A few annotations from my current research on corporate lending.

According to the European Central Bank (ECB), bank corporate lending in the eurozone fell during December 2009 at an accelerating rate.
European banks must be wary, as I believe these are tangible signs that corporations of all sizes are taking countermeasures and are looking at alternative (i.e., non bank-supplied) ways to provision cash to run their businesses.

In the wake of the crisis, large corporations got so aggressive in reducing costs and conserving cash that they managed to create for themselves liquidity available to run the business. Indeed, recent ECB surveys report for these firms lower and broadly unchanged need for bank loans. This reflects the large firms’ greater ability to substitute equity or bond issuance for bank financing, the conditions of which became considerably more favorable in the second half of 2009.

As for small and medium enterprises (SME) in the eurozone, more than half constantly rely on internal funding (source: ECB), with significant growth trends in trade credit, leasing, hire purchase and factoring, and overdrafts and credit lines. The growth percentage in requests for bank loans remains, instead, single-digit.
This goes along with the percentage of SMEs expecting a deterioration in their access to bank loans in the first half of 2010, which continues to be somewhat larger than the percentage of SMEs expecting an improvement.

In parallel, I see a number of fund-raising initiatives that dis-intermediate the role of FIs:
• State-sponsored supply chain finance programs (e.g., CLEPA; European Bank for Reconstruction and Development; Nafin).
• Non-FIs capital lending (e.g., Ups Capital; Sainsbury’s; Wal Mart’s “Supplier Alliance Program”; Nestle; HP).
• Peer To Peer Lending (e.g., Kiva; The Receivables Exchange).

Perhaps naming these “Do It Yourself” corporate lending programs might be too presumptuous, but the signs of disaffection and dis-intermediations are there for banks to watch carefully and take the appropriate countermeasures.

As you can appreciate, this post is more of a note-book with personal annotations. More is yet to come, as I progress in my research endeavor.
Comments are, as always, very much welcome.

The recent Federal Reserve actions to limit bank overdraft fees have been widely reported. The US press seems all too eager to throw banks under the bus with assertions of all manner of unfairness (or worse) in describing the practice of levying fees upon allegedly unsuspecting account holders. Even written accounts of communications campaigns launched in compliance with the opt-in mandate for automatic overdraft protection assert nefarious intent among some banks. US banks have lots on their collective plates in today’s environment. The attack on overdraft fees is only making matters worse.

And the story may not be over. A proposed Senate bill, The Fairness and Accountability in Receiving Overdraft Coverage Act would impose further restrictions on overdraft fees, effectively eliminating bank’s ability to offer free checking services to millions of account holders.

In light of the moral high ground claimed by some supporters of the proposed legislation, one would think that banks stand alone in an otherwise ocean of fairness and serenity. But, this is hardly the case. I thought I would share an anecdote from my own experience while in Orlando for the BAI Payments Connect Conference at the Gaylord Palms Resort to ilustrate my point.

While at the event, I concluded it would be wise to return one day earlier than originally planned. In weighing the cost of doing so, I concluded that the modest fee associated with changing flights (previously $50.00) would be more than offset by not having to pay another night’s stay at the Gaylord. After making the new flight arrangements, I discovered that the fees associated with doing so had tripled to $150.00 Upset, but undeterred, I continued. After all, the hotel rates were expensive, so the savings would still more than offset the (shall I dare say unreasonable) fees imposed by Delta.

The Gaylord front desk staff were a delightful bunch who immediately took action on my request to check out. In less than a minute I had a detailed reconciliation of my two-night stay there, being politely reviewed by the highly trained hotel staff. The invoice revealed a “Resort Fee” of $11.30 per night. Interesting I mused. Charging a resort fee to experience a multitude of retail shops in close proximity to the hotel is like paying a cover charge to enter a shopping mall. At least I avoided the “Self Park” fee by taking a taxi to the hotel. I don’t recall the resort fee being mentioned at check-in.

Worse, was the additional levying of an “Early Departure Fee” of $56.50 – not including the additional Osceola County Tax which was assessed on top of the fee. Nearly $60.00 for leaving a day early? Heck, that could buy a good night’s sleep and continental breakfast at lesser properties. I asked the kind lady behind the front-desk if I somehow should have known about this so-called early departure fee, and sure enough – I had NOT opted in.

