Management Strategies

11:05 AM
Bob Giltner
Bob Giltner
Commentary
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Launching New Product Innovations With Old Systems

Legacy systems and limited resources shouldn't stop community banks from launching new product innovations.

The pace of innovation has never been greater in the financial services industry, nor more important to growing customer revenues and relationships. Yet community and regional banks often feel hamstrung by their legacy systems. Their innovation can only be as fast as their core vendors provide it.

Fortunately, these banks can create innovative new services to capture new revenues and customers with existing systems by better understanding the customer needs behind competitive innovations. Three examples of innovations around the hottest trends in financial services today where bank response can be made with legacy systems are how they can respond to prepaid card growth, alternative payments options, and enhanced online lending services.

Growth in prepaid cards
The Federal Reserve Payments Study conducted in 2013 shows prepaid card transactions now equal 20 percent of debit card transactions and are by far the fastest growing payment segment. Yet community and regional banks cannot underwrite their own cards as large banks can and are forced to rely on vendors for the level of innovation they can deliver with prepaid cards. Working with prepaid vendors can generate little revenue, and for most that have tried, success has been minimal.

[For more on the growth of prepaid cards, check out: Prepaid Card Costs Rising.]

How can this be, when prepaid volume is growing so fast? The answer lies in understanding the customer needs behind prepaid growth. Prepaid is not for the “under-banked,” as often thought and defined in marketing; it is for the “under-served” existing customers of community and regional banks. They are under-served because they are using the prepaid cards in addition to checking accounts to get the benefits of transactions their checking accounts do not offer. 

One of the key benefits of using a prepaid card by banked customers is the certainty of no overdraft fees ever on the transaction and the assurance that transactions are declined if no funds are available. Community and regional banks can easily configure and market a checking account to be “return all” and with no overdraft fees. Return-all, no-overdraft-fee-ever checking accounts or debit card-only accounts serve a different market segment than the ones who pay the majority of fees today and who want their financial transactions completed. A new segment has emerged, highly focused around millennials, those under 35 years of age, that want items always returned if funds are not available. Consumers are very willing to pay for the “no overdraft fee” service, as shown by total prepaid revenues today exceeding total checking maintenance fees.

Growth in online and in-store payment alternatives
Should the customers of your community or regional bank use their bank debit cards when shopping online or in-store? Banks will have an uphill battle if they think, in today’s “compromised card” environment, they can convince consumers that their accounts are protected. Major news stories in the national media tell them otherwise and recommend consumers not use a bank debit card at gas stations and restaurants and neither online nor in-store. 

Consumers want to be in control, and using PayPal, as it states in the new advertising, or retail alternatives like the Starbucks Card gives them more control. It assures a compromised transaction does not create access to their entire bank accounts. They willingly have additional payment accounts to use in conjunction with their checking accounts. Community and regional banks can easily offer and set up such an additional payment “debit-only” account on legacy systems and link it through online banking to a customer’s main account. Customers then can move money to the debit card account in seconds with online banking or mobile banking to shop online or in-store. When done, they can easily move the money back to their main accounts with no risk to their main banking if the card is compromised. Such a service is far simpler that PayPal or retail cards for customer use.

Enhanced online lending services
Need a small loan quickly to pay a bill or make a purchase? For most regional and community banks, a consumer’s only choice is an overdraft or a credit application for a larger loan. But a plethora of providers now deliver options quickly online with immediate underwriting, such as PayPal’s BillMeLater, Float Money, BetterFinance, and Amazon, or peer lenders like Lending Club. Such online and real-time underwriting and delivery of small loans is available with many partners today for community and regional banks. Offering such services will drive transaction and revenue growth, and not cannibalize existing revenues, as the segment users are different with different needs.

Innovation is not just a function of technology. For community and regional banks it is driven by understanding existing customer needs they are underserving in comparison to the services of new, alternative technologies. They can respond with legacy systems or by engaging established third parties to expand and enhance transactions, customers, and revenues.

Bob Giltner is CEO of Louisville, Kentucky-based R.C. Giltner Services, a provider of PaySound®, a consumer payments checking solution that offers no overdraft charges ever for a flat, monthly fee, enabling community and regional banks and credit unions to acquire ... View Full Bio

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