Archives for June 2011

Fiserv and CashEdge Prepare to Step into the Ring

It’s been a really busy week on the M&A front – S1/Fundtech, Intuit/Mobile Money Ventures, and now Fiserv/Cashedge. Yesterday, Fiserv announced that it has agreed to acquire CashEdge. It’s a strategic move on the part of Fiserv and I can think of numerous reasons for the acquisition. Let’s explore a few of the areas:
  • P2P Payments. Fiserv has a ZashPay, CashEdge has Popmoney. Why does Fiserv need two separate solutions? Well, there is lots of activity taking place in the online banking space with regards to P2P. The recent announcement of ClearXchange (a joint venture of Bank of America, Wells Fargo, and JPMorgan Chase) has raised a lot of eyebrows and everyone is wondering whether this is the P2P payments silver bullet. Can a joint ZashPay/Popmoney solution take on the likes of ClearXchange? Should it take on ClearXChange or attempt to be part of it? This is still a murky area as there are lots of unknowns, but I would love to hear your thoughts.
  • Account Aggregation, Online Banking, PFM. There are 3 main account aggregation players – Yodlee, Intuit, and CashEdge. Fiserv’s acquisition of CashEdge now allows them to offer account aggregation and tie it into their Voyager online banking solutions. No doubt this is also a major stab at rival Intuit and their online banking and account aggregation endeavours. CashEdge is also an Intuit partner, and this now opens up doors for Fiserv to step in and attempt to woo Intuit online banking customers. It’s also a stab at Jack Henry, as CashEdge is the aggregation provider for their PFM solution. It could also be a stab at firms like ClairMail, another CashEdge partner. Will Fiserv box out Intuit, Jack Henry, and ClairMail customers with this acquisition? Things could get mighty sticky as competition is clearly heating up.
  • Small Business Payments. This is a fast growing area, and one that is changing rapidly as banks and vendors attempt to simplify the online banking money movement process. Every online banking provider needs to work on this area. For more info, see my small business online banking vendor evaluation report.

This is clearly a strategic and competitive move on Fiserv’s part. I believe it holds a lot of potential, it will all come down to execution and how the joint entity will work with its banking clients and prospects. I’d love to hear your thoughts.

Durbin D-Day

Finally, the wait is over. Yesterday (June 29th), the Fed’s Board approved and announced the final version of Regulation II, known in the payments industry as the Durbin amendment, which sets out the rules for debit card transactions. Financial institutions feared the worst after the initial proposals annouced in December last year. Today, banks can breath a sigh of relief. In both of the major issues on the table – the interchange caps and the rules for network exclusivity – the Fed’s final rule is better than the proposed worst-case scenario. Visa’s stock closed the day at $86.57, up by $11.29 or 15%. For the interchange, the Fed settled on a cap of 21 cents on transactions that fall within the regulation’s scope. Furthermore, the banks can charge an additional 0.05% of each transaction’s value. Finally, another 1c could be added if the banks’ fraud-prevention systems were deemed adequate by the Fed. Given this, an issuer still needs a $100 transaction to break-even based on the issuer’s average transaction cost of $0.27, which was outlined in the Industry’s comment letter to the Fed during the consultation period. However, it is a significant improvement over the originally proposed cap of 0.12c per transaction. For network exclusivity, the Fed opted for Alternative A, i.e. the issuers will have to place two unaffiliated marks on every debit card, which is most likely to translate into one signature and one PIN network. Again, this is not as drastic a change as it would have been under Alternative B, which would have demanded two network choices for each method of payment (i.e. two signature and two PIN). Even though the final rules are not as harsh as the worst-case proposals, the financial industry is still worse-off and will have to adapt. The retailers should be declaring victory, however, instead, The National Retail Federation expressed “serious disappointment” and called the final rules “a major loss for American consumers.” The new rules will go into effect on 1 October, 2011. The cloud of uncertainty has been lifted and the industry can get on with final preparations and implementation. The numbers can be plugged into the scenario models built up by various institutions over the last year to finalise the expectations of impact, the relevant systems can be upgraded accordingly and the contract negotiations (e.g. around network affiliations) can proceed with certainty. Of course, as we all continue to study the final rules, more questions will emerge. And, as the dust settles, there will be unexpected outcomes and consequences of this momentous ruling. But this morning, the US financial institutions should reflect that it could have been a lot worse.