Maybe banks should consider operating some of the properties being foreclosed upon. At least one can earn fee income in the hospitality industry – for the time being.

Since 2007, there has been exciting growth in the U.S. mobile banking sector.  The number of FIs that have implemented mobile banking during the last 3 years continues to rise, and the number of mobile banking active users is one of the most promising adoption metrics in the banking industry.

However, one area that has seen relatively little progress has been mobile banking functionality.  By and large, mobile banking features today are not too different  from mobile banking features first offered in 2007.  Increasing FI saturation and rapid user adoption suggest that the mobile banking sector is on the verge of innovation. 

Research backs this up.  I am about to publish a new report that takes a look at the way banks and mobile tech vendors in the U.S. view the next few years of mobile banking. During the course of my research, both industries agreed about the importance of rolling out of new mobile technologies.  However, our research also unearthed that within the bank-vendor symbiotic relationship, very differing “world views” exist, especially in terms of scope.  Whereas banks look at mobile banking within the context of multiple channels, systems and organizational units, mobile tech vendors are naturally concerned with their specific field of expertise.  

In other words, banks cannot always move as fast as vendors would like, and tension can ensue.  An excellent example is P2P.  Whereas some mobile vendors have P2P solutions at the ready, banks need time to work out bank-wide implementations (e.g., offering P2P in the on-line and ATM channels).  Young niche vendors under pressure to gain revenue become frustrated, banks under the gun to build channel consistency feel “pushed”.

Stayed tuned for my report, which offers a look at how this inter-industry “marriage” is playing out.

Celent has recently published two core banking case studies that talk about cost reduction by moving to a modern platform:

Cutting Cost to the Core:How Philippine National Bank Saved 75% by Moving off the Mainframe

Tipping the Scale: Using Unix at One of the Largest Banks on Earth

In the first case study, Philippine National Bank (PNB)

Philippine National Bank

moved from Kirchman (subsequently Metavante, subsequently FIS) Bankway, a traditional mainframe, CICS, COBOL, batch system to i-flex (subsequently Oracle) FLEXCUBE running on Unix. They were able to reduce costs by an astounding 70%.

Celent then conducted a case study on one of the largest banks on Earth, State Bank of India (SBI).

State Bank of India

SBI has about as many branches as Bank of America, Wells Fargo and JP Morgan Chase….combined.

Yet, this bank decided to run its core system on TCS BαNCS on Unix to reduce their initial costs by about a third versus the mainframe. Operating costs dropped dramatically since the bank was able to drop headcount by nearly 90%!

Headcount dropped

If you are interested in lowering IT and operational costs, core systems can enable you to make the scale of change required in today’s banking environment.

FIS announced that Citi is going to be conducting a core migration and didn’t provide many details. I filled in some of the gaps in an article in American Banker.

For those of you who don’t subscribe to American Banker, This is a big deal with Citi moving their entire deposits from an internally developed legacy system to licensed software. Many of the people who developed this internal platform are no longer with Citi, so maintenance and changes are a challenge.

I am consistently surprised that banks that conduct a massive core migration are continuing to move to batch systems rather than move to real time systems. Please see the Celent report, Overcoming the Fear Factor: Migrating Core Banking Systems

Citi is moving to Systematics, the 30 plus year old mainframe, COBOL, CICS, batch system that runs at Bank of America, RBS Citizens, and lots of other large banks. If a bank is going to all the trouble of moving core systems, why not go all the way and move to real time, to say FIS Profile? To answer my not so rhetorical question, it will involve changes in item processing and increase risk, but there is certainly some reward to go with that. It’s much easier to have such an opinion when I’m not responsible for the conversion and change management.

American banks are clearly concerned about adopting the change that a real time system brings. Union Bank (formerly Union Bank of California) is moving to Infosys Finacle, which is a real time system. I eagerly await the results of this migration.

Will this start the long-awaited avalanche of core banking migrations? Not yet, but pressure is building. The Citi migration is not a game changer. The Union Bank migration may well be. The Canadians are quite active and there should be some announcements soon. I think that if Union Bank is able to out-innovate the competitors with their new real-time platform and reduce costs, the mass migration will start.

I am currently working on research that looks at the near-term (next 2 years or so) future of mobile banking in the U.S.  No doubt, a lot of reports have been written about this subject, so I am taking a slightly different approach, comparing the views of the banking industry with the views of mobile technology vendor industry. 

