tolerance, desired
future income, future life events, etc. To improve client
understanding and communication of the available
options banks can build investment simulator tools
showing the results of a retirement/investment plan.
Visualizing likely outcomes helps customers realize
what impact their investment decisions now will have
in the future and what adjustments may be necessary
to achieve the desired outcome. Investment simulators
can vary greatly in their level of sophistication, ranging
from simple single-outcome tools focusing on life
events that mainly aim to raise questions which can be
addressed with an advisor to sophisticated tools aimed
at investment professionals allowing detailed scenario
analysis (e.g. Voyant). Banks should carefully consider
optimal use of such digital tools.
IDEA 4: FINANCIAL CONSOLIDATOR
Consolidate client’s assets in one place, provide
analysis tools and referrals to generate revenue
Copyright © 2014 Oliver Wyman 16
Strategic intent:
• Help clients build a complete picture of their assets
and thus enable them to better manage their affairs
through better product diversification, better prices,
more precise view on risks taken and an easier
comparison of performance.
• Generate revenue through referral fees.
As discussed in the previous section, there is a clear client
need around having a consolidated view of all customer
assets and liabilities in one single place. Some banks
have started to offer digital solutions that provide a single
customer view. One example of such a service is Mint.
com, which has over 10 million registered customers
across the USA and Canada. The portal supports multiple
types of accounts, offers functionality to set budgets,
and categorize expenditures. Based on the analysis of
spending behavior it recommends potential savings. The
service is provided for free, with referral fees generated
through savings recommendations. In Europe, this is more
developed in the Insurance space where platforms such
as Comparis in Switzerland provide information on all
insurances you hold. The tool contacts you proactively and
before all legal deadlines to offer alternatives to switch for
better products. Traditional Financial Services providers
should carefully consider opportunities related to
developing similar tools. A potential area for development
is a service that targets pre-retirees with functionality to
manage and compare multiple pension providers.
IDEA 5: OPEN ARCHITECTURE
Increase client stickiness by offering third party services
on own platform, supported by additional services
Strategic intent:
• Give clients a broader choice of products, either
by filling in gaps or in direct competition with
own offerings.
• Generate fees from third-party services sold.
• Position as a one-stop shop.
In recent years, we have seen significant growth of online
comparison engines that allow users to choose suitable
offers for a wide range of goods including financial
services products, such as loans, mortgages, credit
cards or insurance. Customers using comparison engines
benefit from greater choice and frequently from easier
administration at no extra cost. In a similar spirit, banks
should consider complementing their affluent banking
offerings with third-party products (potentially limited
to non-competing products). This generally requires
careful consideration of benefits from increased customer
stickiness versus undermining own brand and potential
reputational risks. However, the business model based on
open architecture can be very successful as demonstrated
by the example of Fidelity, which operates a leading fund
platform in the UK, US and other geographies selling its
own as well as competitor products.
IDEA 6: SOCIAL CIRCLES
Develop a social network matching client profile in
order to raise customer satisfaction and gain better
client understanding
Strategic intent:
• Increase understanding of clients’ needs at low cost
by interacting with clients online.
• Help clients to get peer advice.
• Increase brand recognition and client retention
through online interactions.
Many of the most popular websites on the internet like
Facebook, LinkedIn or Twitter are built around the idea
of connecting and sharing with like-minded people. In
addition to the largest social networking sites, many
other sites provide similar services for specific niches:
USAA provides community hubs for military spouses
and veterans, CafeMom for mothers and aSmallWorld
for the social elite and the jet set; Coutts facilitates
communities within its client groups (e.g. entrepreneurs,
professionals). Banks can leverage the same idea to build
an opt-in social network and build a digital meeting place
for wealthy baby boomers and retirees. This would allow
more targeted focusing on that peer group and facilitate
discussions on key topics, such as retirement planning.
IDEA 7: ADVISOR MATCHING
Let users handpick their advisors and allow digital
interaction, increasing customer satisfaction
Strategic intent:
• Maximize convenience and satisfaction by allowing
clients to choose their own bank and relationship
manager online.
• Earn referral fees.
Copyright © 2014 Oliver Wyman 17
Some banking customers, especially in the affluent and
HNW segments, would prefer to personally choose their
financial advisors and get to know them before receiving
financial advice. To meet this preference and ensure
closer relationships between clients and advisors, a bank
may enhance its affluent banking offering to include
an online advisor matching platform. Similarly to the
functionality offered by unbiased.co.uk (an independent
non-profit UK body), such a platform could allow users
to filter through profiles of potential advisors based on a
range of factors, such as expertise, geographical area or
languages spoken and include a tool for quick and easy
communication. In addition, all advisors added to the
platform may be vetted by the bank and rated by clients
to ensure quality.
IDEA 8: THEMATIC INVESTMENTS
Use an online tool to explore, discuss investment
ideas, then customize the portfolio and invest cheaply
Strategic intent:
• Drive additional volume through a
stockbroking platform.
• Establish strong and sticky client relationships.
To enhance the investor proposition of an affluent banking
offering, banks could provide customers access to, and
perhaps guide them towards, thematic investment ideas
and translate them into tangible and easily accessible
trades. This could take the form of either an online
platform aimed at self-directed investors or low-cost
investment advice provided by relationship managers.
One successful website using such an approach is
Motif Investing. First, the website conducts research to
identify trends and investment ideas. Then, it screens
stocks and weights them to build sample portfolios
around different themes, such as “Clean Technology
Everywhere” or “QE Japan”. Investors can review the
portfolios, discuss them in online forums and tailor as
required. They pay a fixed fee for buying a motif of 30
stocks. In summary, the challenge is to translate bank
research into simple trades and provide a low cost
transaction service.
IDEA 9: CROWD INVESTMENT STRATEGY
Use existing and sourced client portfolio data
to inform clients what others are doing with
their finances
Strategic intent:
• Use data to inform clients what other people are
investing in.
• Prompt clients to invest more and thus earn
revenues through increased volumes.
Another idea to drive additional volume through the
stockbroking platform is to use crowd sourcing to
provide or review investment suggestions. Crowd-
based solutions have affected many sectors – from
encyclopedias and travel industry to fund raising – and
are now making their way in finance. For example, eToro,
a social trading network in Cyprus, allows clients to view
trading activity of others and link their portfolios to “guru
traders” to copy their trades. Motif Investing mentioned
in Idea 8 allows users to vote on an theme portfolio and
discuss it in detail in a forum. Such capabilities can be
easily added to affluent banking offerings while alerting
users that crowd views may not be reliable, timely or
appropriate for complex issues.
IDEA 10: DIGITAL CONCIERGE
Provide a digitally-enabled concierge product tailored
to client base, to greatly increase client satisfaction
Strategic intent:
• Provide a helpful and convenient service enabling
clients to do more.
• Earn revenues through fees or advertising.
To increase customer satisfaction and differentiate from
competitors, banks may introduce a complementary
or paid-for concierge service for (pre) retirees. One
example of such a service is MyConcierge in France,
which offers: restaurant and travel reservations, cultural
and sporting events, and sporting requests. Services
can be accessed over the phone, via the web or by using
a dedicated app. Implementation of this idea requires
careful positioning next to other concierge services, e.g.
offered by cards. One potential challenge is the need
for the service to consistently meet bank brand and
quality expectations.
Copyright © 2014 Oliver Wyman 18
A PRESCRIPTION FOR SUCCESS
The rapid technological and social changes described
above create threats and opportunities for banks in
the Affluent segment. How should banks respond and
manage this process? Below are what we believe to be
the most important items to consider.
A. Understand the dynamics of your portfolio and
who your customers are. Getting a robust customer
fact base is key. Different segments often have very
different behaviors and profitability, therefore it
is worth investing in understanding what the key
customer segments are and their differences in
terms of behaviors, profitability, likelihood to switch
and features they value most.
B. Think carefully how to maximize the required
investments across future market and competitor
scenarios. This requires a good awareness of existing
innovation and how they will reshape the sector.
What do you have in place now and coming on
stream soon? How are your competitors moving in
the digital space? Test your current strategy against
tomorrow’s environment and reconsider your digital
strategy in this context.
C. Decide on a digital participation strategy. This
requires understanding the customer “value
equation”. Starting with the status quo, banks should
re-assess customer value to the bank and how it is
likely to change over time due to evolving customer
expectations and behaviors. Based on the results,
the bank should consider all options available to
affect future customer value. What could be done
differently? How much will it cost and how much
impact can it have on customer value?
D. Prioritize investments. This involves allocating
planned initiatives into different groups. Typically
defensive and/or high positive value impact
investments are classified as “must haves” and
prioritized. Lower value investments with an option
to delay action are classified as “Watch points” and
implemented based on market developments. Costly
investments with a potentially high but uncertain
impact are classified as “Big Bets”. Generally, we
advise banks to place competing bets, in much the
same way as innovative technology companies.
E. Engage the organization. Success will likely require
major change in culture and infrastructure, and
lessons must be learnt from other successful players.
To win in the digital space, banks need to view digital
as a fundamental change with potential to alter the
whole value chain.
Copyright © 2014 Oliver Wyman 19
CONCLUSION
Affluent segment providers have not yet fully embraced
these ten ideas. Much of this has been for understandable
reasons given the limited capacity for investment and
the difficulty to find the right financial equilibrium. This
is in part driven by an approach that attempts to add
new digital capabilities without “risking” reducing the
traditional offering. However, as more providers embrace
digital offerings as substitutes rather than additions,
the risk may lie with those who fail to move. Recent
announcements by leading banks such as Barclays, HvB
and Wells Fargo indicate movement toward reducing
reliance on traditional assets such as branches in favor of
investment in digital channels and offerings.
To win in the digital affluent space, banks need to view
digital as a fundamental change, with potential to
alter the whole value chain. The expected benefits are
substantial: not only a rise in affluent customer numbers,
reduced cost-to-serve and streamlined process but also a
notable improvement in overall economics and enhanced
customer experience. The transition won’t be easy, but the
future winners will work out how to do this effectively.
Ashley Cunnington is a Partner at Oliver Wyman.
Paul Mee is a Partner at Oliver Wyman.
Mike Harding is a Partner and Head of the Digital Network group.
Copyright © 2014 Oliver Wyman 20
APPENDIX
SUMMARY OF THE 10 IDEAS
Idea Description
Potential benefits
to firm
Potential
downsides
Implementation
challenges Examples
1. PORTFOLIO
STRATEGY
• Explore risk/return
trade offs of an
investment strategy
using an intuitive
toolkit then review
with a real person
• Attract new clients
• Strengthen advisory
process by
communicating risk/
reward trade-offs
• Avoid mis-selling
• Mechanics and time
needed may not be
acceptable to clients
• RMs may not be
suited to playing
validator role
• Tool requires thought
and careful design
• Integration into
wider advisory
process
• E*Trade (US)
2. PEOPLE
LIKE YOU
• See what real
people similar to
you are doing with
their money
• Increase cross-selling
• Supports self-service
• Comparisons may
be misleading/not
reflect complexity of
client’s situation
• To work out the
mechanics, in
particular disclosure
issues
• Getting clients to opt in
• OCBC Bank
(Singapore)
• NAB (Australia)
3. INVESTMENT
SIMULATOR
• Understand the
risk/return options
associated with a
savings plan
• Attract new clients
• Strengthen advisory
process by communi-
cating risk/reward
trade-offs
• Avoid mis-selling
• Mechanics and time
needed may not be
acceptable to clients
• RMs may not be
suited to playing
validator role
• Tool requires thought
and careful design
• Integration into
wider advisory
process
• Julius Baer
(Switzerland)
• Voyant (UK)
4. FINANCIAL
CONSOLIDATOR
• A service that will
provide a consoli-
dated view of all
accounts held by
an individual
• Can generate revenues
through referral fees
• Enables wallet sizing
• Binds clients to
the service
• Clients unwilling to
provide all their
financial information
to the bank
• Clients are aware of the
sensitivity of their data
• Linking with sufficient
providers to enable full
consolidation
• Presenting data
consistently
• Mint.com
(US, Canada)
• Personal
Capital (US)
5. OPEN
ARCHITECTURE
• Complement your
product offering by
non-conflicting
third party
products
(such as trust,
tax, philanthropy,
government
support, SRI,
care services)
• Increase customer
stickiness and
fee generation
• Cross-sell
opportunities
• Undermining brand
awareness through
third party products
• Potential reputational
risk due to third
party products
• Risks associated
with product due
diligence, selection and
advice process
• Fidelity (US)
Copyright © 2014 Oliver Wyman 21
Idea Description
Potential benefits
to firm
Potential
downsides
Implementation
challenges Examples
6. SOCIAL
CIRCLES
• An opt-in social
network for
wealthy people
• Increased customer
understanding
• Builds a deeper,
broader client
relationship
• Bank may not control
all interactions and may
be disinterm-
ediated
• Position the network as
a “wealth circle” next
to existing premium
programs (e.g.
credit cards)
• USAA (US)
• CafeMom (US)
• aSmallWorld (UK)
7. ADVISOR
MATCHING
• Choose a personal
advisor based on
your preferences
and begin digital
communication
• Closer relationship
• Increased customer
satisfaction
• Too much choice
leading to client
confusion
• Places relationship
with the advisor, not
the bank
• Limits ability of bank to
switch advisors
• Capturing of personality
profile of advisors and
what clients really want
• Running advisor
network afterwards
• Unbiased.
co.uk (UK)
• Knab
(Netherlands)
8. THEMATIC
INVESTMENTS
• Online platform
offering wide
range of thematic
portfolios, plus
structuring and risk
management tools
• Interesting to
savvy self-directed
investor segment
• Builds out self-
service model
• Leverages bank research
• Cannibalization
of existing fund/
DPM business
• Integration of research,
low cost transaction
services, reporting and
analysis toolkit
• Motif Investing (US)
9. CROWD
INVESTMENT
STRATEGY
• Use crowd sourcing
to provide or review
investment
suggestions
• Enables independent
review of strategy
• Supports self-service
• Crowd view may not
be reliable, correct
or timely
• Not the best way
to analyse complex
issues
• Not of interest to all
client segments
• Building the critical
crowd size to get
good advice
• Avoiding legal and
compliance issues
• EToro (Cyprus)
• Curensee (US)
10. DIGITAL
CONCIERGE
• A concierge service
tailored to (pre)
retirees, offering
proactive advice
on life events and
lifestyle transition
• Complimentary or paid-
for service generating
revenue (white-label or
in-house developed)
• Increased customer
satisfaction
• Need to consistently
meet bank brand and
quality expectations
• Positioning next to
similar concierge
services, e.g. offered
by cards
• MyConcierge
(France)
Copyright © 2014 Oliver Wyman 22
INTRODUCTION
Banks have long sought a bigger share of the wealth
management market, and the enviable stream of
capital-efficient fee income that it entails. With
banks’ traditional lending, deposit and transactions
businesses squeezed by post-crisis regulations and low
interest rates, their enthusiasm for wealth management
is only growing.
The challenge for banks has always been how to
break the stranglehold that more established wealth
management business models hold on the market,
driven both by brand loyalty and a better ability to advise
clients with complex needs. This Oliver Wyman point-of-
view looks at one specific “break-through” opportunity
for banks: namely, making themselves the preferred
destination for customers rolling over their defined
contribution plans into an IRA. This is an approachable
opportunity even for banks without large wealth
management functions because it is scalable without
having to rely on a large, highly paid staff. We argue that
this is one of the best ways for a bank to build scale in, or
even start, its wealth management business.
The market for rollovers today is dominated by the
leading defined contribution plan administrators,
such as Fidelity and Vanguard. These firms enjoy
well-established retirement brands and, given their
incumbent positions as the plan administrators,
provide a logical destination for a rollover. While these
are genuine competitive advantages, they are not
insuperable. As we explain, banks possess significant
strategic assets they could bring to bear in this fight. As
the providers of core banking products, they too possess
well-established brands and incumbent relationships
with the target audience. And the information that banks
naturally gather about their customers gives them an
advantage in identifying when customers have changed
jobs or retired, the events which traditionally trigger a
rollover into an IRA, and a fuller view of the customer’s
overall financial picture.
If banks can learn to use this information to target
customers, offer the investment choices they are looking
for and provide the hassle-free rollover that they desire,
then IRAs can provide a launching pad into the much
larger wealth management business.
MARKET CONTEXT
Individual Retirement Accounts (IRAs) were created in
1974 by the Employee Retirement Income Security Act
(ERISA). Like the 401(k), or other defined contribution
plans, the IRA is a long-term savings product to which
the majority of contributions are tax-exempt, and
where account balances enjoy tax-deferred or tax-free
growth. Unlike the 401(k), however, an IRA is set up by
individuals rather than by their employers.
3. RETAIL BANKS & THE IRA
ROLLOVER OPPORTUNITY
THE ROAD TO WEALTH (MANAGEMENT)
By Inderpreet Batra, Alina Lantsberg and Tim Spence
Copyright © 2014 Oliver Wyman 23
Exhibit 1: Why did you rollover your 401(k) account into
an IRA?
I changed
my employer
70%
I did it for
other reasons
11%
I retired
or reached
retirement age
19%
Source Oliver Wyman Retirement Insights 2013
Under the provisions of ERISA, transfers of funds from
employer sponsored 401(k) retirement plans into IRAs
(rollovers) are tax and penalty-free. IRAs also offer most
individuals a much broader range of choices, both
in terms of investment vehicles and providers, than
do traditional employer-sponsored retirement plans.
These factors have made IRAs a primary destination for
employees rolling over their defined contribution
accounts when changing jobs or retiring.
Exhibit 2: Growth in retirement market ($TN)
2008 2009 2005 2000
11.6
14.6
3.9
2.3
3.6
3.4
1.4
14.2
3.7
2.0
3.4
3.7
1.4
16.3
4.2
2.2
4.0
4.4
1.5
18.0
4.5
2.5
4.5
4.8
1.7
18.1
4.5
2.5
4.5
4.9
1.7
18.9
4.7
2.6
4.7
5.1
1.7
19.6
4.8
2.7
4.9
5.3
1.8
19.7
4.9
2.7
5.0
5.4
1.8
20.7
5.1
2.8
5.3
5.7
1.8
20.9
5.2
2.8
5.3
5.7
1.8
3.1
2.0
2.9
1.0
2.6
2010 2011 2012
Q3
2013
Q1
2013
Q2
2012
Q4
2012
Q2
IRAs
DC plans
Private DB plans
Government plans
Annuity reserves
Source ICI Research Report: Defined Contribution Plan Participants’ Activities, First Three Quarters of 2013, February 2014
IRAs already constitute a large pool of assets – about
$5.7 TN according to ICI estimates (see Exhibit 2) – and,
as of 2013, 46 million households or ~40% of all US
households already hold them. They are also growing
rapidly, fueled in part by rollovers from employer-
sponsored plans.
1
Between 1996 and 2008, IRA balances
grew at an annual rate of 7.5%, with rollovers peaking
at $316.6 BN in 2007. 27% of traditional IRA-owning
households rolled over within the last 2 years.
2
The firms
that provide and manage IRAs earn fees largely from
trading commissions and asset management. Collectively,
we estimate that IRA balances constitute a $30 BN
revenue pool.
COMPETITIVE LANDSCAPE
IRA Rollovers are an appealing strategic focus given
the frequency with which they occur and the amount
of money in motion. To that end, nearly all of the large
national and regional banks already offer IRAs. But recent
Oliver Wyman primary research shows that 30-40%
of their customers are unaware of this offering (see
Exhibit 3).
1 ICI Research Perspective: Vol. 19, No.11, November 2013.
2 ICI Research Perspective: Vol. 19, No.11, November 2013.
Copyright © 2014 Oliver Wyman 24
Exhibit 3: Percent of customers who do not know that
their primary bank offers an IRA (when it does offer
the product)
Bank A
31%
35%
Bank B
31%
Bank C
33%
Bank D
37%
Bank E
Source Oliver Wyman Retirement Insights 2013
The major 401(k) plan administrators are currently
winning the fight by a wide margin. According to our
research, Fidelity and Vanguard, the two best-known
plan administrators that offer IRAs as well, currently
capture more than 40% of all rollovers. Brokerages such
as Merrill Lynch and Morgan Stanley also do well on
Exhibit 4: If you had to roll over your 401(k) today into an IRA, which financial institutions would you seriously
consider rolling it over to?
29%
F
i
d
e
l
i
t
y
P
r
i
m
a
r
y
b
a
n
k
C
h
a
r
l
e
s
S
c
h
w
a
b
V
a
n
g
a
u
r
d
M
e
r
r
i
l
l
L
y
n
c
h
M
o
r
g
a
n
S
t
a
n
l
e
y
E
*
T
r
a
d
e
T
D
A
m
e
r
i
t
r
a
d
e
S
c
o
t
t
r
a
d
e
N
a
t
i
o
n
w
i
d
e
U
B
S
P
u
t
n
a
m
35%
23%
21%
14%
9% 9%
5% 5%
4%
11%
2%
Source Oliver Wyman Retirement Insights 2013
this dimension. The dominance of these two business
models is easily explained. Plan administrators have well-
established retirement brands and, as the incumbent
providers of the 401(k), appear to most customers as the
most straightforward rollover destination. Brokerages
have large advisor forces, the widest range of investment
options and existing relationships with the wealthiest
rollover candidates.
HOW BANKS CAN COMPETE
The lead plan administrators and brokerages enjoy in
the IRA rollover market may seem unassailable, but it
is not. In recent research conducted by Oliver Wyman,
potential IRA customers ranked their primary checking
account bank second only to Fidelity as a potential
rollover destination (see Exhibit 4).
We believe the recipe for converting consideration
to a successful rollover strategy consists of three key
elements, outlined below and then explained in detail.
1. Target customer segments: “Force concentrate”
on the population where the bank possesses the
strongest incumbency advantage
Copyright © 2014 Oliver Wyman 25
2. The offer: Construct the rollover value proposition
around a “no-hassle” process and a broad suite of
investment choices
3. The marketing strategy: Leverage data from the
customer’s checking account to identify when
rollover opportunities arise before brokerages or plan
administrators can see them, and utilize the full breadth
of touch-points to drive up awareness of the offer
1. TARGET CUSTOMER SEGMENTS
A typical bank can identify at least three pools
of customers that it can target for IRA rollovers.
These include:
• Current banking customers, including those that use
the bank as their primary checking account
• Employees of commercial customers
• Non-customers in footprint, who are aware of the
bank’s brand and presence
Among these pools, banks have the strongest
relationships with primary checking customers,
i.e. those that use them as their primary means of
performing day-to-day transactions and frequently
have salaries direct deposited into the account. These
customers tend to stay loyal and have frequent ongoing
interactions with the bank. We believe that this is the
pool of customers that banks should focus on first.
Not all these customers will have 401(k) accounts. In
recent research for a regional bank, we determined
that only 55% of their primary checking customers
had a 401(k) account. Among these, those that do not
currently have an IRA are easier to capture than those
that already do. For this particular bank, we estimated
that 19% of their primary checking customers fell in this
category (see Exhibit 5).
Penetration rates of 2-3% are typical for banks that have
not made a concerted push in this space. Increasing this to
10% is a $100+MM incremental revenue opportunity for a
typical regional bank. And given product ownership rates
and the advantages banks enjoy, this is quite achievable.
DDA data on income and balances can also be used
to identify customers who have high-balance 401(k)
accounts. Targeting these customers will yield more
profitable outcomes in terms of higher trading
commissions and asset management fees, given their
strong correlation with balances.
Exhibit 5: IRA Rollover opportunity among primary checking customers
Total IRA rollover opportunity
Increasing challenge to capture opportunity
% of total
All primary
checking
customers
Never had
a 401(k)
Do not currently
have a 401(k)
Currently
have a 401(k)
Have an IRA
with bank
Do not have
an IRA
Have an IRA
with another
provider
100
23
22
55
34
19
2
Source Oliver Wyman Retirement Insights 2013
Copyright © 2014 Oliver Wyman 26
2. THE OFFER
In the past few years, a “cash reward” arms race of
sorts has broken out among plan administrators
and online brokerages competing for IRA rollovers.
Schwab, TDAmeritrade, E*TRADE and many others
offer up to $600 in cash to prospective clients. This
bounty is substantially higher than what banks
have traditionally proven willing to pay for new
accounts, and would spell doom but for one thing: it
doesn’t seem to matter much to customers. Recent
Oliver Wyman research suggests that customers place
much higher emphasis on minimizing the hassles
associated with the switching process and getting
access to a wide range of investment options (see
Exhibit 6).
Reducing the hassles associated with the rollover
process can also help banks overcome any possible
disadvantages of not having a robust advice offering.
The rollover can be the beginning of a relationship
that evolves into advice, with the early wins
associated with the no-frills rollover strategy being
used to fund the development of a more holistic,
advice-based offering.
There are many elements that go into making the
rollover process low-hassle. One, banks must make the
process quick, let customers know in advance how long
it will take and provide regular updates; the pain for
customers is usually not the time but the uncertainty.
Two, they should reduce the pain associated with
reconstructing an investment portfolio. They should
find out the portfolio composition in advance and try to
replicate that; at the very least, they should be able to
offer an alternative portfolio that is materially equivalent
in its risk/return profile. Three, they should try and
reduce paperwork, e.g. by enabling online submissions
and letting people provide images of documents instead
of only offering older, more outdated methods.
3. THE MARKETING STRATEGY
There are two competitive advantages that banks
possess, which can drive effective marketing of the
rollover offer.
First, by monitoring a person’s checking account, a bank
can tell whether a person has changed jobs by observing
a change in the direct deposit source. The bank can also
Exhibit 6: Why did you select your current IRA provider to roll over your 401(k) account?
