Archives for May 2012

Please join me to hear about the future of mobile banking

I’m very excited about our upcoming mobile banking panel at Celent’s Innovation and Insight Day in Charlotte on June 13th. We have three great panelists: Wells FargoBrian Pearce, Senior Vice President, Head of Retail Mobile Channel, Wells Fargo Internet Services Group suntrustGinger Schmeltzer, Senior Vice President, Digital Channels, SunTrust Bank standardchartered Todd Schofield, Managing Director, Standard Chartered. We’ll be discussing what’s next in mobile banking and payments, covering such topics as:
  • Mobile RDC
  • Google Wallet
  • PayPal, friend or foe?
  • Mobile offers and couponing.
Please join us in the discussion; register for the event.

The “P2P” Payments Battle is Raging

There are so many choices when it comes to P2P services offered by banks. Yesterday, clearXchange announced that it has finally gone live for payments being sent between Wells Fargo and Bank of America. This isn’t the first big move in this space in 2012 – Fiserv announced in late February that it is combining ZashPay and Popmoney. There’s a battle taking place, and it’s not going to be pretty, especially as clearXchange adds more banks into its mix. What does this all mean? There are several important questions to be answered regarding consumer payment solutions offered by banks:
  1. Can banks dominate the P2P payments landscape? Will customers go to banks or alternative payments providers?
  2. Is there really a difference to the customer between a “P2P” payment or a bill payment (a payment is a payment)?
  3. How do mobile and tablet devices factor into the picture?




There are going to be some significant changes over the next few years to the consumer payment options offered by financial institutions. I’m going to address these questions and more in an upcoming report – stay tuned! In the meantime, please weigh in with your comments and questions.

Does EU Really Want to Ban Card Interchange?

Just as PayPal in the US was gearing up to challenge the established order of payment networks (see my previous blog), on the other side of the Atlantic, MasterCard (MA) received news that the European General Court upheld a decision by the European Commission (EC) that the scheme’s multilateral interchange fees (MIF) violate EU antitrust rules. MasterCard said it would appeal again, but if upheld, the decision could have profound consequences for card payments not just in Europe, but also globally. For those who haven’t followed this closely, back in 2007, the EC deemed MasterCard’s MIFs for intra-regional cross border transactions illegal, and ordered MA to withdraw these fees within 6 months. MasterCard appealed, and in the interim, reached an agreement with the EC which allowed it to establish cross border interchange rates, provided they do not exceed 0.3% for credit cards and 0.2% for debit card transactions on a weighted average basis. This week’s decision only applies to cross-border fees within Europe, which are “fall-back” rates when either bilateral agreements or multilateral domestic agreed rates do not apply. However, it’s been watched closely by all the interested parties, and already variuos domestic retailer bodies, such as the British Retail Consortium, are calling for the ban to extend to the domestic arrangements as well. Also, the court’s decision does not aply to Visa which has already cut its cross-border debit fees. The European Commission is now likely to turn its attention to Visa’s credit fees. In other words, while the decision’s immediate scope is limited, it sets a precedent and gives ammunition to the “anti-interchange brigade”. What makes this decision particularly dangerous is that it appears to be challenging the actual concept of interchange, rather than the level of fees or the approach by which they are calculated. As reported by Finextra, the court said that it “does not accept the arguments relating to the objective necessity of the MIF to the operation of the MasterCard payment system“. There is a big difference between arguing for a reduction in fees and banning them altogether. The ruling changes little in practice in the immediate term. MasterCard’s stock started the day of the decision at $426 and was trading at $416 just over 24 hours later, a 2.3% drop, which implies it was not unexpected news to the investors. Also, the story isn’t over – MasterCard already said they would appeal and I expect the pro-interchange lobbying efforts would only get bigger. The concept of interchange has been a cornerstone of four-party card schemes and many would say it’s worth fighting for.

