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The Innovation QuestionWhat, How & Why Now?
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Lee Wetherington, AAPDirector of Strategic Insight
Jack Henry & Associates, Inc.®
@leewetherington
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Lee WetheringtonDirector of Strategic Insight
• Develops actionable insight and strategy
for the financial services industry at large
• Delivers keynotes nationwide
• Technology Faculty Chair for graduate
banking schools
• Authors articles for industry trades
• Degrees in Economics and English
from Duke University
• Accredited ACH Professional (AAP)
Presenter
@leewetherington
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Agenda
• The Innovation Question
• Why, What, How, Who?
• Here & Now
• Convergence & Big Change
• Innovating in Complex Ecosystems
• Lending; Mobile; Payments; Delivery Channels
• What Innovation Looks Like Today
• Gen Y; Impulse Control; Feedback Loops; Automation
• Best Practices; What to Do
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Why is innovation a big deal?
• Aggressive competition
• Banks, CUs and shadow banking ecosystem
• Disruptors
• Mobile, lending and payments
• Fast-evolving customer expectations
• Driven by pace of new tech adoption/diffusion
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Innovation Management Waves
Assembly-line Manufacturing
• 1920s
Information Systems
• 1950s
JIT inventories
TQM
• 1990s
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Innovation Evolution
Massive, vertical integration
• GE
• BASF
• IBM
External supply chain management
• Toyota
• Dell
• Nestlé
Ecosystem Orchestration
• Amazon
• Hasbro
• Roche
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Then and Now
Vertically Integrated Company
Collaborative Partnerships
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Then and Now
InnovationInnovation
Ecosystems
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Q1: What is “innovation”?
1. Improvements to product/service feature functions
2. New technology that fundamentally disrupts the existing
order and creates significant new value for the customer
3. Organizational changes that better align the bank’s
execution with its strategy
4. A buzz word that nobody understands but everybody likes
to talk about
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
What is “innovation” exactly?
• Confusing “big I” and “little I” innovation
• Big I: large scale, disruptive technology
• Little I: incremental feature/function improvements
• Ability to fail fast and cheap in the exploration of reasonable ideas and opportunities
• Only 25% of new product development efforts ever launch commercially
• Of those launched, 45% fail to meet profit goals
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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Who cares about innovation?
SOURCE: Celent’s “MAKING INNOVATION MATTER AND IDENTIFYING CUSTOMERS WHO CARE”; Mike Fitzgerald & Craig Weber; February 2015
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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Consumers identify “None” as most innovative
SOURCE: Celent’s “MAKING INNOVATION MATTER AND IDENTIFYING CUSTOMERS WHO CARE”; Mike Fitzgerald & Craig Weber; February 2015
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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Who cares? Digital Behaviors
SOURCE: Celent’s “MAKING INNOVATION MATTER AND IDENTIFYING
CUSTOMERS WHO CARE”; Mike Fitzgerald & Craig Weber; February 2015
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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One third of consumers are digital or active
SOURCE: Celent’s “MAKING INNOVATION MATTER AND IDENTIFYING
CUSTOMERS WHO CARE”; Mike Fitzgerald & Craig Weber; February 2015
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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Over HALF of consumers are digital or young
SOURCE: Celent’s “MAKING INNOVATION MATTER AND IDENTIFYING
CUSTOMERS WHO CARE”; Mike Fitzgerald & Craig Weber; February 2015
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Innovation in Financial Services
• As regulated, risk-averse entities, banks aren’t
usually comfortable failing, much less failing fast
and often
• General public perceives financial institutions as
“laggards in innovation” (Celent)
• The bar is low; modest advances heavily rewarded
• Many banks dedicate their most skilled talent to
regulatory response/compliance
SOURCE: Celent’s “Innovation in Financial Services: The Leadership Gap”; December 2013
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Q2: Why don’t banks “I”nnovate?
