Your Bank Wants to Know You
Every year about this time, Americans get a holiday reminder from Jimmy Stewart about the good old days of banking.
George Bailey, the small-town banker immortalized by Stewart in the movie “It’s a Wonderful Life,” not only knew his customers by first name, he could recite their account balances from memory and sensed when problems at home meant a borrower might miss a mortgage payment or two.
Such intimacy has been replaced by ATMs, PINs and telephone banking, but banks are starting to realize that they lost more than goodwill when they lost touch with their customers. They lost profits.
Now banks have launched an unprecedented effort to learn more about their customers’ personal lives, using sophisticated new software programs and cutting-edge technology to gather, store and analyze all sorts of private information that once sat passively inside bank files. The goal of all this customer-monitoring is to sell more products and services. Expecting a baby? Soon, it may be that your bank will know even before you break the news to friends, by analyzing your credit card spending and then using the information to hawk a new life insurance policy.
Big inheritance? Don’t be surprised if your bank’s computers notice the unusual surge in your checking account and forward the tip to an investment advisor who calls to ask if you’d like to buy some stock.
Even bank tellers are being trained to watch and listen more closely to customers, making casual-sounding conversation that might yield a sales lead.
“It’s not Big Brother we need to worry about,” says one industry consultant. “It’s Big Banker.”
For banks, it may be a matter of survival. As with many businesses today--from media companies to supermarkets--banks are struggling to reinvent themselves in an economy increasingly dominated by information and technology.
The best hope for their future, many bankers believe, is to leverage the customer relationships they have forged over the decades and use the wealth of information they have collected but largely ignored.
“Banks are realizing that the most valuable asset they have is the information on their customers,” said banking attorney Deborah S. Thoren-Peden of Pillsbury Madison & Sutro in Los Angeles.
It marks a seismic shift for the conservative banking industry. Not long ago, banks wouldn’t have dared exploit the sensitive information in their customer databases. Privacy was locked away as safely as cash in a vault. In the 1970s, California bankers stood shoulder-to-shoulder with the American Civil Liberties Union to protect the privacy rights of their customers against government intrusion.
No more. Today, rather than minding their customer information, many banks are mining it.
Bank of America, the nation’s largest, is preparing to launch a new software program that will enable it to more closely monitor the financial activities of its customers, then segment them based on account balances, income and a variety of other factors.
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First Union, the nation’s sixth-largest bank, is spending $33 million to build a data warehouse--believed to be the largest in the industry--to store and utilize its customer information.
Perhaps the best example of this aggressive new sales culture was provided this summer, when it was disclosed that many large banks had been selling customer information to telemarketing firms.
But industry experts say that practice is and was only a tiny piece of a much larger marketing and information revolution underway at banks nationwide. Banks now consider it smarter and more profitable to keep customer information to themselves and to share it only with affiliates, rather than sell it for a quick buck.
New software products are helping banks slice and dice information in innovative new ways, enabling them to profile consumers not only by wealth, but also by personal habits, lifestyle events and myriad other things that most customers would never knowingly reveal to their banks.
“If people knew the kind of analysis that was going on with their information, they’d be very upset,” said Beth Givens, project director of the Privacy Rights Clearinghouse, a San Diego advocacy group. She worries that the trend is causing banks to collect and store much more information about their customers than they actually need.
New federal legislation enacted this year will accelerate the effort by making it easier for banks to enter other lines of business such as securities and insurance. Many banks hope to reshape themselves into financial supermarkets that provide consumers with everything from home loans and credit cards to insurance and stocks. Armed with such a comprehensive financial picture of millions of American consumers, banks plan to put themselves in an unrivaled position to sell products and services.
Customers will benefit too, banks say. The trend will enable banks to lower costs, tailor products and services and cut down on unwanted mail or telephone solicitations.
“The goal is to bring value to our customers,” said Gail Magnuson, senior vice president of customer information policy at Bank of America.
But the industry is aware that it will need to move slowly to avoid alienating customers. “Privacy is the dark side of the customer experience,” Magnuson said.
If banks can persuade consumers to accept the new uses of their personal information, they could secure a profitable future for themselves, according to John Byrne, one of the banking industry’s leading privacy experts. If banks move too quickly or aggressively, they could shake the customer confidence that provides the foundation of the banking industry. The stakes are high, according to Byrne, an attorney for the American Bankers Assn.