PayPal’s March Into the High Street

The readers of this blog and Celent clients with access to our reports will know that when we talk about “mobile payments” we are careful to specify what we mean by it. While many talk about NFC payments, we prefer to discuss “mobile at the retail point-of-sale”, recognising the diversity of ways how a mobile could be used to make a payment. Last year we predicted that the biggest rival to the emerging NFC solutions (and a threat to the banks and card issuers) would be PayPal with its “wallet-in-the-cloud” approach to in-store mobile payments. This week PayPal announced two massive steps in that direction – a deal with two large POS manufacturers, Verifone and Equinox, and new relationships with 15 retailers, including household names, such as Abercrombie & Fitch, American Eagle Outfitters, Barnes & Noble, Foot Locker, JC Penney, Office Depot, and Toys “R” Us among others. This is in addition to the last year’s pilot with Home Depot, which has now seen the solution rolled out to 2,000 stores. Some of the press has already called PayPal the “world’s fifth payments network.” In case you are not familiar with PayPal’s in-store vision, essentially, you are checking out with your PayPal account rather than your Visa/ MasterCard/ Amex card or cash. You may have a PayPal card, but it’s simply a way to identify and communicate your PayPal account credentials. The same could be achieved by entering your mobile phone and a PIN into the terminal. The solution does not rely on NFC, so the consumers don’t have to purchase NFC-equipped handsets and merchants don’t have to do hardware upgrades to their terminals. Usually, software upgrade is sufficient, which is why the deals with POS manufacturers as well as POS software developers are crucial to make it easy to the merchants. Of course, the merchants still need to have a commercial agreement with PayPal to accept it as a payment method, which is why securing relationships with the US leading merchants is so important. However, PayPal understands very well that scaling up the merchant relationships on a global basis is going to be the hardest task in creating a truly universal payments scheme. That could be one of the reasons why PayPal continues to position itself as a “bank’s friend” – it understands how difficult it would be to achieve the necessary global scale on its own. However, that would require to “open up the scheme” and go from a three-party to a four-party model. Would PayPal be prepared to do that? Would banks be willing to join in?

How Many Bank Branches do we Need in the US?

Finextra published an article yesterday that was also picked up by American Banker and others. The news was twofold: 1. Bank of America announced it enjoys 10 million mobile banking customers, up about 3 million from a year ago – about 43,000 new active mobile customers per week. 2. Concurrent with its swelling ranks of active mobile banking customer, the bank is closing branches and unplugging ATMs. The bank closed 154 branches and eliminated 631 ATMs in Q1, citing the move to online and mobile channels as a contributory factor according to the Finextra article. Celent is not surprized by the branch closure news. As explained in a recent Oliver Wyman report, Branch Flexing: An Agile Approach to Cost Management, April 2012, “to maintain profit levels in the face of a post-crisis and regulatory-reform decline in net revenue of about 32%, US banks would need to increase revenues by 12% a year for the next three years or cut costs by 18% a year, or a combination of the two.” Cost cutting isn’t optional, particularly among larger US banks. Making material cost reductions will require a re-examination of branch networks, which typically contribute between 40% and 60% of a modern retail bank’s costs. Branch flexing refers to a strategic realignment of branch resources (and cost) with customer profitability. Ultimately, branch flexing involves investments in technology, training, culture and compensation. Celent has advocated departure from traditional, teller centric retail operating models for some time. But what about the total number of branches. Is there an argument that the industry has built an unsustainable number of branches, flexing or not? We think so. The argument begins with a simple observation that the US branch density (branches per million inhabitants) has nearly tripled since 1970. Thus, before consumers enjoyed the ATM, telephone banking, internet banking or mobile banking, the industry served consumer’s collective needs with less than 22,000 FDIC insured branches. Do we really need 90, 000 now? branch-density1 We think not. But it’s not so much if they’re needed (The Economist had a great debate about that topic earlier this week), but will they remain profitable? If indeed we’re in a “new normal” of sharply reduced retail banking profitability, than the answer – to one degree or another – is “no”. Celent is developing a more detailed perspective on how many bank branches the US is likely to support over the next ten years. Stay tuned.

