More Personalized Banking Services, Please

Cisco Blog Photo #4For more than a decade, banks have been talking about how customers should be able to connect through multiple channels and have a consistent experience across them. They admit that they need to break their silos and design products and processes to deliver services anytime, anywhere. In the last few years, a new dimension has emerged: how do banks leverage big data to deliver personalized services consistently in real time across multiple channels?

Today’s consumers are digital savvy, and they’ve integrated social media into their lifestyle. As such, they’ll readily take advice from strangers, and they’ll openly share information that previous generations would consider strictly private. Our world is being transformed by data and enabling technologies that can exploit it. Capturing structured and unstructured data, turning it into information and driving insights from it is a source of economic value.

According to a recent survey by Cisco, 46% of consumer respondents in the U.S. believe that banks know enough about them to offer personalized services. Even more bankers (58%) feel that’s the case. Moreover, 69% of consumer respondents would provide more private information in exchange for more personalized service, higher security against identity theft and greater simplicity in managing their finances. 63% of the consumers surveyed said simplicity in managing finances (including budgeting) is very important.

Consider this example of how a predictive financial management tool from the bank can meet customers’ needs. Let’s say you set a goal to save 10% a month. The bank can help you achieve it by analyzing all the data they have about you and your spending habits. When you walk into a grocery store, the bank can push a recommendation to you on your smart phone based on your location. This time of the month, you generally spend around $300 for groceries. To meet your budgetary goals, you need to spend no more than $270. As you’re putting items into your shopping cart, you’re also getting a running total on your smart phone.

The survey showed that 34% of consumer respondents believe receiving real-time advice that would assist with financial purchasing decisions would be attractive. And of those, half said they would be interested in receiving it based upon their actual geographic location.

Consumers want a personalized mobile/online banking experience, but they still want branches, too. As consumers have moved transactions onto virtual channels, the number of  transactions in the branch can’t support the overhead of the physical premises. That’s why banks such as Wells Fargo and Bank of America plan to launch new branch formats that are one-third of the size of their traditional branches, but still deliver the same set of services. They can provide access to remote expertise through video information walls, larger screen ATMs with video chat and wireless technology.

Technology is the enabler, but good service is the key to success. We’re talking high availability, competence and efficiency. That’s the stuff that a positive brand image and customer loyalty is made from.


Dodd-Frank Reform: Wrestling Over Remaining Issues

Wrestling graphic

After years of wrangling and wrestling over financial services reform, Dodd-Frank is kicking into effect. In March, category one players started central clearing of OTC derivatives. Category two players come on stream in June, and category three starts in September. Moreover, we’re starting to get a better feel for how market participants intend to position themselves.

For example, GFI Group recently submitted an application to open a proprietary U.S. futures exchange. News reports say BGC is revamping ELX Futures, and ICAP may launch futures in London on ISDX (formerly PLUS). But what structure will these venues take, what are the benefits to launching a futures exchange, and how can these venues differentiate the contracts they list?

Firms can register as a Designated Contract Merchant (DCM) or a Swap Execution Facility (SEF). Dodd-Frank allows DCMs to list futures and swaps, whereas SEFs can only list swaps. The advantage of going the DCM route is the rules already exist, whereas the SEF rules don’t exist yet. The delayed rules are driving SEF wannabes like ICAP crazy because they’re spending a hefty sum of money preparing for launch without bringing in revenue to offset the expense.

What’s the holdup?

Under Dodd-Frank, trades have to be reported as soon as technologically practicable. However, reporting on block trades can be delayed so the liquidity provider has time to hedge the risk. As far as the CFTC is concerned, “technologically” means electronic, so trades have to be done electronically unless they’re a block. Yet there are other times when buy side firms just want to trade over the phone — a good example is in illiquid markets. And why not, as long as the call is recorded and the trade is reported in a timely fashion. One could argue the voice trading issue is pretty bogus, but that doesn’t mean it’s going away.

Then there’s the issue of RFQ 2 and RFQ 5. The CFTC said trading must be conducted on a central limit order book or through an RFQ process. If customer trade is being crossed, it has to be exposed to the market for 15 seconds. But should buy side firms have to show the RFQ to two or five dealers?

I recently spoke to Chris Ferreri, managing director at ICAP about this. He argues that the RFQ issue is a red herring, and it makes no sense holding up the SEF rules on its account. An RFQ can be as simple as “make me a market on 100 5s.” That RFQ doesn’t increase price transparency because there’s no price stated in it. There’s no direction either, because the buy side firm is asking for a two-way market. The RFQ includes an amount, but the buy side firm may have more to do. The maturity is transparent. The downside of the RFQ process is five dealers know that a buy side firm is looking to execute a trade in the market, and chances are the firm doesn’t want to share that information.

Back to the products

Derivatives traders will probably be able to choose from several flavors of OTC and standardized products — some will be look alike contracts and others will be differentiated. Ferreri points to a couple unsuccessful attempts to launch look alike futures contracts in the past: specifically, Eurex’s Eurodollar contract and BrokerTech Futures’ treasury futures contract. He blames their failure on the vertical model for trading and clearing futures contracts, clearinghouses’ unwillingness to accept contracts that compete with their own products, and the concern over lack of fungibility.

The concern about lack of fungibility is understandable for a physical futures contract. If a trader buys 10,000 bushels of wheat on an exchange, then that exchange is responsible for delivering 10,000 bushels of a specific quality wheat to a given location at a certain time. Contracts must be in place with farmers, grain elevators, railroads and truckers. In the case of a cash-settled financial futures contract, one could argue the fungibility argument is weaker because cash is fungible.

Finally, there could be battles over intellectual property because futures contracts are patented. For example, Goldman Sachs owns the patent on the CME interest rate swap futures contract.

Financial market participants don’t like lack of clarity, and they’re not particularly fond of change either. The sooner issues such as voice trading and RFQ 2/RFQ 5 can be resolved, the better. As for the venues and products that emerge and their potential viability – I guess we’ll just have to wait and see.