Archives for May 2009

Celent Launches Corporate Service

This research service focuses on corporate treasurers, aiming to deliver the latest thinking and insights around the business dynamics, operational practices, and technological underpinnings that impact corporate treasury departments. The service helps corporate decision-makers stay abreast of industry trends, analyze and seize opportunities, and monitor the playing field. Technology vendors can also benefit from the service by receiving strategic guidance and research insights. To learn more about this service, click here.

PSD: Payment Services Directive or Payment Services Distress?

I have recently attended a European conference on the Payment Services Directive (PSD), the legal foundation for the creation of an EU-wide single market for payments. As stated on the European Commission’s site, the PSD “aims at establishing a modern and comprehensive set of rules applicable to all payment services in the European Union. The target is to make cross-border payments as easy, efficient and secure as ‘national’ payments within a Member State”. Impressions from the conference Although all the major European PSD experts were in the room, there still was plenty of uncertainty, confusion, and open items I supposed were to be already resolved. The PSD has principally focused on consumer protection. For this market sector it is not too problematic for banks to adapt their rules to the Directive’s mandatory guidelines. Different story is when it comes to corporations. The PSD does not provide clear provisions and guidelines on how to deal with issues that have emerged since the Directive principles have been brought to the public. Bank representatives have argued about the difficulty of implementing some provisions into local legislation. In all response I heard, more than once, legislators saying that “the law is the law, and cannot be changed”. Looks like regulators and banks have for all this time worked in parallel without sharing views and without committing themselves to find the right compromise. This impression was further on validated after I heard regulators in the room lament they were “surprised” of the negative comments they heard from banks. Would banks have “raised the issue before, things could have been worked out”. Bottom line Although all parties claim this not to be the case, the Payment Services Directive is still perceived as a compliance exercise. The European Commission is completely missing the point of providing a clear business case for adoption. On their side, banks are still in a guilty “wait-and-see” mode. In either case, distress seems to be the right sentiment that surrounds the PSD program.

Credit Card Legislation

Large credit card issuers have been given relatively free rein in the past. That has now come to an end with recent legislation. Double cycle billing is now over. According to the American Banker, “The statute allows card companies to increase rates on existing balances only when a payment is 60 days or more late, a promotional rate expires, the rate is tied to a variable rate or the cardholder has entered a workout agreement.” While I can understand how card holders are upset if they find their rates increased unilaterally, it also prohibits banks from repricing for risk when the financial circumstances of the card holder change. I can think of a reasonable compromise: a happy medium would be to allow limited rate increases on existing balances (say x% every 3 months) given certain well-defined changes such as a drop in FICO score of greater than y. This is unsecured credit, and if risk increases so should price. Mortgages, car loans, and HELOCs have a collateral to help banks recover some of their loans in worst case. Credit cards don’t, so I think banks deserve A BIT, more flexibility. Credit cards shouldn’t give banks carte blanche to double cycle bill, apply payments to the advantage of the bank, repeatedly charge overlimit fees for the same event. Look for similar Congressional action on NSF fees tied to debit cards. With the government bailing out the banks, citizens are feeling empowered to question some of the more egregious practices.

Next Generation Online Banking Solutions

I have been receiving many inquiries from banks about what to do with their aging online banking platforms. They recognize the need to upgrade but question what their provider is suggesting or simply would like to know more about where the market is headed. I have spent a lot of time researching the market and I have a pretty strong opinion regarding the types of features/functions that banks need to offer. Usability and customer experience are paramount. Some of the key areas of discussion lately have been:
  • Vendor solutions. Should I stick with my current vendor or switch to a new provider? Who has the best solution out there? This is not a simple question to answer, and one that requires plenty of investigation. Celent has recently evaluated the vendors of retail online banking solutions (see the following report). Banks have been approaching us for custom evaluations where we plug in their specific requirements. I enjoy these projects as they always produce different results and I get to meet a lot of interesting and knowledgeable people.
  • Web 2.0 Rich Internet Applications. Banks are trying to sift through the hype. They want to build Rich Internet Applications (RIA) but are having a hard time defining the business case. It’s a slow-moving process, but banks are recognizing the shift and the need to remain competitive. Non-banks are leading the Web 2.0 charge and banks are realizing that they are playing catch-up when it comes to customer experience.
  • PFM. I have blogged about this extensively. Banks know they need to jump on the PFM bandwagon. Should they build a solution, buy pieces, outsource the entire thing? They also want to know how to integrate PFM properly into online banking. Lots of questions here.
  • Social Media. Twitter is the talk of the town. I am receiving a ton of inquiries about how banks can leverage Twitter and other forms of social media. Banks also want to know how to integrate this into online banking and customer support.
While retail online banking has been the subject of most inquiries, small business online banking has proven to be a popular topic as well. Most banks tend to lump their small business customers onto retail solutions and ignore their unique requirements. The last thing a bank wants to do is let a small business customer fall through the cracks. They require customized features, some of which will need to be scaled down from cash management solutions (e.g. ACH, wire transfers, entitlements). The same can be said for high net worth customers who may require sophisticated capabilities. In any case, I have been conducting a lot of online banking research lately and I am enjoying the fresh perspective that certain banks are thinking about or even starting to take. If you would like to discuss any of these please comment or feel free to send me a note (email / Twitter).

