CONTENTS

D E P A R T M E N T S
BRIEFING
FAN/FRED FALLOUT
A banker's view of FHA's
"Hope for Homeowners"
... .. program ............. 7
What you must know now about the
new federal anti-foreclosure effort.
By Bill Streeter
Covered bonds gain interest
after GSE takeover ...... 12
How this successful European tool can
help U.S. rebound. By ]erry Marlatt
Snapshot: Branch sales sag
to ten-year low ....... 8
By Maria Tor
Remembering Joe Kizzia, veteran editor
of ABA Banking ]oumal ......... 63
100th Anniversary:
Then & Now ..... 64
Late-'60s saw the birth of that
long-lasting favorite- Reg Z.
ABA RESOURCES ............ 15
COMMUNITY BANKING
Hot, web, and green . . . . . 18
il llA Internet deposits may be

1
'\,r
1
"hot," but a new auction site
and two additional third-
party, internet-based services just might
show you the money. By Steve Cocheo
TECH TOPICS
Mortgage IT: Not this
year's hot property .... 54
What types of technologies
will sell now that lending is
on the slow track?
By Lauren Bielski
Case in Point: Looking for sales in all
the right places ................. 56
COMPLIANCE CLINIC
Put your BSA/ AML program
into shape ...................... 58
Common sense plus hard work makes a
beginning. By Steve Cocheo
Mailbox ...................... 59
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& A dLmrlJ
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COVER STORY: RETAIL BANKING REPORT
Rethinking segmentation ......................... 26
By Stephen Onufrey and Howard Moskowitz. Common sense tells you that
no two customers will react to what's in your branch in exactly the same
way. But predicting who willlike a new service requires a look at a cus-
tomer's self-service style and situational objectives. Research from two indus-
try experts offers surprising findings on engineering a banking experience
that resonates.
Still pushing the envelope ............ 36
By Lauren Bielski. For Umpqua Bank CEO Ray Davis,
an out-of-the-box retail banker, culture and empowerment
are what have made the Oregon-based bank consistently
successful, not its offbeat branch designs.
D.C. DIALOGUE
Keep regulation functional ..................... 42
By Ed Blount. It's legislative karma: As a congressman,
Christopher Cox helped pass Gramm-Leach-Bliley-as SEC
Chairman, Cox had to sort out implementation of Reg R. In an
interview, Cox holds forth on the roles of the SEC and the Fed.
BASEL IMPACT
Capital windfall? ..................... 46
By Geoffrey Rubn and William Nayda. A majority of banks
could see reduced capital requirements under the optional Basel II
Standardized Approach. Sorne, however, would be required to
hold more capital. Here's why.
ABABANKINGJOURNAL ?.f.
WEB EXCLUSIVES ON ABABJ.COM
U nderstanding the "digital native"
In the "Talking Credit" blog: credit
committees; CRE exams
COLUMNS
Editor's Column .............. .4
P.T. Barnum capitalism
ABA Chairman's Position ..... 15
Our competitors just won't take
"no" for an answer
Banker's Mart .................. 60
To advertise/Index of advertisers 62
["The Economy" appears this month
in the Digital Magazine, p 64a,
www.ababj. com]
Coming in November's ABA 81- 1 OOth Anniversary Special lssue
Profile of incoming ABA Chairman Arthur Connelly
Paul Volcker, Dick Kovacevich, Ed Yingling, Jim Culberson, Billlsaac, Walter Shipley
and a CEO panel discuss historie issues, current trends, and banking's future
ABA BANKING JOURNAL/OCTOBER 2008 3
RETAIL BANKING REPORT
Rethinkin
segme
Demographics are only part of
the story. H ow customers react
to a series of vignettes helps
banks get inside the customer's
mind, heart, and emotions.
