Question

Please respond to each item below with a 100+ Word response per part:

Part 1: Think of a list of financial institutions, banks and/or credit unions Select one and discuss the many services that financial institution, bank or credit union provided for its customers.

Part 2: Identify how that same financial institution, bank or credit union could have served the consumers better.

Part 3: Did the bank make money by serving a customer? If so, how? If not, why not?

Answer 1

Part 1.

What is a 'Financial Institution - FI'

A financial institution (FI) is a company engaged in the business of dealing with monetary transactions, such as deposits, loans, investments and currency exchange. Financial institutions encompass a broad range of business operations within the financial services sector, including banks, trust companies, insurance companies, and brokerage firms or investment dealers. Virtually everyone living in a developed economy has an ongoing or at least periodic need for the services of financial institutions.

Types of Financial Institutions

Financial institutions offer a wide range of products and services for individual and commercial clients. The specific services offered vary widely between different types of financial institutions.

Banks and similar business entities, such as thrifts or credit unions, offer the most commonly recognized and frequently used financial services: checking and savings accounts, certificates of deposit (CDs), home mortgages, and other types of loans for retail and commercial customers. Through means such as credit cards, wire transfers, letters of credit and currency exchange, banks act as payment agents, facilitating financial transactions between consumers and businesses or between companies.

Investment banks specialize in providing services designed to facilitate business operations, such as capital expenditure financing and equity offerings. They also commonly offer brokerage services for investors, act as market makers for trading exchanges, and manage mergers, acquisitions and other corporate restructurings.

Among the most familiar non-bank financial institutions are insurance companies. Providing insurance, whether for individuals or corporations, is one of the oldest financial services. Protection of assets and protection against financial risk, secured through insurance products, is an essential service that facilitates individual and corporate investments that fuel economic growth.

Investment companies and brokerages, such as mutual fund and exchange-traded fund (ETF) provider Fidelity Investments, specialize in providing investment services that include wealth management and financial advisory services. They also provide access to investment products that may range from stocks and bonds all the way to lesser-known alternative investments, such as hedge funds and private equity investments.

The early 21st century has seen an explosion in online banks that maintain no physical branches, and in non-bank financial firms that provide niche financial services such as personal loans, money transfers, debit cards and specific investments.

Banks

Banks are corporations with a state or federal charter, which can accept deposits, invest in securities and make loans to businesses or individuals. Loans are considered to be the most valuable assets for commercial banks and deposit accounts are their main liability. Some banks may provide other financial services for its members. Banks are regulated on a federal level and have government protection for their depositors (FDIC insurance).

Credit unions

FDIC insures depositor accounts for commercial banks and most non-bank thrift institutions, such as credit unions. Credit unions have similar services as banks but are focused more for small savers and checkable type of transactions. They provide lending services and are owned by their members.

Brokerage companies

Brokerage companies are large corporations and are an intermediary to investors and investment companies. They offer financial services typically to buy and sell stocks for clients.

Insurance companies

An insurance company is another type of financial institution that offers investment vehicles for investors along with other products which may provide financial protection by way of insuring businesses or individuals.

These financial institutions are the backbone of our economy. With improved regulation, we hope they will continue to prosper and develop a strong foundation for our country.

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Part 2

Providing exceptional customer service in your bank or credit union is important, helping to attract and retain customers in a competitive landscape. As technology becomes more robust and customer-buying habits shift, banks and credit unions must be constantly looking for areas of innovation and ways to meet the demands of a 21st-century customer.

1. Empower Your Employees

Your customer service employees are your front line. As such, they need to have the right resources to provide exceptional customer service. But many times they don’t. Far too many banks and credit unions are falling behind when it comes to providing their employees with the tools they need to most effectively do their job and that in turn not only affects customer service quality but employee morale as well. For example, inefficient and dis-organized knowledge base solutions result in confusion for your front line staff. They can’t find the information they need which impact their confidence and the confidence of customers. In order to change this, banks and credit unions need to ensure that every employee has:

Accurate, up-to-date and consistent information

Immediate answers to their questions

An easy way to search for information

All too often the critical information employees need in order to answer customer questions is buried in long policy documentation or only available by asking the “key go to people” i.e. lending and managers. In a recent SilverCloud poll, a majority of banks and credit unions reported that 30% or more of key “go to” staffs daily time is spent supporting front line staff questions. This inefficient system leaves customers waiting on hold and employees scrambling for information.

2. Educate Your Customers on Financial Literacy

The concept of educating potential and current customers on financial literacy is not necessarily new. What is new is how banks and credit unions today are choosing to do it and whom they’re now targeting. While financial literacy programs such as Operation HOPE and Junior Achievement, have existed outside of banks for many years, targeting low income and youth populations, it is only recently that banks have recognized the value in bringing educational initiatives in-house. In fact, Operation HOPE’s new model does just that, bringing its financial literacy program into bank branches. And these types of financial literacy programs aren’t targeted towards the low-income population but towards middle class customers, who may need education but are embarrassed to seek it out.