1. Not capable of innovating
2. Don’t know how to innovate
3. Too risk averse to innovate
4. There’s been no need to innovate
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
“Until recently, there has been no need
for the industry to change.”Ron Shevlin
Author, Smarter Bank
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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80% of online adults own a smartphone
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Smartphones have changed shopping:
• 47% of smartphone owners comparison shopped
with their phones while at a retail store
• 69% changed where they purchased as a result!!!
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Gen Y Income > Gen X Income by 2020
Personal income by demographic segment (2010-2025)
SOURCE: Javelin Strategy & Research; “The Three Costliest Myths About Gen Y”; May 2014
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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Marketshare of Total Assets: Banks & CUs
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
How is “innovation” usually done?
1. Identify customer needs
2. Deliver great products
3. Beat the competition to market
PROBLEM: You can do all three and still fail.
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
The “Innovation Blindspot”
SOURCE: Ron Adner’s “The Wide Lens: A New Strategy for Innovation”
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
Sony eBook
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Michelin Run-Flat Tires
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Nokia 6650 (First 3G Phone in 2002)
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The “Wide Lens”
SOURCE: Ron Adner’s “The Wide Lens: A New Strategy for Innovation”
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
Co-Innovation & Probability of Success
Partner A
Partner B
Partner C
Partner D
85% 85% 85% 85%
52%
SOURCE: Ron Adner’s “The Wide Lens: A New Strategy for Innovation”
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
Co-Innovation & One Weak Link
Partner A
Partner B
Partner C
Partner D
85% 85% 85% 2%
1.2%
SOURCE: Ron Adner’s “The Wide Lens: A New Strategy for Innovation”
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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Weigh Probabilities: Disruption vs. Innovation
Probability of Your Success at Innovation
Pro
bab
ility
of
Dis
rup
tio
n f
rom
Ou
tsid
e
HIGH
HIGH
LOW
BlockchainAlt Lending
Mobile Payments
Faster Payments
Fintech Startups
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
Innovation Strategy: The Wide Lens
SOURCE: Ron Adner’s “The Wide Lens: A New Strategy for Innovation”
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
How to Co-Innovate in 2015
1. Use the “Wide Lens”
2. Check the value proposition
• Great for customers? Or does it just make management happy?
3. Identify dependencies
• Does your innovation depend on other innovations/companies?
4. Map the ecosystem
• Suppliers; intermediaries; customers; competitors
5. Assess risks
• Dependencies; ecosystem; timing; blindspots and bugs
• Candid calculation of co-innovation probability of success
6. Timing, timing, timing (you have to get it right)
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
• The Bad News
• Innovation is more urgent due to scale and pace of change
• Big “I” innovation is more complex in tech ecosystems
• Complexity brings difficulty and diminishes probability of
success
• The Good News
• Little ”i” innovation is easy and cheap
• You don’t have to risk the whole bank to see what works
Innovation: Bad News, Good News
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© 2015 Jack Henry & Associates, Inc. All Rights Reserved
Complex
Ecosystems
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Complexity: The Unicorn Stampede
SOURCE: https://www.cbinsights.com/blog/increasingly-crowded-unicorn-club/
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
41 SOURCE: https://www.cbinsights.com/blog/increasingly-crowded-unicorn-club/
@leewetherington
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SOURCE: http://www.americanbanker.com/bankthink/the-great-rebundling-of-financial-services-1077172-1.html
@leewetheringtonSOURCE: http://www.americanbanker.com/bankthink/the-great-rebundling-of-financial-services-1077172-1.html
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Lending
Ecosystem
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Alternative Funding Providers
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Harness the Alternative Lender Marketplace?
FI
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
• Alternative lending improved distribution & delivery
• It did NOT (and will not) disenfranchise FI lending
• “Alternate lending disruptors will be disrupted in 2016”
• Investor scrutiny of returns on their Alt-Lending investments
• FIs aggressively re-entering consumer lending as interest
rates rise
• What began as true friends-and-family P2P lending in the
2000s has evolved into B2C lending.
