Why are credit unions changing vendors at a higher rate than banks?

Credit unions are almost twice as likely to change vendors as banks, with competitive churn rates of 7.6% compared to 2.7% for banks.  Churn Rate measures the number of institutions in a given time period that either change or drop a vendor contract.  Churn is broken down into two components: competitive churn, which measures the rate at which institutions are opting to change vendors, and consolidation churn, which measures uncontrollable factors like acquisitions or liquidations. The figure below (powered using data from FI Navigator) references total churn for the year ending March 31st, 2016.

FINPic

The figure reveals significant differences in churn between banks and credit unions.  But why is this difference so large? There are two possible drivers:

  1. Customer centricity: A focus on the customer could be a driver for higher churn. Banks and credit unions operate differently, and Celent has explored the variations in blogs and publications.  The mission statement of the credit union market has historically revolved around extreme customer centricity.  Over the last decade, mobile has become a critical component in quality customer service.  Emphasizing the needs of the customer could be driving credit unions to take more concerted efforts to maximize mobile/ digital, exploring competitive options more frequently than banks. Credit unions are low margin businesses that often give higher interest rates for products like auto-loans or deposit accounts through non-profit tax breaks.  Being member-owned, most of the smaller profits also go back into the business.  This creates a natural incentive to streamline the back-office, and credit unions have adopted cost effective technologies at higher rates. Thin margins combined with a focus on customer service could mean credit unions are more likely to evaluate provider options more frequently.
  2. Solution providers: Another perspective is that it’s the vendor market, not the CUs that are driving the churn. The vendor spectrum for credit unions in the US is much more diverse, with 43 vendors compared to 22 selling to banks.   This would reinforce the argument that competitive dynamics are more intense, and it would be reflected in sales cycles. With cost pressures that originate from their smaller size and lower margins, credit unions are more likely to look for alternative ways to provide products and services, leveraging mechanisms like Credit Union Service Organizations (CUSOs) to enhance the business.  Other similar joint ventures leverage cooperative arrangements to develop homegrown software products.  Consortiums not present in the banking market would introduce more competitors into the market, and as a result impact competitive dynamics.

Credit unions skew much smaller than banks (the mean credit union asset size is  $200 million vs. banks with around $2.5 billion), leading to a noticeably higher consolidated churn. Celent examined the pressures on credit unions here. As minimum viable institution size continues to get bigger, smaller institutions will be challenged to stay afloat. Vendors will face the risk that their customers are becoming targets for M&A activity resulting in more vendors competing for a shrinking demographic.

Credit unions need to think about how to best streamline their operations to remain viable.  This includes a mix of cost-effective customer service technologies like mobile banking.  Vendors need to have a better understanding of the competitive landscape into which they sell, as competition is intense.  Better data and detailed benchmarks can help vendors plan their strategy.

Celent is collaborating with FI Navigator to analyze the mobile banking market in financial services (in fact, FI Navigator wrote a great piece about credit unions and banks last year).  FI Navigator assembled a platform that leverages a proprietary algorithm to track every financial institution offering mobile in the US, as well as nearly 50 vendors.  Beginning with the first report at the end of April, Celent will be releasing a biannual examination of the mobile market. FI Navigator will also be making the platform available for further custom reporting and data analysis.  For more information on the nature of the collaboration and availability of data, go here.

The Banking Railroad of Innovation: Follow the River

I'm a big fan of the old movie classics. The TMC channel was a loyal companion during my graduate school days at the University of Illinois, offering a comforting black and white backdrop to frequent all-day programming sessions, and today I frequently call on TMC to get me through my daily hour-long treadmill sessions.

This weekend TMC offered up Jimmy Stewart as railroad detective Grant McLaine in 1957's Night Passage. A classic Western, McLaine was fired in disgrace over a railroad robbery carried out by his estranged brother, only to be offered a second chance to prove his loyalty to the railroad by being the courier for a large cash payroll being sent to the workers at the rail head.