AVERAGE SCORE FOR CUSTOMERS WHO HAVE DONE AT LEAST ONE ROLLOVER
*
6 5 4 3 2 1
It was minimum hassle
The had the investment choices I was looking for
My advisor took care of everything
They also offered me retirement advice
They have the leading IRA offering in the marketplace
My colleagues/friends/family recommended it to me
I was impressed by clients testimonials
A phone rep helped me
They gave me monetary incentive
A person at the branch helped me with it
I received a letter/email asking if I was interested in rollovers
Someone called me and asked if I was interested in rollovers
2.1
2.3
2.9
3.0
4.1
0
5.2
5.2
4.5
4.4
3.6
3.5
2.8
Source Oliver Wyman Retirement Insights 2013
* Each respondent was asked to rank all these reasons on a 7-point scale, where 1 was “Not important at all”
and 7 was “Extremely important”
Copyright © 2014 Oliver Wyman 27
glean if someone has retired by combining the age of the
customer with a total stop in direct deposits. A change in
address may also indicate a change in job or retirement.
Banks can use such information to trigger direct
marketing to target customers (see Exhibit 7), which is
something that brokerages cannot do.
Second, banks have a significant distribution and
interaction advantage with their primary checking
customers. Banks can utilize the various channels their
customers use to build awareness of their offering and
to solicit prospects. Plan administrators typically have
minimal branch networks and few occasions on which
to interact with their customers. Once the bank has
reached out to a prospect based on a trigger, they can
use the branch to close the rollover transaction. The initial
outreach can also be delivered via the channel preferred
by the customer – online, mobile, or the branch itself.
CONCLUSION
Building a wealth management business is a daunting
prospect for most retail banks. Not only does it require
a costly extension of most banks’ infrastructure, but it
also requires expensive new advisory staff who often
find it difficult to fit into the culture of a retail bank.
The current model whereby certain products, such as
insurance and mutual funds, are sold out of branches
avoids these problems but fails to create a compelling
reason for customers to use the bank as their primary
wealth manager. When it comes to wealth management,
many banks are stuck at the starting line – unwilling
to make the investment required for the full retail
brokerage-style offering and unable to see any other way
to move forward.
IRA rollovers are a good way to get started because the
product and platform can be outsourced so that the bank
plays only the primary roles of advisor and distributor.
The IRA rollover discussion can also be used as an entrée
for a broader retirement-focused conversation down the
line, potentially leading to an overhaul of the customer’s
finances and consolidation of assets into the bank.
Income from the IRA assets can then be used to fund the
development of a broader wealth management offering.
For many customers, rolling a 401(k) into an IRA often
marks a “new beginning”. If banks can capture a bigger
share of this business, it may also mark a new beginning
for their ambitions in wealth management.
Inderpreet Batra is a Partner at Oliver Wyman.
Alina Lantsberg is a Principal at Oliver Wyman.
Tim Spence is a Partner at Oliver Wyman.
Exhibit 7: Illustrative IRA rollover direct marketing process
CUSTOMER
BANK
Leaves current job
Begins 401(k)
rollover process
Notice change
in direct deposit/
change in address
Reach out to
offer IRA
Copyright © 2014 Oliver Wyman 28
CONSTANT CONNECTIONS WITH BRANDS INFLUENCE CONSUMERS' BANK
PREFERENCES BEFORE THEY'RE IN MARKET FOR A NEW CHECKING ACCOUNT
ADS &
PROMOTIONS
BANK
EXPERIENCE
PRODUCT
FEATURES
RECOMMENDATIONS
BANK
REPUTATION
ONLINE
RESEARCH
4. MAKING THE SWITCH
CHECKING ACCOUNT PATH TO PURCHASE
Copyright © 2014 Oliver Wyman 29
MOTIVATIONS FOR SWITCHING
CHECKING ACCOUNTS
THEY TAP INTO THEIR PREEXISTING
BRAND KNOWLEDGE FOR
BANK CONSIDERATIONS
2 IN 3 ALREADY KNOW WHICH
SPECIFIC BANK THEY WANT BEFORE
SHOPPING
MARKETING NEGATIVE BANK
EXPERIENCE
LIFE EVENTS
WANTING TO CONVERSION TAKES 2.5
MONTHS ON AVERAGE
2 MONTHS
MOST ACTIVELY RESEARCH FOR LESS
THAN ONE MONTH
15 TOUCHPOINTS
USE BANK TOOLS
USE SEARCH
USE COMPARISON SITES
MAJORITY OF SWITCHERS USE ONLY
IN THE 90 DAYS PRIOR TO OPENING
A NEW ACCOUNT
26%
18%
15%
40% 40% 20%
3 MONTHS CONVERSION 1 MONTH
Copyright © 2014 Oliver Wyman 30
USE BANK TOOLS
USE COMPARISON SITES
SWITCHERS LEAN MOSTLY ON
RECOMMENDATIONS BY
FAMILY & FRIENDS
DIGITAL INFLUENCES
OF OFFLINE OPENINGS
57%
KEY ATTRIBUTES & FEATURES
BRAND PRODUCT CONVENIENCE
GOOD REPUTATION
HIGH QUALITY SERVICE
LOW FEES
LOW MINIMUM BALANCE
BRANCHES NEAR WHERE I LIVE
LOTS OF ATMS
7 IN 10
OPEN IN BRANCH
9 IN 10
OF THOSE WHO HAD ONE BANK IN
MIND END UP CHOOSING
THAT BANK
44%
Copyright © 2014 Oliver Wyman 31
Source AOL & Oliver Wyman, “Making the Switch”, June 2014
Base Switchers (n=868)
BRAND IMPLICATIONS
MAINTAIN ALWAYSON BRANDING AS
PART OF ACQUISITION STRATEGIES
YOU CAN’T RELY ON CONSUMERS TO
RAISE THEIR HANDS
ACTIVATE BRAND ADVOCATES TO AMPLIFY
WORD OF MOUTH INFLUENCE
RECOGNIZE DIGITAL ATTRIBUTION ON BOTH
ONLINE AND OFFLINE ACQUISITION
ALIGN MESSAGING TO KEY BRAND,
PRODUCT & CONVENIENCE ATTRIBUTES
Copyright © 2014 Oliver Wyman 32
5. THE DECISION-
CENTERED BANK
By Peter Carroll
Many banks have announced the goal of becoming more
“customer centric”. It may be better to become more
“decision centric”.
A decision-centric bank is one that marshals information
about its customers to make highly effective decisions
in its dealings with them, whether those decisions occur
as part of the sales process, or as part of continuing
customer service.
Being decision centric may not sound like a new concept
since bankers have always made decisions. But making
decisions doesn’t necessarily mean a bank is “decision
centric”. In the early part of the 21st century, being
decision centric has a very distinct meaning for a bank
and that meaning has three key parts:
1. The collection and interpretation of information
about customers
2. The conscious use of that information to decide
how to act or react differently at the level of the
individual customer
3. The deliberate design of operational processes
that allow for, and take advantage of, the ability to
make decisions and take different actions at the
customer-level
In order to define more clearly what we mean by the
term “decision-centric bank”, it will first be helpful to
draw a distinction between two types of decision, both
important, but each quite different. Let us call them
“Positioning decisions” and, for the want of a better
term, “Operating decisions”
1
.
“Positioning decisions” are the decisions made
periodically to position a firm in the marketplace. They
might be thought of as “strategic” and/or “structural” in
nature. They have the quality that, once they are made,
they are hard to change. They are decisions whose
consequences the firm must live with for a while. They
are therefore decisions that should not be taken lightly
as long-term success certainly hinges on making more of
them right than wrong.
Exhibit 1 sets up the distinction between Positioning
decisions and Operating decisions, in relation to the
broader term “Business Intelligence”.
Examples of positioning decisions would include:
• A decision to enter (or exit) a large segment or new
product area:
? A bank choosing to enter the credit card
business or auto lending
? Starting a high net worth division
? Selling off a merchant acquiring arm
• A decision to introduce a new value proposition for
the affluent segment
• A decision to redesign the bank’s suite of DDA
products
1 As we shall see, “Operating decisions” are not “decisions made in Operations”, though some of them could be; they are decisions made within the established business
processes of the bank and its current strategy; they are customer-level decisions that may involve material differences of action or ‘treatment’ for one customer relative
to another.
Copyright © 2014 Oliver Wyman 33
All these decisions require careful thought, in part
because they involve the mobilization and commitment
of substantial resources in the form of capital, employees
and expense budgets.
They also require careful thought because it takes a
while to frame, and then make, these decisions and
longer still to implement some of them; it then takes
even more time to generate results and for the wisdom of
the decisions and the effectiveness of their execution to
reveal themselves.
These decisions position the bank in the market and in
relation to chosen segments; once taken, they define the
‘battlefield’ on which the bank competes, using various
methods and programs to win new customers, hold on
to them, increase share of wallet and so forth.
Which brings us to the idea of ‘Operating decisions’.
Operating decisions are different inasmuch as they are
decisions that are made after the positioning decisions
have been taken. In fact, they are decisions made within
the set of business processes that comprise the bank’s
current market and competitive position. They are part
of how the bank is run.
They tend to be decisions made frequently – on a
monthly, weekly and even daily basis. And they can
differentiate the action that is taken at the customer
level: Mrs. Smith can be treated differently than
Mr. Jones.
Exhibit 1: The distinction between positioning decisions
and operating decisions
BUSINESS INTELLIGENCE
INSIGHTS, DECISION SUPPORT
POSITIONING
DECISIONS
• Strategic/important
• Structural/lasting
• Descriptive analytics
OPERATING
DECISIONS
• Campaign tactics
• Customer-level
• Predictive analytics
SUPERIOR RESULTS: PROFIT, GROWTH
Using these definitions, Henry Ford made plenty of
positioning decisions but really no operating decisions.
Speaking of potential buyers for his ‘Model T’ he famously
said, “They can have any color they want as long as
it’s black!” In his pursuit of low production cost and
affordability, he ruled out any attempt to satisfy different
customers with different products, or with different
product/feature combinations. Fast forward to today and
we have reached the point where a consumer can virtually
specify his car and get it custom built within a few weeks.
However, auto-manufacturers still do not really make any
operating decisions at the customer level. Banks, on the
other hand, make plenty of customer-level decisions. And
they should be making even more such decisions, with
better and stronger decision support.
OPERATING DECISIONS – AND
DECISION CENTRICITY – IN BANKS
In banking, operating decisions have become just as
important as positioning decisions. They have also
become the strongest method by which one bank can
outperform its rivals, many of whom have adopted
broadly the same position in the marketplace (that is
to say, they have made similar positioning decisions
regarding their branch networks, product suites,
value propositions, digital options, segments served
and so forth). Examples of operating decisions in
banking include:
• Direct mail solicitation of prospects for a product
sale, where the selection of the target and the
content of the offer are determined using data and
models to estimate likely, differential outcomes – e.g.
for a rewards card, it is important to estimate the
response probability and the expected level of spend
• Online application-taking in which the screen
sequence and content is adapted in real time to the
available information about the applicant
• Phone center scripting for handling complaints and
(in particular) account-closing calls
• Cross-sell messaging to existing customers via
statement stuffer (paper or electronic)
• Small business sales/switching incentives targeted
to individual “high-value prospects”
• Collections tactics that differentiate by delinquency
status but also by customer classification
Copyright © 2014 Oliver Wyman 34
Banks have always made operating decisions and made
them, to some degree, at the customer level. But they
typically did so without the benefit of real insights that
anchored a different treatment to meaningful differences
between customers. Some decisions might have been
differentiated only at a segment level, so that Mrs. Smith
would be treated differently than Mr. Jones if she fell in
a different segment than him, but not if they were both
regarded as being in the same segment. In the past,
individually differentiated treatment of customers was
idiosyncratic and strongly judgment-driven.
For example, bank tellers (and bank managers) might
have historically treated Mrs. Smith differently than Mr.
Jones. But usually that would have been because the
teller or the manager knew one of these customers better
than the other; the differentiation would have been ad
hoc and based on the employee’s intuition about the
best course of action. Even the goal of the differentiation
was likely quite judgmental: if Mrs. Smith complained
and threatened to leave the Bank, would she have been
given some inducement not to leave? Perhaps. But would
the bank employee have known whether Mrs. Smith’s
relationship with the bank was even profitable, and
therefore worth keeping? If Mr. Jones came in to make
a deposit in his checking account, would he have been
encouraged to apply for a loan of some type? Perhaps. But
would the bank employee have had any real insight into
the likely profitability of the new loan (or the profitability
of the existing account for that matter)?
Actions that differentiated how a customer would be
treated were based only on ad hoc interpretations of a
customer’s uniqueness and vague assumptions about
how the bank’s action might pay off.
Some people feel that this type of relationship-based
customer centricity should be brought back – that
bank-client interactions should be mediated by
branch staff “who really know the customer”. Every
Christmas, in “It’s a Wonderful Life”, we enjoy watching
George Bailey ( Jimmy Stewart) win back his panicky
customers, each of whom he knows personally, with
heartfelt appeals to their individual circumstances,
while old Mr. Potter tries to steal the Bailey Building &
Loan Association out from under him. But the truth is
that human judgment is a notoriously unreliable guide
to wise banking decisions. George Bailey’s approach
to customer-level decisioning, based on his own
judgment, would very likely have led to a poor loan
portfolio. Mr. Potter would probably have run the bank
more successfully than George Bailey, although the
movie wouldn’t have been as good.
In fact, studies of the way bank employees make ad hoc
customer-level decisions have shown that those decisions
are often made in ways that run counter to the bank’s best
interests. In some cases, bank employees take advantage
of any latitude available to them to benefit either
themselves or the customer – at the expense of the bank.
But in general, employees empowered to make decisions
at the customer level do so inconsistently.
Many studies have explored the consistency and
accuracy of human judgment in repetitive situations
like loan application underwriting. The sad truth is
that human beings are not as good decision-makers
as automated methods that employ mathematical
models to interpret available data. More specifically,
human beings are about as good as mathematical
models when dealing with easy cases (e.g. making a
credit decision about applicants who are either very
well qualified or very poorly qualified). But in the so-
called “grey area”, human decision-makers tend to be
far more inconsistent than mathematical models based
on applicant data. This is not only true in banking; the
phenomenon has been widely studied and it turns out
to be true across a spectrum of situations calling for
judgments based on available data.
Mathematical models tend to outperform human judges
in three main ways:
1. Better selection of relevant variables from among a
large number of possibly useful ones
2. Better estimation of the “meaning” (i.e. predictive
power) of the selected variables
3. Greater consistency in the application of de facto
decision criteria that use these variables
THE NEW POWER OF
OPERATING DECISIONS
No, the thing about “operating decisions” in banking
isn’t that they are entirely new; it is that they are newly
powerful. These decisions can now be made in a way
that is far more accurate and consistent than when the
only available basis for making them was the intuition of
bank employees.
Copyright © 2014 Oliver Wyman 35
A decision-centric bank makes “operating decisions”
using customer-level data and supporting tools such as
predictive models to achieve effective differentiation of the
action to be taken for each customer. And in making these
decisions, the bank can establish a clear economic goal: the
expected value added by the action about to be taken.
In this sentence, the term “expected value” means
more than just the general expectations of the program
designer; it means the calculation or direct estimation
of the outcomes of the action involved in the decision.
For example, if the decision involves sending out a piece
of direct mail to solicit a credit card application, then
“expected value” is derived from the estimated cashflows
that will result from the action, shaped by predictions of
relevant customer behaviors like response/application
rate, approval rate, usage rate (or balance level), account
life/term, default rate, and so forth.
THE PREDICTIONS FOR MRS. SMITH
To take another example, if the decision involves offering a
customer an incentive to stay with the bank, after she calls
to close an account, then “expected value” will consider
the current profitability of the account, focus on the new
likelihood of the relationship remaining loyal, combined
with the current and future profitability of the relationship
(where “profitability” could, of course, be negative), while
taking into account the cost of the incentive.
The new power of operating decisions, and by
extension, of being a decision-centric bank – lies in these
concrete factors:
• Having a clearly defined objective for the supporting
decision analytics: the value added, or the change
of account value, resulting from the decision or
action to be taken. Banks have made important
strides in understanding the baseline economics
of their products, and the sources of profit variance
at the product-account and customer level; this
understanding must now be migrated into the
banks’ decision-support processes
• Deriving the estimate of “decision value” directly
from predictive analytics focused on the customer
and account behaviors that will define post-decision
cashflows; banks have significantly improved
their data environments and now they need to
exploit these data to generate decision-specific
predictive analytics
• Focusing decision-support processes for operating
decisions on those decision-points – on the
comparatively small number of decision-points – that
most directly affect downstream profits; and having
this focus reflect two important considerations:
i) Where profit really comes from. The bulk of
consumer and small business banking profits
come from about 25% of all customers, in a
handful of key products, when they exhibit
attractive characteristics (like high account
balance or spend volume)
ii) How easy or hard it is to develop and deploy
decision support. There is a methodology
that allows a bank to build out support for key
operating decisions that takes three key factors
into consideration:
i The frequency with which this decision is
taken (or could be taken) per year – higher
is better
ii The magnitude of the range in possible
‘decision values’; that is, the range of profit
or value outcomes associated with a good
versus a bad decision in one area – higher
is better
iii The implementation challenge of deploying
and maintaining the particular type
of decision support; generally, things
involving direct mail and online actions
are easier to implement while things that
involve training all branch tellers or writing
new code, for example, are much harder
By focusing on the most important levers of profit,
support for operating decisions can be developed and
deployed more rapidly and more effectively than in
typical Business Intelligence programs.
DECISION MAPPING
In making the distinction between positioning decisions
and operating decisions, a few examples of each type of
decision were given earlier. It is worth returning to the
question of operating decisions for a moment because
most banks today do not actually make as many such
decisions at the customer level as they could. Once a
bank realizes that it has a viable methodology for making
decisions at the customer level it should carefully re-
examine its business processes to see if there are places
where the methodology can now be applied.
Copyright © 2014 Oliver Wyman 36
Our approach to this exercise is called “decision
mapping”. Typically, we draw two decision maps, the
first being the business-as-usual decision map. Think
of the decision map as a kind of process flow-chart for
the business or for some part of the business. The chart
will often flow from left to right in a way that reflects a
“customer life-cycle” showing prospects on the left,
applicants in the middle, customers to the right of
center and departing customers (e.g. perhaps, those
in collections) on the very right. And on the chart, we
highlight the points in the process flow where an action
is taken, along with the basis for the action, and any
differentiation that is embedded in the action (e.g. a
segment-level or customer-level differentiation).
The second decision map is more creative, and
could include entirely new tactics, with new decision
support, at different points along the flow-chart.
Equally, the new chart could still show decisions from
the first map but now with improved differentiation
methods deployed as decision support to achieve
superior outcomes. The improved differentiation could
reflect a move from segment-level differentiation to
customer-level differentiation. It could also reflect the
employment of new data, in new predictive models,
to anticipate differences in customer behaviors
more accurately.
Take the mortgage business for example. In most
mortgage operations, the pursuit of applicants is
relatively “aggregate” using mass advertising to reach
potential borrowers, and mortgage brokers as conduits
for applicants. There is relatively little attempt to appeal
differentially to individual borrowers/applicants. This
could be done differently, however, using far more
differentiation. How? One example would be to use
information from online Multiple Listing Services (MLS)
to identify sellers (i.e. those who have just listed their
home for sale). This is a leading indicator of two new
borrowers: the seller, who is highly likely to borrow
soon in order to purchase a new home somewhere
else, and the yet-to-be-identified buyer of the house
that was just listed. An ambitious lender can approach
the seller and deliver a message that includes being
the lender of choice to the seller himself, as well as to
prospective buyers. More importantly, faced with 1,000
new home listings, the lender can decide which sellers
to approach, using data-driven models to assess the
differential likelihood of success and value.
During times of extremely high capacity utilization, a
mortgage lender can use such tactics to adjust the total
DECISION-CENTRICITY AND “BIG DATA”
In the late 1990s, many banks were charmed by the
promises of large technology vendors and other sirens
into building major data warehouses linked to data mining
tools. The promise was that the investments would pay
off in better insights and decisions. Today, “Big Data” is
being presented as the basis for yet another round of large
programmatic investments with very similar promises.
And some of our clients who are interested in building
better analytics and better decision support seem to be
tuning in to the sirens’ new song.
Books have been written about the reasons for the
failure of data mining, but two reasons are worth
singling out: the first is lack of focus. Most data mining
implementations then, and most Big Data efforts today,
pretend to offer banks a “panoptic system” – an all-
seeing, all-powerful decision-engine that will enable the
bank to make the right decision at the right time and at
the right place.
These decision-engine approaches all failed before, and
likely will again. A contributing factor may be that their
designers, perhaps because they do not understand
bank economics and a handful of basic truths about
consumers, fail to focus on the comparatively small
number of decision-points where better decisions will
have the largest impact on downstream profits.
The second reason for failure then, and likely again now,
is closely related to the first. In data mining, the thinking
ran in the wrong direction: collect the data, store it and
clean it, then attack it with “analytics” and finally figure
out how to make money from what you just did. The right
way to approach things is to understand where you make
money, and why, then look at the decision-points that
already do, or could, make the biggest difference – and
then build the data and analytics infrastructure to
support just those decisions.
Copyright © 2014 Oliver Wyman 37
number of applicants entering the workflow pipeline,
and do so with a bias towards the applicants and loans
most likely to be valuable.
Or take Small Business banking: most banks have some
form of segment-driven approach to Small Business,
but they do not differentiate at the individual customer
level. This is a huge lost opportunity, because analysis
of the profitability of small business relationships shows
that the entire profit made by banks in serving the SB
sector comes from just 25% of small businesses. Instead
of using marketing tactics like newspaper and radio ads
that implicitly target all small businesses about equally,
and relying on locational convenience as the prime
underlying draw, banks could deploy targeting models
to pre-select the highest-value SB relationships and then
target them directly. To select the high-value SB targets,
a predictive model must be built using available third-
party data from vendors like Experian, Lexis Nexis or
Dun & Bradstreet. To predict the likely value of a new SB
relationship, the critical things to predict are basically:
average checking account balance, average monthly
charge volume (if the SB is a merchant) and whether the
SB has a business credit or charge card.
Once the targets have been identified, face-to-face
meetings are used to acquire the account. Face-to-face
selling is expensive, so the targeting models need to
be reasonably accurate; even so, the high-value small
business owner will typically not be predisposed to
switch and so a “switching incentive” may also need to
be offered, if the decision-support models suggest a
sufficiently strong NPV – with the level of that switching
incentive calibrated to the predicted NPV.
In this new account-acquisition approach, the
operational processes use data about individual
prospects to determine, first, whether to act or not (i.e.
to target or not target), and then the type of action (i.e.
the amount of any switching incentive). This is a huge
break with traditionally undifferentiated decisioning.
Decision mapping, then, is a simple visualization
technique for the much harder and more fundamental
task of thinking through – and creatively re-thinking –
the way the bank organizes, operates, decides and
acts. This technique places strong emphasis on the
identification of points in the process flow where the
bank can differentiate its action at the customer level,
using expected value as the primary decision criterion.
CONCLUSION
A decision-centric bank is a bank that recognizes that
its core business processes contain numerous critical
decision points where it can marshal information
about its customers and deploy decision-support
tools to translate that information into different
actions for individual customers. It is also a bank that
recognizes that the aggregated effect of making these
thousands of decisions better is a very substantial
improvement in financial performance.
This paper started with a casual reference to the fact
that many banks have announced a goal of becoming
more customer-centric. Having instead laid out the
argument for becoming more decision centric, we can
perhaps revisit the idea of customer centricity. In some
important ways, a decision-centric bank is a customer-
centric bank because it understands bank customers,
understands how they differ, and understands how
to use its insight into each customer to take actions
at the individual level that will control the profitability
of its overall portfolio of customers. This may not be
the same idea of customer centricity that motivates
many bank programs; it is not predicated on a general
assumption that if you treat customers with a more
human touch they will repay you with share of wallet,
longevity and “net promotion”. But it is a form of
customer centricity that ties the bank’s knowledge of
its individual customers directly to profit improvement.
Peter Carroll is a Partner at Oliver Wyman.
Copyright © 2014 Oliver Wyman 38
Many banks are re-evaluating their commitment
to residential mortgage lending in the face of the
significant investments required to meet regulatory
and customer expectations. These investments would
have a higher return if mortgage could have a role in
establishing and deepening customer relationships.
Unfortunately, recent Oliver Wyman research indicates
that mortgage is not effective as a relationship-
deepening platform outside of a few niche areas.
If mortgage is to be a strategic relationship
product, it should be easy to cross-sell into, or out-
of, a mortgage. Therefore, we set out to test two
deepening hypotheses:
• Hypothesis 1: A primary banking customer can be
sold a mortgage more easily than a non-customer
• Hypothesis 2: A stand-alone mortgage customer
can be sold other bank products, such as a checking
account, to become the customer’s primary bank
1
However, Oliver Wyman’s recent Survey of Consumer
Finances supported neither hypothesis, except in
niche cases.
THE OPPORTUNITY
There are a number of intuitive reasons to pursue
mortgage as a relationship product:
Obtaining a purchase mortgage is a significant life
event for customers
Buying a home is a highly emotional and aspirational
transaction that represents a key life event for
customers. Serving this need with as few pain points
as possible can make a lasting impression on the
customer’s relationship with the bank.