Fundtech & S1 – A Match Made in Heaven?

Earlier today, S1 announced that it had joined forces with Fundtech. This merger of two well known payments and electronic banking solution providers has a lot going for it. For the most part, these two firms have complementary product sets. As a single firm, they now have the capacity to be a global player, serve clients of different sizes, and provide complete front-back end solutions. It sounds rosy on paper, but it’s not going to be that simple to pull off. Don’t get me wrong, I think this transaction has a lot of potential, but let’s explore some of the finer points. What Works:
  • Complementary product sets. Here are a few examples, there are several more. Fundtech has a vast array of payments solutions that it sells to large banks across the globe. S1 has payments solutions as well, but they have been focused on a different slice of the market – small banks in the US. S1 has a suite of online banking products for retail banking, Fundtech does not.
  • Common goals. Both firms want to own as much of they can of the electronic banking and payments (front to back) landscape. Both companies have been actively investing in their solutions. They now have a library of solutions that can serve banks of all sizes around the globe and they can provide solutions for retail banking through corporate banking.

What’s Going to Hurt

  • Product Overlap. Not surprisingly, there is some overlap. The key area of overlap is online banking for businesses/large corporates. S1 has two solutions – one for large financial services firms (LFIN) , the other for small banks (CFG). Fundtech has two solutions – CashPlus and Global CashPlus. Both firms also have mobile banking solutions that serve business customers. For the moment, all of these solutions will continue to run. I have no doubt however that over time there will be some product consolidation. I can’t see how the firm could justify the expense of keeping these all alive. This will of course take time, particularly since S1 clients will not want to switch to a Fundtech solution and vice versa.
  • M&A doldrums. As with any firm that goes through a merger, there is going to be a lot of energy placed on nitty gritty M&A activities. This redirection of energy could stifle innovation and creativity in a space that is innovating at a very rapid clip. This could allow competitors to leapfrog ahead.

I think it’s interesting and smart that the investor presentation focuses on transaction banking. The title of the investor presentation is, “Transforming The Transaction Banking Landscape.” Transaction banking has been a really active and popular space over the last few years. Whether it’s payments or online banking, solutions geared at corporate customers is where the revenue is at.

Cheques checking out? Not any time soon

I was pleased to be able to speak at Payment Strategies 2011 again two weeks ago. I think this is the third year I’ve been asked to share my thoughts, and as always there were some good speakers on the agenda. The page has videos of the speakers, so I’ll let you decide whether I was one of them! But there was one particular thing I wanted to draw out.

The theme of the event was very much around efficiency and improvement of payments processes. Peter Finlayson of The UK Payments Council as always gave a very frank and balanced view of where the industry was, and where it ought to be going, with much of the focus on cheques. Those of you who have been following the UK payments industry will remember the announcement by the Payments Council to manage the decline of the use of cheques in the UK by 2018. There have been a number of carefully worded statements, such as the need for there to have been a suitable replacement product in place. This is partly a reflection of what is in the power of the Council to deliver – it is a strategic body for the industry, and in effect only has power to close the clearing scheme, rather than ban paper altogether.

Why does this matter? In context, cheques have been decline since 1990, with a fall of over 40% in the last 5 years alone. In 2010 cheques accounted for 7% of non-cash transactions in the UK, down from 27% in 2000. A number of large retail organizations, such as Shell and Tesco, have already stopped taking cheques as a method of payment. Surely then corporates are in the vanguard of removing cheques altogether? Isn’t everybody in agreement about the move to end cheques?

In my session, I spoke about the efficiencies that a corporate could achieve in its payment processes, highlighting things such as data validation to improve STP and e-invoicing. Recently I’ve been discussing (and more on the theme soon) the fact that payments is entering into a third age, where its not so much a “payment is a payment is a payment” but “data is data is data”. As such, I decided to informally poll the audience on how data or paper driven they were. I asked which corporates still sent and/or received cheques as a method of payment. Bearing in mind that the audience was primarily multi-national organisations rather than SMEs, I was shocked to see that every hand went up.