Bank of America has partnered with the educational site Khan Academy to offer its customers financial literacy video tutorials. And Capital One offers its customers and non-profit organizations free multilingual financial education through its partnership with MoneyWise.

When it comes to financial education, the benefits for banks are huge and the avenues to deliver that education are many. As a special report put out by the Federal Reserve Bank of San Francisco stated, “At a time when competition in retail banking is fierce, targeted financial education programs can open new roads into untapped populations, such as the immigrant and underbanked markets. In addition, financial education programs can also create goodwill at the community level and strengthen relationships with local customers and community partners. In some cases, banks can also receive Community Reinvestment Act credit for providing financial education to low- and moderate-income individuals.”

3. Embrace Financial Technology

Staying in compliance with strict regulations and meeting customer demand for immediate, on-the-go service are issues in which banks and credit unions are constantly struggling. Yet, as banks and the financial sector as a whole catch up with advances in technology, they are finding great opportunities to improve their bottom line and increase customer satisfaction.

Some of the ways innovators in the banking sector are using financial technologies to improve their businesses are through:

Exploring advances in mobile payment options

Using biometrics, such as voice identification and eye scanning, to increase security

Integrating systems and converting old data to new formats

Installing drive-through video teller devices

king advantage of customer data and social media (that banks have but are not using to its full potential) to enhance bank marketing and geographically targeted customer offers

These are just some of the many opportunities that financial technology is making available to banks. Due to a large number of start-up fintech (financial technology) companies, such as Square, Lending Club and OnDeck that popped up after the great recession in ‘08 there has been increasing innovation in the field. By looking to these startup companies for inspiration, banks and credit unions can gain an immense amount of knowledge and integrate systems and strategies that work best for their customer base.

4. Become An Advisor, Not Just a Lender, For Small Businesses

Small businesses, post-recession, are looking for more than just a lender. They are looking for a business partner. For community banks and credit unions, this customer need has created a unique opportunity. Yet, many banks and credit unions have not figured out quite how to move beyond the traditional lender role they have played for so long. Synopsizing a recent study by McKinsey & Co., American Banker said, “Serving small-business customers more holistically is a goal that many community banks aspire to. But few are truly making a transition from the lender role to an adviser one, and there is a lot of revenue upside for those who do.”

By acting as an advisor to small business clients, banks gain an additional revenue stream through fee-based services. For example, Lead Bank in Garden City, MO has begun offering services such as strategic planning, capital raising and bookkeeping to supplement their traditional loan and deposit offerings. First Financial Bank in Cincinnati offers a minimal cash management service to its customers, which moves cash to a higher return investment once the account hits a certain level.

“In the Netherlands, SNS Bank has reorganized its branches into a network of advisory-focused, cashless banking shops that serve as a physical extension of the Web. Branches are store-like outlets, have open spaces, tablets that customers can use, and extended opening
Hours,” according to McKinsey and Company. “The original function of a bank branch – depositing and withdrawing cash – has disappeared. Instead, the focus is on a “consultant-style” mobile sales force specialized in selling complex products from both the bank itself and other providers.”

Offering additional services beyond traditional lending benefits the bank through additional revenue and the small business customer who gains a trusted financial partner.

5. Segment Your Client Base and Create Personalized Customer Experiences

With so much competition in the retail banking and credit union space, customers have choices. What’s more, consumer trust fell after the recession began in 2008. For institutions that wish to stay competitive and build customer trust, personalization and segmentation of both messaging and services is crucial. According to an Ernst & Young Survey and a 2013 Forrester Inc. research report, Financial Service Brands Fail to Earn True Consumer Trust, “Financial service brands have long suffered from a lack of consumer trust, but the 2008 financial collapse undermined the brand relationship. Difficult as the road is, financial service brands must strive to secure brand trust to build their brand. One of the key drivers of earning back customer trust is through superior personalized product offerings. High quality products that meet customer needs are a key driver of trust in financial services.”

And with the massive amounts of customer data banks have in their possession, the untapped opportunities for personalization are almost endless.

Credit unions have been on to this idea for years. Member relationships and community are the foundation of these institutions. So it might not come as a surprise that member satisfaction is higher among credit unions than banks. According to a study by First Data, “Even though credit unions are less widely used than national and local banks, they have the highest customer satisfaction: 92 percent of credit union customers are highly satisfied, compared to 84 percent for regional/local banks and 75 percent for national banks. The more personalized nature of the credit union membership experience may account for this higher satisfaction.” But that doesn’t mean there isn’t more that credit unions can do to improve their personalization strategies.