Night Passage Poster

Grant's companion during the critical train ride to the rail head was young Joey.  Riding with Grant on a flatbed car as the train twisted and turned through the Rocky Mountains, Joey asked Grant how the railroad builders knew the best route through the harsh terrain.  This question gives Jimmy Stewart the rare opportunity to showcase his singing and accordion-playing skills as he responds by singing a song called "Follow The River".  The song ends with the chorus:

"Follow the river,
Wherever you may be,
Follow the river back to me."

Just as the railroad builders used the river to guide the design and layout of the early railroads, bankers have used technology to guide how banking services are designed and built.  In an interesting bit of historical irony, the first use of machine-based bank processing was being rolled out by the Bank of America just as Night Passage was hitting the movie theaters.

The system was called ERMA (Electronic Recording Method of Accounting), a machine-driven approach to electronically reading checks and processing the bank's accounts.  ERMA was co-developed by Bank of America and the Stanford Research Institute, launched in 1958, and was able to process 50,000 accounts per day.  While ERMA's initial capacity was small by today's standards, in those days, it represented an outlandish number in comparison with 10,000 accounts per month that BOA estimated it could process using existing paper-based manual methods.

ERMA ushered in the era of Big Iron in banking (a term also used to describe railroad locomotives), as improvements in the speed and capacity of what we today call the mainframe computer facilitated the rapid growth of the large banks during the 1960s and 70s.  Mainframe computers running programs powered by Rear Admiral Grace Hopper's newly developed Common Business Oriented Language (COBOL) became the river that banks followed when planning and building new banking systems like Electronic Payments (EFT), Electronic Tellers (ATM), and others to meet emerging customer demands.

Mainframe computers are interesting from operational processing perspective in that data (specifically customer accounts and daily transaction data) takes a while to load, but once loaded accounts can be processed at a lightning-fast rate.  While ERMA could process only 50,000 accounts in a day, modern mainframes can process millions of accounts in a matter of a few hours.  COBOL itself as a programming language was scorned nearly from Day One by the computer science cognoscenti as a crude and unstructured way to build an enterprise system. 

In 1975, a respected Dutch computer scientist named Edsger Dijkstra made the famous comment that: "With respect to COBOL you can really do only one of two things: fight the disease or pretend that it does not exist, " before concluding, "the use of COBOL cripples the mind; its teaching should therefore be regarded as a criminal offense."  Despite the withering criticism from academia, mainframe vendors and banks moved forward on the basis that the systems simply workedThroughput is the key to understanding how high-volume banking systems and today's railroad system works. 

A case in point is the Canadian National railroad's purchase in 2007 of the Elgin, Joliet & Eastern Line (EJE) to facilitate its rail connection of parts east and west through Chicago.  While the distrance from Gary, Indiana to Waukegan, Illinois is only 70 miles by car, CN now connects these points using EJE's 198 miles of track.  This makes no apparent sense until you consider that CN is now able to route cross-country trains around the busy hub of Chicago, where previously CN endured a variety of operational restrictions and traffic jams arising from the many at-grade crossings through the congested urban core.  To CN, routing traffic around Chicago rather than through Chicago resulted in more throughput and fewer train delays, more than compensating for the additional mileage.

And so it has gone for the banking processing. The use of oft-criticized COBOL and the unique operating characteristics of mainframe computers was tolerated as there were no other alternatives for banks requiring reliable processing at very high scale. That is, until recently.

Just as the river in Night Passage twisted and turned through the Rockies, the path of technological progress has twisted in an unexpected way to many bankers, as cloud services are now challenging the hegemony of mainframe-based banking systems. While a top of the line mainframe computer can be purchased with more than a 100 lightning fast processors, a bank can "rent" thousands, even tens of thousands, processors for 10 minutes, 10 days, or 10 years. Using software that is tuned to manage the distributed processing of bank accounts across thousands of virtual machines, banks can now meet and exceed the enormous throughput of their mainframe computers at a fraction of the cost.

