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Digital Investment: Success Driver or Bottomless Pit?

For sound planning decisions, the financial contributions of digital banking need to be evaluated within the context of all the bank’s channels and capabilities.

Digital channels are increasingly influential in revenue growth and customer profitability in banking. Translating that general sense into specific business cases for development and resource allocation has been difficult, however, given the complexities of online and mobile channels and loose linkages with tangible performance improvement.

The uncertainty has left senior leadership in an untenable position. Mindful that digital channels will continue to force changes in the operating model and revenue/expense equation, executives at most regional banks are actively soliciting cases for new or expanded digital investment that are worthy of presentation to their boards.

But these same leaders are casting a skeptical eye on resulting internal proposals and funding requests, many entailing significant outlays. Thinking back on earlier waves of digital investment initiatives that delivered lackluster results, they grapple with the question of how things are going to be different the next time around. Despite years of investment and persistent analyst predictions, for example, online account opening is still a weak tool in landing new business, damaging the credibility of many early advocates for heavy digital investments.

The digital channel planning challenge is real, yet often made more difficult by constricted calculations that omit customer/market considerations and cross-channel ramifications. Crimping digital marketing and developmental budgets on account of weak online sales fulfillment, for example, overlooks the growing importance of digital channels in winning shopper attention and driving purchasers to the branch.

A better approach is to evaluate the financial contributions of digital within the context of all the bank’s channels and capabilities. Approaching the question in this way, there are three anchors for business case development: 1) boosting primary relationship acquisition by cultivating an association with “leading online/mobile banking” among consumers; 2) harnessing digital channels for cross-sell; and 3) facilitating further transaction migration (branch to digital, call center to digital), permitting corresponding cuts that measurably lower the total cost to serve (yes there are further possibilities).

Leadership Equation
The first of these investment cases, cultivating association with the attribute “leading online/mobile banking,” follows through on what Novantas analysis is now clearly showing: this attribute drives primary checking acquisition. It has to do with meeting early-stage shopper expectations so that people will move beyond general awareness of a candidate provider and give it active consideration for new business.

Boosting primary checking acquisition through a strengthened perception of leading online/mobile banking is not a winner-take-all game; it is one many banks can play. It is not about absolute dominance in digital features and functions, but rather about: 1) assuring that the bank’s digital channels and products achieve at least competitive parity in the areas consumers care about most; 2) incorporating a small number of novel and convenient features; and 3) bringing these features together in an easy-to-use design with strong curb appeal. With this tenable goal accomplished, the bank’s task is then to promote digital offerings aggressively, driving home the message that the bank is making its customers’ lives easier through innovation.

One typical approach starts with shoring up functional gaps in desktop banking (redesigning as well if usability is poor or the look is outdated). Then the bank may want to roll out a new feature, for example, a snazzy smartphone app with video check deposit, swipe-balance and other features. While in evidence elsewhere, such features are still new to many consumers and easy to promote in an online ad or even on a billboard.

Addressing these and other gaps helps to address the fundamental question that shoppers ask in an overcrowded banking market where competitors are many and standout differentiation is rare: “Which bank provides the easiest and most convenient way to get the services that I need?” Importantly, there are both functional and perceptual components in answering this question, both of which require ongoing attention.

Even at this stage of the digital revolution, however, many bankers over-rely on the traditional drivers of perceived convenience:

Share of branches. While local branch presence continues as the prime influence in shopper selection of a new bank, this trend is now tapering, reflecting the increasing digital orientation of the customer base. As previously reported, our research shows that two of every five retail banking customers are now “thin-branch ready,” embracing digital channels for transaction services and, increasingly, when searching for new banking products and providers. Branch density is less and less of a requirement.

Share of voice. Local marketing and media spend will remain important in reinforcing customer perceptions of convenience. But branch-related messaging is giving way to a multi-channel construct, reflecting digital’s growing role in customer perceptions and satisfaction.

The newly ascendant third main driver of perceived convenience — leading online/mobile banking — is highlighted through our Shopper Study research program. We collected data on thousands of recent and prospective purchasers across dozens of U.S. markets, and then correlated respondents’ reported perceptions and behaviors with various local market supply-side factors such as branch and ATM share, media spend and direct mail volume.