H ere 's how the process was
applied at one large retail bank
n their seminal work The Experience
Economy, Joseph Pine and James Gilmore identified
Customer Experience as the emerging key differentiator
in today's services economy. That was almost a decade
ago. Y et a positive, differentiated, memorable and engag-
ing customer experience continues to remain an unde-
fined and elusive goal for most banks. More than ever,
banks recognize that their products and services are
viewed as commodities. Bankers, vendors, technolo-
gists, consultants, customer advocates and industry
pundits all have opinions on what the key elements are of an
exceptional customer experience. But how are those opinions
validated with the customer who will actually have the final
vote? Usually, it is done with a series of focus groups that fine
tune financia! products and services after they already have been
built, when the major decisions are cast in stone.
W e present in this article a new approach to solving the issue
of creating an exceptional customer experience in banking. The
predictive analytic techniques are not new. They have been
proven in successful use in the consumer goods and manufactur-
ing sectors for over 25 years. What is new is the application of
these techniques to the banking and financia! services industry,
and to the realm of experience engineering. And, they deal with
the newly emerging notion of "addressable minds." Knowing
By Stephen Onufrey and Howard Moskowitz, PhD. Onufrey
is retail banking solution executive for the SRO Group, LLC.
He spent 38 years with IBM and two with Unisys working on
retail banking solutions. Moskowitz is president of Moskowitz
]acobs, Inc. A pioneer in the field of psychophysics (the study
of perception and its relation to physical stimuli), he was
inducted into the Hall of Fame of New York's Market
Research Council in 2006.
26 OCTOBER 2008/ABA BANKING JOURNAL
experience for that customer.
the 'mind' of
the individual
customer lets the
bank create the exceptional
The article is based on our work with a large retail banking
company. The work focused specifically on questions relating to
customer acceptance of new technology-based services.
The chief technology officer of that bank was faced with the
task of recommending new technologies that will be cost justified
and will also provide an exceptional customer experience. A pre-
dictive analysis study was performed in order to determine the
potencial impact of specific new technologies (including RFID-
radio frequency identification) to the customer experience.
The resulting data is useful in its own right, but more impor-
tant, we feel, is the methodology and approach to customer
experience research. Other banks can measure their own efforts
against the approach used here.
Here are four broad findings from the project:
1
No future experience really strongly appealed to or repelled
. the average person. The "average person," as we will see, is a
myth. Experience can be engineered, but not by looking at
everyone in the aggregate. In fact, the average reaction to "new
ideas," the substance of the new experience, was neutral to
somewhat negative. Scratch winning ideas for everyone! W e
have to dig deeper to engineer a better experience.
2
With the traditional subgroups-sex, age, income-we saw
. sorne differentiation. The new, technology-based ideas
appealed more to men under the age of 40 who had an income in
excess of $40,000 per year, for example. Still, there was some-
thing missing. lt was clear that going about dividing people the
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Roberto E. Jalon Gardella
EXPERIMETRICAL
Av. 11 de Septiembre 1881 ofic 1620 Providencia
Santiago
Chile
Tel: (56-9) 90684003
http://www.mji-designlab.com/index.php?id=15&L=0
way we'd always done it just wouldn't
give us the big hits for the future that we
needed.
3
W e began to hit sorne pay dirt with
self-explicated groups who defined
themselves as technophiles and techno-
phobes. The technophiles, as you might
gather, liked the new tech-based
experiences. But still there was something
m1ssmg.
4
Response-based segmentation-
where we divide the group into small-
er segments based u pon how they react to
future ideas-was where we found the
real pay dirt; things that really excited
people. W e uncovered windows of des ir e
for different customer experiences, and
groups of people who would relish them.
As described later on, we found four rad-
ically different groups, for which we
could develop different experiences.
The customer survey results were eye
opening. A new offering would create a
customer advocate in one market seg-
ment, yet that same offering could
become a customer detractor to another
market segment. For example, using cell
phones to identify customers when enter-
ing a branch received the highest vote
from one group and the lowest from
another. The important thing was the
combination of specificity-to know
exactly the feature to offer, and to know
precisely the response from the segment.
That allowed the prediction of the opti-
mum customer experience, or experi-
ences.
The key to using this predictive analy-
sis technique is to reflect each bank's own
corporate DNA. Surveying existing and
target market segments and using bank-
unique questions will help the bank to not
only define its exceptional customer expe-
rience but also to help ensure success of
these initiatives.
