Archives for March 2009

IT innovation: any good for banks?

During interactions with banks it is becoming more frequent the request to organize regular internal workshops to talk about IT innovation and future programs The purpose of these workshops is to create a discussion forum among banking stakeholders, by injecting items for discussion on how, and when, will new technologies affect the banking business I have identified a number of items that deserve attention and further investigation, trying to assess the impact they will have on the business of banks going forward. SOA This loosely coupled modular services layer exposes the IT core system to the expanding number of front end solutions, and enables the orchestration of various back end services to create new products and processes. The most significant impact it is already having on the banking business refers to the implementation of payment gateways. Model-driven development (SOBA) This technique translates business models into executable components. We have already seen an application of it with a Trade Alerting Portal Solution adopted by ABN Amro Grid Computing The technique of sharing networked resources has a potential impact on the banking business in the support of the analysis of transactions, both within a single bank and between organizations, for AML purposes Green IT Dematerialization, virtualization, and mobile are the watchwords. We see a growing attention of banks to this innovative subject. HSBC’s “Climate Confidence Index”, and the “Green Globe Banking” award are but two examples. E-invoicing and Payment platforms The benefits of dematerialization can be further extended within the banking business through the implementation of a Collaborative Infrastructure. A unique platform that integrates information, physical and monetary flows on behalf of communities of interest (e.g., supplier consortia; regional industry districts; municipalities), which become themselves part of the infrastructure to provide services to other constituents. Agent-based modeling It is a technique based on software components, which continuously run, exist as semi-autonomous entities, and perform various activities for the completion of a transaction. In banking we see its application in the creation of a dynamic model of liquidity provision in a payment system (RTGS). SaaS (software as a service) It can turn into a fully hosted online banking and bill payment functionality across multiple channels (e.g., mobile devices, ATMs, kiosk, teller stations and contact centers). Social lending The application of Web 2.0 technologies and models in the banking business has already surfaced with Zopa, an exchange platform where people lend and borrow money with each other, sidestepping the banks. Co-creation A collaborative process facilitates the development of highly customized enterprise technology solutions, balancing between off the shelf and a completely customized solution. For banking, this means the possibility to build a solution for commercial and small business lending that processes and manages loans of all sizes. Event-driven supply chain finance Identify events in the physical supply chain that trigger correspondent services in the financial supply chain. Turning this into the banking world means the provisioning of supply chain finance services based on product lifecycle events.

What Banks Can do With Twitter

I seem to be hearing a lot about Twitter these days. Maybe it’s because I cover Web 2.0 and social media at Celent. Or maybe Twitter is just getting a lot of press/media coverage. It’s probably a bit of both. For those who are in the dark, Twitter is a tremendously popular micro blogging site. On Twitter, one can send out “tweets” which are basically short status updates. These updates are available for other users to see and appear in the feed of those who are your “followers.” Updates can be about anything – a link to an interesting article you read, linking people to your blog, updating people about an event or city you will be visiting, or just announcing what you had for dinner. Let’s face it – posts on Twitter can either be helpful or horribly useless to both the sender and receivers. It’s important for Twitter users to understand how they can tweet productively. Now for the interesting part – Twitter can be used for much more than personal use. Corporations, senior executives, marketers, etc. can use Twitter as a channel to stay in contact with customers, prospects and the general public. Banks are no exception and many are out in full force on Twitter. What should banks be doing on Twitter?
  • Marketing. New product announcements, press releases, events should be promoted on Twitter.
  • Building and solidifying relationships. Twitter can have a more personal feel to it, particularly if messages are exchanged. Customers value individualized attention and appreciate having their questions answered.
  • Solving customer service issues. Why not provide a way for customers to reach out to you? Twitter is another channel that can be used by customers to message someone at their bank. It’s certainly not going to take over for the good old telephone, but it is a quick way (if the bank uses it in a timely manner) to assist customers.
What are banks doing on Twitter (a few examples)?
  • Ask_WellsFargo – A Wells employee answering questions about products and dealing with customer service issues
  • chasebank – Occasional product promotion
  • 1stMarinerBank – A bit of everything. Even smaller banks are using Twitter!
  • Wachovia – Customer service, links to Wachovia blog posts, (2420 followers as of the time of this post!)
  • INGDIRECT – Tips, customer service, links to articles. Often refer issues to their customer support telephone line
  • BofA_help – Customer support
Others are developing strategies (WellsFargo is a good example). They have reserved their name so that squatters don’t grab it but are still trying to figure out how they want to use Twitter. I am not suggesting that Twitter take over for other channels. In fact banks should have support on their primary channels down-pat prior to embarking on experimental adventures. Twitter is a great way to communicate as long as it is used properly and in conjunction with other channels. Analysts can use Twitter too! On a side note, I have recently joined Twitter and plan to use it to broadcast what I am working on, what conferences I will be at, etc. If you would like to follow me on Twitter you can find me at jjegher.