We found that banks designated by survey respondents as having “leading online/mobile banking” had a distinct advantage in winning new-to-bank primary checking accounts versus banks that only scored well on share of branch and share of voice. For a large or mid-size regional bank, a typical research finding is that a five percentage-point increase in shopper association with leading online/mobile banking wins one additional percentage point of origination share.

This presents a powerful opportunity. For a bank currently pulling a 6% share of primary checking account churn in a given market, advancing to a 7% share represents a potential 17% increase in origination volume.

Is this potential advantage restricted to only the largest banks having the resources to build out best-in-class capabilities? Our research firmly suggests otherwise. There is evidence that association with this attribute is fully attainable by regional banks and even super-community banks as well.

Winning credit for online/mobile capability requires substance and voice: targeted investment to deliver essential functionality plus appropriate marketing support to promote consumer awareness of the digital value proposition. It does not require superiority. Specific research methodologies can be used to identify competitive gaps and prioritize corrective investments.

Cross-Sell Connection
Digital cross-sell is becoming a critical driver of customer lifetime value. While banker-customer interaction in the branch has traditionally supplied both the relationship prelude and fulfillment destination for account origination, precious little customer face time is available via branches these days. By overwhelming proportions, online and mobile banking now represent the most common everyday touchpoints with most customers, with many transacting at the branch less than once a month.

One excuse for denying this trend is the supposition that affluent, high-value customers (with large representation from older age groups) remain wedded to the branch, both for high-touch service and rep-facilitated account origination. But contrary to common perception, our research shows that higher-income customers are actually less interested than others in conducting routine transactions in the branch. Moreover, higher income customers are increasingly likely to shop for credit cards and other well-understood products online, posing serious limitations for branch-centric cross-sell strategies for these products.

The situation poses one of the great sales challenges in banking, which is somehow harnessing impersonal digital channels to recreate the rapport and one-on-one context that had been almost exclusively relied upon for relationship expansion. Yet most regional banks are not doing nearly enough to advance digital cross-sell — and they certainly are not generating sufficient results within online and mobile banking today.

The biggest barrier is the lack of a cohesive strategy that pulls the necessary combination of levers: customer analytics, offer engine, display options and digital fulfillment. A successful digital cross-sell investment plan will combine interrelated success elements from marketing, analytics, product design and the digital channel itself.

In the Novantas experience, the best foundation for digital cross-sell strategy is a customer segment- and lifecycle-based prioritization of needs-based opportunity, providing an organizing principle for the scope and staging of investments. The best cross-sell opportunities typically spring from the household cash management relationship, as anchored by the primary checking account.

The challenge is understanding evolving core customer needs through a multi-channel lens, and then finding the most effective ways to digitally promote, present and fulfill relevant offers. We mention this first because although there are defined progressions of execution capabilities needed to support online and mobile cross-sell, customer-focused strategies take precedence.

With that said, our multi-bank research indicates that regional banks are generally falling behind the national banks and direct players in fleshing out the execution capabilities needed for effective digital cross-sell (Figure 1: Three Stages of Digital Cross-Sell Capability).



While Stage 1 players have little or no ability to route marketing messages through digital channels, for example, a select group of Stage 3 players have developed integrated messaging through all digital channels (e-mail, text message, web site, etc.). In the mobile space, Stage 1 players can only partially replicate the functionality of the bank’s public web site, while Stage 3 players have replicated the full functionality of the site for mobile-specific access.

Transaction Migration
A third business case for digital investment is transaction migration — shifting even more daily banking activity to alternative channels in a way that permits specific cost reductions. The banner example in recent years is the deployment (and promotion) of imaging-enabled automated teller machines for check and cash deposits, which has won strong customer acceptance and permitted branch staffing (and even local branch count) to be tightened without impinging on customer rapport and service.