N ow let' s m ove to the details of pre-
dictive analysis and addressable minds in
the banking industry.
Customers design the future
In this particular case we were not dealing
with physical products, nor were we
focused on the world of today. Rather, we
were dealing with the near-future world
of banking as people would like to have it,
but at the same time a world so full of
new technologies that it's hard for people
to say what they want.
28 OCTOBER 2008/ABA BANKING JOURNAL
RETAIL BANKING REPORT
lollcrosoft Internet [xplorer
Connect onhne in 'real me' with e customer rep 'Yia instant messeging, voice cwer IP or\lid o
confarenong Vla your computer
We offer a bank.lssued smart card so we can recognize you entenng lile branch and process your needs
raster
New technology tnsures constslent bankmg elCpenences onyour computar, PDA or cell phone. at ATM S.
cwer lhe phone
Use one encrypted password roran banking se \lia Internet. cell phone or PDA
GJ(D[D[I)[Dsffi(D(D 0ill -Jm)
Thlnki ng a.bout vour curren! Banki ng Eperience, howwould yo u
feel if your bank offered these expa.nded servlces?
1-LESS satJSlil!d. 5-TIIe SAME,
9- 10 sousfil!d
lnt-
Figure 1: Screen shot of a typical concept or vignette for the next-generation bank
At an early point in the development
cycle the issue on the table was simply
how to get into the mind of a bank cus-
tomer to find out what was appealing. lt
was pretty easy to define customers by
their banking patterns, and even by the
way they described themselves when it
comes to technology in banking (e.g.
bank by internet). What wasn't so clear
was whether lurking in the background
were unexpected mind-sets.
The team turned to systematics-a dis-
ciplined experimentation with ideas using
an approach called RDE, or rule-develop-
ing experimentation.
RDE shows the 'algebra of the mind.'
The goal was quite simple-learn the
rules of the bank customer's mind, when
it comes to bank-related technology.
Furthermore, it was important to get it
right- not just get politically correct
answers that are often obtained when
bank customers go through batteries of
questions asking 'would you like or dis-
like this feature.' Instead, we presented
bank customers with a variety of vignettes
containing descriptions of a banking
experience as the customer would
encounter it. W e could then discover
what particular features in a vignette
drove acceptance of the experience.
For the bank in question, we created 24
tech-related service options (experience
ideas that the bank could feature), falling
into six different broad customer cate-
gories (e.g. "Online collaborative"). The
24 elements were the basis for an online
survey that presented one or more ele-
ments as a vignette (see Figure 1). Each of
267 participants saw different vignettes
and rated each one.
Note the rating question at the bottom
of Fig. 1: "Thinking about your current
bank experience how would you feel if
your bank offered these expanded ser-
vices?" W e put the question as a response
to an actual combination of features. W e
didn't ask the customers, "W ould you
want it or not?" because most people will
say they want most things.
The vignettes describe a complex situa-
tion, often with sorne elements that
appeal, and other elements that don't
appeal. So the vignettes force the partici-
pant to integrate all of the information
and make a judgment. Even though the
combinations looked random, they were
not. Rather, the combinations were devel-
oped in a systematic way so that the 24
elements really appeared as independent
agents. Statistically we could discern what
each of the elements contributed to the
rating.
Further, in the rating question we hint-
ed that this vignette would be a set of
expanded services. The participants are
reacting to something that could be, not
saying whether they would like it to be.
That is, in the interview we're acting as if
the services already exist, and the partici-
pant is rating the set of services, rather
than selecting from a "wish list."
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Finally, rather than having the partici-
pant grade degrees of "goodness," we ha ve
the scale move from less satisfied to indif-
ferent to more satisfied. W e actually allow
the new ideas to be far worse than the cur-
rent ideas, which happened in sorne cases.
Further, we ask the participants to com-
pare the new vignette implicitly to what
they currently are experiencing.
Different strokes for different folks
To keep things simple, we divided the 267
participants into four different segments
or groups, looking at the patterns for each.
(Don't divide people into more groups
than is absolutely necessary, because
when it comes time to create new services,
fewer segments are better from the view-
point of operations and marketing).
