As I wrote earlier this year, I have a confirmed case of iPhone envy.  As I scan industry news, that sense of envy is getting stronger.  This is because lately, I have been noticing iPhone apps that are leveraging the role of mobile devices in payments — i.e., the ability to receive/present data that encourages purchasing behavior.

For example, Starbucks and Target are using mobile devices to enable users to access promotional discounts, ads/news and even “soft” versions of prepaid cards.   The adoption of mobile functionality by such well-recognized brands is bound to raise consumers’ awareness that mobile phones have a role to play at physical points-of-sale.  It appears that retailers are not only using apps, but SMS/text and mobile browser modalities as well. 

Yes, I know this is not an iPhone…

In the case of iPhone apps, a consumer that shops at both Starbucks and Target has to go to separate locations (e.g., the Starbucks.com web site, the Target.com web site, the iPhone App Store, etc.) for downloads. Looking ahead, I wonder if the app distribution model may need some “tweaking”.   Retailers such as Starbucks and Target enjoy powerful brand equity and the temptation will understandably be for them to create their own, discrete apps.  Because of this, Starbucks and Target aren’t the first and won’t be the last retailers to launch their own apps. 

However, disparate apps will likely impede consumer awareness and adoption (as well as create a highly-cluttered iPhone deck).  Consumers are eventually going to want a lot more simplicity, and to be automatically updated across all their favorite retail brands. A retailer aggregator app might make a lot more sense, one that consumers instinctively access at POS.  If this were to happen, it would create interesting real estate for “top of wallet” reminders or promotions (”use your ABC debit card and get an additional 5% off”).  Hmmm, I wonder if a bank would be interested in something like this…

As I’m not (yet) an iPhone user, I’d like to hear from our iPhone-using readers — are there any apps available that do a good job of retailer aggregation and open the possibility of promoting a payment type?

Recent changes in Reg. E requiring banks to institute mandatory opt-in provisions for courtesy overdraft programs weren’t a big hit with most banks – for good reason. NSF fees comprised 74% of total fee income collected by US banks in 2007 according to the FDIC, amounting to nearly $30 billion. Right or wrong, NSF fees grew to become an important contributor to checking account profitability among US banks.

This occurred alongside the growth of “free checking”. The end result was a bifurcated model for checking account profitability. A small number of high fee and high balance customers have subsidized the majority of low balance customers with limited NSF behavior. The latter customers used to pay monthly maintenance fees, but those vanished with the advent of free checking - along with the perceived value of bank services.

The end result was unfortunate in a way. A majority of banking customers received banking services essentially free of charge and didn’t appreciate it, while a small minority of customers paid significant NSF fees (ostensibly due to their own negligence) and ended up offended. In addition, differentiating became difficult with most every bank offering generic free checking. There has got to be a better way to do things.

Bank of America announced significant changes in its overdraft policy this week. Going well above the call of duty, Bank of America announced it will effectively eliminate overdraft fees caused by debit card transactions (through denial of those transactions) while preserving courtesy overdraft on check or ACH transactions in a highly transparent manner. Customers will also be able to obtain emergency cash at ATMs with explicit fee notices. Moves like this are likely to go a long way in restoring trust and confidence among consumers. Good brand building in other words. But, there’s more to this opportunity than brand building along.

It may come to play that free checking as US consumers have known it will largely disappear as a result of the Reg. E changes. Opinions differ on the matter, but the associated revenue loss will be certain – and substantial. Many banks will be quick to seek alternative fee revenue. Savvy banks have a golden opportunity to use the heightened public awareness of bank fees to their advantage. The debacle can instead become a dream come true – an opportunity to redefine their value proposition. It won’t be easy, but opportunities like this don’t come around very often.

Last Friday I got a call from the fraud department of my credit card company asking me about several transactions. None of them were made by me and I declared them to be fraudulent. We went through the usual motions - card cancelled, new card will be sent in the mail, I am not responsible for the fraudulent transactions. I didn’t think much of it all, but did wonder where the fraud originated from since this is a card that I rarely use.

Yesterday I saw a tweet from @Monoprice talking about an investigation they were conducting due to customer complaints about credit card fraud. Interestingly enough, I had made a couple of recent transactions at Monoprice (I am a total gadget guy, and this is the best place to get HDMI cables) and started to wonder if this could be the source of the fraud on this occasionally used card.

What interested me about this situation was how the web was being used for status updates and how this can make or break the reputation of a business. When I got the call from the credit card fraud department, I had no idea where the fraud originated from. I happen to follow Monoprice on Twitter and noticed the update. They have a large following on Facebook as well and decided to use these sites to keep their customers informed. Should Monoprice have contacted me directly to inform me that I may have fraudulent transactions on my account or rely on mass communication channels like Twitter and Facebook? Or, should the fraud departments of the credit card companies be taking care of customer communication?

My take is that it’s good business for merchants to use channels like Facebook and Twitter to communicate with the public. I am also very thankful that the credit card fraud department picked this up. At this point, Monoprice has yet to confirm that there was a breach of some sort. In fact, their preliminary investigation shows that no credit card information has been stolen from them (see the message on Monoprice.com). The fact is however, that exposing the possibility of a breach to the public yielded a slew of people who experienced credit card fraud after shopping at Monoprice (see the posts on Facebook). This likely is not a coincidence. It will be interesting to see how this plays out and if the public will ever even find out if an actual breach took place.  However, now that all the dirty laundry is out hanging on Facebook, it will be hard for this merchant to balance the merits of the social web with the damage to its reputation.

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.