The king of mainframe computing, IBM, clearly understands and has responded to the changing role of the mainframe in banking.  During the 50th Anniversary celebration of the mainframe in 2014, IBM rolled out its new vision of the mainframe as an uber-sized cloud server, allowing for the hosting of several thousand virtual machines at one time.  Last summer, IBM upped the ante with the annoucement of IBM LinuxONE Emperor, a z13-based server allowing for up to 8,000 virtual machines to be hosted on a single machine.

While banks have experimented with cloud services to varying degrees, most of the innovation has taken place at the channel services level, with new online and (particularly) mobile banking applications getting a technology refresh through the unique benefits of cloud services.  While each bank will need to build its own business case for the gradual porting of COBOL-based account processing systems to modern programming languges that are "cloud-ready", it is clear that cloud-based account processing will allow the level of agility in product development that is increasingly called for as channel and payment systems continue to evolve.

Cloud-backed innovation in back office systems has been slow to develop, with many banks citing security and the fear of regulatory issues as inhibitors to adoption.  As the recent two-part Celent report Banking in the Cloud:  Between Rogues and Regulators establishes, regulators in fact do not have any objections to banks hosting their banking services in the cloud, provided that banks follow the same standard of care (including encryption, access controls, data masking, etc.) that they manage for in their own data center.

In time, I expect that the banking railroad will continue to follow the river of innovation that is now leading us directly into the age of cloud services. The proven yet inflexible COBOL-based systems that have served the industry reliably for 50 years will be replaced with agile and cloud ready account processing platforms that will over time both reduce costs and the drive service quality improvements that banks will need to compete and survive in the increasingly competitive world of financial services.

Digital banking is ready to take off in Latin America

Digital is the new reality in Latin America. In a recent Celent survey 100% of the participants recognized that a scenario where all financial products get digitized needs to be addressed sometime in the next 7 years and 59% of them believe it needs to be addressed immediately. There is also a general consensus that most banks are entering into Digital late, despite some are already moving in that direction. Threat of fintechs is also a reality. Over 80 fintechs in Brazil and 60 in Colombia are a good sense that the industry is already being challenged beyond incumbents.

In other geographies Banks have responded to this threat by becoming extremely digital and also neo-banks have been launched to attract those customers seeking for a more friendly and digital relationship with its financial institution. Atom Bank in the UK, Fidor Bank in Germany, and mBank in Poland are only a few to mention. In Latin America the major milestones in Digital development we had seen were Nubank (Brazil – Market Cap $500M) and Bankaool (Mexico – ~$142M in assets), until March of 2016 when Banco Original (~$1,67Bn in assets) launched in Brazil.

While Nubank is focused entirely in offering a credit card with a customer friendly personalized real-time view of expenses and modern contact channels (email, call or chat), Bankaool is mainly focused in a checking account with a debit card, SME loans and investment vehicles.

Banco Original is the 3rd step in this digital only bank strategy in the region, becoming the 1st universal digital only bank in Latin America.  As part of its strategy to position the bank as different and innovative they launched this advertising campaign featuring Usain Bolt. As part of a strategic definition in 2013 the bank started a ~$152M investment over the period of 3 years to become a digital bank. They launched in March of this year . The bank has no branches and the interaction is 100% through digital channels and a call center. This move was central to its strategy of becoming a universal bank moving away of being solely focused in agribusiness.

While most of neo-banks and fintechs looking to change the customer experience in financial services have adopted in-house development to support their digital strategy, this is not the case of Banco Original which relied in a 3rd party Open API solution. Commercially available solutions that can support a digital only bank means that as an industry we are ready to take off. There is no reason now why other banks should not follow, and software vendors will do their part pushing their offering into banks of all sizes.

I believe that we are in a tipping point were banks in Latin America will need to re-think their investments and strategies towards digital: the threat is now real.