• U.S. Treasury Department will continue investigating
marketplace lenders, especially on heals of San Bernandino
terrorist attack
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2016 Forecast: Alternative Lending Marketplace
SOURCE: Aite Group’s “Top 10 Trends in Retail Banking & Payments, 2016: The Quest to Reduce Friction”; January 2016
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Mobile
Ecosystem
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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© 2015 Jack Henry & Associates, Inc. All Rights Reserved
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Mobile Wallet Wars: Complexity & Fragmentation
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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“Chase Pay will allow Chase’s 94M credit, debit and
pre-paid card customers to make in-store, in-app
and online purchases, beginning in 2016.”
Sarah Perez
TechCrunch
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“Banks can’t add
tap-to-pay features
to their iPhone
apps because
Apple doesn’t let
third parties use
the NFC tech in its
phones.”
Jason Del Rey
Senior Editor
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© 2015 Jack Henry & Associates, Inc. All Rights Reserved
• Though there is an Android Pay app, issuers can add
Android Pay to their own apps via the API.
55 Celent; “Tokenization Evolution: Rapid Developments”; Zilvinas Bareisis; October 2015
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
…Android Pay will
allow issuers to
integrate mobile
payments into their
mobile banking apps.
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
• Launched September 10, 2015
• Tokenized NFC mobile payments (like Apple Pay)
• Issuers must sign up and enable cards, but can leverage existing tokenization with MC and Visa
• Host Card Emulation (HCE) approach to NFC means tokens generated in the cloud (and limited number stored on phone)
• Works with all NFC-enabled Android devices (running KitKat or later) on any mobile carrier
• Pre-installed on new Android phones (Verizon, AT&T, T-Mobile)
• Google collects no fees from issuers and issuers pay no tokenization fees to Visa/MC
Android Pay: Fact Sheet
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
• NFC & MST mobile payments on…
• Galaxy S6, S6 Edge, S6 Edge+ and Note 5
• Does NOT support in-app purchases/payments
• Is NOT supported on Verizon at launch
• Tokenization
• Issuers must sign up and enable cards, but can leverage existing tokenization with MC and Visa
• Host Card Emulation (HCE) approach to NFC means tokens generated in the cloud (and 10 stored on phone)
• Leverages fingerprint identification
• Similar to Apple Pay
• Samsung collects no fees from issuers and issuers pay no tokenization fees to Visa/MC
Samsung Pay: Fact Sheet
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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1% of U.S. Shoppers Use Apple Pay
1% of U.S. shoppers use Apple Pay
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
New
Tokenization
Options
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© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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“Tokenization binds payments credentials
to any device connected to the Internet:
cars, wearables, appliances, clothing…”SOURCE: www.pymnts.com
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
• New token services enable issuers to deploy not only
to Apple Pay but to Android Pay and Samsung Pay.
Tokenization: Set Up Once, Deploy Everywhere
https://usa.visa.com/partner-with-us/payment-technology/visa-token-service.html62
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
VDEP is a framework—not a service or technology.
Participants commit to…
• Enable access to all issuers
• Refrain from charging issuers fees to participate
• Restrict transaction data usage
• Data can only be used to operate wallet
• Data cannot be used for marketing purposes!!!
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Visa’s Digital Enablement Program (VDEP)
Celent; “Tokenization Evolution: Rapid Developments”; Zilvinas Bareisis; October 2015
NOTE: Issuers that sign VDEP agreement gain
access to Visa’s token services free of charge.
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
Criteria for Choosing a Mobile Payment Play
SOURCE: Mobey Forum; “The Host Card Emulation in Payments: Options for Financial Institutions”; HCE Workgroup; December 201464
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Apple Pay Android Pay Samsung Pay Issuer HCE App
Issuer
Cost
Security
Cardholder
Usability
Issuer
Control
Ability to
Integrate into
Issuer App
POS
Acceptance
Data
Ownership
?