Individuals in a specific segment showed
relatively similar patterns in the specifics
that appeal to them. Individuals from dif-
ferent segments showed relatively dissim-
ilar patterns.
Whenever we divide people by their
"revealed mind-sets" (i.e. by how they
react to things, not by what they say
about themselves), we have to keep three
things in mind. First, we want to be able
to work with mind-sets that differ radi-
cally from each other. Second, we want to
be able to interpret these mind-sets.
Third, and most important, we want to
find opportunities to create a stellar bank-
ing experience by discovering which
mind-set a particular customer has, and
optimally addressing that mind-set.
The four segments for this particular
Table 1
RETAIL BANKING REPORT
research project (again, focused on tech-
nology-related services) are as follows:
Segment 1
(self-reliant online
banking seekers)
This segment comprised around 40%
of the participants. They really didn't
respond to much. About the only strong
element is the real-time feature ("W e will
answer all your requests in real time by
email, instant or text messaging"). It's
important to realize that not everyone
wants the next-gen bank. This first seg-
ment provides us with a dos e of reality-
and cautions us not to think that everyone
is waiting for this new bank.
Segment 2
(technology and high
security seekers)
This segment was about 20% of the
participants. They respond strongly to
security, and to security backed up by
technology. Thus they will really feel that
they have an improved experience if the
bank can facilitate transfers safely and
electronically (e.g. "Securely access and
manage accounts or funds transfers by
PDA, Internet or automated telephone").
They also feel strongly about security.
Segment 3
(collaborative online seekers)
This segment comprised about 20% of
the participants. They like working with
the bank's staff, in a collaborative mode-
e.g. "Faster loan application process."
Segment 4
(personal touch with
technology seekers)
This segment also comprised about
20% of the participants. They want sorne
feeling of connection with the bank, but
also want a feeling that they are recog-
nized as individuals. This idea appeals to
them, for example: "Manage all you bank-
ing needs with self-service state-of-the art
kiosk and be confident that live help is
available if needed."
The segments liked different things, but it's
important to realize that each segment except
"self-reliant online banking seekers" can be
t:TTIIy delighted by the correct choice of offer-
ings from this next-gen bank. This is what we
were looking for-the breakthrough ideas
that touched sorne of the customers, if not all
of them. Now we had the building blocks,
which could be assembled in any way we
wished. Plus, we hadan advantage-we hada
real sense of how the world works in the cus-
tomer's mind for these features.
Dialing a bank opportunity
We'd like to end this piece with a vision
of how a bank might engineer the future
using the knowledge obtained from this
and other similar projects. Let's do an
exercise that this bank's planner might
follow, to create three features, which in
total appeal to our three responsive seg-
ments-segments 2, 3 and 4, respectively.
(We won't bother trying to satisfy seg-
ment 1 because there was nothing in this
particular project that really appealed to
these people.) Continued on page 34
How a set of messages given toa customer will perform for customers overall and customers in the four mind-sets.
Choose a secure eye We have a secure Securely access and Base interest Total: Base plus
or finger security electronic signature manage accounts (constant) element contribution
sean to identify you for all in-branch or funds transfers
immediately in- services and by PDA. Internet
branch and at ATM transactions. So or automated
banking can be done telephone
anywhere at any time
All segments
4 2 3 31 40
Segment 1 Self-Driven
3 -4 -3 34 30
Online seekers
Segment 2 Technology/
10
-2
18
28 54
High-Security seekers
Segment 3 Collaborative
-1 4 6 31 41
Online seekers
Segment 4 Personal Touch
3
17
-2 26 43
with Technology seekers
30 OCTOBER 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com
T o do this, we use a "concept optimiz-
er," a tool to sift through lots of ideas, and
find combinations that work together
well. Then, we'll finish by developing a
"typing tool." The objective is for a bank
representative to sit with a new customer,
figure out which segment the customer
belongs to, and then look on the comput-
er to find out what features, what messag-
ing, what "tonality" appeals to this seg-
ment. This is where the notion of address-
able minds earns its keep. The bank repre-
sentative speaks now to the customer in
the way the customer wants, addressing
the mind-set of this particular individual.