As an example of what can be done, with the help of mobile check deposit on top of its investment in next-generation ATMs, one national bank has shifted nearly 60% of retail deposit transactions out of the branch, leaving only 40% to be handled by tellers. Among large regionals, by contrast, digital channels still carry only 25% to 40% of the deposit transaction workload, with 60% to 75% of the burden still on tellers. Closing this gap spells opportunity for regional players that can strike the right blend of technology deployment, customer-friendly transaction migration and specific cost reduction.

Importantly, though, transaction migration strategies must be grounded in local markets, often right down to the individual branch level. Some branches, for example, have already seen staffing pared to irreducible minimums. Moreover, we have found (both through consumer market research and close analysis of clients’ own data) that the trend towards alternative channels varies significantly by market within the footprint, beyond what can be explained by income alone. Indeed, population density and the presence of national banks can drive variation even at the zip code level.

Also customer transitions need to be managed carefully. For many transactions currently occurring in the branch, the customer preference to shift to online or mobile channels is already there: it is a matter of awareness, education and interface design. The transition hurdle may be that substitute digital arrangements have not been communicated well; or that the technology is not easy to get started with; or that it is not easy to use. Identifying and removing these hurdles can accelerate channel substitution, with potentially significant cost savings for the bank.

Regional banks also commonly face several challenges in realizing gains from transaction migration. Critical tasks include identifying the implication of different transaction migration scenarios on distribution planning. In the call center, for example, the biggest opportunity may be converting contact center representatives to outbound sales. In these and other challenges in converting transaction migration to actual business improvement, success depends on digital and other channel leaders working hand in hand to develop and execute on an overall framework and sequencing.

Transition Economics
Without question, digital channels have become a major touchpoint for consumers, with important roles to play at each stage of the customer journey. Put another way, the modern retail bank cannot possibly succeed without offering a robust digital experience (Figure 2: Role of Digital Channels in the Customer Lifecycle).


The challenge, however, is managing transition economics as more customer activity shifts from the branch to online, mobile and ATM channels. The high ground is not simply diverting branch resources to digital, it is shifting responsibilities for tangible revenue generation and cost reduction so that alternative channels carry their weight.

An effective digital investment case should clearly demonstrate why certain initiatives need to be prioritized, and the value they provide.

The business case should hinge on digital’s role and contribution in the new multi-channel experience, not just as a standalone channel. A number of banks that invested heavily in digital in recent years have tried to justify outlays solely on the basis of in-channel metrics, such as online product sales and bill pay penetration. This has set unrealistic expectations for in-channel payoffs, leading to management disappointment, while under-nourishing the growing potential for cross-channel benefits.

High-value digital channel business cases for revenue generation specifically include sales driven across channels. Robust proposals for cost-saving transaction migration include a quantification of efficiencies to be realized at the branch level, as well as other cross-channel metrics that speak to the bank’s overall performance. Such broader, inter-connected business cases can now be quantified.

To be fair, gaining marketplace credit for having leading online/mobile features may require incremental marketing expense, which is an offset to the sales and cost savings benefits. But most often the task is ensuring that the messaging featured in current marketing initiatives highlights online/mobile features more prominently, as opposed to upping marketing expenditures.

Instead of a series of one-off proposals, the bank needs a prioritized digital channel investment plan, typically a rolling plan for the next three to five years. This should be a living document that identifies the type and size of investments; the sequencing of initiatives; requirements for cross-channel and cross-functional coordination; risks and critical success factors; and appropriate metrics.

Customer attitudes and behaviors are rapidly shifting towards digital shopping and banking, but the banking response has been uneven. Several yawning competitive gaps are already on display. One example is hard-coded, catch-all sales programs within digital banking at a number of regional banks. Another is decrepit desktop banking applications, allowed to decay as players put all, not just some, of their eggs in the mobile basket. The consequences of these and other imbalances will only grow over time. This leaves banking leadership to face a stark question: What is our future state if the bank mis-invests or under-invests in digital?

Chris Musto and Paul Kadin are Managing Directors at Novantas Inc., respectively in the New York and Boston offices. They can be reached at and

For more information, contact Novantas Marketing

+1 (212) 953-4444