“Trust is a key thing for us,” Byrne said. “If we lose our trust, we have nothing.”
The kind of customer-monitoring currently underway at many large banks is similar to what U.S. banking regulators proposed earlier this year under the ill-fated “know-your-customer” rule. The government wanted banks to keep files on virtually every customer, including details about where customers got their money and what types of transactions they were likely to make. Then banks would have been expected to monitor transactions and watch for activity that strayed from the expected norm.
The know-your-customer proposal generated 350,000 complaints from bank customers and privacy advocates, leading bank regulators to quickly withdraw the plan. But although banks opposed the concept when it was a government mandate, they are embracing the idea as a voluntary marketing tool.
“The know-your-customer rule may be gone, but my business is still strong,” said John Daly, president of Miami-based Americas Software, which sells a computer program that enables banks to monitor all customer transactions on a daily basis. He developed the software to help banks comply with the know-your-customer regulation, but to his surprise, banks began purchasing it for marketing purposes.
According to Daly, the program can create profiles of customers based on how much money they keep in their accounts; their estimated annual income (calculated by adding up direct deposits of paychecks); their historical activity; and a variety of other measures. It also searches for sudden spikes or declines in account balances, large cash transactions and wire transfers.
“It can even tell you when a customer gets a raise at work or a new higher-paying job by looking for people who have an increase in their direct deposits,” Daly said.
Bank of America is one of his first customers. The bank is preparing to install the software shortly to monitor its retail customers, according to Monique Maranto, a senior vice president at Bank of America. BofA is believed to be the largest bank so far to use the system for marketing purposes.
Meanwhile, dozens of other software developers, information firms and data-mining companies are turning their attention--and their products--to meet the rising demand from the financial services industry.
NCR Corp., one of the world’s biggest data warehousing companies, unveiled its own software for banks this summer. It and dozens of other companies also are offering computer-generated scoring systems that can measure everything from how much money a bank can expect to earn from a particular customer to how likely it is that a borrower will file for bankruptcy protection. These new types of scoring systems are offshoots of the credit-scoring formulas that are frequently used to determine whether a borrower will be approved for a credit card or mortgage.
Increasingly, banks use the new scoring systems to determine which customers to pamper and which to palm off. For example, a customer who gets a high “profitability” score might find that his or her telephone calls are answered by customer service after only a couple of rings, whereas those with a low score might find themselves stuck on hold listening to Muzak.
Distinguishing Between ‘Zales and Cartier’
Credit card transactions offer a gold mine of information about customers’ needs and wants, but until recently banks and card issuers have had difficulty mining it. That’s because under most credit-card processing systems, banks only learn the amount that customers charge and a general description of the merchant.
Enter San Diego-based HNC Software, which adapted a technology originally developed by the government to combat terrorism and applied it to credit-card receipts. The system teaches the computer to recognize and interpret certain words and then uses the information to make assumptions about the customer.
“Basically it knows the difference between Zales and Cartier,” explained Patricia Campbell, marketing director at the HNC Financial Solutions subsidiary. “Before, we only knew that someone was shopping at a ‘jewelry store.’ There’s a big difference.”
For example, by being able to tell that a customer has been shopping at a store that specializes in maternity clothing, rather than merely at a “clothing” store, the computer can assume that a newborn is on the way. For the bank, it might be time to pitch a new life insurance policy. Or perhaps the family will need a larger home and, therefore, a new mortgage.
The software takes the analysis even further, looking for patterns in behavior to create “psychographic” profiles of customers, which are similar to demographic profiles but based on more personal information.
Say the computer notices that a consumer shops at both L.L. Bean, which caters to conservative shoppers, and Toys R Us, which generally has more youthful following. It concludes that the shopper is a “rich grandparent,” Campbell explained. The customer is then grouped into a marketing bucket with other “rich grandparents” who might receive special offers from the bank for college savings bonds in their grandchildren’s names.
HNC has sold the system to four national banks, but it declined to identify them.
The rising popularity of debit cards, online banking and smart cards also offers consumer information that banks previously could not easily obtain. Debit cards, for example, are replacing the anonymous cash transaction. And with a debit card, the bank can monitor shopping trends.
Even more promising for banks is the growth in online bill-paying, which is expected to gradually replace handwritten checks. Banks found it virtually impossible to track paper checks, but with online bill-paying, banks can more easily capture information about where consumers are spending their money and to whom they are writing checks.