Thirty minutes later, the customer and
the bank representative should be deep in
conversation about the cross-selling
offerings that appeal to the segment to
which the customer belongs.
Keep in mind we're not creating an
average experience. Instead, we are creat-
ing a far-better-than-average experience,
knowing that our target customer groups
are looking for different things. The bank
plays the role of master blender of these
different needs.
Table 1 (p.30) shows the results of sift-
ing through the data. The top row shows
the three elements which together drive
the response, and which attract the differ-
ent mind-set segments. We see immedi-
ately that, in this case, there are no big hits
that appeal to everyone, which prevents
wasting time looking for a magic bullet
that does not exist.
W e see that each of the three elements
does either well or poorly in a particular
segment. N ow that we ha ve chosen these
three elements we can take their utilities
or impact values and add that to the base
interest. The total represents the propor-
tion of people who would say that they
feel more satisfied.
If we didn't have to satisfy all three seg-
ments, but rather only two, we might fea-
ture a different, even better combination
of elements. W e wouldn't worry so much
about satisfying everyone. In fact, when
we look at Table 2 we find that the more
we focus on one segment, the more likely
it will be to create far more spectacular
experiences because we will have isolated
a group with a specific mind-set, know
what appeals to them, and not need to
worry about the other segments that may
be less satisfied. That is a business deci-
sion- to appeal to a larger group with a
good experience, or a mind-set segment
with a great experience.
34 OCTOBER 2008/ABA BANKING JOURNAL
RETAIL BANKING REPORT
Final step: "Typing" a new customer
to create an "addressable mind"
Let's now fast forward a bit, say three
weeks after the experiment has been run,
the data analyzed, the segments deter-
mined, and the selling messages devel-
oped. We know from looking at Table 1
that we can select a product offering and
experience for any segment, or any com-
bination of segments.
When a new customer comes in, the
bank can "type" this new customer as
belonging to one of the four segments,
and then "dial up" the offer for the cus-
tomer, once it is known to which segment
the customer belongs.
To continue the example, let's use the
actual data to create four questions to
type the customer. We see these questions
in Figure 2. Each question comes from
the original experiment where we discov-
ered the hot buttons, and the segments.
The typing engine calculates the compos-
ite score and discovers the segment to
which that customer belongs. The cus-
tomer has just turned into the "address-
able mind," whose responses to new
offerings can be predicted.
Depending on the segment, the appro-
priate products and services are presented
to the customer with the selling messages
which were previously determined
Ultimately, the bank representative now
knows what to offer and how to present
the offer.
What comes next?
lt is clear that those banks that can differ-
entiate themselves with an excepcional
customer experience will set themselves
apart from the perception of commodity
that customers have of banks.
Banks can change their advertising,
marketing and branding, but without the
individual customer experience to drive
those changes, the customer will see
through the facade and vote with their
feet by leaving. Today through systemat-
ic measurement, experimental design,
customer typing, and creating addressable
minds, it is possible to create that won-
derful customer experience which incor-
porates the customer needs with the
bank's unique DNA. BJ
For more information about the tech-
niques described here, read the full white
paper on www.ababj.com (Follow:
Content Central!Retail Ranking/
"Inventing the future of retail banking").
For further reading, try Selling Blue
Elephants: How to make great products
that people want before they even know
they want them, by H oward M oskowitz
and Alex Gofman (www.SellingBlue
Elephants.com)
hltp:/112. 109.160. 59JDG53H6/iwfrl0ne.osp Micr0$o0 lnlernel (xplorer
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Our banks customer servlces reps wlll help browse & use our o n-Une servlces
Manage all your banklng needs wlth a state of the art klosk and be confldent
tha.lltve help ls avallable lf you need 11
Thlnkmg bout your current Banklng Experience, how would yo u
feellf your bank offered these expanded servlces?
OJ[IJ[D8J[Dill0C!J0 )
l LESS Jalis fiod, 5The SAME,
9 10RE s:aw fi..!
rt .... t
Figure 2. Four questions to be presented to a customer by the customer service representative. The
customer rates each question and the typing engine determines which segment he or she is in based
on the composite response.
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