Open Source in banks?

I’m at the Open Source Business Conference: Taking Open Source to the Enterprise. Do banks use open source? The answer is at least that some do. HSBC is a SUSE Linux user. Bank of America has a team of people responsible for open source. Their job is to push open source throughout the organization, so it is on an equal footing with traditional commercially available enterprise software. Tim Golden, SVP of Open Source Management and Compliance at Bank of America stated, “People are fine with open source here at Bank of America. We have a strategy and policy. My role is leveling the playing field with open source.” Linux is one of the core applications at the bank. When moving up the stack to application servers and databases there is a religious war. It is much more acceptable to the bank to have open source in the web tier. One of the disadvantages of open source in the purchase process is that independent software vendors (ISVs) can do a proof of concept (POC). Open source vendors generally can’t because they don’t have the margin and budget to support such activities. Their solution is to offer free downloads and let engineers create their own proof points. Traditionally open source vendors have brought 80% of the functionality at a fraction of the cost. Now open source has in some cases out-innovated traditional vendors. Firefox serves as a powerful example. Tom Berquist, CFO of Ingres, had an interesting take on open source in these tight economic times. As IT budgets are cut, CIOs have limited choices: *Cut new investments *Cut existing operational expenses (usually people) *Some combination of both. The former eliminates innovation at the firm, loses corporate value on existing projects that are terminated, and leaves the business units frustrated. The latter leads to loss of people with valuable skills and puts SLAs at risk. Using open source software is another way to cut costs without presenting either of the downfalls of the other options. He compared an open source stack of eclipse, JBoss, Ingres database and RedHat Linux versus a stack of Oracle JDeveloper, BEA Oracle, Oracle database, and Oracle Linux for a 4 CPU 8 Intel core system. Three year costs for open source were $118K versus $964K for the Oracle stack. For a new project, this is real savings. For an existing project there would be migration costs and training costs associated with moving things to open source. In times of shrinking budgets, open source software allows IT to avoid the pitfalls of the other two options: cutting new projects or cutting heads.