Two upcoming reports will be covering Digital and a couple of disruptive scenarios in the banking industry in Latin America, so expect to have more information soon if you are a Celent customer. If you would like to become a Celent customer please contact Fabio Sarrico (fsarrico@celent.com).

 

I hate being wrong: A precise look at mRDC adoption in the US

Nobody likes being wrong. I’m no exception.

Sometimes it’s not so much being wrong as much as being inaccurate. Here’s an example of where my best-effort estimates have been a bit off.

Mobile RDC (mRDC) has been a fairly hot topic and a mobile banking capability that has gained rapid and widespread adoption among US banks. But how rapid and how widespread? I’ve taken a stab at answering these and other questions over the past few years. Relying on a combination of financial institution surveys and RFI responses from the leading vendors, Celent has published comprehensive annual reports on the evolving state of remote deposit capture, including mRDC.

Back to the question…

Since empirical methods would be tedious and time consuming, I created estimates of mRDC bank adoption annually based on vendor-reported client base and implementation backlogs. It turns out that two of my last three annual estimates weren’t all that accurate. How do I know?

Last month, FI Navigator and Celent announced a collaboration to publish the industry’s most comprehensive report detailing mobile banking offerings on the more than 6,000 U.S. financial institutions that offer mobile banking and more than 50 vendor providers.

The report, Mobile Banking Quantified – Comprehensive Benchmarks for US Vendors & Institutions, will be available for download in late April 2016. The research leverages FI Navigator’s mobile banking data and analytics module, along with Celent’s industry research methodologies, to provide vendor and institution performance standards from nearly three years of month-to-month historical data.

Look at how my historical annual estimates compare to the more accurate FI Navigator data since mid-2013.

mRDC History

Back in 2013, vendors were implementing as quickly as they could. In aggregate, vendors reported over 700 banks and credit unions were under contract, but not implemented. It turns out that implementations proceeded faster than I thought, as my year-end estimate was 40% low! I did better in 2014, but estimated 9% high in 2015.

I look forward to the extraordinary precision and depth of insight Celent’s relationship with FI Navigator will bring the industry. For more information on the report and additional offerings, please go to http://discover.celent.com/FIN-Mobile.

Top trends in corporate banking webinar

Please join me on Thursday, April 21st at noon EST for an overview of the 2016 edition of our Top Trends in Corporate Banking report, which was published in March.

2016-04-18_15-40-50

Corporate banks continue to place an enormous focus on investing in digital channels to meet the ever-increasing demands of clients for enhanced tools while boosting security and fraud prevention. Despite this investment, corporate banking has lagged in terms of adoption of innovative technologies. To improve that performance, corporate banking lines of business are undertaking a broad set of initiatives to overcome the inertia that has left clients behind in terms of innovation. Among the top trends, we will examine the opportunities in trade finance and customer onboarding for improving efficiency and enhancing client satisfaction.  Other top trends include fintech partnerships, distributed ledger technology and open APIs and adapting liquidity management strategies.  I look forward to having you join us on Thursday! 

Click here to register

 

 

 

Congratulations to Celent Model Bank 2016 Winners!

Last week many of us at Celent were in New York attending our Innovation and Insight Day on April 13th. It is Celent's flagship event during which we announce Model Bank and Model Insurer winners and celebrate their achievements. In addition, the program includes keynote speeches from industry leaders and Celent analysts, plenty of opportunities to network with peers, and even to experience some of the latest technologies first hand, courtesy of our sponsors.

The theme of this year's event was "Financial Services Reborn", and the Museum of American Finance on Wall Street provided an inspiring setting to celebrate innovation in financial services. Craig Weber, Celent CEO, kicked off the proceedings drawing insightful parallels between the battle of Alamo and the future of financial services. It must have been the first time in Craig's career that he had to come up on stage to the soundtrack of hip hop music, an extract from the Broadway musical "Hamilton", but it set the tone for the rest of the day – to expect the unexpected and to be open to new ideas.