This shows the scale of the challenge. Whilst much work (and quite rightly) is being focused on more vulnerable groups such as the elderly, there is obviously still a massive gap still close on corporates. With Faster Payments available for corporates, its not as if there aren’t viable, and frankly, better solutions available. The reality is that this will not be a cheque replacement project, but a business process transformation project. Paper is as much a habit and process, as it is a payment type.

Managing Mobile RDC Risk

Chase is the leader in mobile remote deposit capture (RDC), with more customers depositing more checks than anyone else in the market. I just received a notice from them that is essentially Chase practicing good risk management. Dear Chase Customer: You are receiving this message because you are enrolled in Chase QuickDepositSM. We want to provide you the following updates for this service.
  • You may deposit as much as $1,000 on any day and as much as $3,000 over any thirty (30) day period.
  • Federal Reserve Board Regulation CC (availability of funds) does not apply when you send us images of your electronic checks. Generally, you will be able to withdraw funds by the second business day after you make a deposit. However, we may delay access to your funds based on factors we determined in our sole discretion.
  • We may return or refuse to accept all or any part of a Chase QuickDeposit transaction at anytime. We are not liable if this would cause outstanding checks or other debits to your account not to be honored and returned.
Fundamentally they are limiting risk by limiting deposits and limiting availability. The first is pretty self-explanatory. The second takes into account that within two business days using image clearing, Chase is most likely to know that funds are good. This avoids the risk of intentional or unintentional duplicate presentment: a customer takes a picture of the check twice, perhaps at the same bank, perhaps at different banks. About 75% of all banks Celent surveyed have enterprise wide duplicate presentment monitoring, so if the check is presented twice at the same bank, it is likely to be discovered and submitted for clearing only once. If the check is deposited at two different banks, it will be submitted for clearing twice. The bank issuing the check will deny the second deposit attempt. Chase wants to make sure that it isn’t the second bank having already making the funds available. Customers are likely to accept this with no trouble. Using mobile RDC allows the customer to deposit the check immediately upon receipt, rather than waiting until the next trip to the branch or ATM. The check could sit on the consumer’s desk for days. In exchange for the convenience of mobile RDC, the customer may need to wait an additional day for availability. It’s a fair trade off and a good move by Chase that I expect other banks will follow. How is your bank managing mobile RDC risk?

Celent Model Bank Awards 2011

The capstone of Celent’s Innovation and Insight Day held in Atlanta, GA last week was the recognition of Celent Model Bank award recipients for 2011. For the most part, it’s not much fun to be a banker these days. The news media, consumer advocates, regulators and politicians alike seem to make bank bashing their full-time job. In sharp contrast, Celent sought to celebrate financial institutions doing things well. The picture below shows this year’s Model Bank winners that were able to accept the awards in person.
Celent Model Bank 2011 Award Winners