One area I’m researching is new front-end (consumer-facing) technology that is expected to be increasingly offered.  In terms of responses, both industries are pretty consistent in thinking that 3 front-end functionalities will soon gain traction; P2p payments, expedited payments and mobile RDC (remote deposit capture).  When I ask research interviewees about which of these functionalities will be directly monetized (i.e., gain fee revenue), the answers are far less consistent (stay tuned for the report to find out who said what…). 

However, no matter how the two industries envision monetization, as we may already know how monetization will turn out in the U.S.  This is because there are already a few examples of the above 3 functionalities in-market:

• P2P payments:  Mercantile Bank of Michigan is planning to launch a mobile P2P service (powered by S1 and PayPal) sometime in Q2 this year, for free.
• Expedited payments.  M&I Bank already offers mobile expedited payments, at $4.99 per transaction.
• Mobile RDC:  Three FIs (USAA, San Antonio CU, Randolph-Brooks FCU) already offer (or are planning to offer) mobile RDC, for free.

That both P2P and mobile RDC are offered for free is not surprising, if one looks at them (from a bank perspective) as replacements for paper checks.  It’s probably quite fair to assume that most banks’ check processing costs are multiples of their electronic transaction processing costs.  As such, banks should be very interested in migrating consumers from checks to P2P and/or mobile RDC — to do so, offering these two functionalities for free might not be a bad idea.

Back in late September 2009, rumors were flying regarding a Citi and Microsoft venture in the personal financial management (PFM) space.  It garnered a lot of attention, particularly due to Microsoft’s decision to exit Microsoft Money online. Folks were very curious, myself included, as to what these two heavyweights would conjure up.

The rumors were true, and late last month, Bundle.com was launched. Citi, Microsoft, and Morningstar are investors in the new venture. Jaidev Shergill, formerly of Citi Ventures, is the CEO. I visited the site with the expectation of finding a potential contender in the PFM space. Instead I found a site that provided a very limited view into personal financial management. The site allows users to compare their spending habits with others around them or in other areas. There is also a community where users can interact with one another and discuss personal finance.

I like the ideas of spending comparisons but this is not a new feature. It has been offered by Mint.com, Wesabe, and Geezeo for some time - all offer various flavours of community and social interaction. I see spending comparisons as a nice to have, not an absolute requirement (see my blog entry on this). I don’t believe that folks should model their spending habits according to others for one simple reason - most people don’t have good spending or budgeting habits. Everyone needs their own custom-made plan. Bundle.com is going to need to add a lot more to its portfolio in order to attract users and keep them coming back. Bundle is still in beta, and it will be interesting to see what else they add to the pot. I am also curious to see if Citi will begin to integrate any of the features into their  own offerings.

The more I think of it, the more I believe SaaS is not the right model for heavy-process transaction-based applications.
Certainly appropriate to manage data-intensive applications (e.g., customer interaction data à-la Salesforce.com) but not so fit when integration and STP are the business imperatives.
I don’t have a final position on this matter, but I will investigate more on it, as the impact on treasury management systems (TMS) can be quite devastating.
I’ll keep you posted on my research, and please feel free to inject comments.

I have to admit, I have app-envy.  Owning an old Windows 6.1 Motorola mobile phone, I look on with a certain longing at my friends, colleagues and fellow airplane passengers who enjoy endless, happy hours with their iPhone/Android/Blackberry ”iBeer” apps. I am even more jealous of their mobile banking apps, which seem to me the coolest retail banking technology ever.

But truthfully, I am beginning to get a bit dizzy contemplating the options that await once I finally trade in my current mobile device.  At the last count I saw, the iPhone App Store had 120,000 apps.  This got me to thinking about the plight of banks offering mobile solutions, which are increasingly feeling the pressure to keep up with the app explosion.   A very quick check on Wikipedia revealed the following:

• There are about 6 versions of the iPhone OS (operating system), with a new one in beta
• Since April 2009, there have already been 3 versions of the Android OS
• There are at least 30 versions of the Blackberry OS, more if you include those for the Canadian market — I stopped counting, but see for yourself.
• The Windows Mobile OS has been around for a while, but it’s probably safe to say that phones with 5 or 6 versions are still in use
• Let us not forget the Palm and BREW OS’

Yikes…  Undoubtedly, more of the above will come.  I’m no developer, but common sense dictates that this is a lot for a bank to keep up with.  Prioritizing, developing, maintaining and owning apps for a myriad of operating systems and mobile devices has got to be daunting and expensive.  In recognition of this, some banks are just creating apps for the iPhone, which often constitutes a large number of mobile banking users.  But what about addressing all the other phones and OS’ out there? 