TOP 10 REASONS CITED FOR HOME OWNERSHIP ASPIRATION
2
1 Having a good place to raise children
2 Better physical safety for your family
3 More space for your family
4 Control over living space, e.g. renovations
5 Paying rent is not a good investment
6 Allows you to live in a nicer home
7 A good financial opportunity
8 Allows you to select a community that shares your values
9 A means to build wealth that can be passed on
10 More convenient location closer to work, family, and friends
6. MORTGAGE CROSS-SELL
THE ELUSIVE OPPORTUNITY
By Ahmet Hacikura and Sayako Seto
1 A bank with a customer’s traditional checking account.
2 Based on share of mortgage holders considering the reason to be major in buying a home. Other reasons include tax benefits associated with owning a home, good
retirement investment, something to borrow against if needed, a symbol of success or achievement, and motivation to become a better citizen and engage in important
civic activities. Source: Fannie Mae National Housing Survey (Q4/2011).
Copyright © 2014 Oliver Wyman 39
Level of customer insight is unparalleled
2
The mortgage application process reveals deep financial
and demographic information on customers, which may
be used to identify optimal cross-sell opportunities for
other banking products.
Mortgage customers are desirable banking customers
more broadly
Consumers who qualify for a mortgage tend to have
higher incomes and are greater users of banking products
overall, making relationships with them attractive.
Customers who consolidate their mortgage and
primary banking relationships with one bank tend to
have deeper relationships with that bank
Our research shows that customers who consolidated
mortgage and primary checking also have a higher share
of their other product holdings at their primary bank. It is
important to recognize that while the mortgage product
may have played a role in deepening the relationship,
the stronger driver is likely these customers’ general
preference to consolidate products at a single institution,
i.e. this cross-sell may have happened naturally even
without much effort from the bank.
Exhibit 2: How primary bank share of non-mortgage products varies by mortgage consolidation behavior*
Seperate mortgage and
banking
Consolidated mortgage
and banking
PRIMARY BANK’S SHARE OF OTHER PRODUCT HOLDING FOR CUSTOMERS
HELCO Other loans Auto CD
83%
Money
market deposit
Savings Credit card
73%
65%
54%
45%
50%
27%
9%
36%
22%
14%
4%
4%
87%
Source Oliver Wyman Survey of Consumer Finances (Q1/2012)
* Share of products based on count of products held
Exhibit 1: Mortgage customers*
NUMBER OF PRODUCTS
BY DEMOGRAPHIC
EXCL. MORTGAGE AND AVERAGE INCOME
COUNT OF PRODUCTS HELD BY MORTGAGE STATUS
% with annual
income greater
than $75 K
Deposit
products
Other loan
products
Real estate
loan
products
Has a
mortgage
53%
3.9
Does not
have a
mortgage
32%
3.5
Does not
have a
mortgage or
own a home
15%
3.0
Source Oliver Wyman Survey of Consumer Finances (Q1/2012)
* “Other loan products” include auto, credit card, other installment, payday,
and other loans. “Deposit products” include traditional checking, savings,
online checking, online savings, money market deposit, and CDs. “Real estate
loan products” consists of home equity loans/lines of credit
Copyright © 2014 Oliver Wyman 40
THE CHALLENGE
Consolidation is the exception, not the norm
Customers who consolidate their mortgage and primary
banking relationships with one bank are a minority. Most
customers, even those who express a preference for
consolidation, do not consolidate in practice.
Exhibit 3: Only 20% of customers obtain their mortgage
from primary checking bank
MORTGAGE CUSTOMER RESPONDENTS ONLY*
20%
80%
Has a mortgage
at primary bank
Has a mortgage,
but not at
primary bank
Source Oliver Wyman Survey of Consumer Finances (Q1/2012)
* Even for the 17% of customers who “strongly agreed” with the statement,
“Ideally, I would keep all products at one financial institution”, the percentage
who actually consolidated mortgage and banking was only 27%
Even large banks struggle to promote consolidation of
mortgage and banking relationships
The mortgage market is highly concentrated, with
the top three players accounting for nearly 40% of all
originations. Given their high market share in both
mortgage and banking, these banks tend to have more
customers who consolidate their primary checking
and mortgage. However, even for them, consolidated
relationships are a small share of all mortgage
customers. Plenty of their banking customers get
mortgages elsewhere, and plenty of their mortgage
customers have their checking relationship elsewhere.
Exhibit 4: Mortgage market share among primary
checking households*
SHARE OF CUSTOMERS
A CHECKING ACCOUNT ONLY
HOUSEHOLDS WITH A MORTGAGE AND
Mortgage with a
top 3 bank
Mortgage with my
primary bank
Mortgage with a
small bank
Mortgage with a
medium bank
My primary
bank is a
top 3 bank
32%
27%
10%
31%
My primary
bank is a
medium bank
23%
8%
43%
27%
My primary
bank is a
small bank
12%
34%
12%
42%
Source Oliver Wyman Survey of Consumer Finances (Q1/2012)
* Top 3 mortgage banks are Wells Fargo, Chase and Bank of America.
Medium banks (next 5) include US Bank, Citibank, SunTrust, BB&T and Fifth
Third. Bucketing derived from rankings based on Inside Mortgage Finance: Top
100 Mortgage Lenders 6M2013
Primary banks do not appear to be advantaged in
offering mortgages
When selecting mortgage lenders to apply with,
customers consider competitive pricing to be the most
important factor. Among remaining factors, many are
just as important as an existing relationship, including
referral by a realtor or developer (for purchase mortgage
customers), reputation for good customer service,
or referral by a colleague, friend or family member.
Convenience of branch locations, a potential advantage
for primary banks, is among the lowest ranked factors,
which also include strength of brand and quality of
marketing materials. Once they receive quotes or pre-
approvals, customers overwhelmingly consider pricing
to be the key decision factor. None of this suggests a
competitive advantage for most primary banks.
Copyright © 2014 Oliver Wyman 41
Using mortgages to attract primary banking
relationships may be too lofty a goal
While lenders often sell mortgages to customers with
a primary banking relationship elsewhere, cross-sell
of primary banking to these customers is limited Our
research shows that deposit products are “sticky”
financial products – customers rarely switch primary
banks (in a given 18 month period, only 10-15% of
customers switch). When they do switch, their stated
reason is most frequently the incumbent bank’s failure
to deliver rather than a desire to consolidate products
elsewhere, or special offers from other banks.
Our research also suggests that a fair share of customers
find it difficult to justify consolidation of financial
products with one provider, citing concerns around
proximity of a new bank’s branches, breadth of their
services, pricing, and the effort required to switch.
Even if banks are able to address these concerns, it is not
clear that many customers will care to consolidate their
mortgage and primary banking relationships – some
customers exhibited a level of indifference specific
to mortgages, indicating that they held all financial
products with one institution, save for their mortgage,
and did not intend to change that.
Exhibit 5: Reasons for switching primary banks *
6%
Poor offerings/rewards
New fees were added to my account
Original fees/charges were too high
I didn’t like what I read about them in the news
Not ‘tech savvy’ enough with online/mobile banking
Not enough ATMs
My old bank was acquired by a new bank
My old branch closed
Started college
Other
Moved/relocated
Got a new job
Family changes
CONSUMERS WHO RECENTLY SWITCHED BANKS
†
BASED ON RESPONDENTS WHO SWITCHED PRIMARY BANK IN LAST 18 MONTHS 12% OF ALL RESPONDENTS
WHAT WERE THE MAIN REASONS YOU DECIDED TO CHANGE YOUR PRIMARY BANK?
Wanted to consolidate bank/financial services
Special offer from my new bank
Poor service
Poor interest offered
Most decision factors are unrelated
to mortgage, and many relate to
failures of the primary checking bank
prior to switching
Only some decision factors could
be related to the mortgage process
Desire to consolidate is not a strong reason
Special offers do not particularly
motivate switching behavior
7%
21%
14%
13%
12%
8%
2%
6%
12%
1%
1%
10%
4%
28%
23%
18%
Source Oliver Wyman Survey of Consumer Finances (Q1/2012)
* Respondents were asked to check all that apply
† Defined as consumers who switched their primary checking bank with within the last 18 months; Consumers are not counted as a “switcher” if their new bank
was acquired by their old bank and they did not actively switch banks
Copyright © 2014 Oliver Wyman 42
IMPLICATIONS
Cross-sell into and out-of a mortgage relationship
are both attractive in theory, but uncommon and
challenging in practice. Consequently, the strategic role
for mortgages is most often:
• As a stand-alone business with attractive product-
specific economics
• As an accommodative product sold to the minority
of primary bank customers that prefer to consolidate
their relationships
Due to the scale requirements and compliance burdens,
pursuit of mortgage as a stand-alone business is likely
to be feasible and attractive primarily to large banks and
specialist lenders.
However, all banks should consider providing mortgages
as an accommodative product to capitalize on the
available, albeit limited, customer demand among
consolidators. Outsourcing options can be considered to
execute this strategy in a cost-effective manner.
While there are some clear limits to mortgage cross-
sell potential, we see several opportunities to improve
performance:
Update basic marketing and sales approaches
Ensure that all primary banking customers are aware of
the bank’s mortgage product offerings and that sales
representatives can easily identify customer demand for a
mortgage, i.e. leave no natural opportunity on the table. In
addition, ensure that customers applying for mortgages
are aware of the bank’s primary banking and other
products and encouraged to purchase them. In a recent
mystery shopping exercise we observed that few banks
consistently attempted these forms of low-effort cross-sell.
Consider a segemented approach for higher-
effort cross-sell
The customer’s reasons for applying for a mortgage and
their relationship status with the bank can be useful in
determining cross-sell potential.
Existing bank customers getting new mortgages
from the bank should be a high priority for multi-
product cross-sell efforts as they have demonstrated a
willingness to consolidate, and the mortgage application
will provide a detailed profile to help target cross-sell
offers. Given their natural inclination to consolidate,
these customers likely do not require high cost tactics
or incentives, and banks should not overspend to get
such sales. Additionally, banks may consider simplifying
the mortgage application process for existing bank
customers by pre-populating forms using information
already available in bank systems. This is only a partial
reduction of customer hassles, as the typical mortgage
application requires significantly more information than
what a bank may have on file, but banks may find this
worthwhile if the required investment is low.
New customers getting new mortgages should be the
next priority and banks should first attempt to cross-sell
a primary checking account to gauge the customer’s
level of interest in consolidation. There are two types of
new customers that may warrant use of tailored tactics to
establish a checking relationship:
• Customers who are getting a mortgage due to a
recent or pending life event may be more likely
to switch their primary bank. For example, in the
coming purchase mortgage market banks may see
a higher percentage of applicants getting purchase
mortgages due to a long distance move away from
their current bank, generating the need to find a
more convenient bank. For these customers, some
higher cost attempts may be worthwhile (e.g.
Exhibit 6: Reasons why customers do not consolidate
financial services relationships
EXPLANATION ILLUSTRATIVE QUOTES
Value placed on brand
and specialization
“I am loyal to my small hometown bank,
but I wanted to go with a national bank for
my mortgage.”
Locational convenience “I would like to consolidate everything to
[mortgage provider], but they do not have a
local branch where I live.”
Price “Service and fees associated with each
product make me shop for best deal.”
Breadth and quality
of offerings
“No one financial institution suits all of my
needs and preferences.”
“Each institution offers different advantages
for their different products.”
Hassle factor and lack
of urgency
“It is a lot of work to move everything to a
new bank.”
“I have not gotten around to it.”
“It is not important enough to go through the
trouble of getting all at one institution.”
Mortgage is a unique
and separate product
“I presently have everything except my
mortgage in one institution. I will not
change that.”
Copyright © 2014 Oliver Wyman 43
outreach by a branch manager, customized letter
displaying conveniently located bank branches and
ATMs near the purchase property, prepopulated
checking account opening forms using information
from mortgage application, etc.).
• Affluent customers, as identified by their needs
for larger loans and information available in the
mortgage application, may be worth pursuing
through higher cost acquisition tactics (e.g. an in-
person visit, concierge services for checking account
setup) since the high potential return may justify
the costs even taking into account the expected
success rate. Banks may also tailor mortgage
terms and product features at the margin for large
nonconventional loans, particularly if the loans are to
be kept on balance sheet.
Refinance customers are likely to be the least attractive
target for cross-sell (excluding other real estate credit) as
they neither demonstrate a willingness to consolidate,
nor signal a heightened need to switch banks. That said,
checking customers may be good targets for mortgage
refinance offers as their transaction data may be used to
identify their current mortgage and how long they have
had it, thereby assessing whether they would benefit
from a rate reduction.
Be careful with relationship rate discounts
Unless they are used specifically to generate profitable
multi-product relationships with affluent customers, the
net result is likely to be a loss of profits. Instead, consider
the use of lower-cost relationship enhancing benefits
on primary accounts, such as ATM fee refunds, free
checkbooks, or elevated service levels (e.g. dedicated
service lines) for affluent customer segments.
CONCLUSION
Mortgage generally is not effective as a relationship
deepening product, but there are still attractive pockets
of opportunity for improved cross-sell. Banks should
consider higher-effort cross-sell tactics focused on
those niches where expected returns justify the costs,
while avoiding generalized efforts that may be value-
destroying.
Ahmet Hacikura is a Partner at Oliver Wyman.
Sayako Seto is an Associate at Oliver Wyman.
Copyright © 2014 Oliver Wyman 44
7. LAYING THE FOUNDATIONS
FOR RECOVERY
Excerpts from Oliver Wyman’s 2014 European Retail and Business Banking report
By Simon Low, Jason Quarry, Vanessa Lopes Rodrigues and Mark Barrie
1. TRANSFORMING SMALL BUSINESS BANKING
Small business banking is an area of heavy focus in
European banking today. It is a major source of credit
issues in the weakest economies, but – at the same
time – lending to small businesses is the focus of efforts
by many policy makers to stimulate economic growth. A
combination of cost and regulatory pressures are forcing
many banks to revisit their sales and service models.
Furthermore, the needs of the small business customer
are rapidly evolving, as the expectations of business
owners (in terms of channel access, connectivity of
applications, speed of turnaround, etc.) are set by their
experiences as a consumer.
The current model has resulted not only in unsustainable
credit losses, but also a cost base that is too high for the
revenue generated. Furthermore, it is only tolerated by
an unhappy customer base, that often feels that it is not
receiving the service it has been promised, because of
the lack of alternatives.
In short, the small business banking model needs to be
transformed. We would prioritize four areas for small
business banking management teams:
1. Establishing “best in class” NPL management
2. End-to-end lending process review
3. Smarter organizational and operational
segmentation schemes
4. Digitalization of the small business offer
ESTABLISHING “BEST IN CLASS”
NPL MANAGEMENT
Small and medium businesses have been a major source
of NPLs for many banks across Europe, and a significant
backlog of lower value (particularly small business) cases
remain unresolved. These cases must be tackled quickly
and consistently. Both banks and the economy will benefit
from the reallocation of resources post-restructuring or
resolution, but it is imperative that individual customers
are treated fairly throughout the process.
However, small business NPLs demand a different
approach than those employed in consumer or
corporate lending. Neither the policy settlements used
in the former (characterized by the clearly defined
central rules and highly standardized elements that
allow banks to handle high volume, small ticket
problem loans) nor the bespoke restructuring of the
latter (with its complex underwriting and solution set of
restructured debt, new equity or “Payment In Kind”) are
appropriate when tackling small business NPLs.
“Best in class” small business NPL management is
anchored on a set of structured processes and decision
trees, that allow a standard set of solutions (such as debt
consolidation, basic debt restructuring) to be deployed
according to well defined objective criteria. Banks
must develop the analytics to support an NPL strategy
that is focused on small business borrowers, including
Copyright © 2014 Oliver Wyman 45
segmentation of the portfolio, development of resolution
options, and the implementation of triage and impact
assessment models. Furthermore, they must establish
an operating model anchored on a “mass customized”
approach to NPL management: standard forms that distil
key information for decision makers, workflows that ensure
processes are structured and efficient, triaging criteria that
focus scarce resource on the highest priority assets, etc.
Adopting such an approach will allow banks to work
quickly and consistently through the small business
NPL backlog by enabling case managers to take
responsibility for the delivery of appropriate solutions,
while at the same time removing inconsistencies at the
front line and driving faster decision speed.
END-TO-END LENDING
PROCESS REVIEW
Small business lending remains a focus of policy makers,
at both a European and national level, given its ability
to stimulate and support economic growth. This is
particularly true for markets like Greece and Italy, where
small businesses constitute a large proportion of national
GDP and drive the majority of employment. Central bank
initiatives, such as the Bank of England’s Funding for
Lending scheme and the ECB’s Long Term Refinancing
Operation (LTRO) scheme, have become more targeted
at small business lending. Bank recapitalization
programs have sought to ensure that banks have the
capital to lend into the economy, while development
institutions, such as the pan-European JEREMIE fund
or Greece’s IfG, have boosted the availability of equity
funding for small businesses themselves.
However, while these initiatives have removed many of
the balance sheet constraints that may hinder European
banks from lending to small businesses, we believe
that – in some cases – they will not be sufficient to ensure
the free flow of funds to the sector. The experience of the
Royal Bank of Scotland, the UK’s largest small business
lender is instructive: an independent report written
towards the end of 2013 highlighted how softer factors
can also reduce the ability of banks to lend.
Even if banks have the capital and funding to support
the sector, it will be important to ensure that there is
also sufficient management bandwidth to champion
small business lending again, and that front line staff
are not overly focused on other priorities (such as
risk management or deposit gathering). Institutional
risk appetite must also be matched by individual risk
appetite: changes made after the crisis (to risk policy,
incentives, delegated authorities and so on) may have
dented the latter to the extent that risk aversion level
at a deal-by-deal level is preventing portfolio level
targets being reached. Changes in focus (away from
lending against property to lending against cashflow)
may also expose latent capability gaps that were not as
evident pre-crisis.
Exhibit 1: Key decision tree modules
1 3 2 4 5
COOPERATION
DEBT
CHARACTERISTICS
VIABILITY CAPACITY ASSETS
• Determines whether
treatment set can be
applied
• Customer should be
communicating, willing
to pay and providing
requested information to
be classed as
co-operating
• Other borrowing with our
bank and other banks
(business or personal)
• Under customer-level
treatment, drives
combined treatment and
payment priority
• Whether business is likely
to succeed and generate
free cash ?ow
• Drives long-term ability
to repay debt
• Free cash ?ow available
to service debt, today and
in future
• Determines which
treatment options are
sustainable
• Assets available for sale
to support debt
repayment
• Potentially reduces debt
through asset sale
• Decision tree which
assesses whether
customer should be
classed as co-operating
• Decision tree which splits
customers according to
the debt they hold at the
bank and elsewhere
• Scorecard assesses
viability based on a set of
weighted category scores
compared to threshold
value
• Policy and methodology
for assessing the income
and expenditure of
trading, property and
personal accounts
• Total repayment
capacity calculated
• Decision tree which
segments customers to
identify those with
non-essential material
assets that they are
willing to sell
TYPICAL APPROACH
Source Oliver Wyman analysis
Copyright © 2014 Oliver Wyman 46
We expect the political pressure to lend to small
businesses to continue to mount. As a result, all small
business lenders should challenge themselves sooner
rather than later to ensure that they are doing all they
can. This should include a review of the end-to-end
lending process, including the effectiveness of marketing
activity designed to stimulate demand, conversion rates
at the pre-application stage (where many marginal deals
are filtered out by front line staff) and the behavioral
implications of policy changes introduced post-crisis.
SMARTER ORGANIZATIONAL
AND OPERATIONAL
SEGMENTATION SCHEMES
Over the past year, we have seen many banks re-
segment their customers across organizational
boundaries. In some instances, small business banking
has moved from the Retail to the Corporate division,
although in most cases it has gone in the other direction.
This shift in organizational responsibility is a cyclical
(and often political) event which occurs every few years.
However, we also observe a number of powerful forces at
work that suggest a more definitive solution is required.
For example:
• Which core banking platform (Retail or Corporate)
is best able to meet small business needs? With so
much investment now going into the development
of both (see the section on digitalization below),
it is all the more important to have small business
customers on the right platform from the start.
• How do the regulators define small businesses (for
example, as “unsophisticated”, “vulnerable” or
qualifying for “retail treatment”)? Wherever these
definitions apply, small businesses must be served
by a (retail) operating model that has the necessary
processes and controls in place, to avoid exposing
the bank to unnecessary conduct risk.
• At what point do automated processes break down?
There is no point in offering a “direct” model to small
business customers if every major interaction (from
account opening to incremental product sales to
credit underwriting) requires information that a
relationship manager would be best placed to gather
and qualify.
• What value do individual small business customers
place on having a named relationship manager
(and what incremental value does the bank get
from assigning one)? It is clear that turnover-based
segmentation schemes assume a generic inflexion
point, and apply it to the whole portfolio. Other
indicators (such as whether the small business has a
CFO or professional finance function) may provide a
more reliable guide.
The most thoughtful players are seeking an organizational
segmentation scheme that solves for all of these
questions; so that the overall proposition offered to small
business customers (whether they be above or below the
Retail/Corporate boundary) is internally consistent, and
therefore more effective and efficient.
Within each organizational unit, we also expect to
see a continued focus on operational segmentation.
Quantitative research techniques need to be deployed to
refine and enhance the differentiated propositions being
offered to the smallest businesses served by a direct or
branch-led model, as a way of both growing share (by
focusing on the attributes that each sub-segment values)
and profitability (by ensuring that value is recovered
through differential pricing). Equally, banks must find
a way of delivering “mass customized” propositions
to the larger small businesses served by a relationship
manager: the latter cannot be given the discretion to
create bespoke solutions for each individual client, but a
“one size fits all” solution will not be sufficient for such a
heterogeneous client base.
Exhibit 2: Conversion rates along the lending process for small and medium enterprises (SMEs)
STAGE PASS THROUGH RATE PER APPROACH FOR BORROWING
Initial engagement SMEs contacting bank to discuss financing 100%
Application, approval and appeal SMEs submitting a formal application to the bank 51%
Bank approves the application 39%
Competition, contracting and draw down SMEs accepting the approved facility 37%
SMEs drawing down on the approved facility 27%
Source RBS Independent Lending Review
Copyright © 2014 Oliver Wyman 47
DIGITALIZATION OF THE SMALL
BUSINESS OFFER
Digital is setting a new standard for small business
banking. In part, this is being driven by ever more
demanding small business owners, whose expectations
of their business bank account have been raised
by their experience as a consumer (in banking and
beyond). Equally, of course, small business banking is
often able to piggy-back off the investments that have
already been made into retail banking digital platforms.
Banks that visibly succeed in setting these standards
can benefit enormously: in North America, both Bank
of Montreal and PNC claim significant increases in
customer numbers as a result of well thought through
online and mobile banking offers targeting small
business owners. In most European markets, all
major players are already adding new features and
functionality to existing platforms. In many of the banks
that Oliver Wyman has worked with, the driving force
is therefore the desire to maintain market parity: falling
too far behind in any particular area that is valued by
small business owners (such as mobile or user access
management) risks an uptick in customer attrition and
the erosion of the customer base.
Exhibit 4: New digital standards in small business banking
VALUE CHAIN DESCRIPTION OF KEY THEMES EXAMPLES
Customer interaction • Integrated banking solution for personal and business needs of the small business owner
• Consumer Web 2.0 experience is influencing SME user interface design, leading to a more
intuitive layout and visualization of information
• User access management tools support multiple different modes of interaction
(e.g. transaction initiation vs. authorization vs. reporting)
• Increasing differentiation of client service levels, pricing and product offering, based on
modular approach
• Standard Chartered
• Wells Fargo
Channel • Mobile Banking applications offer streamlined access to core functionality, with a focus on
owner/manager oversight and authorisation
• Social Media used for marketing/promotions and customer servicing, and moving towards
collaboration and transactional banking
• Video/webchat used to enhance basic servicing, and increasingly to access product or
industry expertise
• La Caixa
• ASB
Product/Service • Aggregator and portal models combine bank and third party services
(e.g. community, learning hub, service hub, group purchasing schemes, etc.)
• Banks begin to leverage core attributes (e.g. trust, security) to offer new products and
services to existing customers (e.g. data storage, secure email, digital signature, etc.)
• Mobile payment solutions to allow businesses to take payments remotely
• Bank of America
• Barclays
IT/Back office • Increasing automation of processes (STP) and/or decision making, to meet SME client service
level expectations (e.g. KYC/KYB)
• Process enhancing features such as real-/near-time delivery, alert system, full product view,
review tools, research
• Citibank
Source Oliver Wyman analysis
Exhibit 3: Illustrative - organizational segmentation schemes for SMEs and corporates
SUBSEGMENT
Multinational
Large Corporate
Large Mid-cap
Mid-cap
Small Mid-cap
SME
Micro
>€3–5 BN
€5 BN to €1 BN
€1 BN to €500 MM
€500 MM to €250 MM
€250 MM to €10 MM
€10 MM to €1 MM
€1 MM to startup
COMPANY TURNOVER BUCKET
Micro Business
Banking: no
dedicated RM,
remote sales
and servicing
via internet,
telephone
Micro Business
Banking: no
dedicated RM,
remote sales
and servicing
via internet,
telephone
Small Business
Banking:
branch-based
RM/SB
specialist, with
large portfolio
size (300+
customers),
offering
face-to-face
point of contact
Small Business
Banking:
branch-based
RM/SB
specialist, with
large portfolio
size (300+
customers),
offering
face-to-face
point of contact
Commercial
Banking:
dedicated RM,
often based in
commercial
centers (rather
than branches)
offering
standardized
product
solutions
Commercial
Banking:
dedicated RM,
often based in
commercial
centers (rather
than branches)
offering
standardized
product
solutions
Corporate
Banking:
dedicated RM,
supported by
multiple product
specialists,
tailoring
banking
solutions to
customer need
Corporate
Banking:
dedicated RM,
supported by
multiple product
specialists,
tailoring
banking
solutions to
customer need
International
Corporate and
Investment
Banking:
Product driven
or high-calibre
RMs with deep
product
expertise, ability
to deliver the
bank and
relevant product
experts are key
International
Corporate and
Investment
Banking:
Product driven
or high-calibre
RMs with deep
product
expertise, ability
to deliver the
bank and
relevant product
experts are key
Copyright © 2014 Oliver Wyman 48
However, being good at delivering core banking
products and services online and through mobile and
tablet applications will not be enough to stand out from
the crowd in the medium term: to do this, banks need
to find ways of supporting small businesses in their own
business activities, solving their day-to-day problems
and helping them acquire and retain more customers.