EBADay 2012

Its event season at the moment – I’m off to Madrid for a client event tomorrow for example. Last week though was EBADay in Edinburgh. EBADay is actually now a 2 day event, now, by my calculations, in its 6th year. Its roots lie in the EBA Clearing AGM, which actually is central to its success. The board of the EBA form part of the who’s who in payments in Europe. By adding an event, the “right” people have been attending from day one. As a result, EBADay is for many of the corporate payments professionals in Europe has become one of the must attend events. The event is split in two parts, the conference and the exhibition. The conference is made up of panel sessions primarily and they were generally good, with some turning out to be excellent. I spoke on a panel entitled “Understanding the real value of payments data” along with speakers from, in alphabetical order, Citi, The Clearing House, Dovetail, JP Morgan and RefData. Our challenge was that there was simply so much too much to discuss in such a short period of time. But the questions from the audience clearly showed a need for greater transparency into payments data. This was somewhat alarming as I first spoke about this requirement from corporates nearly 10 years ago, but is does reflect the theme of my research agenda this year. The exhibition is unlike I’ve seen at any other event, and I think it works. Instead of the exhibitors bringing their usual mega stands with them, it effectively becomes fixed size display. This picture gives a far better idea of how it works. At the same time, the pricing for a stand is much lower than many other shows. One client shared their costs at a high level – they spent less than 50% than they would have at a rival show for a stand, but got considerably more in addition to the stand for their money. Guess which show is growing and which is shrinking? The outcome was that there was a real buzz in the building, with everybody staying onsite, and staying in the same area as the exhibition. Something also done better than any other show so far was the availability of free wifi throughout the entire building – thanks to Clear2Pay for sponsoring. So, takeaways & themes. SEPA remains a key topic, with attention turning to the detail now. As Simon Newstead of RBS pointed out, the “single end date” legislation actually has 10 end dates, mentioned in 34 places. Furthermore, whilst everyone was talking about what corporates need to do, actually getting a handle on what corporates have already done, proved to be much more tricky. Indeed, only 2 company names came up in conversation at all during the conversations. Whilst there must be more, it served to highlight the real scale of the problem. Greece. Other than the highly entertaining keynote by the German economist, the general consensus seemed to be it was when Greece left the euro, not if. This and the related economic troubles cast a long shadow over the event. The industry wasn’t necessarily pessimistic for its future – indeed, consensus was SEPA will continue regardless – but that the exit would an event not seen before and would accordingly result in new challenges. The worriers were more concerned by who might follow them. Next year the event will be in….well, they’re playing that card close to their chest. Traditionally announced in the closing plenary, the only clues that were given was that it was a country that started with the letter G and contained the letters R & E. With Frankfurt only a recent host, perhaps Greece has suffered its first euro exit, albeit from the Euro Banking Association!

Mobile Payments Come to Canada

I recently blogged about all the different mobile payments initiatives in the UK. As if not wanting to be left behind, this week Canada had a few announcements of its own. On Monday, the Canadian Bankers Association (CBA) introduced mobile payments guidelines. And on Tuesday, Rogers Communications, a Telco, and the Canadian Imperial Bank of Commerce announced that they would be launching a mobile wallet later this year. Canada seems to have many of the ingredients for mobile payments to succeed. The banking and telco markets are relatively concentrated making it (in theory) an easier task to cooperate on industry-wide initiatives. The country has implemented EMV and is boasting one of the highest use rates of contactless cards – according to MasterCard, over 10% of their transactions in Canada are contactless. And the smartphone adoption is already high and continues to rise. However, I couldn’t help but shake off a bit of a “me too” feeling about the announcements. While the guidelines are obviously a welcome document for the Canadian market, it follows a long line of similar documents from EPC, GSMA, SCA, MobeyForum and other organisations. And the wallet announcement reminds of a Quick Tap from BarclayCard and Orange, one of the first NFC initiatives launched in the UK – it’s a single MNO, single bank and a single platform (Blackberry) solution. Given that it is a SIM-based solution, scaling on other platforms, particularly Android, should be possible. Adding more banks and more operators might prove to be more difficult. So, congratulations on taking the first steps. However, more will be needed to make mobile payments ubiquitous in Canada.

Nacha Payments 2012 Round-up

Last week I was in Baltimore for the Nacha Payments annual event, a regular fixture on my calendar. I just wanted to share some impressions, some of my own, others themes from the many conversations I had. For those of you who’ve not been, it’s a large event – registrations this year were around the 2500 mark, with just under 100 exhibitors. But for many it’s the conference itself that’s the attraction, with approximately (I haven’t counted!) 160 sessions, may running concurrently in 6 tracks. A quick word on the event overall. As an analyst we spend a lot of time attending events like these – indeed, you could easily do nothing but! Whilst a large number of attendees, a concern voiced by a couple of clients was that it both felt smaller in terms of attendees (something I’d have to agree with), and lower in level of attendee. There were some complaints that the exhibition was something of a poor cousin, relegated to the basement, a long way from the exhibition. At least one fellow delegate asked me where it was, though I have to say it was very well signposted. I feel that the event is still a must for most of us, but with budgets tight and getting tighter for many, ensuring the events deliver for attendees is an absolute imperative. At shows like this, we rarely get chance to attend many of the sessions, as we’re meeting clients & prospects, and walking the floor. I’ve usually caught up with the sessions by listening to the replays afterwards, so I was very disappointed to see that the sessions weren’t being recorded this year. A few themes did come out though. Of those I or those who I spoke to attended, the most animated audience award goes to that discussing the impending 1073 rule. It was standing room only, implying that the audience knew that it was an important topic. Yet the response of the audience suggested rather different – there was a palpable sense of disbelief at what was going to happen very soon. As an aside, I’d be very interested in hearing any opinions or insight on the topic. Mobile loomed large on the agenda. It’s not an area that I specifically focus on but I was struck by the diverging opinions. On one hand, some banks were saying that those customers who used the mobile service were the most profitable. However, others also said they didn’t know how or when they’d make money from mobile. That same polarisation of views came to the surface regarding faster payments in the US. The common debate has been whether the introduction of such as service would impact revenues from wire payments. The discussion seems to have moved on somewhat, with more (though not all) believing moving up the processing window to create a same-day service would have little impact. However, the discussion, probably fuelled the debate hosted by the Fed in September focussed more on immediate funds transfer. Whilst admittedly a small sample set, the discussions here seem to have moved from “should we?” to “how do we?”, with many pointing to ClearXChange as being the most likely to capitalise on this growing interest. The main question here is if or when the proposition moves from P2P to A2A, and captures the demand that AFP surveys show that corporates have. The nay-sayers interesting didn’t seem to questioning the demand, but focussed solely on the likely ability for banks to alter their systems to cope with the challenges that such speed brings. Overall, I was left with an impression that the industry was bracing itself for considerable change over the next few years, some driven by increasing regulatory intervention (welcome to Europe!), and others driven by the recognition that increasing demands from corporates and consumers require changes in the back office part of the system, as well as the front-end. ACH is playing a vital role today – but with some investment, could play an even greater role tomorrow. See you in San Diego for Payments 2013!