It would seem to me that a bank has two choices to keep up with apps. The first is to outsource work to a vendor, whether a full-on mobile banking technology vendor, or an app “development shop”.  The second is to provide a minimal level of apps (say, just for the iPhone) in the nearer-term, and wait for a “post-app” era in the longer-term.  HTML 5 may have the potential to enable mobile browsers to offer the same functionality/integration with a phone’s native capabilities (e.g., locationing) that apps currently perform.  In either case, both banks and vendors have a lot to think about in terms of development roadmaps.

Again, I’m no developer.  I would love to hear from our readers.  Are apps here to stay?  Will HTML 5-enabled browsers eventually usurp apps?  Is there some other approach that can replicate the attractiveness of apps?

Remote cash capture (RCC) is the deployment of secure, validating currency accepting and recycling equipment (aka smart safes) at merchant locations coupled with information reporting and provisional credit mechanisms. Such equipment has been in use for nearly 15 years in the US as a means to improve merchant cash cycle control. The advent of bank-offered provisional credit based on validated currency residing at the merchant location has been a relatively recent phenomenon with the first implementations in 2004.

Its emergence has caused a surge in interest and adoption of these devices. The offering of provisional credit by participating financial institutions has significantly improved the merchant business case for remote cash capture. But, the float benefits involved are secondary. The primary benefit of provisional credit is its enablement of wholesale reengineering of the cash cycle within merchants and between merchants, armored couriers and banks cash vault networks. In the process, RCC removes the substantial cash handling burden historically carried by bank branch personnel, largely without the assistance of meaningful automation. In short, RCC is a win-win-win wherever the merchant business case warrants.

Remote cash capture relies upon four components.

1. Secure, in-store safes that accept, validate and count currency with a high degree of accuracy and dependability. Such safes have been available since 1995, but have only recently been linked with banks for provisional credit.
2. Same-day electronic transmission of the precise safe deposit information to central treasury and optionally, the merchant’s financial institution.
3. Ability and willingness for the financial institution to grant ledger credit for remotely validated cash. A growing number of banks are offering provisional credit based on the validated currency. Commonly, cash logistics providers guarantee the funds, covering any losses resulting from discrepancies discovered following physical cash verification.
4. Associated cash logistics servicing. This includes armored cash pick-up, change order servicing, web based reporting, deposit aggregation, virtual vaulting and equipment maintenance.
   

   RCC's many Moving Parts

Closed-Loop System
Historically, RCC has been a closed-loop approach to cash management. Each armored courier’s solution is proprietary. One provider’s safes will not communicate with another courier’s information system. As a result, interested financial institutions must invest in systems integration and file validation and testing efforts to get in the game. To do so with multiple armored couriers requires additional cost and ongoing overhead. As a result, only a few dozen banks have participated, and only the four largest armored couriers.

Fiserv is about to change all that.
Deposit Manager from Fiserv is a device- and transportation- agnostic solution, which means banks and retailers have the freedom to choose devices and service vendors based on the needs of each retail location, regardless of geographical footprint. With Deposit Manager, Fiserv owns the IT infrastructure, just like they do for ATM monitoring. This may be a game changer for RCC.

With Fiserv’s device and transportation agnostic solution:

• The barrier to entry for regional armored couriers will be significantly lowered. This will likely increase competition for RCC solutions at the courier level, improving service levels and settling prices.
• A significant number of smaller banks are likely to enter the fray.
• Service dynamics are likely to become fluid across the board. Historically, the armored couriers were in the driver’s seat, with the banks playing a secondary role – mere providers of provisional credit. Now, banks may start selling RCC while capturing the cash processing business too, rather than conceding it to the couriers. The couriers may evolve to play the lesser role – mere transporters of cash. Should this occur, participating banks could capture more than just deposits with RCC.

This will be very fun to watch! Thanks to a systemic change in how RCC can be delivered, the business case for participating banks may be a rosy picture over the coming few years. Wouldn’t that be a welcome surprise?