Celent Model Bank 2011 Award Winners

Pictured in the back row, left to right: • Rick Robel, EVP, Operations & Technology, American Savings Bank • Andrew Lederer, VP, Business Process Manager, Kenebunk Savings Bank • Paul Garofallou, VP , JPMorgan Chase • Basil Lyden, Sr. Business Dev. Exec., Temenos (on behalf of Metro Bank) • Joshua Guttau, President & CFO, TS Bank • Jun Seong Han, Head of New Business, Hana Bank • John Finley, SVP Digital Channels, Bank of the West Pictured in the front row, left to right: • Karl Lamar, VP & Product Manager, Receivables, JPMC • Pete Ingles, SVP, UMB Bank • Stephen Irish, EVP & COO, Enterprise Bank • Alicia Moore, VP & Head of ATM Banking, Wells Fargo • Rachael Diamond, Sr Client Rel. Mgr., Citibank • Bill McNamara, EVP & CIO, Union Savings Bank • Sandy Dixon, EVP & Group Exec., Extraco Banks Here’s a very brief sampling of some of the celebrated initiatives: Bank of the West began its Future Bank initiative in 2007. The purpose of the project was to create a new retail operating model by reengineering systems and processes that would allow reallocation of local resources. The new retail operating model was facilitated by a significant technology change which it implemented alongside comprehensive business process redesign over a period of three years. Results included impressive improvements in teller and platform operational efficiency as well as sales effectiveness. Citi Prepaid Services has a number of success stories to its credit. All are examples of listening to customer needs and responding with innovative and effective payment solutions that reduce cost and improve user experience. Celent recognizes two initiatives Citi Flu Care and Citi Plasma Donation Solution. Over a span of six years, Extraco Banks implemented multiple projects designed to significantly improve its multichannel delivery effectiveness. Its online banking channel now offers online account opening, online lending, live chat, and a life event assistance tool. The majority of its ATMs have been replaced with deposit automation units. Its branch channel has been transformed through technology, organizational redesign, and rigorous workflow improvements. The result was significant efficiency gains, happy, well-served customers, and, as the bank says, a “boringly profitable” business. Hana Bank has gained attention by launching the first smartphone banking service in South Korea. The bank distinguished itself with an array of novel and innovative features including GPS service, Coupon service and mobile PFM. Hana Bank now enjoys nearly a quarter of a million smartphone banking users. JPMorgan’s US Dollar Clearing—Asia Direct, offered by the firm’s Treasury Services business, is the first payment solution to provide direct access to multiple regional and in-country US dollar clearing systems in China, Hong Kong, Japan and Taiwan from a single US dollar account. Clients are not required to establish separate accounts in each country of clearing, resulting in better cash concentration, lower fees, simplified funding arrangements, and less time spent on reconciliation activities. The product has been a win for customers and the bank as well, contributing to a 20% increase in JPMorgan’s Asia revenue from 2008 to 2010. Our hats are off to these banks and their vendor partners for the vision, innovation and hard work that brought so many quality initiatives to market. Celent is accepting nominations for the 2012 Celent Model Bank awards and will be actively soliciting nominations beginning this fall. Nominations can be made online at:

The Unintended Consequences of Regulation

Last week I attended Celent’s Innovation and Insight Day in Atlanta and had an opportunity to catch up with many of our clients, both banks and technology vendors. One of the banks told me an interesting story how after Reg E came into force, they saw a drop in debit card usage and a significantly increased demand for cash. As many of you know, Reg E requires a customer to opt-in to an overdraft facility for debit transactions at the point-of-sale. The regulation’s intention was good – to protect consumers from unexpected overdraft charges. However, the outcome was an unintended steer back towards cash at the point of sale. Many consumers didn’t understand the requirement to opt-in and having had their card declined at the POS due to insufficient funds in their current account, lost confidence in shopping with the debit card. If there is no easy way to check balance and there is a risk that the transaction might be declined, then it is easier just to withdraw cash and use that for purchases instead. As a result, the bank is faced with an unexpected increase in costs and efforts to forecast cash demand and replenishing ATM’s in time to meet that demand. According to a meeting notice published on its website, the Fed plans to meet on June 29 to discuss “Debit Card Interchange Fees, the Fraud Prevention Adjustment, Routing and Exclusivity Restrictions and related matters”. As the Durbin saga is nearing conclusion with the final rules expected to be announced after the meeting, there is a risk that this regulation will also have far-reaching and unintended consequences. Celent has just re-published an Oliver Wyman article series called “Durbin Second-Order Effects“. Oliver Wyman’s partner Andrew Dresner and the series’ author argues that by reshuffling the relative costs between debit, credit and alternative payments, Durbin will have as profound an impact on other actors in the payments ecosystem as it does on debit issuers. Do you agree? Do you have other examples of unintended consequences of regulation?

Celent Banking Innovation & Insight Day Roundup

Last Thursday, Celent hosted it’s annual Banking Innovation & Insight Day. It’s the first time we have held an event in Atlanta and were pleased by the fantastic turnout. We had a broad range of panel sessions and presentations, all following a common theme – banking innovation. Bank Systems & Technology wrote up a brief article describing the theme for the event. Bart Narter welcomed the group with a brief presentation and we then launched into a fascinating discussion on branch of the future moderated by Bob Meara. Bob’s panelists from Extraco Banks and Kennebunk Savings Bank did a great job demonstrating to the audience why the branch is far from dead. Bank Systems & Technology wrote up an interesting article on the session. From there we switched into a series of sessions focused on mainstream, AKA electronic, channels. The audience was swept into online and mobile nirvana with sessions on the future of online banking (with panelists from ING Direct, Bank of Montreal, and BBVA Compass), payments innovation, and mobile banking (with panelists from Bank of The West, City National Bank, M&I Bank, and Bank of America). Last but certainly not least, awards were presented to the banks selected for our 2011 Model Bank initiative. Stay tuned on more about the model bank awards from Bob Meara. All presentations from the event are available for Celent clients to download on our web site. There were quite a number of tweeters in the room providing an event play by play. We invite you to review what folks had to say about the event on Twitter . If you would like to see a few photos from the event please visit our Flickr photostream.