In the graphic above (Exhibit 5), we highlight four areas
along the small business value chain where we see
significant innovation. These areas are adjacent to core
banking services, but the innovation is not typically
being led by banks.
What is clear is that the pace of change in small business
banking has accelerated rapidly with the advent of
digital technologies. Small business bankers rely
on retail (and occasionally corporate) platforms for
developments in core functionality, and must now be
able to articulate crisply and clearly what the small
business specific requirements are, if they hope to
compete for their share of digital investments. They
will also have to develop capabilities (such as data
management, customer analytics and proposition
design) that are not traditionally associated with the
sector, and to establish partnership frameworks to allow
them to access technologies, software and skills that
simply don’t exist in most banks. Above all, they will have
to get used to a much, much faster pace of change.
Exhibit 5: Small business value chain
Professional production and management of paperwork and record keeping that supports business activities, via dedicated software
Using open architecture to encourage the creation of business-specific applications by independent developers that can then be deployed through
point of sale devices (e.g. loyalty/voucher schemes, table booking, bill splitting, etc.)
Leverage financial and payment information to develop comprehensive liquidity forecast and cashflow management tool, and to facilitate ‘one
touch’ financing of working capital
Analysis of small business data to improve small business outcomes
Supplier Buyers
Business Activities (international and local)
Accounting software
SME
Payment
Money out
CHAPS
BACS
SEPA
SWIFT
CARDS
MOBILE
PayPal
Cash
Cheques
Local FX
Payment
Money out
CHAPS
BACS
SEPA
SWIFT
CARDS
MOBILE
PayPal
Cash
Cheques
Local FX
Term Lending (e.g. commercial mortgage, asset finance, long term working capital finance)
Working Capital Management
Info-mediaries
Inventory
Taxes,
salaries
Accounts
Payable
Accounts
Receivable
Cash
Pre
shipping
At destination Pre Shipping
At desti-
nation
Shipping
Domestic/International
Shipping
Domestic/International
Invoice/Goods
Data Finance
Purchase order
Invoice/Goods
Purchase order
1
1
1
2
2 2
3
3
4
4
Source Oliver Wyman analysis
Copyright © 2014 Oliver Wyman 49
2. DELIVERING IMPACT VIA IMPROVED
CUSTOMER EXPERIENCE
The world’s perception of retail banking has
fundamentally changed following the financial
crisis – trust in banks needs to be rebuilt, increasing
conduct regulation makes differentiation through
greater sales effectiveness and product pricing harder
to achieve and customers are slowly becoming less
loyal (more banking relationships) and less sticky
(shorter product lifetimes), albeit from high levels
relative to other service industries. As a result,
alongside marketing, competency in delivering a
high quality customer experience has increased in
importance to the success of retail banks as they have
discovered that the negative impact of their existing
poor service is high and increasing.
Oliver Wyman’s analysis suggests that there are some
clear priorities for generating impact via customer
experience and that differentiation in this area is both
achievable and sustainable.
Firstly, in terms of the impact on customer value, fixing
areas of poor customer experience (“hassles”) is more
important than delighting customers in retail banking
today. Customers that experience poor service are
prone to leave the bank, resulting in the loss of all
value, whereas while delighted customers will stay,
the value impact is less strong. This effect is shown in
Exhibit 6 below using UK customer research data.
These skews in value impact mean that banks need to
think carefully about where to make their investments
in improving customer service – this should be based
on the experience itself, how it impacts customer
value and the value of the customers that are affected
(Exhibit 7).
Exhibit 6: Switcher and stayer status by hassle and delight rates
AS % OF TOTAL RESPONDENTS FOR EACH RANGE OF HASSLE/DELIGHT RATES
0–10
96.3
3.7
10–20
82.4
17.6
20–30
73.6
26.4
30–40
66.9
33.1
40–50
62.9
37.1
50–60
51.6
48.4
60–70
66.7
33.3
70–80
45.5
54.5
80–90
57.1
42.9
90–100
22.2
77.8
HASSLE RATE
0–10
80.3
19.7
10–20
84.6
15.4
20–30
80.1
19.9
30–40
82.7
17.3
40–50
81.4
18.6
50–60
88.3
11.7
60–70
88.9
11.1
70–80
95.3
4.7
80–90
95.2
4.8
90–100
95.0
5.0
DELIGHT RATE
Stayers
Switchers
Source Oliver Wyman analysis
Copyright © 2014 Oliver Wyman 50
Exhibit 7: Key differentiators in customer experience
CUSTOMER TOUCH POINT EXPERIENCE SCORE CUSTOMERS
Differentiator #1
All touch points are NOT the same
For example, a bad rating due to wait time for a
counter cash withdrawal likely has a lower impact
on loyal behaviour than a bad rating due to a
mis-assessed fee and refusal to waive it
Differentiator #2
All score changes are NOT the same
For example, with some interactions
(e.g. in-branch fulfilment) delight may drive
loyalty, whereas with others (e.g. closing a
mortgage on time) it is sufficient to simply
avoid a hassle
Differentiator #3
All customers are NOT the same
Different experience elements matter to
different customers, and there are wide skews in
customer value (e.g. affluent vs. mass market)
Identify the touch points that matter most… …manage them to the economically
optimal outcome...
…to maximize customer value
SHOP
BUY USE
?
?
X X
Source Oliver Wyman analysis
As the retail banking experience becomes
increasingly digital, the digital (particularly mobile)
experience will become the battleground for retail
banks on this dimension. Banking transaction
capability through mobile channels is increasingly
becoming a hygiene factor and expected by
customers and we expect that this will evolve to
become a real source of competitive advantage
for those banks able to deliver a smooth, error free
experience via mobile digital channels.
Simon Low is a Partner at Oliver Wyman.
Jason Quarry is a Partner at Oliver Wyman.
Vanessa Lopes Rodrigues is a Principal at Oliver Wyman.
Mark Barrie is an Associate at Oliver Wyman.
Copyright © 2014 Oliver Wyman 51
Copyright © 2014 Oliver Wyman
All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts
no liability whatsoever for the actions of third parties in this respect.
The information and opinions in this report were prepared by Oliver Wyman. This report is not investment advice and should not be relied on for such advice or
as a substitute for consultation with professional accountants, tax, legal or ?nancial advisors. Oliver Wyman has made every efort to use reliable, up-to-date and
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doc_295171891.pdf
This Digest offers a wide-ranging mix of articles: some topical, some tactical and others fundamental.
Financial Services
VOLUME IV – WINTER 2014
RETAIL BANKING
AMERICAS DIGEST
IN THIS ISSUE
1. DIGITAL CURRENCIES
The Path Forward
2. REINVENTING AFFLUENT BANKING
The Digital Opportunity
3. RETAIL BANKS & THE IRA
ROLLOVER OPPORTUNITY
The Road to Wealth (Management)
4. MAKING THE SWITCH
Checking Account Path to Purchase
5. THE DECISION-CENTERED BANK
Shaping Results by Deciding How to Approach
and Treat Each Customer
6. MORTGAGE CROSS-SELL
The Elusive Opportunity
7. LAYING THE FOUNDATIONS FOR RECOVERY
Transforming Small Business Banking &
Delivering Impact through Improved
Customer Experience
This Digest offers a wide-ranging mix of articles: some topical, some tactical and
others fundamental.
For topicality there is a review of digital currencies that compares and contrasts the better-
known “cryptography-based protocol” world of Bitcoin with the less-well-known “consensus-
based protocol” world of Ripple. Among other things, it argues that despite the far broader
current awareness of Bitcoin, the eventual winner is more likely to be based on an offering
from the consensus-based protocol world.
Tactically, there is a treatise on what it means to become a decision-centric bank. Given
the renewed interest in all things “data & analytical”, and the related interest in “big data”,
this is also fairly topical. Despite the advanced use of data in decision support processes in
the credit card and auto P&C businesses, we believe that there are opportunities to deploy
analytics more effectively in the rest of the industry; this article sets out a general approach to
becoming broadly effective in the deployment of data as a decision-centric bank.
Tactical proficiency is also central to separate articles on transforming small business
banking, improving the customer experience and upgrading mortgage cross-selling.
Some articles deal with fundamental banking issues. The article on reinventing affluent
banking tackles head on the dilemma of affluent consumers: they have more money but they
are costly to serve and special units set up to serve them often end up losing money. This
article describes how to approach and capture this customer segment in the digital age.
Similarly fundamental is the schematic illustration “Making the Switch” in banking. Our
recent in-depth research reveals some important basic facts about the purchase decision in
banking and lays them out in an appealing visual format.
As always, I hope you find them stimulating. Please let us know what you think.
Michael Zeltkevic
On behalf of the
Retail and Business Banking Practice
FOREWORD
TABLE OF CONTENTS
1. DIGITAL CURRENCIES 5
The Path Forward
Digital currencies like Bitcoin have been one of the hottest topics of 2014. Despite skepticism and legal concerns,
they have been gaining an increasingly solid footing among consumers, merchants and financial institutions.
But what will it take to achieve mainstream acceptance? To answer this question we assessed the main types of
digital currencies and identified use cases that can deliver improved customer costs and experience.
2. REINVENTING AFFLUENT BANKING 12
The Digital Opportunity
Affluent customers represent a conundrum for most providers. While their revenue potential should be much
better than a mass market customer’s, they often split their wallet across multiple providers and are demanding
and expensive to serve. However, new ways to exploit readily-available technologies offer the opportunity for
forward-looking competitors to break the linkage between high service and high cost and offer new ways to
capture share of wallet.
3. RETAIL BANKS & THE IRA ROLLOVER OPPORTUNITY 23
The Road to Wealth (Management)
Retail Banks & the IRA Rollover Opportunity looks at one specific “break-through” opportunity for banks: namely,
making themselves the preferred destination for customers rolling over their defined contribution plans into an
IRA. This is an approachable opportunity even for banks without large wealth management functions because it
is scalable without having to rely on a large, highly paid staff. We argue that this is one of the best ways for a bank
to build scale in, or even start, its wealth management business.
4. MAKING THE SWITCH 29
Checking Account Path to Purchase
Oliver Wyman and AOL used survey and clickstream data to understand how digital technology is reshaping the
consumer path-to-purchase for checking accounts.
5. THE DECISION-CENTERED BANK 33
Shaping Results by Deciding How to Approach and Treat Each Customer
It is the frequent decisions we make in the course of running a business that, to a large extent, determine how
profitable it will be. Some decisions are ‘strategic’ and frame the overall field of battle. But increasingly, it is the
myriad ‘micro-decisions’ – the ones controlling how we approach and treat each customer – that shape results.
This is how the world of ‘data & analytics’ can really have a powerful effect.
6. MORTGAGE CROSS-SELL 39
The Elusive Opportunity
Many banks are re-evaluating their commitment to residential mortgage lending in the face of the significant
investments required to meet regulatory and customer expectations. These investments would have a higher
return if mortgage could have a role in establishing and deepening customer relationships. Unfortunately, recent
Oliver Wyman research indicates that mortgage is not effective as a relationship-deepening platform outside of a
few niche areas. Banks should consider cross-sell tactics focused on these niches where returns justify the costs
to effectively pursue attractive pockets of opportunity.
7. LAYING THE FOUNDATIONS FOR RECOVERY 45
Transforming Small Business Banking & Delivering Impact through
Improved Customer Experience
Thematic Perspectives from Oliver Wyman’s 2014 European Retail and Business Banking Report: views on emerging
best practices in two of the major challenges facing European retail banks in the next 3-5 years:
• Transforming small business banking
• Delivering impact via improved customer experience
Digital currencies, loosely defined as electronic mediums
of exchange not subject to the control of a central
authority, have been one of the hottest topics of 2014.
Despite skepticism and legal concerns, they have been
gaining an increasingly solid footing among consumers,
merchants and financial institutions. But what will it take
to achieve mainstream acceptance?
To answer this question we looked at digital currencies
beyond the current market leader, Bitcoin, and
identified two broad types of digital currency protocols:
cryptography-based (e.g. Bitcoin) and consensus-
based (e.g. Ripple). We believe consensus-based
protocols hold more potential than their cryptographic
counterparts, as they promise lower long-term
transaction fees and support real-time transactions in
any currency, whether fiat or digital. There are at least
three use cases for which customer costs and experience
could improve from Ripple or a similar solution in the
near term: international remittances, peer-to-peer
transfers and business-to-business payments.
Given the potential, banks, networks, merchants and
other relevant stakeholder should educate themselves
on these solutions, without necessarily plunging into
implementation. Constant monitoring of the landscape,
engaging in conversations with start-ups and even
pilots should be on the radar screen of companies that
stand to gain from digital currencies – lest they end up
scrambling to catch up later.
Digital currencies have transitioned from a relatively
unknown “geek preserve” to a multi-billion dollar market
under the banner of Bitcoin. En route, they have sent
central banks, financial institutions, payment service
providers, merchants, and consumers worldwide into
rounds of wild speculation:
• Will digital currencies become the norm for
everyday purchases?
• Will payment costs shrink to near-zero?
• Is this the end of transaction fraud as we know it?
Bitcoin, the most successful digital currency, at one
point approached a $14 BN market value. Scores of “alt-
coins” jumped on the bandwagon trying to emulate its
success – over 500 to date. Some tried to legitimately
improve on the Bitcoin value proposition, others were
more questionable. Icelanders will certainly have fond
memories of Auroracoin, the alt-coin that was freely
distributed to the island-nation’s population in February.
At the time, Auroracoin’s market value surpassed
$400 MM, now it has all but vanished from existence. At
the time of writing, Bitcoin itself has been beaten down
to half its peak value.
On one hand, misinformation and speculation plague
the industry, which has become a target for law
enforcement and regulators. On the other, forward-
looking parties are increasingly seeing value in digital
currencies, and are moving fast to reap the benefits.
What better time to offer our perspective on the path
forward for digital currencies?
We will do so first by recapping what the year had in
store for digital currencies and the current state of the
1. DIGITAL CURRENCIES
THE PATH FORWARD
By Vanni Parmeggiani
Copyright © 2014 Oliver Wyman 5
market. Then we will explain the difference between the
two main types of digital currencies as we see it, focusing
on pros and cons. Finally, we will discuss where we see
the greatest opportunities for digital currencies – and
the challenges that need to be overcome.
A YEAR IN REVIEW
Many high-profile economists and bankers have
dismissed digital currencies as a passing fad. Despite
all the skepticism and semi-serious alt-coin attempts,
digital currencies do not seem to be going away.
By Q3 2014, the industry had attracted over $300 MM
in venture capital investment; for comparison, the
investment in internet start-ups in 1995 was 20% lower.
Well-known technology investors like Andreessen
Horowitz are supporting various digital currency
start-ups. Google itself backs Ripple, a leading digital
payments protocol and currency.
Some notable merchants and payment service providers
have started accepting bitcoins. Overstock.com,
one of Bitcoin’s early champions, claims bitcoin sales
approached $8 MM in its first year as a Bitcoin merchant.
Most recently, PayPal has declared it will start processing
bitcoin payments through its Braintree subsidiary.
Several sizeable hacks shook the industry throughout
the year, but companies seem to have learned from
them. After Mt. Gox, the largest digital currency
exchange in the world, lost nearly half a billion of
customer funds to cyber-attacks, audits and enterprise-
grade security have become increasingly prevalent.
However, aside from a cadre of enthusiasts, digital
currencies still raise more questions than acceptance.
Bitcoin, far and away the largest digital currency
worldwide with around 90% market share, persists in
being extremely volatile. The price of a bitcoin in the
past year ranged from a high of over $1,000 to a low of
less than $350. Volatility has made bitcoin more of a
speculative investment asset than a robust medium of
exchange: over the past year, bitcoin exchange-traded
volumes have been 10-15 times higher than transaction
volumes
1
(Exhibit 1).
Digital wallet solutions are simply too many and too
confusing for mainstream adoption by consumers
or merchants. Ease of use is a particularly significant
concern: the mechanics behind digital currencies
already resemble black magic, so the lack of user-friendly
offerings does not help.
The use of digital currency for illicit purposes is still a
concern. Bitcoin is the currency of choice for online drug
and weapon marketplaces like Silk Road, even though
Exhibit 1: Digital currency market snapshot
600
1,200
Bitcoin
91%
Ripple
3%
Litecoin
2%
Next 7
2%
Others
2%
DIGITAL CURRENCY MARKET SHARE BREAKDOWN
TOTAL = $5.7 BN
BITCOIN PRICE VOLATILITY
NOVEMBER 2013 OCTOBER 2014
Nov
2013
Dec
2013
Jan
2013
Feb
2014
Mar
2014
Apr
2014
May
2014
Jun
2014
Jul
2014
Oct
2014
Sep
2014
Aug
2014
BITCOIN TRADETO
TRANSACTION RATIO
Ratio
Bitcoin unit
price ($)
900
300
10
0
20
15
5
0
Source coinmarketcap.com, blockchain.info, Oliver Wyman analysis
1 Transaction volumes include C2C, B2C, and B2B bitcoin transfers.
Copyright © 2014 Oliver Wyman 6
law enforcement agencies have stepped up capabilities
to identify transactions on these networks. Digital
currencies offer a high degree of transparency – fund
flows can be tracked since their inception on publicly
available ledgers – but institutions willing to provide
digital currency services need to set up AML controls
that go beyond established practices to pinpoint
suspicious activity.
Regulators are going through the five stages of grief
in dealing with digital currencies (denial, anger,
bargaining, depression, acceptance). Some countries,
like China and Russia, are enforcing outright bans;
others, like the UK and Australia, are treating digital
currencies just like any other foreign currency; most
countries, though, are still trying to figure out the
best regulatory framework. In the US, the IRS has
announced that digital currencies will be treated
as an investment asset rather than a currency, and
be subject to capital gains taxation. The New York
Department of Financial Services is spear-heading the
first effort at regulating digital currency businesses
under its much-awaited “BitLicense”. Early drafts laid
out requirements in terms of AML, capital, cyber-
security and consumer protection – and drew outcries
of stifling innovation from start-ups operating in the
space. Undeniably though, balanced regulations that
guarantee system stability are necessary to boost
user confidence.
Established financial institutions and payment service
providers, notoriously wary of any innovation that might
carry additional regulatory risk, have been unwilling to
get involved with digital currencies thus far – although
interest is increasing.
What will it take to get digital currencies to the next
level? To answer that question, we have assessed the
two main types of digital currencies to indicate where
we believe the market will head.
COMPETING SOLUTIONS
Although Bitcoin has been grabbing most of the headlines
and has essentially monopolistic market share so far,
digital currencies are more than just Bitcoin. There are
two main types of digital currency protocols, where
by protocol we mean the set of rules that govern a
digital currency:
• Cryptography-based protocols
• Consensus-based protocols
Both protocols are decentralized in nature, as they
rely on computers operated by individual users to
provide the power necessary to process transactions.
The rationale is that decentralized processing is more
cost-effective than centralized processing (e.g. operated
by a corporate or governmental entity) because it
works on free-market principles – transaction costs are
determined by demand rather than fixed. However,
beyond this similarity, there are fundamental differences
in how the two protocols work (Exhibit 2).
Cryptography-based protocols like Bitcoin rely on
sheer network computing power to operate efficiently
and remain secure. Transactions are broadcast to all
computers in the network, called “miners”. Miners
compete to confirm transactions by finding a key to
a cryptographic problem in exchange for a monetary
reward. Every 10 minutes, confirmed transactions are
stored in a publicly accessible ledger called a “block
chain”, which contains details of all transactions that
have ever occurred on the protocol. Once stored, funds
cannot be reversed or re-spent unless a malicious
user somehow manages to take control of more than
50% of network computing power and undo the block
chain – something out of reach for hackers and even for
most sovereign nations.
2
Consensus-based protocols, of which Ripple is the
most prominent example, rely on the “network of trust”
principle. In order to validate a transaction between users
who do not know each other, the protocol attempts to
find a path in which each node is between two users that
have a trusted relationship. Once 80% of the network
reaches a consensus on a set of trusted transactions
(every 2-3 seconds), they are confirmed and stored in a
public ledger. As the network grows so does the amount
of trusted relationships, making the system more efficient.
“Gateways” (e.g. banks) facilitate network-building by
providing access for a multitude of users, similar to the
way payments service providers allow access to existing
payment rails.
We believe consensus-based protocols hold more
potential than their cryptographic counterparts, as they
promise lower long-term transaction fees and support
real-time transactions in any fiat or digital currency.
2 See Appendix for detailed description of Bitcoin mining process.
Copyright © 2014 Oliver Wyman 7
The cryptographic transaction confirmation process,
commonly known as “mining”, is not conducive to
maintaining low transaction fees in the long term. Each
computer participating in the network is currently
motivated to mine via incentives: new bitcoins and
transaction fees are assigned to the miner that confirms
a transaction batch. Since incentives are assigned only
to one miner at a time, whoever has the most computing
power also has the highest likelihood of winning the
incentive. But what happens when new bitcoins are
exhausted? New bitcoin issuance is only meant to
encourage network diffusion; no new bitcoins will be
assigned once the maximum amount of 21 MM has been
reached. At that point, the system needs to self-sustain
through transaction fees, which are close to zero now but
will inevitably rise to pay for mining costs. Unfortunately,
most miners already struggle to break even given the
skyrocketing computing power required to have even a
remote chance of winning incentives, so transaction fees
may rise quite a bit. Hence the main selling point for the
ecosystem to adopt Bitcoin – low transaction fees – comes
under question. Ultimately, centralized processing
may be more cost-effective for a system based on raw
computing power.
Consensus-based protocols, on the other hand, do not
rely on incentives in a winner-takes-all mining system.
Instead, the system relies on “access” fees charged by
the protocol operator (e.g. Ripple) and transaction fees
charged by service providers operating on the network
(e.g. gateways). The protocol operator is responsible
for maintaining and updating the rules that govern the
system, and enabling access to service providers; we
expect these activities to command a small portion of
overall end user fees. In parallel, any number of service
providers can flourish as long as they provide services that
customers want and are willing to pay for. Failing that,
customers are free to switch to a competitor that offers
better service or a better price. There is also an indirect
incentive for service providers to host computing power
to process network transactions, so they can become
vertically integrated with transaction fees reflecting the
full cost of network operations. We believe this system
represents a more sustainable demand-based solution
than one highly dependent on computing power costs.
There are other advantages to Ripple over Bitcoin,
and to consensus- over cryptography-based protocols
generally: Ripple is currency-agnostic and real-time.
In other words, Ripple can be leveraged to transfer
any currency that can be digitized, as long as there is a
market maker willing to facilitate the transaction. Since
essentially all relevant currencies can be digitized, the
opportunity is vast and Ripple can be implemented on
top of existing payments infrastructure with relative
ease. In a more futuristic scenario, the system could
also be used to transfer any kind of asset that can be
digitized, from car ownership titles to equities. All
this would be available essentially in real-time, as
transactions are processed in 2-3 seconds.
Exhibit 2: Bitcoin-Ripple comparison
USD GATEWAY
(e.g. bank)
EUR GATEWAY
(e.g. bank)
USD
XRP
EUR
MARKET MAKERS
BTC WALLET BTC WALLET
USD EUR BTC
USD bank EUR bank
MINERS
BTC
BTC
• Open source cryptography-based digital currency and
payment protocol
• Transactions only in bitcoins (native currency)
• New bitcoins (BTC) issued as incentive for processing
transactions until maximum amount of 21 MM reached
• Optional transaction fees
• Transactions processed every ~10 minutes
• Open source consensus-based digital currency
and payment protocol
• Currency-agnostic (transactions in any ?at or
digital currency)
• 100 BN ripples (XRP) available as bridge currency
to facilitate illiquid transactions
• Optional transaction fees
• Transactions processed in 2-3 seconds
BITCOIN RIPPLE
Copyright © 2014 Oliver Wyman 8
In the Bitcoin world, on the other hand, transactions
need to occur in bitcoins. Normal payment rails, like
credit or debit, need to be used to move funds in
and out of Bitcoin wallets, and currency conversion
fees and FX risk may apply. This raises the problem
of currency acceptance, above and beyond payment
system acceptance: not only must you be connected to
a Bitcoin wallet or processor, you must also be willing
to store and be paid in bitcoins. Given bitcoin volatility,
even the most supportive merchants convert bitcoins
back to fiat currencies as soon as they receive them.
Furthermore, Bitcoin transactions proscess in 10 minutes
on average – the time required for miners to reach
consensus on a new transaction batch. While this may
not matter much for e-commerce, it poses issues for in-
person transactions.
Bitcoin derivatives and protocol enhancements are
in the works, but in the meantime a solution like
Ripple is already available on the market – making
it, or something similar to it, a frontrunner for
mainstream adoption.
THE FUTURE IS NOW(ISH)
By the end of 2014, three banks have announced adoption
of Ripple as a payments protocol: Fidor Bank in Germany
has been followed by Cross River Bank and CBW Bank
in the US. All banks were particularly enthusiastic about
the opportunity to reduce customer costs for electronic
payments. Most recently Earthport, a global provider of
white-label cross-border payment services, announced a
partnership with Ripple.