The “Davids” of the HSA Market

I recently attended an credit union roundtable session that focused on the health savings accounts (HSAs). This was my first professional exposure to the credit union industry, which introduced me to an entirely new lingo including “SEGs” (Select Employer Groups), “dividends” (interest) and “CUSOs” (Credit Union Service Organizations). By talking with the roundtable participants, I came to respect their dedication to their communities, something that I often find missing when I talk with bankers. Whereas banks try to “go wide”, credit unions often don’t have that option and instead try to “go deep” by offering more services to their customers (I even heard a story of a credit union that opened a used car lot to sell discounted automobiles to its customers!). The credit unions also won my respect in the healthcare banking context. The number of credit unions that offer HSAs is increasingly rapidly — from 244 in Dec ’06 to 585 in Dec ’08. During the same period, HSA assets grew from $53 million to $139 million. However, in a growing HSA market, the threat of the credit union industry “Davids” would appear to be of little concern to the bank industry “Goliaths”. After all, credit unions only hold about 2% of HSA assets market-wide. Howevever, embedded within the credit unions’ success, there is a cautionary tale for banks. As the HSA market matures and account holders become more aware of their portability options, any rollovers between credit unions and banks will largely flow one way — to the credit unions. The reason for this is the community presence that credit unions hold. All else being equal, account holders looking to rollover a more prone to choose a local financial institution over a remote one. However, all is not always equal, including interest rates, which are often higher at credit unions. Combined, these factors will likely work to credit unions’ advantage. Proof of this is already emerging; one of the roundtable participants announced that it had won a rather significant block of account holders away from one of the largest HSA custodial banks in the country. David’s slingshot is beginning to hurt…

Reducing Complexity in European Banking

In its fourth quarter 2008 results presentation, ING Group, the European banking and insurance conglomerate, has clearly identified that reducing its operational complexity was key to weather through the crisis and reduce dramatically its operational cost.

However, ING is certainly not an exception in the market, and the issue of complexity reduction is core to the cost reduction strategy of numerous European banks.

In fact, while most of the European banks have implemented best practices to reduce their operating cost and increase revenue, very few have addressed an issue well identified by industrial organizations: reducing operational complexity.

In the past decade, in order to decrease the impact of commoditization on their revenues, banks have dramatically increased the complexity of their product offering, their distribution reach, their pricing structure, etc. In addition, the level of complexity in European banks has dramatically increased during this period because of consolidation and acquisitions. An apparent paradox exists between scale and complexity (i.e., larger financial institutions are not able to consistently leverage economies of scale to mitigate the effects of complexity or reduce the amount of proliferation/duplication). In fact, as financial institutions grow, they tend to get more complex because of :

– Complexity of business model: Larger financial institutions tend to have more variety and differentiation in the customer segments served, products/services provided, and the countries/regions (and their respective regulatory requirements) covered.

– Incomplete or inadequate integration: Many large financial institutions are an amalgamation of smaller businesses that have been acquired over the years; however, in many cases the integration of processes and systems is incomplete or inadequate, thereby increasing complexity.

– Decision-making process: Decentralized decision-making is more common in larger banks, but this allows (and often rewards) business leaders to optimize their own products/services, channels, geographies, and business units vs. optimizing for the corporation.

– IT System strategy: Some organization grow so quickly that applications don’t keep pace. This often leads to IT customization, patchwork, and add-ons to support product/geographic and channel proliferation, leading to more complex systems

While implementing best practices at the operational level has certainly generated cost reduction, it has often failed to achieve the full potential of a strategic approach to cost management by not solving the consequences of complexity. Therefore it is crucial for banks, especially retail, to address the issue of complexity in a full front-to-back approach. However, this will require fundamental changes (e.g., change of business model) which are essential to achieve the long-term cost optimization of financial institutions.

Banks need to jump onto the PFM bandwagon

Wesabe announced today that they will start to sell their PFM offering (dubbed Springboard) to banks and credit unions. Wesabe is not the first vendor to start selling directly to banks. Earlier this year, Geezeo made a similar announcement. These are win-win moves for both the banks and the software companies: – Bank PFM tools cannot compete with the rich solutions offered by non-bank providers. They need to update their offerings in order to remain competitive and keep clients attracted to their sites. For more info see my post on PFM Meets Social Networking. – The non-bank PFM providers have been struggling to make money. Their products are offered free of charge to consumers and their online business models are questionable. Direct sales to banks will provide a much needed revenue stream. Expect to see more of this trend as we move forward. It will be interesting to see how this software will affect PFM usage growth at the banks.