Why Smaller Banks Should offer Image Cash Letter Deposit Services

Farmers & Merchants Bank, a $2 billion-asset bank based in Long Beach, Calif., is launching an image cash letter service. The accompanying press release caught the eye of American Banker resulting in a story today on the topic, Big Check Volumes Aren’t Just for Big Banks, a Small Bank Says, written by John Adams. I was grateful to see an important (albeit not terribly exciting) topic get coverage in American Banker. This blog post serves to add some additional insight to Adam’s article, specifically, why the opportunity for image cash letter (ICL) deposit services is so large. In a previous post, I commented on why wholesale lockbox belongs in the headlines even though it has been around as a staple treasury management offering for five decades. The post emphasized that fter all these years, the market opportunity for wholesale lockbox services remains significant. While the majority of large corporations already use bank WLBX services, WLBX adoption falls markedly with the size of business – particularly among businesses with annual revenues below US$250 million.
WLBX and ICL Deposit Services are Complimentary

WLBX and ICL Deposit Services are Complimentary

The above chart shows the number of businesses by annual revenue that utilize bank WLBX services, or not. Why wouldn’t a good size company, say one with $250 million in annual revenue not use a bank for WLBX services? Because, for whatever reason, they choose to do the work internally. A significant number of these companies have their own remittance processing systems. Some are dated, but most are image equipped and are equipped to send x9.37 compliant files to a bank (or could be made to be). Lots of businesses in other words. All are ICL deposit candidates. Offering an ICL deposit capability used to be a hassle. In the early days of image exchange, there were many variations on the x9 standard going around, and accepting an image file from someone’s in-house system was easier said than done. Well, it probably still is, but not nearly as much so. Now, a bevy of solution providers offer this capability. Some offer outsourced item processing services also, making the task even easier for smaller and midsize banks. But most banks have been focused on offering RDC solutions bundled with desktop scanners, even though tens of thousands of businesses don’t want to buy RDC – they already have scanners. As a result, a minority of U.S. banks offer ICL deposit services. And, the smaller the bank, the less likely ICL services are offered. icl-deposit Hungry for fee revenue? Opportunity knocks!

Celent Innovation and Insight Day – Panelist Sneak Peek and Registration Discount!

Celent Banking Innovation and Insight Day is around the corner! The response so far to this event has been tremendous and we are expecting a full house. Come join us in Charlotte on June 13th to gain a fresh perspective on the future of mobile banking and payments, tablet banking, industry disruption, and more. Celent will also be recognizing the Model Banks selected for inclusion in our annual report. I am pleased to announce that we have secured some great panelists and presenters for this event. I will provide a sneak peek for the moment, others can be found by visiting our event site. A few others are going to be announced shortly: Tablet Mania: Banking Will Never be the Same – Jimmy Dinh – Senior Director, Mobile Banking Strategy and Planning, CIBCJeff Easley, Deposits Product Manager, USAA The DisruptorsAntonio (Yobie) Benjamin – CTO, Managing Director, Citi Transaction Services and Global Enterprise Payments Yobie is also the Chairman of Citi Innovation Labs. The event is free for Celent clients. Non-clients can save $125 by registering with the following discount code: celent2012 Discount is valid through May 22nd. Full event agenda and registration can be found here.