We believe there are at least three prominent use cases
that could benefit from Ripple or one of its cousins in the
near term (Exhibit 3):
• International remittances
• Peer-to-peer (P2P) transfers
• Business-to-business (B2B) payments
International remittance volumes are huge: in 2014
close to $500 BN was sent overseas. Remittances are
also one of the most expensive payment ecosystems for
consumers worldwide: prices range from $10 to $20 per
transaction, while the average ticket size hovers around
$200. Considering the added costs and risks of having
to use physical locations and cash or checks to conduct
transactions, the market is ripe for disruption. Digital
currencies promise to support remittances at a fraction
of the cost, and allow users to leverage self-service
transaction solutions such as mobile phones or ATMs
alongside traditional physical locations. Notably, SMS-
based mobile solutions are being developed alongside
smartphone solutions, in order to effectively target
emerging markets. We have yet to see a substantially
successful service in this space, but the amount of
venture capital interest would definitely suggest 2015
Exhibit 3: High-potential digital currency use cases
USD REMITTANCE
GATEWAY
EUR REMITTANCE
GATEWAY
MARKET MAKER
DIGITAL CURRENCY PROTOCOL
USD EUR
BANK A
GATEWAY
BANK B
GATEWAY DIGITAL CURRENCY PROTOCOL
LOCAL
CURRENCY
BUYER
GATEWAY
SUPPLIER
GATEWAY S DIGITAL CURRENCY PROTOCOL
LOCAL
CURRENCY
INTERNATIONAL REMITTANCES
PEERTOPEER TRANSFERS
BUSINESSTOBUSINESS PAYMENTS
Copyright © 2014 Oliver Wyman 9
might bring disruption to one or more remittance
corridors in the form of new entrants or incumbents
adopting new technologies. Some new entrants have
been hinting at consumer prices around 1% of the
remitted amount – if that were the case, consumer
savings could range between $20-50 BN annually.
Compared to remittances, P2P funds transfers are more
sporadic and typically occur within a single country’s
borders. P2P transfers have already been the target of
disruption in certain sizeable markets – most notably,
in the US PayPal’s subsidiary Venmo grew to over $1 BN
in P2P payments in 2014. While most US banks allow
free transfers within the bank, inter-bank transfers are
relatively inefficient as they rely on ACH or wire rails.
ACH is inexpensive, but takes 1-2 business days to
process and can be revoked within up to 60 days; wire
transfers do not suffer these shortcomings, but they
come with a $10-20 price tag. Solutions like Venmo
can make things easier, but require consumer to open
separate accounts outside of their bank and link their
cards or checking accounts as funding mechanisms. If
banks were to become digital currency gateways, on the
other hand, they could facilitate real-time, nearly cost-
free transfers with minimal disruption to their existing
infrastructure and core systems. This could be even more
appealing to banks that have an established presence
in multiple countries (e.g. Citi, HSBC, BBVA), given the
high transfer time and costs for cross-border transfers,
even if they effectively occur within the walls of the same
institution.
B2B payments are typically large in nature and can be
recurring, especially in buyer-supplier relationships.
In Europe SEPA has established shared standards
and direct debit is essentially free, but in the US and
elsewhere the system is not as seamless. In the US for
example businesses use checks for around half of all
B2B transactions – even though by some accounts this
generates a staggering $50 BN annual processing cost
and high fraud risk. Converting to electronic payments
means incurring the aforementioned ACH or wire issues,
or facing card fees of 2-3% – sizeable for payments of
several thousands of dollars. So why not leverage a
digital payment protocol that is real-time and extremely
low-cost? Businesses could use a bank gateway or even
set up their own gateway and connect their suppliers to
it. Based on our understanding of the Ripple protocol,
participating in the network appears to be fairly
straightforward from an implementation perspective.
If Ripple or an alternative solution gains traction for
these use cases, it could pave the way for mainstream
consumer adoption for purchase of goods and services
as well, where merchants are faced with steep card
acceptance fees. Presumably the first applications would
be in e-commerce and m-commerce, to be followed by
in-store transactions. However, complexities increase:
merchant acquirers and device manufacturers would
have to adapt their processes and technology, and the
response of card issuers and networks is yet to be seen.
Given all the “ifs” influencing this scenario and the need
to first build critical mass, it is difficult to foresee the
time frames and modalities in which it will play out – but
billions of dollars are at stake.
CONCLUSIONS
Digital currencies are one of the most disruptive
innovations in the payments world since the invention
of credit cards over half a century ago. The amount
of interest by both the private and the public sector
signals how potentially far-reaching and game-changing
the implications are. Increasingly robust solutions
are emerging from the Wild West days of the Bitcoin
gold rush – and established merchants and financial
institutions are taking notice.
We believe it would be a mistake for companies not
to educate themselves on how these solutions could
improve their business, even if an implementable
solution may be years away. Network effects are critical
to reap benefits, so being a fast follower is probably
a good strategy; but being a fast follower requires
that companies understand solution pros and cons,
implementation complexities, investment requirements
and key success factors.
Vanni Parmeggiani is a Principal at Oliver Wyman.
Copyright © 2014 Oliver Wyman 10
APPENDIX: BITCOIN MINING PROCESS
TRANSACTION PROCESSING
1) TRANSACTION CONFIRMATION 2) BLOCK CHAIN RECORDING 3) MINER INCENTIVE DISTRIBUTION
Block chain
Transactions New block
Block chain
Orphaned
block
Block chain
• New bitcoins
• Transaction fees
• Transactions are broadcast to all miner nodes
in the network for confirmation
• Each miner node bundles transactions into
a block and competes to confirm the block
by solving a cryptographic proof-of-work
problem (details on following figure)
• When a node finds a proof-of-work, it
broadcasts the block to the whole network by
adding it to the block chain
• Other nodes confirm the block by re-running
the winning node’s solution to the proof-of-
work problem
• Confirmed blocks are time-stamped in the
block chain, creating a public and sequential
database of all bitcoin transactions
• Nodes express their acceptance of the block
by working on creating the next block in the
chain, using the identifier of the confirmed
block as a starting point
• New bitcoins and transaction fees are
collected by the node which found the proof-
of-work confirmed by the network (“winner
takes all”)
• As long as the incentive to mine for new
blocks is higher than the incentive to disrupt
the block chain, the majority of network
computing power will be non-malicious and
Bitcoin will be secure
CRYPTOGRAPHIC PROOF-OF-WORK PROBLEM-SOLVING
1) INPUTS 2) HASH FUNCTION RESOLUTION 3) OUTPUT
Previous block
reference
Metadata
Transactions
Nonce
Block in
progress
+
Nonce
(solution)
Resulting
hash
…
New
block
Con?rmed
block
… … …
• Inputs to the hash function for a new block
always include:
? Hash reference to the previous block
? Metadata (e.g. a timestamp)
? All transactions included in the new block
? A random number called a nonce
• Miners repeatedly increase the nonce until the
hash function yields an output with a certain
number of leading zeroes
? More leading zeroes mean fewer possible
solutions/more time required to solve
the problem
? Every 2,016 blocks (~2 weeks), proof-
of-work difficulty is reset so that miners
employ ~10 minutes to confirm a block
on average
• When a nonce that works is identified, it is
appended to the end of the block with the
resulting hash reference
• Every other miner in the network can run
the hash function with the winner’s nonce to
verify the solution
• If the solution is accepted by a majority of
miners the winner gets the reward and a new
block is started, using the previous block’s
hash as a reference
Copyright © 2014 Oliver Wyman 11
Affluent customers represent a conundrum for most
providers. While their revenue potential should be
much better than a mass customer’s, profit is typically
compromised by high cost to serve, driven by the
perceived need to respond to demands for higher
service levels utilizing expensive personal advisors.
However, new ways to exploit readily-available
technologies offer the opportunity for forward-looking
competitors to break the linkage between high service
and high cost. The competitive landscape of the
Affluent segment will be redrawn over the next few
years as leaders adopt better and cheaper ways to serve
these clients and disrupt the businesses of laggards,
leaving them with leadership only in the high cost, low
profit segment.
To grow or even maintain share in this segment,
competitors need to address three issues:
1. How and where to substitute digital offerings for
personal service, both face-to-face and voice-based.
2. How to develop effective mechanisms to drive
sales through digital channels, shifting from “push”
to “pull”.
3. How to align the organization around this
new, digitally-enabled model, embracing new
opportunities and letting go of legacy approaches
that will compromise the new business.
In this article, we look primarily at a subset of the first
issue – how to introduce digital offerings into the
investment product and service arena. We provide
examples of ten potentially game-changing digital
innovations in this space that are live or about to appear
in the market – they are not theoretical concepts, but
competitive offers that providers are likely to face soon if
they are not already.
As a starting point, we begin by describing the economic
challenges of affluent banking and how a customer-
oriented digital approach may become a game changer
by reviewing the digital trends in affluent banking.
We then present ten digital innovations across the
investment product value chain and discuss three steps
that all banks should take to develop a successful digital
strategy. We conclude by considering why banks have
been slow to adopt these innovations and how different
choices will influence the future winners and losers.
Digital is now moving from a relatively simple problem
of adding new channels and features – what we call
“Digital Featurism” – to the more complex issue of
becoming a core part of financial services business
models. Managing substitution is the new challenge
and will define who wins and who loses in both Affluent
and beyond.
2. REINVENTING
AFFLUENT BANKING
THE DIGITAL OPPORTUNITY
By Ashley Cunnington, Paul Mee and Mike Harding
Copyright © 2014 Oliver Wyman 12
1. SERVING THE AFFLUENT
The affluent banking segment traditionally presents
a quandary for retail banks. On the one hand, affluent
customers are attractive for a number of reasons – they
represent a large and growing segment, hold more
products than the average retail customer and hold a
greater nominal value within these products. On the
other hand, it is a difficult segment to serve effectively
in order to differentiate and win. Affluent customers
typically have their financial holdings spread across a
number of different providers, in order to find the best
price, the best experience, or the best advice. Being the
main transactional bank does not necessarily correlate
with securing the customer’s total value, but does carry
much of the cost-to-serve.
Digital technology has transformed many large
industries over the last decade, leading to new
business models and new dominant market players. In
comparison, the pace of change and broad impact of
digital technology on the banking industry has thus far
been limited. Whilst we have seen rapid developments in
some areas (e.g. adoption of online and mobile banking
for simple transactions and sales), digital has thus far
failed to deliver the long-promised improvements
in customer experience and cost efficiency. This is,
currently, no less true in affluent banking. But things
are changing.
Traditional FS providers face a difficult future. Since the
crisis, the banking industry suffers from a poor image
and unhappy customers are increasingly looking for
and offered more attractive alternatives. We observe a
strong influence of non-banking sectors on customers’
expectations and behaviors. Banks and others need to
“raise their game” to reflect their weakened positions
and higher customer expectations. Despite growth in
the segment, there will be downward pressure on pricing
and revenue as customers become less willing to pay
for “inferior” service and as price comparison platforms
erode the potential to charge premium prices.
At the same time, the scale and nature of investment
needed in the digital space can be substantial, and will
affect the overall cost base and banks’ already squeezed
profitability. Providers must face this double threat of
declining revenue and higher costs not just by adding
new digital services, but by using them in a smart way to
replace higher cost assets and services. In so doing, they
need to learn new skills rapidly including addressing
such difficult questions as:
• How to recruit customers through digital channels?
• How to use digital to cross-sell and up-sell products
amongst affluent customers?
• How to build “stickiness” into the offering to counter
the threat of attrition and tendency to multi-bank?
By way of example, consider the total economics of a
“typical” affluent customer, as shown in Exhibit 1. In
this simplified case we break the financial holdings into
three parts:
• The primary banking relationship – €25,000 deposits
at 2% NIM
1
, fee income of €250, cost-to-serve of
€550 based on an RM-based model.
• The residential mortgage – €300,000 mortgage with
1.5% NIM and fees, 0.5% opex and 0.25% cost of
credit (losses and capital).
• Investments – €200,000 AuM with 1% income, 0.3%
distribution cost and 0.3% platform cost.
This simple example highlights three areas where digital
investments can help to enhance overall customer value:
1. Capturing a larger share of the customer’s wallet
through a better understanding of the client and
more targeted, more relevant and more proactive
contacts. All this to increase service quality and
expand the offering, as well as develop platforms
that aggregate all of customer’s assets in one place
and provide the benefit of a single view.
2. Reducing servicing costs by replacing low-value
Relationship Manager contacts with online, self-
service tools, and opening up a full range of new
advisory models.
3. Providing new ways to acquire customers online,
often at significantly lower costs compared to today.
1 Including benefits of term and liquidity premia in transfer pricing.
Copyright © 2014 Oliver Wyman 13
2. DIGITAL TRENDS
While much remains uncertain, with banks adopting
different approaches to digital technology in affluent
banking, four key trends are clear:
1. Digital channel presence is non-negotiable. All
customer segments increasingly rely on online and
mobile access to banking services. Experience in
the US suggests that demand for digital services
will be particularly strong among mass affluent and
high-net worth customers. This trend will strengthen
with the increasing importance of Generation Y,
characterized by greater uptake of smartphones
and reliance on digital technologies. Hence, some
competitors are already positioning their products
and services to attract future affluent clients at an
early stage by expanding their use of the digital
servicing channel.
2. Digital clients are concentrating banking and wealth
management services onto single platforms. This
is reflected by a proliferation of aggregated portal
solutions in this space, such as Mint.com or Personal
Capital. Traditional banks are reacting by expanding
their product offerings and redesigning their
platforms to meet the clients’ need for a “one-stop
shop”. The aim is to provide a single customer view
both internally and to the customer. Market leaders
in this respect, such as Chase in the US, operate one
portal integrating standard banking functionality
(person-to-person transfers, bill payments, etc.)
and wealth management functionality (asset
allocation data, financial planning, etc.) with uniform
navigation, branding and user experience across
all areas.
3. The digital channel is becoming an integral part of
getting advice. This trend has three facets. Firstly,
digital tools are increasingly used to improve the
quality of interaction between customers and
Relationship Managers (RMs). For example, Groupe
Generali France developed a mobile advisor tool for
RMs, which allows them to show clients portfolio
summaries, analytics and charts on the go. Secondly,
in the aftermath of the crisis, clients believe more in
getting advice from their peers – who are considered
more credible than Relationship Managers
commissioned on sales – and are more and more
looking for “People like you” approaches to see
how real people similar to them behave or invest.
Thirdly, more banks are leveraging digital solutions
in the background to enable RMs to use their time
more efficiently.
Exhibit 1: Affluent customer value across providers
Main bank
pro?t 200
Mortgage provider
pro?t 2,250
Investment providers
pro?t 800
Total
pro?t 3,250
Main bank
cost
Mortgage
provider income
Mortgage
provider cost
Investment
provider income
Investment
provider cost
750 550
4,500 2,250 2,000 1,200
3,250
Customer
pro?t
Main bank
income
Source Oliver Wyman analysis
Copyright © 2014 Oliver Wyman 14
4. Banks are increasingly deploying cutting-edge
advances in digital technology to better serve
customers across a range of areas. For example,
new security features, such as retinal scanning or
voice recognition are used to simplify customer
identification. New document sharing solutions,
such as secure online vaults, allow better back-
and-forth collaboration. New video platforms and
digital workshops are used to educate customers on
markets, products or usage of digital platforms.
3. INNOVATING IN AFFLUENT BANKING – TEN IDEAS
To illustrate how digital technology can make a
difference in affluent banking we have identified
ten examples of digital innovation across the whole
affluent banking value chain (Exhibit 2). Some of these
innovations have already been implemented by market-
leading traditional banks; others were introduced by
non-traditional FS providers; all could be adopted more
widely in the banking industry.
Exhibit 2: Selected digital innovations along the affluent banking value chain
PROSPECTING AND
ACQUISITION
ONBOARDING
AND PROFILING
ADVICE AND
IMPLEMENTATION
MONITORING
AND REPORTING
OPERATIONS
IMPROVE
THE
EXISTING
OFFERING
CREATE
NEW
OFFERING
1. Intuitive toolkit to determine/
validate portfolio strategy
2. “People like you” comparison
within client base
3. Investment simulator to access
risk-return of investment plans
4. Consolidated
?nancial reports
(incl. all assets)
5. Open architecture
with 3rd party
products/services
6. Social network for wealthy 45+ clients
7. Client preference-
based advisor
matching
8. Low-cost thematic investment ideas
9. Investment strategy
based on crowd
sourcing of ideas
10.Digital concierge
service with focus
on (pre-) retirees
Source Oliver Wyman analysis
Copyright © 2014 Oliver Wyman 15
IDEA 1: PORTFOLIO STRATEGY
Provide overview of possible investment strategies
using an intuitive toolkit, enticing new clients and
delivering better service
Strategic intent:
• Retain clients by fulfilling their need for
investment guidance.
• Help clients take better investment decisions driven
by their risk/reward tolerance.
Choosing an investment strategy depends on many
factors (risk and reward preferences, current age,
income, etc.) and inexperienced individuals are likely to
need help. Banks can partly fulfil this need by building
an intuitive, online tool to provide initial investment
guidance. Such a digital solution can be easily accessible
from all relevant areas of the bank’s website (including
the online banking portal), and allow customers to
obtain initial investment guidance more quickly and at
a lower cost than what could be provided by traditional
investment advisors. For example, E*Trade offers a free
“Online Portfolio Advisor” tool. First, the tool asks the
user to fill out a straightforward survey. Then, based
on submitted responses, it determines the user’s
investment profile and displays a sample portfolio
allocation. Users can complete the process online or
offline with the help of a professional advisor and initiate
the process of opening up an investment account.
IDEA 2: PEOPLE LIKE YOU
Use collaborative filtering to show clients how
anonymised people similar to them are investing and
managing their lifestyle
Strategic intent:
• Increase cross-selling and decrease advisor
involvement by obtaining a better understanding of
customer behavior.
• Increase client satisfaction by offering appropriate
products at the right time.
Collaborative filtering allows making recommendations
for “similar” items based on user’s own preferences. The
key idea is that if User one likes A, B and C, and a similar
User two likes A, B and D, then User one is more likely
to be interested in D than some alternative product.
Collaborative filtering is widely used by online retailers,
including Amazon.com or iTunes. More recently the
same approach has been implemented in finance. For
example, OCBC Bank in Singapore and NAB in Australia
both introduced simple “People like you” tools that allow
users to compare their spending patterns with others
in the same demographic. The same approach can be
used more widely in affluent banking. It is sufficient to
record initial information and on-going positions for
individual customers. Then monitor them against a
database of similar customers and provide anonymous
recommendations e.g. “users similar to you started doing
X at this point”.
IDEA 3: INVESTMENT SIMULATOR
Visualize the results of a retirement/investment plan
to improve client understanding and communication
Strategic intent:
• Help clients understand the impact of their decisions
now on their future investment successes and adjust
the asset allocation, risk level or time horizon.
• Sell more savings products.
• Avoid self-directed clients leaving the platform to
seek advice or complement an advised offering.
Choosing an investment strategy is affected by multiple
factors, including time horizon, risk tolerance, desired
future income, future life events, etc. To improve client
understanding and communication of the available
options banks can build investment simulator tools
showing the results of a retirement/investment plan.
Visualizing likely outcomes helps customers realize
what impact their investment decisions now will have
in the future and what adjustments may be necessary
to achieve the desired outcome. Investment simulators
can vary greatly in their level of sophistication, ranging
from simple single-outcome tools focusing on life
events that mainly aim to raise questions which can be
addressed with an advisor to sophisticated tools aimed
at investment professionals allowing detailed scenario
analysis (e.g. Voyant). Banks should carefully consider
optimal use of such digital tools.
IDEA 4: FINANCIAL CONSOLIDATOR
Consolidate client’s assets in one place, provide
analysis tools and referrals to generate revenue
Copyright © 2014 Oliver Wyman 16
Strategic intent:
• Help clients build a complete picture of their assets
and thus enable them to better manage their affairs
through better product diversification, better prices,
more precise view on risks taken and an easier
comparison of performance.
• Generate revenue through referral fees.
As discussed in the previous section, there is a clear client
need around having a consolidated view of all customer
assets and liabilities in one single place. Some banks
have started to offer digital solutions that provide a single
customer view. One example of such a service is Mint.
com, which has over 10 million registered customers
across the USA and Canada. The portal supports multiple
types of accounts, offers functionality to set budgets,
and categorize expenditures. Based on the analysis of
spending behavior it recommends potential savings. The
service is provided for free, with referral fees generated
through savings recommendations. In Europe, this is more
developed in the Insurance space where platforms such
as Comparis in Switzerland provide information on all
insurances you hold. The tool contacts you proactively and
before all legal deadlines to offer alternatives to switch for
better products. Traditional Financial Services providers
should carefully consider opportunities related to
developing similar tools. A potential area for development
is a service that targets pre-retirees with functionality to
manage and compare multiple pension providers.
IDEA 5: OPEN ARCHITECTURE
Increase client stickiness by offering third party services
on own platform, supported by additional services
Strategic intent:
• Give clients a broader choice of products, either
by filling in gaps or in direct competition with
own offerings.
• Generate fees from third-party services sold.
• Position as a one-stop shop.
In recent years, we have seen significant growth of online
comparison engines that allow users to choose suitable
offers for a wide range of goods including financial
services products, such as loans, mortgages, credit
cards or insurance. Customers using comparison engines
benefit from greater choice and frequently from easier
administration at no extra cost. In a similar spirit, banks
should consider complementing their affluent banking
offerings with third-party products (potentially limited
to non-competing products). This generally requires
careful consideration of benefits from increased customer
stickiness versus undermining own brand and potential
reputational risks. However, the business model based on
open architecture can be very successful as demonstrated
by the example of Fidelity, which operates a leading fund
platform in the UK, US and other geographies selling its
own as well as competitor products.
IDEA 6: SOCIAL CIRCLES
Develop a social network matching client profile in
order to raise customer satisfaction and gain better
client understanding
Strategic intent:
• Increase understanding of clients’ needs at low cost
by interacting with clients online.
• Help clients to get peer advice.
• Increase brand recognition and client retention
through online interactions.
Many of the most popular websites on the internet like
Facebook, LinkedIn or Twitter are built around the idea
of connecting and sharing with like-minded people. In
addition to the largest social networking sites, many
other sites provide similar services for specific niches:
USAA provides community hubs for military spouses
and veterans, CafeMom for mothers and aSmallWorld
for the social elite and the jet set; Coutts facilitates
communities within its client groups (e.g. entrepreneurs,
professionals). Banks can leverage the same idea to build
an opt-in social network and build a digital meeting place
for wealthy baby boomers and retirees. This would allow
more targeted focusing on that peer group and facilitate
discussions on key topics, such as retirement planning.
IDEA 7: ADVISOR MATCHING
Let users handpick their advisors and allow digital
interaction, increasing customer satisfaction
Strategic intent:
• Maximize convenience and satisfaction by allowing
clients to choose their own bank and relationship
manager online.
• Earn referral fees.
Copyright © 2014 Oliver Wyman 17
Some banking customers, especially in the affluent and
HNW segments, would prefer to personally choose their
financial advisors and get to know them before receiving
financial advice. To meet this preference and ensure
closer relationships between clients and advisors, a bank
may enhance its affluent banking offering to include
an online advisor matching platform. Similarly to the
functionality offered by unbiased.co.uk (an independent
non-profit UK body), such a platform could allow users
to filter through profiles of potential advisors based on a
range of factors, such as expertise, geographical area or
languages spoken and include a tool for quick and easy
communication. In addition, all advisors added to the
platform may be vetted by the bank and rated by clients
to ensure quality.
IDEA 8: THEMATIC INVESTMENTS
Use an online tool to explore, discuss investment
ideas, then customize the portfolio and invest cheaply
Strategic intent:
• Drive additional volume through a
stockbroking platform.
• Establish strong and sticky client relationships.
To enhance the investor proposition of an affluent banking
offering, banks could provide customers access to, and
perhaps guide them towards, thematic investment ideas
and translate them into tangible and easily accessible
trades. This could take the form of either an online
platform aimed at self-directed investors or low-cost
investment advice provided by relationship managers.
One successful website using such an approach is
Motif Investing. First, the website conducts research to
identify trends and investment ideas. Then, it screens
stocks and weights them to build sample portfolios
around different themes, such as “Clean Technology
Everywhere” or “QE Japan”. Investors can review the
portfolios, discuss them in online forums and tailor as
required. They pay a fixed fee for buying a motif of 30
stocks. In summary, the challenge is to translate bank
research into simple trades and provide a low cost
transaction service.
IDEA 9: CROWD INVESTMENT STRATEGY
Use existing and sourced client portfolio data
to inform clients what others are doing with
their finances
Strategic intent:
• Use data to inform clients what other people are
investing in.
• Prompt clients to invest more and thus earn
revenues through increased volumes.
Another idea to drive additional volume through the
stockbroking platform is to use crowd sourcing to
provide or review investment suggestions. Crowd-
based solutions have affected many sectors – from
encyclopedias and travel industry to fund raising – and
are now making their way in finance. For example, eToro,
a social trading network in Cyprus, allows clients to view
trading activity of others and link their portfolios to “guru
traders” to copy their trades. Motif Investing mentioned
in Idea 8 allows users to vote on an theme portfolio and
discuss it in detail in a forum. Such capabilities can be
easily added to affluent banking offerings while alerting
users that crowd views may not be reliable, timely or
appropriate for complex issues.
IDEA 10: DIGITAL CONCIERGE
Provide a digitally-enabled concierge product tailored
to client base, to greatly increase client satisfaction
Strategic intent:
• Provide a helpful and convenient service enabling
clients to do more.