Clarity on the Future of HSAs (and Demise of FSAs)?

Last week, the U.S. Senate Finance Committee (the senatorial committee playing the lead role in healthcare reform), published a number of options that are being considered as ways to pay for healthcare reform. Very interestingly, the committee provided an insightful glimpse of how HSAs (health savings accounts) and FSAs (Flexible Spending Accounts) may fare in a reformed U.S. health care system. The really big news for the healthcare banking industry is that HSAs don’t appear to be targeted for elimination. In fact, this is huge news — many banks I speak with have been concerned about investing more resources in HSAs if Congress were to eliminate them . This is also an indication that HSA-compliant health plans may fit under a future definition of “sufficient coverage” (see my previous blog post). Having said that, some HSA restrictions are being considered, including contribution limits, higher penalties for non-healthcare distributions and independent adjudication of HSA transactions (i.e., the IRS would no longer “trust” account holders to self-adjudicate appropriate use of HSA funds). Just as interesting to me was the Committee’s suggestion that the tax benefits of FSAs (and HRAs, health reimbursement arrangements) could be restricted. An even more drastic option would be to elminate the tax benefits of FSAs, effectively killing them as a viable offering. At Celent, we have been long predicting a growth in HSAs and a decline of FSAs. If enacted, the Senate Finance Committee’s suggestions would likely accelerate our forecasts, as well as serve as disruptive force in the FSA space. Again, this is really big news.

Be careful what you ask for….

At the MasterCard analyst conference in Purchase, New York, executives talked about buying newspaper with your mastercard at a vending machine. The same goes for transit fares, lattes, etc. While a case can be made for the merchant and it is certainly a win for the associations, it is unclear how big a win it is for the banks. If a consumer buys a $1.00 newspaper, the vendor could argue that the interchange saves the merchant from handling the cash. It’s a win. The association gets increased volume and revenue for the network. They also get greater share of wallet. That’s a big win. The bank gets under 2 cents of interchange on a debit card. Is that a win for the bank? They have costs associated with processing of that transaction that certainly exceed the interchange revenue. Do banks want to increase these transactions? On an individual basis, probably not. It might be worth it if this brings them to the front of wallet for other transactions as well, it could be worth it. Cards are moving to lower and lower transaction amounts and banks need to think about the implications for their card business as these transactions increase.

The Risks of PFM Revealed

It was an interesting and dangerous week in the PFM space. I have been talking about the security risks and data privacy issues of PFM for some time and unfortunately my predictions have come true. This is what happened:
  • Rudder experienced what I would consider to be a serious data breach. Certain Rudder users were able to see the account information of other users. Twitter and the blogosphere were ablaze yesterday with details of the breach. A good summary can be found on the TechCrunch blog. This is a serious blow to Rudder and the entire consumer direct PFM space. This is an inexcusable gaffe and one that will have folks questioning whether they should be providing their account info to these sites.
  • may begin to sell “anonymous” consumer data (This Bloomberg article sums it up). This will raise the eyebrows of many users and I believe it is a privacy violation. Banks have all kinds of “anonymous” data on their consumers but they can’t just turn around and start selling it (they would likely get shot down by regulators).
These 2 events further reinforce my belief that PFM needs to be taken care of by a bank. Startups may have cool, next generation products, but they can’t necessarily be relied upon to protect your information and privacy. Don’t get me wrong, many banks have experienced data breaches, but they answer to a higher authority and are in a better position to help customers deal with the consequences.

Same-Day ACH: Whose Interests are being Served?