Cash may no longer be King, but…

Lest there be any thought about cash going away, use of cash in the US continues to increase despite the rapid growth in the use of electronic payments. The Federal Reserve reports the dollar amount of currency in circulation has grown 88% in the past 10 years to US$770 billion in 2007 and US$889 billion in late 2008. Meanwhile, the amount of cash ordered and deposited through Federal Reserve Banks has increased 75%, to over 27 billion banknotes annually. This trend may seem reasonable in light of the US economic and population growth over the period. For perspective, per capita cash in circulation grew from US$183 in 1985 to US$2,537 in 2005 based on US Bureau of Census population estimates, or at a rate of 6% CAGR – well above the 4.2% inflation over the period. Cash usage is growing – absolutely. Meanwhile, cash usage at traditional point of sale locations has been remarkably steady alongside the dramatic growth in debit card usage. As a percentage of POS mix, cash declined from 39% in 1999 to 29% in 2008 according to recurring research by Hitachi Consulting. The data suggests debit card growth has primarily come at the expense of check usage at point of sale which has dropped from 18% to 8% over the period. There appear to be two dynamics at work. The first is our stubborn affinity for cash payments. Immigration trends as well as grey market economic activity also contribute to the sustaining popularity of cash payments for obvious reasons. Another factor has been the worsening economic conditions of late. 2008 has seen a return to an 8% CAGR of cash in circulation. The fourth quarter alone witnessed a 5.4% growth corresponding to US$45 billion in additional cash in circulation. This suggests the worsening recession impacted holiday spending, reversing the long-term trend favoring credit and debit card usage at point-of-sale. On top of that, there is clear evidence of cash hoarding as seen by the significant rise in the number of high value notes in circulation. Celent expects cash in circulation to peak in the next two years. So in addition to investments in alternative payment mechanisms, Celent encourages banks to revisit their cash logistics management systems. In many banks, there may be significant opportunity for cost savings. On the product side, a growing number of banks are being rewarded for their support of remote cash capture solutions. Remote cash capture will be the topic of a forthcoming Celent report.

Promising Future of Islamic Banking

Islamic banking has become a major global industry with a growth of 10% to 15% per year over the last decade, to reach between USD 700 and 750 billion of assets worldwide nowadays. Currently, Islamic Banking is particularly developed in the Middle East, is definitively on the rise in the Asia-Pacific region, and is currently in an infancy stage in North Africa and in Europe.

North Africa represents a large and still untapped market of nearly 200 million people, with 95% Muslims, except in Sudan where Muslims represent 70% of the population. Furthermore, with an average GDP per capita of US$2,334 in 2007, the North African region is richer than the African average (US$1,137). Islamic banking is still a niche market in North Africa. This could be explained by the fact that North African consumers are traditionally less conservative than Middle East consumers and are used to conventional banking products and services. Furthermore, governments have not particularly encouraged Islamic banking development in their countries. However, things have recently begun to change with:

– New Islamic banks entering these markets; for instance, the UAE Noor Islamic bank which opened an office in Tunisia in June 2008

– Governments creating new regulations; for instance, in 2007, the Moroccan Central Bank decided to authorize certain kinds of Islamic financial products, called alternative financial products, in response to consumers’ demand.

The demand for Islamic Banking product exists in North Africa but also in Europe, where Muslims population is estimated at nearly 15 million people, and is particularly significant in France, the Netherlands, Germany, Belgium, Sweden, and UK. UK has taken the European leadership in Islamic Banking since 2004, when the FSA authorized the Islamic Bank of Britain, the first Shariah compliant retail bank in Europe. In 2006, the European Islamic Investment Bank, the EIIB, also obtained a license from the FSA. In France, the government recently expressed its wish to change the regulation to allow Islamic banking, and the first Islamic banks should appear in 2009. In the meantime, two Islamic banking products have already been launched in 2008 in a French overseas department, La Réunion, by BFCOI, a subsidiary of Société Générale.