• Earn revenues through fees or advertising.
To increase customer satisfaction and differentiate from
competitors, banks may introduce a complementary
or paid-for concierge service for (pre) retirees. One
example of such a service is MyConcierge in France,
which offers: restaurant and travel reservations, cultural
and sporting events, and sporting requests. Services
can be accessed over the phone, via the web or by using
a dedicated app. Implementation of this idea requires
careful positioning next to other concierge services, e.g.
offered by cards. One potential challenge is the need
for the service to consistently meet bank brand and
quality expectations.
Copyright © 2014 Oliver Wyman 18
A PRESCRIPTION FOR SUCCESS
The rapid technological and social changes described
above create threats and opportunities for banks in
the Affluent segment. How should banks respond and
manage this process? Below are what we believe to be
the most important items to consider.
A. Understand the dynamics of your portfolio and
who your customers are. Getting a robust customer
fact base is key. Different segments often have very
different behaviors and profitability, therefore it
is worth investing in understanding what the key
customer segments are and their differences in
terms of behaviors, profitability, likelihood to switch
and features they value most.
B. Think carefully how to maximize the required
investments across future market and competitor
scenarios. This requires a good awareness of existing
innovation and how they will reshape the sector.
What do you have in place now and coming on
stream soon? How are your competitors moving in
the digital space? Test your current strategy against
tomorrow’s environment and reconsider your digital
strategy in this context.
C. Decide on a digital participation strategy. This
requires understanding the customer “value
equation”. Starting with the status quo, banks should
re-assess customer value to the bank and how it is
likely to change over time due to evolving customer
expectations and behaviors. Based on the results,
the bank should consider all options available to
affect future customer value. What could be done
differently? How much will it cost and how much
impact can it have on customer value?
D. Prioritize investments. This involves allocating
planned initiatives into different groups. Typically
defensive and/or high positive value impact
investments are classified as “must haves” and
prioritized. Lower value investments with an option
to delay action are classified as “Watch points” and
implemented based on market developments. Costly
investments with a potentially high but uncertain
impact are classified as “Big Bets”. Generally, we
advise banks to place competing bets, in much the
same way as innovative technology companies.
E. Engage the organization. Success will likely require
major change in culture and infrastructure, and
lessons must be learnt from other successful players.
To win in the digital space, banks need to view digital
as a fundamental change with potential to alter the
whole value chain.
Copyright © 2014 Oliver Wyman 19
CONCLUSION
Affluent segment providers have not yet fully embraced
these ten ideas. Much of this has been for understandable
reasons given the limited capacity for investment and
the difficulty to find the right financial equilibrium. This
is in part driven by an approach that attempts to add
new digital capabilities without “risking” reducing the
traditional offering. However, as more providers embrace
digital offerings as substitutes rather than additions,
the risk may lie with those who fail to move. Recent
announcements by leading banks such as Barclays, HvB
and Wells Fargo indicate movement toward reducing
reliance on traditional assets such as branches in favor of
investment in digital channels and offerings.
To win in the digital affluent space, banks need to view
digital as a fundamental change, with potential to
alter the whole value chain. The expected benefits are
substantial: not only a rise in affluent customer numbers,
reduced cost-to-serve and streamlined process but also a
notable improvement in overall economics and enhanced
customer experience. The transition won’t be easy, but the
future winners will work out how to do this effectively.
Ashley Cunnington is a Partner at Oliver Wyman.
Paul Mee is a Partner at Oliver Wyman.
Mike Harding is a Partner and Head of the Digital Network group.
Copyright © 2014 Oliver Wyman 20
APPENDIX
SUMMARY OF THE 10 IDEAS
Idea Description
Potential benefits
to firm
Potential
downsides
Implementation
challenges Examples
1. PORTFOLIO
STRATEGY
• Explore risk/return
trade offs of an
investment strategy
using an intuitive
toolkit then review
with a real person
• Attract new clients
• Strengthen advisory
process by
communicating risk/
reward trade-offs
• Avoid mis-selling
• Mechanics and time
needed may not be
acceptable to clients
• RMs may not be
suited to playing
validator role
• Tool requires thought
and careful design
• Integration into
wider advisory
process
• E*Trade (US)
2. PEOPLE
LIKE YOU
• See what real
people similar to
you are doing with
their money
• Increase cross-selling
• Supports self-service
• Comparisons may
be misleading/not
reflect complexity of
client’s situation
• To work out the
mechanics, in
particular disclosure
issues
• Getting clients to opt in
• OCBC Bank
(Singapore)
• NAB (Australia)
3. INVESTMENT
SIMULATOR
• Understand the
risk/return options
associated with a
savings plan
• Attract new clients
• Strengthen advisory
process by communi-
cating risk/reward
trade-offs
• Avoid mis-selling
• Mechanics and time
needed may not be
acceptable to clients
• RMs may not be
suited to playing
validator role
• Tool requires thought
and careful design
• Integration into
wider advisory
process
• Julius Baer
(Switzerland)
• Voyant (UK)
4. FINANCIAL
CONSOLIDATOR
• A service that will
provide a consoli-
dated view of all
accounts held by
an individual
• Can generate revenues
through referral fees
• Enables wallet sizing
• Binds clients to
the service
• Clients unwilling to
provide all their
financial information
to the bank
• Clients are aware of the
sensitivity of their data
• Linking with sufficient
providers to enable full
consolidation
• Presenting data
consistently
• Mint.com
(US, Canada)
• Personal
Capital (US)
5. OPEN
ARCHITECTURE
• Complement your
product offering by
non-conflicting
third party
products
(such as trust,
tax, philanthropy,
government
support, SRI,
care services)
• Increase customer
stickiness and
fee generation
• Cross-sell
opportunities
• Undermining brand
awareness through
third party products
• Potential reputational
risk due to third
party products
• Risks associated
with product due
diligence, selection and
advice process
• Fidelity (US)
Copyright © 2014 Oliver Wyman 21
Idea Description
Potential benefits
to firm
Potential
downsides
Implementation
challenges Examples
6. SOCIAL
CIRCLES
• An opt-in social
network for
wealthy people
• Increased customer
understanding
• Builds a deeper,
broader client
relationship
• Bank may not control
all interactions and may
be disinterm-
ediated
• Position the network as
a “wealth circle” next
to existing premium
programs (e.g.
credit cards)
• USAA (US)
• CafeMom (US)
• aSmallWorld (UK)
7. ADVISOR
MATCHING
• Choose a personal
advisor based on
your preferences
and begin digital
communication
• Closer relationship
• Increased customer
satisfaction
• Too much choice
leading to client
confusion
• Places relationship
with the advisor, not
the bank
• Limits ability of bank to
switch advisors
• Capturing of personality
profile of advisors and
what clients really want
• Running advisor
network afterwards
• Unbiased.
co.uk (UK)
• Knab
(Netherlands)
8. THEMATIC
INVESTMENTS
• Online platform
offering wide
range of thematic
portfolios, plus
structuring and risk
management tools
• Interesting to
savvy self-directed
investor segment
• Builds out self-
service model
• Leverages bank research
• Cannibalization
of existing fund/
DPM business
• Integration of research,
low cost transaction
services, reporting and
analysis toolkit
• Motif Investing (US)
9. CROWD
INVESTMENT
STRATEGY
• Use crowd sourcing
to provide or review
investment
suggestions
• Enables independent
review of strategy
• Supports self-service
• Crowd view may not
be reliable, correct
or timely
• Not the best way
to analyse complex
issues
• Not of interest to all
client segments
• Building the critical
crowd size to get
good advice
• Avoiding legal and
compliance issues
• EToro (Cyprus)
• Curensee (US)
10. DIGITAL
CONCIERGE
• A concierge service
tailored to (pre)
retirees, offering
proactive advice
on life events and
lifestyle transition
• Complimentary or paid-
for service generating
revenue (white-label or
in-house developed)
• Increased customer
satisfaction
• Need to consistently
meet bank brand and
quality expectations
• Positioning next to
similar concierge
services, e.g. offered
by cards
• MyConcierge
(France)
Copyright © 2014 Oliver Wyman 22
INTRODUCTION
Banks have long sought a bigger share of the wealth
management market, and the enviable stream of
capital-efficient fee income that it entails. With
banks’ traditional lending, deposit and transactions
businesses squeezed by post-crisis regulations and low
interest rates, their enthusiasm for wealth management
is only growing.
The challenge for banks has always been how to
break the stranglehold that more established wealth
management business models hold on the market,
driven both by brand loyalty and a better ability to advise
clients with complex needs. This Oliver Wyman point-of-
view looks at one specific “break-through” opportunity
for banks: namely, making themselves the preferred
destination for customers rolling over their defined
contribution plans into an IRA. This is an approachable
opportunity even for banks without large wealth
management functions because it is scalable without
having to rely on a large, highly paid staff. We argue that
this is one of the best ways for a bank to build scale in, or
even start, its wealth management business.
The market for rollovers today is dominated by the
leading defined contribution plan administrators,
such as Fidelity and Vanguard. These firms enjoy
well-established retirement brands and, given their
incumbent positions as the plan administrators,
provide a logical destination for a rollover. While these
are genuine competitive advantages, they are not
insuperable. As we explain, banks possess significant
strategic assets they could bring to bear in this fight. As
the providers of core banking products, they too possess
well-established brands and incumbent relationships
with the target audience. And the information that banks
naturally gather about their customers gives them an
advantage in identifying when customers have changed
jobs or retired, the events which traditionally trigger a
rollover into an IRA, and a fuller view of the customer’s
overall financial picture.
If banks can learn to use this information to target
customers, offer the investment choices they are looking
for and provide the hassle-free rollover that they desire,
then IRAs can provide a launching pad into the much
larger wealth management business.
MARKET CONTEXT
Individual Retirement Accounts (IRAs) were created in
1974 by the Employee Retirement Income Security Act
(ERISA). Like the 401(k), or other defined contribution
plans, the IRA is a long-term savings product to which
the majority of contributions are tax-exempt, and
where account balances enjoy tax-deferred or tax-free
growth. Unlike the 401(k), however, an IRA is set up by
individuals rather than by their employers.
3. RETAIL BANKS & THE IRA
ROLLOVER OPPORTUNITY
THE ROAD TO WEALTH (MANAGEMENT)
By Inderpreet Batra, Alina Lantsberg and Tim Spence
Copyright © 2014 Oliver Wyman 23
Exhibit 1: Why did you rollover your 401(k) account into
an IRA?
I changed
my employer
70%
I did it for
other reasons
11%
I retired
or reached
retirement age
19%
Source Oliver Wyman Retirement Insights 2013
Under the provisions of ERISA, transfers of funds from
employer sponsored 401(k) retirement plans into IRAs
(rollovers) are tax and penalty-free. IRAs also offer most
individuals a much broader range of choices, both
in terms of investment vehicles and providers, than
do traditional employer-sponsored retirement plans.
These factors have made IRAs a primary destination for
employees rolling over their defined contribution
accounts when changing jobs or retiring.
Exhibit 2: Growth in retirement market ($TN)
2008 2009 2005 2000
11.6
14.6
3.9
2.3
3.6
3.4
1.4
14.2
3.7
2.0
3.4
3.7
1.4
16.3
4.2
2.2
4.0
4.4
1.5
18.0
4.5
2.5
4.5
4.8
1.7
18.1
4.5
2.5
4.5
4.9
1.7
18.9
4.7
2.6
4.7
5.1
1.7
19.6
4.8
2.7
4.9
5.3
1.8
19.7
4.9
2.7
5.0
5.4
1.8
20.7
5.1
2.8
5.3
5.7
1.8
20.9
5.2
2.8
5.3
5.7
1.8
3.1
2.0
2.9
1.0
2.6
2010 2011 2012
Q3
2013
Q1
2013
Q2
2012
Q4
2012
Q2
IRAs
DC plans
Private DB plans
Government plans
Annuity reserves
Source ICI Research Report: Defined Contribution Plan Participants’ Activities, First Three Quarters of 2013, February 2014
IRAs already constitute a large pool of assets – about
$5.7 TN according to ICI estimates (see Exhibit 2) – and,
as of 2013, 46 million households or ~40% of all US
households already hold them. They are also growing
rapidly, fueled in part by rollovers from employer-
sponsored plans.
1
Between 1996 and 2008, IRA balances
grew at an annual rate of 7.5%, with rollovers peaking
at $316.6 BN in 2007. 27% of traditional IRA-owning
households rolled over within the last 2 years.
2
The firms
that provide and manage IRAs earn fees largely from
trading commissions and asset management. Collectively,
we estimate that IRA balances constitute a $30 BN
revenue pool.
COMPETITIVE LANDSCAPE
IRA Rollovers are an appealing strategic focus given
the frequency with which they occur and the amount
of money in motion. To that end, nearly all of the large
national and regional banks already offer IRAs. But recent
Oliver Wyman primary research shows that 30-40%
of their customers are unaware of this offering (see
Exhibit 3).
1 ICI Research Perspective: Vol. 19, No.11, November 2013.
2 ICI Research Perspective: Vol. 19, No.11, November 2013.
Copyright © 2014 Oliver Wyman 24
Exhibit 3: Percent of customers who do not know that
their primary bank offers an IRA (when it does offer
the product)
Bank A
31%
35%
Bank B
31%
Bank C
33%
Bank D
37%
Bank E
Source Oliver Wyman Retirement Insights 2013
The major 401(k) plan administrators are currently
winning the fight by a wide margin. According to our
research, Fidelity and Vanguard, the two best-known
plan administrators that offer IRAs as well, currently
capture more than 40% of all rollovers. Brokerages such
as Merrill Lynch and Morgan Stanley also do well on
Exhibit 4: If you had to roll over your 401(k) today into an IRA, which financial institutions would you seriously
consider rolling it over to?
29%
F
i
d
e
l
i
t
y
P
r
i
m
a
r
y
b
a
n
k
C
h
a
r
l
e
s
S
c
h
w
a
b
V
a
n
g
a
u
r
d
M
e
r
r
i
l
l
L
y
n
c
h
M
o
r
g
a
n
S
t
a
n
l
e
y
E
*
T
r
a
d
e
T
D
A
m
e
r
i
t
r
a
d
e
S
c
o
t
t
r
a
d
e
N
a
t
i
o
n
w
i
d
e
U
B
S
P
u
t
n
a
m
35%
23%
21%
14%
9% 9%
5% 5%
4%
11%
2%
Source Oliver Wyman Retirement Insights 2013
this dimension. The dominance of these two business
models is easily explained. Plan administrators have well-
established retirement brands and, as the incumbent
providers of the 401(k), appear to most customers as the
most straightforward rollover destination. Brokerages
have large advisor forces, the widest range of investment
options and existing relationships with the wealthiest
rollover candidates.
HOW BANKS CAN COMPETE
The lead plan administrators and brokerages enjoy in
the IRA rollover market may seem unassailable, but it
is not. In recent research conducted by Oliver Wyman,
potential IRA customers ranked their primary checking
account bank second only to Fidelity as a potential
rollover destination (see Exhibit 4).
We believe the recipe for converting consideration
to a successful rollover strategy consists of three key
elements, outlined below and then explained in detail.
1. Target customer segments: “Force concentrate”
on the population where the bank possesses the
strongest incumbency advantage
Copyright © 2014 Oliver Wyman 25
2. The offer: Construct the rollover value proposition
around a “no-hassle” process and a broad suite of
investment choices
3. The marketing strategy: Leverage data from the
customer’s checking account to identify when
rollover opportunities arise before brokerages or plan
administrators can see them, and utilize the full breadth
of touch-points to drive up awareness of the offer
1. TARGET CUSTOMER SEGMENTS
A typical bank can identify at least three pools
of customers that it can target for IRA rollovers.
These include:
• Current banking customers, including those that use
the bank as their primary checking account
• Employees of commercial customers
• Non-customers in footprint, who are aware of the
bank’s brand and presence
Among these pools, banks have the strongest
relationships with primary checking customers,
i.e. those that use them as their primary means of
performing day-to-day transactions and frequently
have salaries direct deposited into the account. These
customers tend to stay loyal and have frequent ongoing
interactions with the bank. We believe that this is the
pool of customers that banks should focus on first.
Not all these customers will have 401(k) accounts. In
recent research for a regional bank, we determined
that only 55% of their primary checking customers
had a 401(k) account. Among these, those that do not
currently have an IRA are easier to capture than those
that already do. For this particular bank, we estimated
that 19% of their primary checking customers fell in this
category (see Exhibit 5).
Penetration rates of 2-3% are typical for banks that have
not made a concerted push in this space. Increasing this to
10% is a $100+MM incremental revenue opportunity for a
typical regional bank. And given product ownership rates
and the advantages banks enjoy, this is quite achievable.
DDA data on income and balances can also be used
to identify customers who have high-balance 401(k)
accounts. Targeting these customers will yield more
profitable outcomes in terms of higher trading
commissions and asset management fees, given their
strong correlation with balances.
Exhibit 5: IRA Rollover opportunity among primary checking customers
Total IRA rollover opportunity
Increasing challenge to capture opportunity
% of total
All primary
checking
customers
Never had
a 401(k)
Do not currently
have a 401(k)
Currently
have a 401(k)
Have an IRA
with bank
Do not have
an IRA
Have an IRA
with another
provider
100
23
22
55
34
19
2
Source Oliver Wyman Retirement Insights 2013
Copyright © 2014 Oliver Wyman 26
2. THE OFFER
In the past few years, a “cash reward” arms race of
sorts has broken out among plan administrators
and online brokerages competing for IRA rollovers.
Schwab, TDAmeritrade, E*TRADE and many others
offer up to $600 in cash to prospective clients. This
bounty is substantially higher than what banks
have traditionally proven willing to pay for new
accounts, and would spell doom but for one thing: it
doesn’t seem to matter much to customers. Recent
Oliver Wyman research suggests that customers place
much higher emphasis on minimizing the hassles
associated with the switching process and getting
access to a wide range of investment options (see
Exhibit 6).
Reducing the hassles associated with the rollover
process can also help banks overcome any possible
disadvantages of not having a robust advice offering.
The rollover can be the beginning of a relationship
that evolves into advice, with the early wins
associated with the no-frills rollover strategy being
used to fund the development of a more holistic,
advice-based offering.
There are many elements that go into making the
rollover process low-hassle. One, banks must make the
process quick, let customers know in advance how long
it will take and provide regular updates; the pain for
customers is usually not the time but the uncertainty.
Two, they should reduce the pain associated with
reconstructing an investment portfolio. They should
find out the portfolio composition in advance and try to
replicate that; at the very least, they should be able to
offer an alternative portfolio that is materially equivalent
in its risk/return profile. Three, they should try and
reduce paperwork, e.g. by enabling online submissions
and letting people provide images of documents instead
of only offering older, more outdated methods.
3. THE MARKETING STRATEGY
There are two competitive advantages that banks
possess, which can drive effective marketing of the
rollover offer.
First, by monitoring a person’s checking account, a bank
can tell whether a person has changed jobs by observing
a change in the direct deposit source. The bank can also
Exhibit 6: Why did you select your current IRA provider to roll over your 401(k) account?
AVERAGE SCORE FOR CUSTOMERS WHO HAVE DONE AT LEAST ONE ROLLOVER
*
6 5 4 3 2 1
It was minimum hassle
The had the investment choices I was looking for
My advisor took care of everything
They also offered me retirement advice
They have the leading IRA offering in the marketplace
My colleagues/friends/family recommended it to me
I was impressed by clients testimonials
A phone rep helped me
They gave me monetary incentive
A person at the branch helped me with it
I received a letter/email asking if I was interested in rollovers
Someone called me and asked if I was interested in rollovers
2.1
2.3
2.9
3.0
4.1
0
5.2
5.2
4.5
4.4
3.6
3.5
2.8
Source Oliver Wyman Retirement Insights 2013
* Each respondent was asked to rank all these reasons on a 7-point scale, where 1 was “Not important at all”
and 7 was “Extremely important”
Copyright © 2014 Oliver Wyman 27
glean if someone has retired by combining the age of the
customer with a total stop in direct deposits. A change in
address may also indicate a change in job or retirement.
Banks can use such information to trigger direct
marketing to target customers (see Exhibit 7), which is
something that brokerages cannot do.
Second, banks have a significant distribution and
interaction advantage with their primary checking
customers. Banks can utilize the various channels their
customers use to build awareness of their offering and
to solicit prospects. Plan administrators typically have
minimal branch networks and few occasions on which
to interact with their customers. Once the bank has
reached out to a prospect based on a trigger, they can
use the branch to close the rollover transaction. The initial
outreach can also be delivered via the channel preferred
by the customer – online, mobile, or the branch itself.
CONCLUSION
Building a wealth management business is a daunting
prospect for most retail banks. Not only does it require
a costly extension of most banks’ infrastructure, but it
also requires expensive new advisory staff who often
find it difficult to fit into the culture of a retail bank.
The current model whereby certain products, such as
insurance and mutual funds, are sold out of branches
avoids these problems but fails to create a compelling
reason for customers to use the bank as their primary
wealth manager. When it comes to wealth management,
many banks are stuck at the starting line – unwilling
to make the investment required for the full retail
brokerage-style offering and unable to see any other way
to move forward.
IRA rollovers are a good way to get started because the
product and platform can be outsourced so that the bank
plays only the primary roles of advisor and distributor.
The IRA rollover discussion can also be used as an entrée
for a broader retirement-focused conversation down the
line, potentially leading to an overhaul of the customer’s
finances and consolidation of assets into the bank.
Income from the IRA assets can then be used to fund the
development of a broader wealth management offering.
For many customers, rolling a 401(k) into an IRA often
marks a “new beginning”. If banks can capture a bigger
share of this business, it may also mark a new beginning
for their ambitions in wealth management.
Inderpreet Batra is a Partner at Oliver Wyman.
Alina Lantsberg is a Principal at Oliver Wyman.
Tim Spence is a Partner at Oliver Wyman.
Exhibit 7: Illustrative IRA rollover direct marketing process
CUSTOMER
BANK
Leaves current job
Begins 401(k)
rollover process
Notice change
in direct deposit/
change in address
Reach out to
offer IRA
Copyright © 2014 Oliver Wyman 28
CONSTANT CONNECTIONS WITH BRANDS INFLUENCE CONSUMERS' BANK
PREFERENCES BEFORE THEY'RE IN MARKET FOR A NEW CHECKING ACCOUNT
ADS &
PROMOTIONS
BANK
EXPERIENCE
PRODUCT
FEATURES
RECOMMENDATIONS
BANK
REPUTATION
ONLINE
RESEARCH
4. MAKING THE SWITCH
CHECKING ACCOUNT PATH TO PURCHASE
Copyright © 2014 Oliver Wyman 29
MOTIVATIONS FOR SWITCHING
CHECKING ACCOUNTS
THEY TAP INTO THEIR PREEXISTING
BRAND KNOWLEDGE FOR
BANK CONSIDERATIONS
2 IN 3 ALREADY KNOW WHICH
SPECIFIC BANK THEY WANT BEFORE
SHOPPING
MARKETING NEGATIVE BANK
EXPERIENCE
LIFE EVENTS
WANTING TO CONVERSION TAKES 2.5
MONTHS ON AVERAGE
2 MONTHS
MOST ACTIVELY RESEARCH FOR LESS
THAN ONE MONTH
15 TOUCHPOINTS
USE BANK TOOLS
USE SEARCH
USE COMPARISON SITES
MAJORITY OF SWITCHERS USE ONLY
IN THE 90 DAYS PRIOR TO OPENING
A NEW ACCOUNT
26%
18%
15%
40% 40% 20%
3 MONTHS CONVERSION 1 MONTH
Copyright © 2014 Oliver Wyman 30
USE BANK TOOLS
USE COMPARISON SITES
SWITCHERS LEAN MOSTLY ON
RECOMMENDATIONS BY
FAMILY & FRIENDS
DIGITAL INFLUENCES
OF OFFLINE OPENINGS
57%
KEY ATTRIBUTES & FEATURES
BRAND PRODUCT CONVENIENCE
GOOD REPUTATION
HIGH QUALITY SERVICE
LOW FEES
LOW MINIMUM BALANCE
BRANCHES NEAR WHERE I LIVE
LOTS OF ATMS
7 IN 10
OPEN IN BRANCH
9 IN 10
OF THOSE WHO HAD ONE BANK IN
MIND END UP CHOOSING
THAT BANK
44%
Copyright © 2014 Oliver Wyman 31
Source AOL & Oliver Wyman, “Making the Switch”, June 2014
Base Switchers (n=868)
BRAND IMPLICATIONS
MAINTAIN ALWAYSON BRANDING AS
PART OF ACQUISITION STRATEGIES
YOU CAN’T RELY ON CONSUMERS TO
RAISE THEIR HANDS
ACTIVATE BRAND ADVOCATES TO AMPLIFY
WORD OF MOUTH INFLUENCE
RECOGNIZE DIGITAL ATTRIBUTION ON BOTH
ONLINE AND OFFLINE ACQUISITION
ALIGN MESSAGING TO KEY BRAND,
PRODUCT & CONVENIENCE ATTRIBUTES
Copyright © 2014 Oliver Wyman 32
5. THE DECISION-
CENTERED BANK
By Peter Carroll
Many banks have announced the goal of becoming more
“customer centric”. It may be better to become more
“decision centric”.
A decision-centric bank is one that marshals information
about its customers to make highly effective decisions
in its dealings with them, whether those decisions occur
as part of the sales process, or as part of continuing
customer service.