Most everyone knows that the Federal Reserve announced recently that it would launch a same-day ACH settlement option to be available in the second quarter of 2010. The service enhancement would be offered optionally, would require opt-in, and would carry ostensibly higher pricing to the originating bank (ODFI) to compensate the RDFI for the accelerated debiting of funds – although the pricing plan was not announced. The accelerated clearing option would be available only for select debit transactions, eChecks, but would not be offered for ACH credit transactions – at least not initially. Some debate surrounds the specific mechanisms surrounding same-day settlement of what for years was a future dated transaction. The Federal Reserve unveiled its plan which some argue unduly favors ODFIs. Meanwhile, a number of industry executives advocate an alternative appearing to offer a stronger value proposition to receiving FIs. The latter proposal, known as the “NACHA concept”, would destroy a longstanding ACH system attribute; float neutrality. The result would look remarkably like today’s check clearing system. The Federal Reserve’s proposed initiative appears adequately researched to us, and meets the stated objective just fine. Why the controversy? A larger question is this: Whose interest is same-day ACH supposed to be serving here? What hitherto unmet need is being met with either of these initiatives that cannot be met with an existing, alternative payment method? Celent finds the motivation for same-day ACH suspect. The often stated driver for same-day ACH is the growing network risk of direct sends occurring among several large banks, bypassing the network and thus “robbing” network operators of coveted transaction volume and its’ resulting revenue. A network based same-day option, some argue, would thus blunt the impact of such out-of-network activity by making ACH network based services more competitive. Not likely. Those same financial institutions have been clearing checks using direct exchange for years because doing so was less costly than using clearinghouses. Similar dynamics are at work with image exchange, and they will likely remain at work with ACH. A more viable argument for same-day ACH is to help the ACH network remain competitive with image exchange. Ironic isn’t it that after a decade of trumpeting the virtues of check conversion (faster returns among them) we are witnessing such a dramatic evolution of the ACH to improve its competitive position versus check clearing mechanisms? Ironic too is that the last ten years of ACH evolution, specifically check conversion, while bolstering ACH network volume, has also increased return rates and costs associated with the added complexity the changes created. Same-day ACH will likely only make matters worse by adding additional complexity. I suspect that when the dust settles a year from now, we’ll see relatively little same-day ACH volume. That is, unless we collectively think beyond competing payment systems and their institutionalized self-interests and deliver real value to consumers. Using same-day ACH for expedited payments would be one such approach.

Australia and Canada connection

Australia and Canada have many things in common: Both are members of the Commonwealth. Both have very consolidated banking industries. In Australia this is enshrined in the four pillars policy. In Canada, the top five banks control about 95% of all deposits. For more information, see the upcoming Celent report Too Big to Bail: Banking in the Developed World. Both industries have weathered the crisis much better than their American and European counterparts. In Australia there has been a wave of core banking announcements: National Australia Bank and Commonwealth Bank of Australia are moving to SAP. Westpac with St. George is moving in this area as well. Canadians are looking to Australia and wondering whether the time has come for them to move as well. While the Australian and Canadian markets are similar to the US market, this in and of itself will not trigger a wave of core banking migrations in the United States. On the other hand, there are rumors of two large US banks, both foreign owned, that are going to be moving to modern, real-time, core systems. Assuming that these deals go forward and implementations are successful, that will be the big trigger in the US. Note that I said assuming. People’s Bank was moving to a new core system and pulled the plug on that migration in mid-stream. If things do go well, these more agile banks will be able to offer new services more quickly and the business side at competitive banks will find it necessary to fund core modernizations or migrations to remain in the game. That’s when things get very interesting…..

The Importance of the Definition of “Sufficient”

Anyone who has even remotely paid attention is aware that there is a major debate looming over healthcare reform. More than any time in the past, it appears that there is a serious possibility that the U.S. healthcare system will be overhauled. I am often asked about the potential impact of healthcare reform on the healthcare banking industry. This is a very hard question to answer, as it is still quite early in the reform process and the positions of the Obama administration, key members of Congress and healthcare industry players are still somewhat fluid — they’re all trying to figure things out in unchartered waters. During the course of the healthcare debate, there has been a lot of attention placed on some of the more controversial components. These include universal coverage, “individual mandates” (requiring health insurance), taxation of insurance benefits, depletion of the Medicare trust fund and the biggie — a “public option” (government-sponsored health plans). My view is that none of these heated subjects will necessarily have a negative impact on healthcare banking. This is because they all have the potential to increase the insured population and make comprehensive (no or low deductible) plans relatively unattractive. Rather, what keeps me up at night is another healthcare reform component, the government’s definition of “sufficient coverage”. To be more specific, the goverment at some point is going to examine health plan design and determine what is “sufficient” health insurance coverage. This determination will almost certainly contain patient pay elements such as maximum deductibles and co-pays. The higher the patient pay amounts, the more likely that HSAs, HRAs and FSAs will occupy an ongoing space in healthcare. So what will sufficient coverage look like? Good question. Given the early stage of the healthcare reform debate, the specifics haven’t been worked out yet. However, the Massachusetts public health care model may provide some clues. Looking at the Massachusetts “CommonwealthConnect” on-line health insurance exchange, many plans have deductibles of $2,000 for individual coverage, but with “carve-outs'” (e.g., routine doctors visits, which are subject to co-pays). Such a plan doesn’t meet the requirements of an HSA-qualified plan, but plans designs are bound to change and co-pays can add up. Because of this, it wouldn’t surprise me if the plan design requirements for an HSA are loosened — the idea of a “Universal Health Account” untethered to plan design has been floated around DC in the past, and may be revisited. Just another example of seemingly daily twists in the health care reform discussion. Stay tuned.