In addition to the large and untapped Muslim population, Islamic banking is currently beginning to attract non-Muslim customers, who are interested in this alternative way of banking. Indeed, a growing number of non-Muslims are turning to Islamic banking as customers, spooked by turmoil in the Western banking system increasingly see the sector as safe and more connected to the real economy. In my opinion, Islamic banking will benefit from this new consumers’ interest and grow even more quickly than it recently did.

Indian Banks : Safe and Sound in a Protected Economy

Indian banks enjoyed a competition-free era, operating under a protectionist regime, till 1991. The competition from private and foreign banks was hardly noticeable till the government liberalized the Indian economy in 1991. Ever since, the number of foreign banks has grown considerably and currently India has 29 foreign banks operating with around 277 branches and 1034 ATMs (as of March 2008). With the announcement of further liberalization on the cards, how has it affected the local banks?

In 2004, Reserve Bank of India, the central banking authority, announced the roadmap for the presence of foreign banks in the country. During the first phase, between March 2005 and March 2009, foreign banks will be permitted to establish presence by way of setting up a wholly owned banking subsidiary (WOS) or conversion of the existing branches into a WOS. At the end of the first phase, the government would conduct a review and decide on the further actions related to the extension of the national treatment to WOS and permission for mergers/acquisitions of any private sector banks in India by a foreign bank. In a way, this move has been a boon to the Indian banking system, as the local banks have vastly improved their banking processes and services in order to compete with the private and foreign banks. While it is unlikely that the foreign banks would compete in the rural and semi-urban segment, they have captured a good percentage of the urban customer base, from the public sector banks, with their customer-centric operations.

As of last year, many foreign banks were keen to open branches in India, including Royal Bank of Canada and Glitnir, an Icelandic bank. The public sector banks in India like Bank of Baroda and Canara Bank underwent rebranding exercises and image makeover, anticipating competition from foreign banks. However, one set of words played a spoilsport on all such plans : Global Financial Crisis.

As a result of the crisis, many foreign banks in India are reworking their strategy. Some of the banks, like Royal Bank of Scotland (ABN AMRO) and Citibank, are trying to sell off their India businesses. The Reserve Bank of India, which had proposed the review, may not ease the current norms, considering that it would open the financial system to the banks which have been faring badly in other countries. For the time being, the local banks can heave a sigh of relief and concentrate on their own expansion. With the General Elections happening in the next couple of months and a possible change in the government, the proposed liberalization policies may not see the light of the day in the near future.

The Premature Reports of HSAs’ Demise

With the election of Barack Obama, there was much discussion about the overhaul of the U.S. healthcare system, a conversation which continues in earnest today and will likely go on for months, if not years. Many policy and industry analysts stated that under the Obama administration, the U.S. would move to a European-style single-payer system and that we would see the end of consumer-directed healthcare (CDH) plans (i.e., higher deductible plans coupled with tax-advantaged medical spending accounts). As a result, some declared, health savings accounts (HSAs) would soon go the way of the dodo bird. As a healthcare banking analyst, I watch healthcare policy from the sidelines, not from the middle of the playing field. However, I must say that in my research of President Obama’s policies as well as of state (e.g., Massachusetts) health care reform, I have never come across any indication that CDH plans are off the table. Furthermore, there does not appear to be any serious discussion about moving to a single-payer system anytime soon. Importantly, there are rumblings in Washington that health care benefits should be taxed to help pay for health care reform. This means that your employer’s health care subsidies (e.g., the portion of your health insurance premium paid by your employer) may begin to be taxed. Such a move would certainly drive more consumers to adopt CDH plans, as such plans have lower premiums and thus would be subject to less tax. More CDH plans = more HSAs, and the dodo bird analogy becomes untenable. However, all is not 100% rosy for HSAs. Many employers contribute to their employees’ HSAs; as health care benefit taxation details are still sketchy, it’s hard to say if such contributions would be taxed too. If so, this would mean very bad news for health reimbursement arrangements (HRAs), which are medical spending accounts that consist solely of employer-provided funds.