?
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© 2015 Jack Henry & Associates, Inc. All Rights Reserved
Payments
Ecosystem
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
Evolution of Payments
Mobile
Digital
Invisible
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@leewetheringtonSOURCE: hatoriz / Shutterstock.com
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
What about
faster payments?
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
• Fragmented approaches will eventually converge
• Fed joins NACHA Same-Day ACH bandwagon rolling out September 2016
• Early Warning acquires clearXchange
• FIS PayNet partners with The Clearing House
• These approaches aren’t ubiquitous…yet
• NACHA’s ACH Same-Day Settlement; The Clearing House’s Real-Time Payments Initiative; MasterCard Send
• Immediate notification more important than immediate settlement.
• What about virtual currencies?
• Bitcoin, RippleLabs, etc.
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Faster Payments?
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
Blockchain could
change everything
…but probably not.
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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• Internet of Information
• Internet of Things
• Internet of Value
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Protocol Application
TCP/IP & SMTP Email
TCP/IP & HTTP Web browser
TCP/IP & VoIP Skype & FaceTime
Distributed Ledgers
(Blockchains)
Bitcoin, NASDAQ Pre-IPO
private stock exchange, etc.
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Blockchain is a protocol, not an application
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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Blockchain
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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Blockchain is a distributed ledger
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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“…transfers facilitated by central authorities
such as FIs and clearinghouses has not
changed in the last 150 years. Distributed
ledger technology can eliminate the need
for that trusted middleman.”
SOURCE: World Economic Forum
via www.forbes.com
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
• “…faster, cheaper and more secure/transparent way to manipulate money electronically…”
• “…financial services face the most immediate threat.”
• But layers of infrastructure must be built first, and consumers and regulators must be persuaded to trust blockchain–two prerequisites that give incumbents an early edge.
• “…shortened settlement time also reduces the risk of fraud. Shared ledger technology could even curb the current epidemic of identity theft.”
• Applications: payments; title insurance; buying/selling a house; buying/selling stocks; corporate syndicated loans and trades; private stock and repurchase agreements
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Blockchain: Why (and When) It Might Matter
SOURCE: “Bitcoin's Shared Ledger Technology: Money's New
Operating System”;Laura Shin, Sep 9, 2015; http://www.forbes.com
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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Blockchain as a Service
Private / hosted | Digital assets | Shared ledgers
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Delivery Channel
Ecosystem
Tipping Point:The digital channel reached parity with the physical
branch in 2014, with 49% of applicants opening checking
accounts online, or on a smartphone or tablet.
SOURCE: Javelin Strategy & Research; “Digital Account Opening Reaches Tipping Point”; February 2015
Branches are dying! Long live the branch!
Branches: The Long View (Looking Back)
SOURCE: FDIC: “Brick-and-Mortar Banking Remains Prevalent in an
Increasingly Virtual World”; FDIC Quarterly; 2015, Volume 9, No. 1
SOURCE: FDIC: “Brick-and-Mortar Banking Remains Prevalent in an
Increasingly Virtual World”; FDIC Quarterly; 2015, Volume 9, No. 1
Recent Branch Cycles: 1989-2014
Branch transaction activity declined 45% since 1992.
Check use declined 68% since 2003.
Top 50 U.S. banks have reduced branch networks.
…but branch density hasn’t changed significantly.
Branch Density in Decline Since ‘89
SOURCE: FDIC: “Brick-and-Mortar Banking Remains Prevalent in an
Increasingly Virtual World”; FDIC Quarterly; 2015, Volume 9, No. 1
CONCLUSION: Branch density hasn’t changed
significantly, so technology is not impacting branching.