Both of our guest speakers – Nadeem Shaikh, Co-Founder and CEO of Anthemis Group, and Leanne Kemp, Founder and CEO of Everledger – thrilled the audience and opened everyone's eyes to the opportunities presented by Fintech and Blockchain respectively, while our colleague Will Trout spoke eloquently about consumer-led convergence. A big 'thank you' to all the speakers, as well as the sponsors supporting the event!

The rest of the day was all about celebrating the achievements of Model Bank and Model Insurance award winners. As many of this blog's readers know, the vision for Celent’s Model Bank research, now in its ninth year, is to spotlight effective uses of technology in banking. This year we received a record number of submissions – well over 100 – that came from all over the world; the nominations were spread equally between North America, EMEA and APAC. The award winners come from four continents and nine countries and range from credit unions and microfinance institutions to the world's largest banks.

Celent Model Bank 2016 winners are:

  Model Bank 2016 Categories

  Award Winners

  1. Digital Banking Transformation

  Citizens Bank, US

  DenizBank, Turkey

  Garanti Bank, Turkey

  Santander, US

  2. Omnichannel Banking

  BECU, US

  Beyond Bank, Australia

  Standard Chartered Bank, Korea

  3. Digital Payments and Cards

  Bank of America Merrill Lynch, US

  RBC, Canada

  4. Corporate Payments and Infrastructure Modernization

  Bank of China, China

  CBW Bank, US

  5. Cash Management and Trade Finance

  CIBC, Canada

  HBL (Habib Bank), Pakistan

  6. Security, Fraud, and Risk Management

  Alfa-Bank, Russia

  USAA, US

  7. Legacy Transformation

  Sberbank, Russia

  Umpqua Bank, US

  Vietnam Bank For Social Policies, Vietnam

  Model Bank of the Year

  Eastern Bank, US

As always, we published a series of reports with detailed case studies of all winning initiatives. Celent research subscription clients can access the Model Bank of the Year and individual category reports via our website.

This year we also introduced a new award, Model Bank Vendor. We wanted to acknowledge the vendor role in helping multiple clients achieve technology or implementation excellence, one of our judging criteria, and to extend our appreciation to the entire vendor community, which is instrumental in the ongoing success of the Model Bank program. Celent recognized two companies as Model Bank Vendors for 2016:

  • EdgeVerve Systems
  • Nucleus Software

Congratulations to all our award winners! We are grateful to have been exposed to so many extraordinary initiatives and the talented individuals responsible for their success. We look forward to continuing with the Model Bank program next year to identify and award the most impressive banking technology initiatives from around the world, and will begin accepting nominations again in September – stay tuned!

 

A good recipe from the Brazilian banking industry in times of need

The world seems convulsed these days. No matter where you live, something significant is developing around you or about to burst. Brazil has not been the exception. Economic slowdown and corruption allegations involving high officers in government and the private sector, have led to massive social protests. The Panama Papers only to continue to build […]
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Amazon Echo’s implications for banking

EchoToday’s banking watchword is simplicity. As ludicrous as it may have sounded a couple of years ago, the difference between three taps and two has become significant, and is getting more important every day. But what if there were no taps? I've always been a bit of a tech geek, but had resisted buying the […]
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The iPhone, the FBI, and the lessons for bankers

With today’s news comes the interesting development that the FBI has apparently used a “tool” acquired from an unnamed third-party white hat security firm to gain access to the locked iPhone of one of the San Bernardino shooters without requiring Apple’s cooperation.  This issue had been the subject of a recent tug-of-war between Tim Cook and the US […]
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Liquidity management: Staying afloat in turbulent times

External ForcesLiquidity management has recently begun to assume increasing importance as four key external forces create turmoil in a historically placid section of corporate treasury. The most significant regulation affecting liquidity management is Basel III, along with others such as money market fund reform. Taken together, they’re changing the way banks structure their balance sheets and […]
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