USAA and UPS Stores: A Lesson in Branch Relevance

In October 2010, USAA announced its partnership with The UPS Store to act as an in-person deposit gathering channel for the bank – something USAA has done without for years and still managed to enjoy a deposit growth rate of roughly three times the industry average. Last week, USAA announced its Easy Deposit service is now available at 1,700 The UPS Store locations. From its start in 1983, the objective of USAA Federal Savings Bank was to leverage the company’s strong brand equity and high customer satisfaction among its insurance, credit, and brokerage customers to build a strong banking franchise. USAA struggled with attracting member checking and savings deposits— for good reason. Without a branch network, USAA relied on mail-in deposits. To facilitate, it has provided free self-addressed stamped envelopes for members. But this approach, with its delayed funds availability and high internal processing cost, was not a competitive proposition. USAA more recently pioneered desktop and mobile RDC solutions for its banking customers as an alternative for mail-in deposits which used to be its mainstay. The solutions have been a huge success. So why this? The obvious answer is that despite the overwhelming success of Deposit@Home and Deposit@Mobile, a significant number of USAA members aren’t opting in. Far from an indictment against remote deposit capture, USAA’s latest move – along with its opening additional full-service retail branch locations in Killeen, TX and Washington, D.C. speaks volumes about the enduring relevance of branch banking in our increasingly multichannel world. Moreover:
  • This move gives credence to the “branch is not dead” argument. Financial institutions serve a diverse customer base with differing needs and preferences. As much of a success as Deposit@Home and Deposit@Mobile have been, they have not rendered branch banking obsolete – even for USAA. Traditional retail banks should expect significant deposit transaction migration to self-service channels with desktop and mobile RDC, but not overwhelmingly so. There will remain – for at least a number of years – important customer segments for which RDC solutions won’t appeal.
  • On the other hand, retail branches are disturbingly devoted to deposit gathering. USAA’s move will give it quick access to 1,700 locations near its target geographic markets at a small fraction of the cost of traditional branches. Traditional banks that think they don’t compete with USAA need to think again.
  • As transactions continue their migration to self-service channels, there will be increasing demands placed upon retail FIs to re-think their branch models. The status quo is no longer sustainable. As transaction volumes leave the branch, so will foot traffic. FIs will have to create new reasons for customers to visit the branch and obtain proportionally higher cross sell ratios just to maintain. At the same time, declining transaction volumes will produce increasing unit costs on the remaining transactions. It’s not a pretty picture.
  • USAA obviously isn’t selling in The UPS Stores. Any cross-selling will be for UPS Store products and services, not those of USAA. This isn’t a problem for USAA because it has become adept at selling its wares without face-to-face interaction. Traditional retail banks need to learn this art! For most U.S. financial institutions precious little sales effort exists apart from the branch network. This too is unsustainable.
Again, welcome to the new normal! What do you think?

Cap One Acquires ING Direct

Capital One was the likely winner to acquire ING Direct’s US business, and they did. Few people do data analytics better than Capital One and a large direct business such as that run by ING is a perfect customer pool upon which to use the analytics that they have wielded so successfully in credit cards. Capital One was experimenting with direct banking in some markets, including my home of San Jose. Half the ads I saw in my yahoo mail were for Capital One. Direct banking is like the credit card business in that they are branchless business which rely on outbound messaging and lots of experimenting around price and marketing techniques to make a successful venture. Capital One knows how to run such businesses. Nevertheless, this is a bold move by Cap One. They have assets of $129 billion and they are a acquiring a bank with $92 billion in assets. This vaults them into the top ten banks in the US. What do you think?