By personalizing messaging and services, customers are more likely to feel valued and their engagement with your bank or credit union is likely to increase. Today, there are a multitude of personalization technologies available to banks and credit unions that allow for:

Marketing automation that includes CRMs, lead scoring, robust email marketing capabilities and ROI reporting

Prioritization of high touch customers and members

Individualized interactions based on customer communication preferences

Information delivered specifically to a customer based on prior behavior and recent transactions

Through personalization technology, customers are also able to access the information they need immediately, without having to call the customer service line. And banks are able to proactively view and manage customer journeys to better target each customer on an individual level with products and services they need and want at that moment in time.

6. Stay Consistent Across Channels and Branches and at Every Touch Point

According to an Ernst & Young 2014 Consumer Banking Survey, omni-channel experience was listed as one of the key areas for improvement among banks. The survey stated, “To stay competitive, banks and credit unions need to continue building out channel capabilities to provide 24/7 real-time access to banking, seamlessly, across channels.”

Providing consistent and accurate information across channels is a constant challenge for banks and credit unions. Yet, in today’s technological world, with customers banking online, on their mobile devices and on tablets in addition to at branch locations, providing consistent information is becoming more and more crucial for institutions hoping to provide the best in banking customer service. According to a Banking Technology article, “Research from Google has shown that 46% of people managing their finances online switch between devices before completing the activity. Often customers will start research on a smartphone before migrating to a PC or tablet to dig deeper into the information they need.”

7. Create Real Customer Relationships

Creating relationships with customers and members is at the heart of a strong customer service strategy. It is crucially important to customer satisfaction and retention, but it is often easier said than done.

In order to create strong customer relationships, banks and credit unions must:

Build trust

Be transparent

Stay consistent and reliable

Trust and transparency go hand in hand and are very important in the financial services industry, especially in the wake of the ‘08 financial crisis. In today’s modern world as the traditional branch function changes, consistency across channels and branches is key. Through customer and employee education, rewards and offers programs, personalized marketing, technological innovation and an emphasis on customer centricity (waiving fees for loyal customers, using data to personalize messaging and services, offering free additional advisory services, etc.), these three tenets of a strong customer service strategy can be achieved.

8. Test and Then Test Again

Just like no two customers are exactly alike, no two banks or credit unions are the same. What works for one bank and one customer segment may not work for another. The only way to know for sure what works in your bank or credit union is to test. And then test again. Testing things such as frequency, messaging and channel of communications; target markets for certain products; and special offers are just some of the very many areas possible for testing and honing.

At SilverCloud we help banks and credit unions offer the best in customer service and experience. Through a sales and service application that integrates across mobile, Internet and digital banking channels, SilverCloud provides a consistent and intelligent buying experience for the customer. Learn more about how we help banks and credit unions provide exceptional customer service that translates into revenue, loan and deposit growth.

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Part 3

There are three main ways banks make money:

Net interest margin

When you deposit money into your bank account, you’re giving your bank permission to use your money to make loans. Your bank loans your money out to others at a cost to the lendee, in the form of an interest rate (think: mortgages, student loans, car loans, credit cards, etc.). Banks collect money off the interest paid by borrowers, and a small amount of that interest is given back to customers’ bank account. This is partially due to customers’ expectation that they will see a return when they “invest” their savings with a bank, as well as the bank’s way of saying thank you for the investment. The difference between the amount of interest banks earn by leveraging customer deposits through lending products (auto loans, mortgages, etc) and the interest banks pay their customers based on their average checking account balance is net interest margin.

Even though your money is being loaned out to other people, you can withdraw all of your money out of our bank account right now without a problem. This is because banks are required to keep a minimum fraction of customer deposits on hand at the bank, known as the reserve requirement. In the U.S., the reserve requirement is set by the Federal Reserve.

Interchange

Interchange is the money banks make from processing credit and debit transactions. Each time you swipe your card at a store, the store, or merchant, pays an interchange fee. The majority of money from interchange goes to your bank–the consumer’s bank–and a little goes to the merchant’s bank. Because merchants have no control over interchange fees, there’s been some recent legislation that’s capped interchange fees on debit cards.

Ever wonder how banks can afford to offer incentives and rewards for using their credit cards? Interchange! Merchants are assessed a higher interchange fee when reward program credit cards are used to make purchases. Additionally, banks cover the cost by charging membership fees.

Fees

Fees are a relatively modern banking phenomena. In 1996, the Supreme Court ruled on the landmark case, Smiley v. Citibank, which included credit card late fees and other penalties under the definition of “interest.” Following this ruling, late fees spiked.

In 2007, two Acts were proposed to change the way that banks charge fees, but unfortunately, neither made it past Congress. However, in 2010, a federal law was passed that that requires that consumers must agree to debit card overdraft coverage with their banks before fees are charged or services are provided.

In 2015, the U.S.’s three biggest banks made $6 billion from ATM fees and overdraft fees, which is somewhere between 5-20% of their total revenue.

While late fees, overdraft fees, and ATM fees are relatively well known, there’s also a host of other fees that banks may charge customers. If you have an account with Simple, you’ll know that we don’t charge fees; ever.