“It’s a wealth of information,” said Larry Greenberg, chief marketing officer at Telebank, the Arlington, Va.-based online banker.
Balancing Service and Privacy
Banks say these new techniques will enable them to vastly reduce the amount of junk mail they send customers and replace generic offers with ones that better suited to the particular individual. Customers increasingly expect such service, said BofA’s Magnuson.
“Our customers want special offers, and they expect us to know some of these things,” she said. “And as their demand for special offers increases, so does the requirement that we use information.”
For example, BofA research shows that customers are irritated if the bank fails to inform them that they could save money by switching to a different type of checking account. But in order to reach such a conclusion, the bank must analyze the customer’s transactions, Magnuson explained.
The challenge for banks is finding the balance between customer demands for service and expectations of privacy, bankers say.
“There’s a fine line today between being helpful and being intrusive,” said Tom Byrne, Wells Fargo Bank’s marketing director in Southern California. He said Wells Fargo is not currently using software monitoring programs for marketing purposes because it is concerned about a customer backlash.
Some consumers welcome the prospect that their bank might tailor an offer specifically to their needs and wants.
“I don’t mind if my bank wants to solicit me for financial business, as long as its coming from my bank,” said Ralph Holland, a retiree who lives in Venice. “They’re entitled to do that. But I would mind if they sold my name or gave information to someone else. That would make me mad.”
Others say they don’t want their bank snooping into their personal lives or examining their financial transactions for marketing purposes.
“It’s troubling to me that my bank would be scrutinizing my checking account or making assumptions about my lifestyle in the name of marketing,” said Stephany Yablow, a Sherman Oaks law clerk. “Maybe I’m cynical, but I know that information will end up being used in ways I don’t want.
Privacy-rights advocates say these new information-collection practices highlight the need for new legislation to protect consumers.
“We can’t rely on the industry, in most cases, to act in the interest of the public,” said David Sorkin, associate director of the Center for Information Technology & Privacy Law in Chicago. Sorkin says banks should be required to obtain their customers’ permission before sharing transaction and other information with affiliates. Such sharing is expected to increase with the recent enactment of financial modernization legislation.
But marketing experts predict that customers eventually will become accustomed to the practice, particularly as banks begin to use the information to make offers of more obvious value, such as alerting a consumer when its profitable to refinance or providing discounts on products and services that the customer actually uses.
A recent survey by the New Jersey-based Center for Social & Legal Research found that the majority of Americans, about 55%, are “privacy pragmatists,” willing to give up some privacy in return for something of value. The rest of the population is about evenly split between people who would not give up their privacy for anything and those who don’t feel strongly about the issue.
It’s what experts call the “privacy bargain.”
“For most people, privacy is an economic trade-off,” said management guru and author John Hagel III. “People want to know what they are receiving in exchange.”
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An Eye on Your Finances
Your bank is watching. More than ever, financial institutions are tracking, recording and analyzing customers behavior. Banks say the monitoring will enable them to offer better products and services, but privacy advocates worry about some of the practices. Here are some examples.
1. CONSUMER ACTION: Mrs. Garcia uses her credit card at a maternity shop. BANK RESPONSE: Computers detect purchases and assume she is expecting a baby.
2. CONSUMER ACTION: Mr. Garcia inherits $50,000 and deposits the money into his checking account. BANK RESPONSE: Computers notice surge in account balance. Bank investment unit tries to sell Mr. Garcia a new mutual fund.
3. CONSUMER ACTION: Direct deposits of Mr. Garcia’s biweekly paychecks suddenly stop. BANK RESPONSE: Bank computers red-flag account. Did Mr. Garcia lose his job? The bank monitors the family’s finances. Mrs. Garcia’s request for a higher credit card limit is declined.
4. CONSUMER ACTION: Paycheck deposits resume. Mr. Garcia got a new, higher-paying job. BANK RESPONSE: Computers note new annual income is 35% higher than previous year. Bank’s mortgage unit calls to see if the family might want to use the extra cash toward buying a new home.
5. CONSUMER ACTION: Mrs. Garcia calls the bank’s toll-free customer service center to see if a particular check has cleared. BANK RESPONSE: Before operators answer, computers identify the caller based ontelephone number and run a “profitability” score. Computer determines the Garcias are good customers, then routes the call for special treatment.