‘The FDIC is looking at lagging rather than
leading indicators of branch health.’ –Brett King
‘The FDIC doesn’t measure the average number of
visits to a branch per customer per year.’ –Brett King
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
What Works………………….What Doesn’t
• “Divest to Invest”
• Channel-Centric
• Driving Revenue
• Knowing your market, your
strategy, and your
customers
• Choosing optimal channel
delivery
• Engagement
• Deliver everything to
everybody in all channels
• Absolute Cost Cutting
• Product-Centricity
• Migrating Transactions
• Generalizing from national
banks to local banks
Divest to invest.
94
“Delivery channels can’t just be
additive. Banks must make bold
and deliberate plans to redirect
their investments and capabilities.”
Terence Roche
Cornerstone Advisors
Let Strategy Drive Optimal Channel Mix P
hysic
al
Dig
ital
Digital Focus
Digital Mainstream
Balanced
Trust Advisor
Physical Focus
Assess Branches as Part of Delivery Strategy
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
97
Javelin Digital Banking Model: 10 Principles
SOURCE: Javelin Strategy & Research; “Turning Digital Banking
into a Financial Journey Starts with the First Paycheck”; May 2015
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
What innovation
looks like today.
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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“Adults under 35 had a savings rate
of negative 2% in 2014.”SOURCE: Moody Analytics
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
100
50-60% of Generation Y
confess they have
impulse purchase
problems… and huge
holes in their ears.
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
So what’s the
answer to the
impulse problem?
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
102
Real-time
feedback
loops?
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
…but there are
limitations
to real-time
feedback.
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
A third of US consumers
who have owned an
activity tracker stopped
using it within six months.Endeavour Partners, July 2014
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
So how to help
those immune to
feedback loops?
(because their brains aren’t fully mature yet)
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
Opt-outs and automation.
© 2015 Jack Henry & Associates, Inc. All Rights Reserved
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Automated savings?
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Impulse Savings
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© 2015 Jack Henry & Associates, Inc. All Rights Reserved
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© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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Likely Choice of Next FI (Potential Switchers)
SOURCE: Javelin’s “Bank Switching: Combating ‘Silent Churn’ to Maximize Primary FI Status”; November 2015
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
116
Next FI: Moneyhawks (Potential Switchers)
SOURCE: Javelin’s “Bank Switching: Combating ‘Silent Churn’ to Maximize Primary FI Status”; November 2015
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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Primary vs. Secondary Relationships (by FI Size)
SOURCE: Javelin’s “Bank Switching: Combating ‘Silent Churn’ to Maximize Primary FI Status”; November 2015
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
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Checking Accounts & Credit Products (by FI Size)
SOURCE: Javelin’s “Bank Switching: Combating ‘Silent Churn’ to Maximize Primary FI Status”; November 2015
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
1. Target well-defined, sufficiently large, receptive
segments with your innovation efforts.
2. Segment by behavior.
• “Highly Digital” much different from “Analogs”
3. Use your own data (supplemented by 3rd party
data) to discover accurate, current understanding
of how your consumers are responding to
technology.
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Innovation: Best Practices
SOURCE: Celent’s “MAKING INNOVATION MATTER AND IDENTIFYING
CUSTOMERS WHO CARE”; Mike Fitzgerald & Craig Weber; February 2015
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
• Define “innovation”
• Weigh probability of disruption against your
probability of success in innovation
• Align employee incentives with strategic innovation
• De-stigmatize failure and experimentation
• Develop communication plan around innovation
• Conspicuous senior-level commitment to innovation
• Clear link between strategy and innovation/transformation
• Beware killing innovation with project-management
overkill and/or CFO/Compliance Officer veto power
120
The Road Ahead: Transformation & Innovation
SOURCE: Celent’s “Innovation in Financial Services 2016:
Reaching the Next Level”; November 2015
© 2014 Jack Henry & Associates, Inc. All Rights Reserved
Lee Wetherington, AAP
http://discover.profitstars.com/leewetherington
@leewetherington
http://www.linkedin.com/in/leewetherington