Being decision centric may not sound like a new concept
since bankers have always made decisions. But making
decisions doesn’t necessarily mean a bank is “decision
centric”. In the early part of the 21st century, being
decision centric has a very distinct meaning for a bank
and that meaning has three key parts:
1. The collection and interpretation of information
about customers
2. The conscious use of that information to decide
how to act or react differently at the level of the
individual customer
3. The deliberate design of operational processes
that allow for, and take advantage of, the ability to
make decisions and take different actions at the
customer-level
In order to define more clearly what we mean by the
term “decision-centric bank”, it will first be helpful to
draw a distinction between two types of decision, both
important, but each quite different. Let us call them
“Positioning decisions” and, for the want of a better
term, “Operating decisions”
1
.
“Positioning decisions” are the decisions made
periodically to position a firm in the marketplace. They
might be thought of as “strategic” and/or “structural” in
nature. They have the quality that, once they are made,
they are hard to change. They are decisions whose
consequences the firm must live with for a while. They
are therefore decisions that should not be taken lightly
as long-term success certainly hinges on making more of
them right than wrong.
Exhibit 1 sets up the distinction between Positioning
decisions and Operating decisions, in relation to the
broader term “Business Intelligence”.
Examples of positioning decisions would include:
• A decision to enter (or exit) a large segment or new
product area:
? A bank choosing to enter the credit card
business or auto lending
? Starting a high net worth division
? Selling off a merchant acquiring arm
• A decision to introduce a new value proposition for
the affluent segment
• A decision to redesign the bank’s suite of DDA
products
1 As we shall see, “Operating decisions” are not “decisions made in Operations”, though some of them could be; they are decisions made within the established business
processes of the bank and its current strategy; they are customer-level decisions that may involve material differences of action or ‘treatment’ for one customer relative
to another.
Copyright © 2014 Oliver Wyman 33
All these decisions require careful thought, in part
because they involve the mobilization and commitment
of substantial resources in the form of capital, employees
and expense budgets.
They also require careful thought because it takes a
while to frame, and then make, these decisions and
longer still to implement some of them; it then takes
even more time to generate results and for the wisdom of
the decisions and the effectiveness of their execution to
reveal themselves.
These decisions position the bank in the market and in
relation to chosen segments; once taken, they define the
‘battlefield’ on which the bank competes, using various
methods and programs to win new customers, hold on
to them, increase share of wallet and so forth.
Which brings us to the idea of ‘Operating decisions’.
Operating decisions are different inasmuch as they are
decisions that are made after the positioning decisions
have been taken. In fact, they are decisions made within
the set of business processes that comprise the bank’s
current market and competitive position. They are part
of how the bank is run.
They tend to be decisions made frequently – on a
monthly, weekly and even daily basis. And they can
differentiate the action that is taken at the customer
level: Mrs. Smith can be treated differently than
Mr. Jones.
Exhibit 1: The distinction between positioning decisions
and operating decisions
BUSINESS INTELLIGENCE
INSIGHTS, DECISION SUPPORT
POSITIONING
DECISIONS
• Strategic/important
• Structural/lasting
• Descriptive analytics
OPERATING
DECISIONS
• Campaign tactics
• Customer-level
• Predictive analytics
SUPERIOR RESULTS: PROFIT, GROWTH
Using these definitions, Henry Ford made plenty of
positioning decisions but really no operating decisions.
Speaking of potential buyers for his ‘Model T’ he famously
said, “They can have any color they want as long as
it’s black!” In his pursuit of low production cost and
affordability, he ruled out any attempt to satisfy different
customers with different products, or with different
product/feature combinations. Fast forward to today and
we have reached the point where a consumer can virtually
specify his car and get it custom built within a few weeks.
However, auto-manufacturers still do not really make any
operating decisions at the customer level. Banks, on the
other hand, make plenty of customer-level decisions. And
they should be making even more such decisions, with
better and stronger decision support.
OPERATING DECISIONS – AND
DECISION CENTRICITY – IN BANKS
In banking, operating decisions have become just as
important as positioning decisions. They have also
become the strongest method by which one bank can
outperform its rivals, many of whom have adopted
broadly the same position in the marketplace (that is
to say, they have made similar positioning decisions
regarding their branch networks, product suites,
value propositions, digital options, segments served
and so forth). Examples of operating decisions in
banking include:
• Direct mail solicitation of prospects for a product
sale, where the selection of the target and the
content of the offer are determined using data and
models to estimate likely, differential outcomes – e.g.
for a rewards card, it is important to estimate the
response probability and the expected level of spend
• Online application-taking in which the screen
sequence and content is adapted in real time to the
available information about the applicant
• Phone center scripting for handling complaints and
(in particular) account-closing calls
• Cross-sell messaging to existing customers via
statement stuffer (paper or electronic)
• Small business sales/switching incentives targeted
to individual “high-value prospects”
• Collections tactics that differentiate by delinquency
status but also by customer classification
Copyright © 2014 Oliver Wyman 34
Banks have always made operating decisions and made
them, to some degree, at the customer level. But they
typically did so without the benefit of real insights that
anchored a different treatment to meaningful differences
between customers. Some decisions might have been
differentiated only at a segment level, so that Mrs. Smith
would be treated differently than Mr. Jones if she fell in
a different segment than him, but not if they were both
regarded as being in the same segment. In the past,
individually differentiated treatment of customers was
idiosyncratic and strongly judgment-driven.
For example, bank tellers (and bank managers) might
have historically treated Mrs. Smith differently than Mr.
Jones. But usually that would have been because the
teller or the manager knew one of these customers better
than the other; the differentiation would have been ad
hoc and based on the employee’s intuition about the
best course of action. Even the goal of the differentiation
was likely quite judgmental: if Mrs. Smith complained
and threatened to leave the Bank, would she have been
given some inducement not to leave? Perhaps. But would
the bank employee have known whether Mrs. Smith’s
relationship with the bank was even profitable, and
therefore worth keeping? If Mr. Jones came in to make
a deposit in his checking account, would he have been
encouraged to apply for a loan of some type? Perhaps. But
would the bank employee have had any real insight into
the likely profitability of the new loan (or the profitability
of the existing account for that matter)?
Actions that differentiated how a customer would be
treated were based only on ad hoc interpretations of a
customer’s uniqueness and vague assumptions about
how the bank’s action might pay off.
Some people feel that this type of relationship-based
customer centricity should be brought back – that
bank-client interactions should be mediated by
branch staff “who really know the customer”. Every
Christmas, in “It’s a Wonderful Life”, we enjoy watching
George Bailey ( Jimmy Stewart) win back his panicky
customers, each of whom he knows personally, with
heartfelt appeals to their individual circumstances,
while old Mr. Potter tries to steal the Bailey Building &
Loan Association out from under him. But the truth is
that human judgment is a notoriously unreliable guide
to wise banking decisions. George Bailey’s approach
to customer-level decisioning, based on his own
judgment, would very likely have led to a poor loan
portfolio. Mr. Potter would probably have run the bank
more successfully than George Bailey, although the
movie wouldn’t have been as good.
In fact, studies of the way bank employees make ad hoc
customer-level decisions have shown that those decisions
are often made in ways that run counter to the bank’s best
interests. In some cases, bank employees take advantage
of any latitude available to them to benefit either
themselves or the customer – at the expense of the bank.
But in general, employees empowered to make decisions
at the customer level do so inconsistently.
Many studies have explored the consistency and
accuracy of human judgment in repetitive situations
like loan application underwriting. The sad truth is
that human beings are not as good decision-makers
as automated methods that employ mathematical
models to interpret available data. More specifically,
human beings are about as good as mathematical
models when dealing with easy cases (e.g. making a
credit decision about applicants who are either very
well qualified or very poorly qualified). But in the so-
called “grey area”, human decision-makers tend to be
far more inconsistent than mathematical models based
on applicant data. This is not only true in banking; the
phenomenon has been widely studied and it turns out
to be true across a spectrum of situations calling for
judgments based on available data.
Mathematical models tend to outperform human judges
in three main ways:
1. Better selection of relevant variables from among a
large number of possibly useful ones
2. Better estimation of the “meaning” (i.e. predictive
power) of the selected variables
3. Greater consistency in the application of de facto
decision criteria that use these variables
THE NEW POWER OF
OPERATING DECISIONS
No, the thing about “operating decisions” in banking
isn’t that they are entirely new; it is that they are newly
powerful. These decisions can now be made in a way
that is far more accurate and consistent than when the
only available basis for making them was the intuition of
bank employees.
Copyright © 2014 Oliver Wyman 35
A decision-centric bank makes “operating decisions”
using customer-level data and supporting tools such as
predictive models to achieve effective differentiation of the
action to be taken for each customer. And in making these
decisions, the bank can establish a clear economic goal: the
expected value added by the action about to be taken.
In this sentence, the term “expected value” means
more than just the general expectations of the program
designer; it means the calculation or direct estimation
of the outcomes of the action involved in the decision.
For example, if the decision involves sending out a piece
of direct mail to solicit a credit card application, then
“expected value” is derived from the estimated cashflows
that will result from the action, shaped by predictions of
relevant customer behaviors like response/application
rate, approval rate, usage rate (or balance level), account
life/term, default rate, and so forth.
THE PREDICTIONS FOR MRS. SMITH
To take another example, if the decision involves offering a
customer an incentive to stay with the bank, after she calls
to close an account, then “expected value” will consider
the current profitability of the account, focus on the new
likelihood of the relationship remaining loyal, combined
with the current and future profitability of the relationship
(where “profitability” could, of course, be negative), while
taking into account the cost of the incentive.
The new power of operating decisions, and by
extension, of being a decision-centric bank – lies in these
concrete factors:
• Having a clearly defined objective for the supporting
decision analytics: the value added, or the change
of account value, resulting from the decision or
action to be taken. Banks have made important
strides in understanding the baseline economics
of their products, and the sources of profit variance
at the product-account and customer level; this
understanding must now be migrated into the
banks’ decision-support processes
• Deriving the estimate of “decision value” directly
from predictive analytics focused on the customer
and account behaviors that will define post-decision
cashflows; banks have significantly improved
their data environments and now they need to
exploit these data to generate decision-specific
predictive analytics
• Focusing decision-support processes for operating
decisions on those decision-points – on the
comparatively small number of decision-points – that
most directly affect downstream profits; and having
this focus reflect two important considerations:
i) Where profit really comes from. The bulk of
consumer and small business banking profits
come from about 25% of all customers, in a
handful of key products, when they exhibit
attractive characteristics (like high account
balance or spend volume)
ii) How easy or hard it is to develop and deploy
decision support. There is a methodology
that allows a bank to build out support for key
operating decisions that takes three key factors
into consideration:
i The frequency with which this decision is
taken (or could be taken) per year – higher
is better
ii The magnitude of the range in possible
‘decision values’; that is, the range of profit
or value outcomes associated with a good
versus a bad decision in one area – higher
is better
iii The implementation challenge of deploying
and maintaining the particular type
of decision support; generally, things
involving direct mail and online actions
are easier to implement while things that
involve training all branch tellers or writing
new code, for example, are much harder
By focusing on the most important levers of profit,
support for operating decisions can be developed and
deployed more rapidly and more effectively than in
typical Business Intelligence programs.
DECISION MAPPING
In making the distinction between positioning decisions
and operating decisions, a few examples of each type of
decision were given earlier. It is worth returning to the
question of operating decisions for a moment because
most banks today do not actually make as many such
decisions at the customer level as they could. Once a
bank realizes that it has a viable methodology for making
decisions at the customer level it should carefully re-
examine its business processes to see if there are places
where the methodology can now be applied.
Copyright © 2014 Oliver Wyman 36
Our approach to this exercise is called “decision
mapping”. Typically, we draw two decision maps, the
first being the business-as-usual decision map. Think
of the decision map as a kind of process flow-chart for
the business or for some part of the business. The chart
will often flow from left to right in a way that reflects a
“customer life-cycle” showing prospects on the left,
applicants in the middle, customers to the right of
center and departing customers (e.g. perhaps, those
in collections) on the very right. And on the chart, we
highlight the points in the process flow where an action
is taken, along with the basis for the action, and any
differentiation that is embedded in the action (e.g. a
segment-level or customer-level differentiation).
The second decision map is more creative, and
could include entirely new tactics, with new decision
support, at different points along the flow-chart.
Equally, the new chart could still show decisions from
the first map but now with improved differentiation
methods deployed as decision support to achieve
superior outcomes. The improved differentiation could
reflect a move from segment-level differentiation to
customer-level differentiation. It could also reflect the
employment of new data, in new predictive models,
to anticipate differences in customer behaviors
more accurately.
Take the mortgage business for example. In most
mortgage operations, the pursuit of applicants is
relatively “aggregate” using mass advertising to reach
potential borrowers, and mortgage brokers as conduits
for applicants. There is relatively little attempt to appeal
differentially to individual borrowers/applicants. This
could be done differently, however, using far more
differentiation. How? One example would be to use
information from online Multiple Listing Services (MLS)
to identify sellers (i.e. those who have just listed their
home for sale). This is a leading indicator of two new
borrowers: the seller, who is highly likely to borrow
soon in order to purchase a new home somewhere
else, and the yet-to-be-identified buyer of the house
that was just listed. An ambitious lender can approach
the seller and deliver a message that includes being
the lender of choice to the seller himself, as well as to
prospective buyers. More importantly, faced with 1,000
new home listings, the lender can decide which sellers
to approach, using data-driven models to assess the
differential likelihood of success and value.
During times of extremely high capacity utilization, a
mortgage lender can use such tactics to adjust the total
DECISION-CENTRICITY AND “BIG DATA”
In the late 1990s, many banks were charmed by the
promises of large technology vendors and other sirens
into building major data warehouses linked to data mining
tools. The promise was that the investments would pay
off in better insights and decisions. Today, “Big Data” is
being presented as the basis for yet another round of large
programmatic investments with very similar promises.
And some of our clients who are interested in building
better analytics and better decision support seem to be
tuning in to the sirens’ new song.
Books have been written about the reasons for the
failure of data mining, but two reasons are worth
singling out: the first is lack of focus. Most data mining
implementations then, and most Big Data efforts today,
pretend to offer banks a “panoptic system” – an all-
seeing, all-powerful decision-engine that will enable the
bank to make the right decision at the right time and at
the right place.
These decision-engine approaches all failed before, and
likely will again. A contributing factor may be that their
designers, perhaps because they do not understand
bank economics and a handful of basic truths about
consumers, fail to focus on the comparatively small
number of decision-points where better decisions will
have the largest impact on downstream profits.
The second reason for failure then, and likely again now,
is closely related to the first. In data mining, the thinking
ran in the wrong direction: collect the data, store it and
clean it, then attack it with “analytics” and finally figure
out how to make money from what you just did. The right
way to approach things is to understand where you make
money, and why, then look at the decision-points that
already do, or could, make the biggest difference – and
then build the data and analytics infrastructure to
support just those decisions.
Copyright © 2014 Oliver Wyman 37
number of applicants entering the workflow pipeline,
and do so with a bias towards the applicants and loans
most likely to be valuable.
Or take Small Business banking: most banks have some
form of segment-driven approach to Small Business,
but they do not differentiate at the individual customer
level. This is a huge lost opportunity, because analysis
of the profitability of small business relationships shows
that the entire profit made by banks in serving the SB
sector comes from just 25% of small businesses. Instead
of using marketing tactics like newspaper and radio ads
that implicitly target all small businesses about equally,
and relying on locational convenience as the prime
underlying draw, banks could deploy targeting models
to pre-select the highest-value SB relationships and then
target them directly. To select the high-value SB targets,
a predictive model must be built using available third-
party data from vendors like Experian, Lexis Nexis or
Dun & Bradstreet. To predict the likely value of a new SB
relationship, the critical things to predict are basically:
average checking account balance, average monthly
charge volume (if the SB is a merchant) and whether the
SB has a business credit or charge card.
Once the targets have been identified, face-to-face
meetings are used to acquire the account. Face-to-face
selling is expensive, so the targeting models need to
be reasonably accurate; even so, the high-value small
business owner will typically not be predisposed to
switch and so a “switching incentive” may also need to
be offered, if the decision-support models suggest a
sufficiently strong NPV – with the level of that switching
incentive calibrated to the predicted NPV.
In this new account-acquisition approach, the
operational processes use data about individual
prospects to determine, first, whether to act or not (i.e.
to target or not target), and then the type of action (i.e.
the amount of any switching incentive). This is a huge
break with traditionally undifferentiated decisioning.
Decision mapping, then, is a simple visualization
technique for the much harder and more fundamental
task of thinking through – and creatively re-thinking –
the way the bank organizes, operates, decides and
acts. This technique places strong emphasis on the
identification of points in the process flow where the
bank can differentiate its action at the customer level,
using expected value as the primary decision criterion.
CONCLUSION
A decision-centric bank is a bank that recognizes that
its core business processes contain numerous critical
decision points where it can marshal information
about its customers and deploy decision-support
tools to translate that information into different
actions for individual customers. It is also a bank that
recognizes that the aggregated effect of making these
thousands of decisions better is a very substantial
improvement in financial performance.
This paper started with a casual reference to the fact
that many banks have announced a goal of becoming
more customer-centric. Having instead laid out the
argument for becoming more decision centric, we can
perhaps revisit the idea of customer centricity. In some
important ways, a decision-centric bank is a customer-
centric bank because it understands bank customers,
understands how they differ, and understands how
to use its insight into each customer to take actions
at the individual level that will control the profitability
of its overall portfolio of customers. This may not be
the same idea of customer centricity that motivates
many bank programs; it is not predicated on a general
assumption that if you treat customers with a more
human touch they will repay you with share of wallet,
longevity and “net promotion”. But it is a form of
customer centricity that ties the bank’s knowledge of
its individual customers directly to profit improvement.
Peter Carroll is a Partner at Oliver Wyman.
Copyright © 2014 Oliver Wyman 38
Many banks are re-evaluating their commitment
to residential mortgage lending in the face of the
significant investments required to meet regulatory
and customer expectations. These investments would
have a higher return if mortgage could have a role in
establishing and deepening customer relationships.
Unfortunately, recent Oliver Wyman research indicates
that mortgage is not effective as a relationship-
deepening platform outside of a few niche areas.
If mortgage is to be a strategic relationship
product, it should be easy to cross-sell into, or out-
of, a mortgage. Therefore, we set out to test two
deepening hypotheses:
• Hypothesis 1: A primary banking customer can be
sold a mortgage more easily than a non-customer
• Hypothesis 2: A stand-alone mortgage customer
can be sold other bank products, such as a checking
account, to become the customer’s primary bank
1
However, Oliver Wyman’s recent Survey of Consumer
Finances supported neither hypothesis, except in
niche cases.
THE OPPORTUNITY
There are a number of intuitive reasons to pursue
mortgage as a relationship product:
Obtaining a purchase mortgage is a significant life
event for customers
Buying a home is a highly emotional and aspirational
transaction that represents a key life event for
customers. Serving this need with as few pain points
as possible can make a lasting impression on the
customer’s relationship with the bank.
TOP 10 REASONS CITED FOR HOME OWNERSHIP ASPIRATION
2
1 Having a good place to raise children
2 Better physical safety for your family
3 More space for your family
4 Control over living space, e.g. renovations
5 Paying rent is not a good investment
6 Allows you to live in a nicer home
7 A good financial opportunity
8 Allows you to select a community that shares your values
9 A means to build wealth that can be passed on
10 More convenient location closer to work, family, and friends
6. MORTGAGE CROSS-SELL
THE ELUSIVE OPPORTUNITY
By Ahmet Hacikura and Sayako Seto
1 A bank with a customer’s traditional checking account.
2 Based on share of mortgage holders considering the reason to be major in buying a home. Other reasons include tax benefits associated with owning a home, good
retirement investment, something to borrow against if needed, a symbol of success or achievement, and motivation to become a better citizen and engage in important
civic activities. Source: Fannie Mae National Housing Survey (Q4/2011).
Copyright © 2014 Oliver Wyman 39
Level of customer insight is unparalleled
2
The mortgage application process reveals deep financial
and demographic information on customers, which may
be used to identify optimal cross-sell opportunities for
other banking products.
Mortgage customers are desirable banking customers
more broadly
Consumers who qualify for a mortgage tend to have
higher incomes and are greater users of banking products
overall, making relationships with them attractive.
Customers who consolidate their mortgage and
primary banking relationships with one bank tend to
have deeper relationships with that bank
Our research shows that customers who consolidated
mortgage and primary checking also have a higher share
of their other product holdings at their primary bank. It is
important to recognize that while the mortgage product
may have played a role in deepening the relationship,
the stronger driver is likely these customers’ general
preference to consolidate products at a single institution,
i.e. this cross-sell may have happened naturally even
without much effort from the bank.
Exhibit 2: How primary bank share of non-mortgage products varies by mortgage consolidation behavior*
Seperate mortgage and
banking
Consolidated mortgage
and banking
PRIMARY BANK’S SHARE OF OTHER PRODUCT HOLDING FOR CUSTOMERS
HELCO Other loans Auto CD
83%
Money
market deposit
Savings Credit card
73%
65%
54%
45%
50%
27%
9%
36%
22%
14%
4%
4%
87%
Source Oliver Wyman Survey of Consumer Finances (Q1/2012)
* Share of products based on count of products held
Exhibit 1: Mortgage customers*
NUMBER OF PRODUCTS
BY DEMOGRAPHIC
EXCL. MORTGAGE AND AVERAGE INCOME
COUNT OF PRODUCTS HELD BY MORTGAGE STATUS
% with annual
income greater
than $75 K
Deposit
products
Other loan
products
Real estate
loan
products
Has a
mortgage
53%
3.9
Does not
have a
mortgage
32%
3.5
Does not
have a
mortgage or
own a home
15%
3.0
Source Oliver Wyman Survey of Consumer Finances (Q1/2012)
* “Other loan products” include auto, credit card, other installment, payday,
and other loans. “Deposit products” include traditional checking, savings,
online checking, online savings, money market deposit, and CDs. “Real estate
loan products” consists of home equity loans/lines of credit
Copyright © 2014 Oliver Wyman 40
THE CHALLENGE
Consolidation is the exception, not the norm
Customers who consolidate their mortgage and primary
banking relationships with one bank are a minority. Most
customers, even those who express a preference for
consolidation, do not consolidate in practice.
Exhibit 3: Only 20% of customers obtain their mortgage
from primary checking bank
MORTGAGE CUSTOMER RESPONDENTS ONLY*
20%
80%
Has a mortgage
at primary bank
Has a mortgage,
but not at
primary bank
Source Oliver Wyman Survey of Consumer Finances (Q1/2012)
* Even for the 17% of customers who “strongly agreed” with the statement,
“Ideally, I would keep all products at one financial institution”, the percentage
who actually consolidated mortgage and banking was only 27%
Even large banks struggle to promote consolidation of
mortgage and banking relationships
The mortgage market is highly concentrated, with
the top three players accounting for nearly 40% of all
originations. Given their high market share in both
mortgage and banking, these banks tend to have more
customers who consolidate their primary checking
and mortgage. However, even for them, consolidated
relationships are a small share of all mortgage
customers. Plenty of their banking customers get
mortgages elsewhere, and plenty of their mortgage
customers have their checking relationship elsewhere.
Exhibit 4: Mortgage market share among primary
checking households*
SHARE OF CUSTOMERS
A CHECKING ACCOUNT ONLY
HOUSEHOLDS WITH A MORTGAGE AND
Mortgage with a
top 3 bank
Mortgage with my
primary bank
Mortgage with a
small bank
Mortgage with a
medium bank
My primary
bank is a
top 3 bank
32%
27%
10%
31%
My primary
bank is a
medium bank
23%
8%
43%
27%
My primary
bank is a
small bank
12%
34%
12%
42%
Source Oliver Wyman Survey of Consumer Finances (Q1/2012)
* Top 3 mortgage banks are Wells Fargo, Chase and Bank of America.
Medium banks (next 5) include US Bank, Citibank, SunTrust, BB&T and Fifth
Third. Bucketing derived from rankings based on Inside Mortgage Finance: Top
100 Mortgage Lenders 6M2013
Primary banks do not appear to be advantaged in
offering mortgages
When selecting mortgage lenders to apply with,
customers consider competitive pricing to be the most
important factor. Among remaining factors, many are
just as important as an existing relationship, including
referral by a realtor or developer (for purchase mortgage
customers), reputation for good customer service,
or referral by a colleague, friend or family member.
Convenience of branch locations, a potential advantage
for primary banks, is among the lowest ranked factors,
which also include strength of brand and quality of
marketing materials. Once they receive quotes or pre-
approvals, customers overwhelmingly consider pricing
to be the key decision factor. None of this suggests a
competitive advantage for most primary banks.
Copyright © 2014 Oliver Wyman 41
Using mortgages to attract primary banking
relationships may be too lofty a goal
While lenders often sell mortgages to customers with
a primary banking relationship elsewhere, cross-sell
of primary banking to these customers is limited Our
research shows that deposit products are “sticky”
financial products – customers rarely switch primary
banks (in a given 18 month period, only 10-15% of
customers switch). When they do switch, their stated
reason is most frequently the incumbent bank’s failure
to deliver rather than a desire to consolidate products
elsewhere, or special offers from other banks.
Our research also suggests that a fair share of customers
find it difficult to justify consolidation of financial
products with one provider, citing concerns around
proximity of a new bank’s branches, breadth of their
services, pricing, and the effort required to switch.
Even if banks are able to address these concerns, it is not
clear that many customers will care to consolidate their
mortgage and primary banking relationships – some
customers exhibited a level of indifference specific
to mortgages, indicating that they held all financial
products with one institution, save for their mortgage,
and did not intend to change that.
Exhibit 5: Reasons for switching primary banks *
6%
Poor offerings/rewards
New fees were added to my account
Original fees/charges were too high
I didn’t like what I read about them in the news
Not ‘tech savvy’ enough with online/mobile banking
Not enough ATMs
My old bank was acquired by a new bank
My old branch closed
Started college
Other
Moved/relocated
Got a new job
Family changes
CONSUMERS WHO RECENTLY SWITCHED BANKS
†
BASED ON RESPONDENTS WHO SWITCHED PRIMARY BANK IN LAST 18 MONTHS 12% OF ALL RESPONDENTS
WHAT WERE THE MAIN REASONS YOU DECIDED TO CHANGE YOUR PRIMARY BANK?
Wanted to consolidate bank/financial services
Special offer from my new bank
Poor service
Poor interest offered
Most decision factors are unrelated
to mortgage, and many relate to
failures of the primary checking bank
prior to switching
Only some decision factors could
be related to the mortgage process
Desire to consolidate is not a strong reason
Special offers do not particularly
motivate switching behavior
7%
21%
14%
13%
12%
8%
2%
6%
12%
1%
1%
10%
4%
28%
23%
18%
Source Oliver Wyman Survey of Consumer Finances (Q1/2012)
* Respondents were asked to check all that apply
† Defined as consumers who switched their primary checking bank with within the last 18 months; Consumers are not counted as a “switcher” if their new bank
was acquired by their old bank and they did not actively switch banks
Copyright © 2014 Oliver Wyman 42
IMPLICATIONS
Cross-sell into and out-of a mortgage relationship
are both attractive in theory, but uncommon and
challenging in practice. Consequently, the strategic role
for mortgages is most often:
• As a stand-alone business with attractive product-
specific economics
• As an accommodative product sold to the minority
of primary bank customers that prefer to consolidate
their relationships
Due to the scale requirements and compliance burdens,
pursuit of mortgage as a stand-alone business is likely
to be feasible and attractive primarily to large banks and
specialist lenders.
However, all banks should consider providing mortgages
as an accommodative product to capitalize on the
available, albeit limited, customer demand among
consolidators. Outsourcing options can be considered to
execute this strategy in a cost-effective manner.
While there are some clear limits to mortgage cross-
sell potential, we see several opportunities to improve
performance:
Update basic marketing and sales approaches
Ensure that all primary banking customers are aware of
the bank’s mortgage product offerings and that sales
representatives can easily identify customer demand for a
mortgage, i.e. leave no natural opportunity on the table. In
addition, ensure that customers applying for mortgages
are aware of the bank’s primary banking and other
products and encouraged to purchase them. In a recent
mystery shopping exercise we observed that few banks
consistently attempted these forms of low-effort cross-sell.
Consider a segemented approach for higher-
effort cross-sell
The customer’s reasons for applying for a mortgage and
their relationship status with the bank can be useful in
determining cross-sell potential.
Existing bank customers getting new mortgages
from the bank should be a high priority for multi-
product cross-sell efforts as they have demonstrated a
willingness to consolidate, and the mortgage application
will provide a detailed profile to help target cross-sell
offers. Given their natural inclination to consolidate,
these customers likely do not require high cost tactics
or incentives, and banks should not overspend to get
such sales. Additionally, banks may consider simplifying
the mortgage application process for existing bank
customers by pre-populating forms using information
already available in bank systems. This is only a partial
reduction of customer hassles, as the typical mortgage
application requires significantly more information than
what a bank may have on file, but banks may find this
worthwhile if the required investment is low.
New customers getting new mortgages should be the
next priority and banks should first attempt to cross-sell
a primary checking account to gauge the customer’s
level of interest in consolidation. There are two types of
new customers that may warrant use of tailored tactics to
establish a checking relationship:
• Customers who are getting a mortgage due to a
recent or pending life event may be more likely
to switch their primary bank. For example, in the
coming purchase mortgage market banks may see
a higher percentage of applicants getting purchase
mortgages due to a long distance move away from
their current bank, generating the need to find a
more convenient bank. For these customers, some
higher cost attempts may be worthwhile (e.g.
Exhibit 6: Reasons why customers do not consolidate
financial services relationships
EXPLANATION ILLUSTRATIVE QUOTES
Value placed on brand
and specialization
“I am loyal to my small hometown bank,
but I wanted to go with a national bank for
my mortgage.”
Locational convenience “I would like to consolidate everything to
[mortgage provider], but they do not have a
local branch where I live.”
Price “Service and fees associated with each
product make me shop for best deal.”
Breadth and quality
of offerings
“No one financial institution suits all of my
needs and preferences.”
“Each institution offers different advantages
for their different products.”
Hassle factor and lack
of urgency
“It is a lot of work to move everything to a
new bank.”
“I have not gotten around to it.”
“It is not important enough to go through the
trouble of getting all at one institution.”
Mortgage is a unique
and separate product
“I presently have everything except my
mortgage in one institution. I will not
change that.”
Copyright © 2014 Oliver Wyman 43
outreach by a branch manager, customized letter
displaying conveniently located bank branches and
ATMs near the purchase property, prepopulated
checking account opening forms using information
from mortgage application, etc.).
• Affluent customers, as identified by their needs
for larger loans and information available in the
mortgage application, may be worth pursuing
through higher cost acquisition tactics (e.g. an in-
person visit, concierge services for checking account
setup) since the high potential return may justify
the costs even taking into account the expected
success rate. Banks may also tailor mortgage
terms and product features at the margin for large
nonconventional loans, particularly if the loans are to
be kept on balance sheet.
Refinance customers are likely to be the least attractive
target for cross-sell (excluding other real estate credit) as
they neither demonstrate a willingness to consolidate,
nor signal a heightened need to switch banks. That said,
checking customers may be good targets for mortgage
refinance offers as their transaction data may be used to
identify their current mortgage and how long they have
had it, thereby assessing whether they would benefit
from a rate reduction.
Be careful with relationship rate discounts
Unless they are used specifically to generate profitable
multi-product relationships with affluent customers, the
net result is likely to be a loss of profits. Instead, consider
the use of lower-cost relationship enhancing benefits
on primary accounts, such as ATM fee refunds, free
checkbooks, or elevated service levels (e.g. dedicated
service lines) for affluent customer segments.
CONCLUSION
Mortgage generally is not effective as a relationship
deepening product, but there are still attractive pockets
of opportunity for improved cross-sell. Banks should
consider higher-effort cross-sell tactics focused on
those niches where expected returns justify the costs,
while avoiding generalized efforts that may be value-
destroying.
Ahmet Hacikura is a Partner at Oliver Wyman.
Sayako Seto is an Associate at Oliver Wyman.
Copyright © 2014 Oliver Wyman 44
7. LAYING THE FOUNDATIONS
FOR RECOVERY
Excerpts from Oliver Wyman’s 2014 European Retail and Business Banking report
By Simon Low, Jason Quarry, Vanessa Lopes Rodrigues and Mark Barrie
1. TRANSFORMING SMALL BUSINESS BANKING
Small business banking is an area of heavy focus in
European banking today. It is a major source of credit
issues in the weakest economies, but – at the same
time – lending to small businesses is the focus of efforts
by many policy makers to stimulate economic growth. A
combination of cost and regulatory pressures are forcing
many banks to revisit their sales and service models.
Furthermore, the needs of the small business customer
are rapidly evolving, as the expectations of business
owners (in terms of channel access, connectivity of
applications, speed of turnaround, etc.) are set by their
experiences as a consumer.
The current model has resulted not only in unsustainable
credit losses, but also a cost base that is too high for the
revenue generated. Furthermore, it is only tolerated by
an unhappy customer base, that often feels that it is not
receiving the service it has been promised, because of
the lack of alternatives.
In short, the small business banking model needs to be
transformed. We would prioritize four areas for small
business banking management teams:
1. Establishing “best in class” NPL management
2. End-to-end lending process review
3. Smarter organizational and operational
segmentation schemes
4. Digitalization of the small business offer
ESTABLISHING “BEST IN CLASS”
NPL MANAGEMENT
Small and medium businesses have been a major source
of NPLs for many banks across Europe, and a significant
backlog of lower value (particularly small business) cases
remain unresolved. These cases must be tackled quickly
and consistently. Both banks and the economy will benefit
from the reallocation of resources post-restructuring or
resolution, but it is imperative that individual customers
are treated fairly throughout the process.
However, small business NPLs demand a different
approach than those employed in consumer or
corporate lending. Neither the policy settlements used
in the former (characterized by the clearly defined
central rules and highly standardized elements that
allow banks to handle high volume, small ticket
problem loans) nor the bespoke restructuring of the
latter (with its complex underwriting and solution set of
restructured debt, new equity or “Payment In Kind”) are
appropriate when tackling small business NPLs.
“Best in class” small business NPL management is
anchored on a set of structured processes and decision
trees, that allow a standard set of solutions (such as debt
consolidation, basic debt restructuring) to be deployed
according to well defined objective criteria. Banks
must develop the analytics to support an NPL strategy
that is focused on small business borrowers, including
Copyright © 2014 Oliver Wyman 45
segmentation of the portfolio, development of resolution
options, and the implementation of triage and impact
assessment models. Furthermore, they must establish
an operating model anchored on a “mass customized”
approach to NPL management: standard forms that distil
key information for decision makers, workflows that ensure
processes are structured and efficient, triaging criteria that
focus scarce resource on the highest priority assets, etc.
Adopting such an approach will allow banks to work
quickly and consistently through the small business
NPL backlog by enabling case managers to take
responsibility for the delivery of appropriate solutions,
while at the same time removing inconsistencies at the
front line and driving faster decision speed.
END-TO-END LENDING
PROCESS REVIEW
Small business lending remains a focus of policy makers,
at both a European and national level, given its ability
to stimulate and support economic growth. This is
particularly true for markets like Greece and Italy, where
small businesses constitute a large proportion of national
GDP and drive the majority of employment. Central bank
initiatives, such as the Bank of England’s Funding for
Lending scheme and the ECB’s Long Term Refinancing
Operation (LTRO) scheme, have become more targeted
at small business lending. Bank recapitalization
programs have sought to ensure that banks have the
capital to lend into the economy, while development
institutions, such as the pan-European JEREMIE fund
or Greece’s IfG, have boosted the availability of equity
funding for small businesses themselves.
However, while these initiatives have removed many of
the balance sheet constraints that may hinder European
banks from lending to small businesses, we believe
that – in some cases – they will not be sufficient to ensure
the free flow of funds to the sector. The experience of the
Royal Bank of Scotland, the UK’s largest small business
lender is instructive: an independent report written
towards the end of 2013 highlighted how softer factors
can also reduce the ability of banks to lend.
Even if banks have the capital and funding to support
the sector, it will be important to ensure that there is
also sufficient management bandwidth to champion
small business lending again, and that front line staff
are not overly focused on other priorities (such as
risk management or deposit gathering). Institutional
risk appetite must also be matched by individual risk
appetite: changes made after the crisis (to risk policy,
incentives, delegated authorities and so on) may have
dented the latter to the extent that risk aversion level
at a deal-by-deal level is preventing portfolio level
targets being reached. Changes in focus (away from
lending against property to lending against cashflow)
may also expose latent capability gaps that were not as
evident pre-crisis.
Exhibit 1: Key decision tree modules
1 3 2 4 5
COOPERATION
DEBT
CHARACTERISTICS
VIABILITY CAPACITY ASSETS
• Determines whether
treatment set can be
applied
• Customer should be
communicating, willing
to pay and providing
requested information to
be classed as
co-operating
• Other borrowing with our
bank and other banks
(business or personal)
• Under customer-level
treatment, drives
combined treatment and
payment priority
• Whether business is likely
to succeed and generate
free cash ?ow
• Drives long-term ability
to repay debt
• Free cash ?ow available
to service debt, today and
in future
• Determines which
treatment options are
sustainable
• Assets available for sale
to support debt
repayment
• Potentially reduces debt
through asset sale
• Decision tree which
assesses whether
customer should be
classed as co-operating
• Decision tree which splits
customers according to
the debt they hold at the
bank and elsewhere
• Scorecard assesses
viability based on a set of
weighted category scores
compared to threshold
value
• Policy and methodology
for assessing the income
and expenditure of
trading, property and
personal accounts
• Total repayment
capacity calculated
• Decision tree which
segments customers to
identify those with
non-essential material
assets that they are
willing to sell
TYPICAL APPROACH
Source Oliver Wyman analysis
Copyright © 2014 Oliver Wyman 46
We expect the political pressure to lend to small
businesses to continue to mount. As a result, all small
business lenders should challenge themselves sooner
rather than later to ensure that they are doing all they
can. This should include a review of the end-to-end
lending process, including the effectiveness of marketing
activity designed to stimulate demand, conversion rates
at the pre-application stage (where many marginal deals
are filtered out by front line staff) and the behavioral
implications of policy changes introduced post-crisis.
SMARTER ORGANIZATIONAL
AND OPERATIONAL
SEGMENTATION SCHEMES
Over the past year, we have seen many banks re-
segment their customers across organizational
boundaries. In some instances, small business banking
has moved from the Retail to the Corporate division,
although in most cases it has gone in the other direction.
This shift in organizational responsibility is a cyclical
(and often political) event which occurs every few years.
However, we also observe a number of powerful forces at
work that suggest a more definitive solution is required.
For example:
• Which core banking platform (Retail or Corporate)
is best able to meet small business needs? With so
much investment now going into the development
of both (see the section on digitalization below),
it is all the more important to have small business
customers on the right platform from the start.
• How do the regulators define small businesses (for
example, as “unsophisticated”, “vulnerable” or
qualifying for “retail treatment”)? Wherever these
definitions apply, small businesses must be served
by a (retail) operating model that has the necessary
processes and controls in place, to avoid exposing
the bank to unnecessary conduct risk.
• At what point do automated processes break down?
There is no point in offering a “direct” model to small
business customers if every major interaction (from
account opening to incremental product sales to
credit underwriting) requires information that a
relationship manager would be best placed to gather
and qualify.
• What value do individual small business customers
place on having a named relationship manager
(and what incremental value does the bank get
from assigning one)? It is clear that turnover-based
segmentation schemes assume a generic inflexion
point, and apply it to the whole portfolio. Other
indicators (such as whether the small business has a
CFO or professional finance function) may provide a
more reliable guide.
The most thoughtful players are seeking an organizational
segmentation scheme that solves for all of these
questions; so that the overall proposition offered to small
business customers (whether they be above or below the
Retail/Corporate boundary) is internally consistent, and
therefore more effective and efficient.
Within each organizational unit, we also expect to
see a continued focus on operational segmentation.
Quantitative research techniques need to be deployed to
refine and enhance the differentiated propositions being
offered to the smallest businesses served by a direct or
branch-led model, as a way of both growing share (by
focusing on the attributes that each sub-segment values)
and profitability (by ensuring that value is recovered
through differential pricing). Equally, banks must find
a way of delivering “mass customized” propositions
to the larger small businesses served by a relationship
manager: the latter cannot be given the discretion to
create bespoke solutions for each individual client, but a
“one size fits all” solution will not be sufficient for such a
heterogeneous client base.
Exhibit 2: Conversion rates along the lending process for small and medium enterprises (SMEs)
STAGE PASS THROUGH RATE PER APPROACH FOR BORROWING
Initial engagement SMEs contacting bank to discuss financing 100%
Application, approval and appeal SMEs submitting a formal application to the bank 51%
Bank approves the application 39%
Competition, contracting and draw down SMEs accepting the approved facility 37%
SMEs drawing down on the approved facility 27%
Source RBS Independent Lending Review
Copyright © 2014 Oliver Wyman 47
DIGITALIZATION OF THE SMALL
BUSINESS OFFER
Digital is setting a new standard for small business
banking. In part, this is being driven by ever more
demanding small business owners, whose expectations
of their business bank account have been raised
by their experience as a consumer (in banking and
beyond). Equally, of course, small business banking is
often able to piggy-back off the investments that have
already been made into retail banking digital platforms.
Banks that visibly succeed in setting these standards
can benefit enormously: in North America, both Bank
of Montreal and PNC claim significant increases in
customer numbers as a result of well thought through
online and mobile banking offers targeting small
business owners. In most European markets, all
major players are already adding new features and
functionality to existing platforms. In many of the banks
that Oliver Wyman has worked with, the driving force
is therefore the desire to maintain market parity: falling
too far behind in any particular area that is valued by
small business owners (such as mobile or user access
management) risks an uptick in customer attrition and
the erosion of the customer base.
Exhibit 4: New digital standards in small business banking
VALUE CHAIN DESCRIPTION OF KEY THEMES EXAMPLES
Customer interaction • Integrated banking solution for personal and business needs of the small business owner
• Consumer Web 2.0 experience is influencing SME user interface design, leading to a more
intuitive layout and visualization of information
• User access management tools support multiple different modes of interaction
(e.g. transaction initiation vs. authorization vs. reporting)
• Increasing differentiation of client service levels, pricing and product offering, based on
modular approach
• Standard Chartered
• Wells Fargo
Channel • Mobile Banking applications offer streamlined access to core functionality, with a focus on
owner/manager oversight and authorisation
• Social Media used for marketing/promotions and customer servicing, and moving towards
collaboration and transactional banking
• Video/webchat used to enhance basic servicing, and increasingly to access product or
industry expertise
• La Caixa
• ASB
Product/Service • Aggregator and portal models combine bank and third party services
(e.g. community, learning hub, service hub, group purchasing schemes, etc.)
• Banks begin to leverage core attributes (e.g. trust, security) to offer new products and
services to existing customers (e.g. data storage, secure email, digital signature, etc.)
• Mobile payment solutions to allow businesses to take payments remotely
• Bank of America
• Barclays
IT/Back office • Increasing automation of processes (STP) and/or decision making, to meet SME client service
level expectations (e.g. KYC/KYB)
• Process enhancing features such as real-/near-time delivery, alert system, full product view,
review tools, research
• Citibank
Source Oliver Wyman analysis
Exhibit 3: Illustrative - organizational segmentation schemes for SMEs and corporates
SUBSEGMENT
Multinational
Large Corporate
Large Mid-cap
Mid-cap
Small Mid-cap
SME
Micro
>€3–5 BN
€5 BN to €1 BN
€1 BN to €500 MM
€500 MM to €250 MM
€250 MM to €10 MM
€10 MM to €1 MM
€1 MM to startup
COMPANY TURNOVER BUCKET
Micro Business
Banking: no
dedicated RM,
remote sales
and servicing
via internet,
telephone
Micro Business
Banking: no
dedicated RM,
remote sales
and servicing
via internet,
telephone
Small Business
Banking:
branch-based
RM/SB
specialist, with
large portfolio
size (300+
customers),
offering
face-to-face
point of contact
Small Business
Banking:
branch-based
RM/SB
specialist, with
large portfolio
size (300+
customers),
offering
face-to-face
point of contact
Commercial
Banking:
dedicated RM,
often based in
commercial
centers (rather
than branches)
offering
standardized
product
solutions
Commercial
Banking:
dedicated RM,
often based in
commercial
centers (rather
than branches)
offering
standardized
product
solutions
Corporate
Banking:
dedicated RM,
supported by
multiple product
specialists,
tailoring
banking
solutions to
customer need
Corporate
Banking:
dedicated RM,
supported by
multiple product
specialists,
tailoring
banking
solutions to
customer need
International
Corporate and
Investment
Banking:
Product driven
or high-calibre
RMs with deep
product
expertise, ability
to deliver the
bank and
relevant product
experts are key
International
Corporate and
Investment
Banking:
Product driven
or high-calibre
RMs with deep
product
expertise, ability
to deliver the
bank and
relevant product
experts are key
Copyright © 2014 Oliver Wyman 48
However, being good at delivering core banking
products and services online and through mobile and
tablet applications will not be enough to stand out from
the crowd in the medium term: to do this, banks need
to find ways of supporting small businesses in their own
business activities, solving their day-to-day problems
and helping them acquire and retain more customers.
In the graphic above (Exhibit 5), we highlight four areas
along the small business value chain where we see
significant innovation. These areas are adjacent to core
banking services, but the innovation is not typically
being led by banks.
What is clear is that the pace of change in small business
banking has accelerated rapidly with the advent of
digital technologies. Small business bankers rely
on retail (and occasionally corporate) platforms for
developments in core functionality, and must now be
able to articulate crisply and clearly what the small
business specific requirements are, if they hope to
compete for their share of digital investments. They
will also have to develop capabilities (such as data
management, customer analytics and proposition
design) that are not traditionally associated with the
sector, and to establish partnership frameworks to allow
them to access technologies, software and skills that
simply don’t exist in most banks. Above all, they will have
to get used to a much, much faster pace of change.
Exhibit 5: Small business value chain
Professional production and management of paperwork and record keeping that supports business activities, via dedicated software
Using open architecture to encourage the creation of business-specific applications by independent developers that can then be deployed through
point of sale devices (e.g. loyalty/voucher schemes, table booking, bill splitting, etc.)
Leverage financial and payment information to develop comprehensive liquidity forecast and cashflow management tool, and to facilitate ‘one
touch’ financing of working capital
Analysis of small business data to improve small business outcomes
Supplier Buyers
Business Activities (international and local)
Accounting software
SME
Payment
Money out
CHAPS
BACS
SEPA
SWIFT
CARDS
MOBILE
PayPal
Cash
Cheques
Local FX
Payment
Money out
CHAPS
BACS
SEPA
SWIFT
CARDS
MOBILE
PayPal
Cash
Cheques
Local FX
Term Lending (e.g. commercial mortgage, asset finance, long term working capital finance)
Working Capital Management
Info-mediaries
Inventory
Taxes,
salaries
Accounts
Payable
Accounts
Receivable
Cash
Pre
shipping
At destination Pre Shipping
At desti-
nation
Shipping
Domestic/International
Shipping
Domestic/International
Invoice/Goods
Data Finance
Purchase order
Invoice/Goods
Purchase order
1
1
1
2
2 2
3
3
4
4
Source Oliver Wyman analysis
Copyright © 2014 Oliver Wyman 49
2. DELIVERING IMPACT VIA IMPROVED
CUSTOMER EXPERIENCE
The world’s perception of retail banking has
fundamentally changed following the financial
crisis – trust in banks needs to be rebuilt, increasing
conduct regulation makes differentiation through
greater sales effectiveness and product pricing harder
to achieve and customers are slowly becoming less
loyal (more banking relationships) and less sticky
(shorter product lifetimes), albeit from high levels
relative to other service industries. As a result,
alongside marketing, competency in delivering a
high quality customer experience has increased in
importance to the success of retail banks as they have
discovered that the negative impact of their existing
poor service is high and increasing.
Oliver Wyman’s analysis suggests that there are some
clear priorities for generating impact via customer
experience and that differentiation in this area is both
achievable and sustainable.
Firstly, in terms of the impact on customer value, fixing
areas of poor customer experience (“hassles”) is more
important than delighting customers in retail banking
today. Customers that experience poor service are
prone to leave the bank, resulting in the loss of all
value, whereas while delighted customers will stay,
the value impact is less strong. This effect is shown in
Exhibit 6 below using UK customer research data.
These skews in value impact mean that banks need to
think carefully about where to make their investments
in improving customer service – this should be based
on the experience itself, how it impacts customer
value and the value of the customers that are affected
(Exhibit 7).
Exhibit 6: Switcher and stayer status by hassle and delight rates
AS % OF TOTAL RESPONDENTS FOR EACH RANGE OF HASSLE/DELIGHT RATES
0–10
96.3
3.7
10–20
82.4
17.6
20–30
73.6
26.4
30–40
66.9
33.1
40–50
62.9
37.1
50–60
51.6
48.4
60–70
66.7
33.3
70–80
45.5
54.5
80–90
57.1
42.9
90–100
22.2
77.8
HASSLE RATE
0–10
80.3
19.7
10–20
84.6
15.4
20–30
80.1
19.9
30–40
82.7
17.3
40–50
81.4
18.6
50–60
88.3
11.7
60–70
88.9
11.1
70–80
95.3
4.7
80–90
95.2
4.8
90–100
95.0
5.0
DELIGHT RATE
Stayers
Switchers
Source Oliver Wyman analysis
Copyright © 2014 Oliver Wyman 50
Exhibit 7: Key differentiators in customer experience
CUSTOMER TOUCH POINT EXPERIENCE SCORE CUSTOMERS
Differentiator #1
All touch points are NOT the same
For example, a bad rating due to wait time for a
counter cash withdrawal likely has a lower impact
on loyal behaviour than a bad rating due to a
mis-assessed fee and refusal to waive it
Differentiator #2
All score changes are NOT the same
For example, with some interactions
(e.g. in-branch fulfilment) delight may drive
loyalty, whereas with others (e.g. closing a
mortgage on time) it is sufficient to simply
avoid a hassle
Differentiator #3
All customers are NOT the same
Different experience elements matter to
different customers, and there are wide skews in
customer value (e.g. affluent vs. mass market)
Identify the touch points that matter most… …manage them to the economically
optimal outcome...
…to maximize customer value
SHOP
BUY USE
?
?
X X
Source Oliver Wyman analysis
As the retail banking experience becomes
increasingly digital, the digital (particularly mobile)
experience will become the battleground for retail
banks on this dimension. Banking transaction
capability through mobile channels is increasingly
becoming a hygiene factor and expected by
customers and we expect that this will evolve to
become a real source of competitive advantage
for those banks able to deliver a smooth, error free
experience via mobile digital channels.
Simon Low is a Partner at Oliver Wyman.
Jason Quarry is a Partner at Oliver Wyman.
Vanessa Lopes Rodrigues is a Principal at Oliver Wyman.
Mark Barrie is an Associate at Oliver Wyman.
Copyright © 2014 Oliver Wyman 51
Copyright © 2014 Oliver Wyman
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