Archives for November 2012

Fintech Startups – Coopetition or Competition? Business Models Are Shifting.

I spend a fair bit of time analyzing and following the fintech startup scene. I’ve met and interacted with numerous startups over the years, as well as through industry events like  Finovate and Innotribe. I frequently get very excited by their potential, and what they can bring to the industry. I admire the founders of these firms as they attempt to make their mark in an age old, highly regulated industry, that is slowly but surely adapting to the popularity of digital channels. Is there a killer fintech startup business model? Here are a handful of models out there that I invite you to weigh in on:
  1. Should startups go after consumers/businesses directly? This is the most popular model, with most firms taking this type of approach. Examples include Square, Simple, PayPal, etc. It’s also one of the hardest models as it’s quite difficult for a newly minted organization to establish a brand and build critical mass on its own.
  2. Can startups be successful at enabling others in addition to going after their core market? This is becoming an increasingly popular model as startups seek out new streams of revenue. It’s particularly popular in the payment space as it allows for a potentially increasing stream of transactional revenue. This is done by offering something like an SDK that others can build on. Examples include, Stripe, etc.
  3. Is the name of the game to simply use financial institutions as a distribution channel?  Some startups take this route right out of the gate (e.g. MineralTree, Cardlytics, etc.), while others pivot to this model (e.g. Social Money,, etc.). Finally there are startups that simply fall back on this model once they realize that they have been unsuccessful in models 1 or 2. While it sounds great to use a bank as a distribution channel, it can be a frustrating experience given the very long sales cycles typically encountered with financial institutions. Burning cash while attempting to close a deal with a bank can be a tough pill to swallow.
  4. Can a startup have it all by tackling all three of of the models ? It’s possible but it can also spread a business, particularly a newer one, dangerously thin
Finally, what does all of this mean for financial institutions? How do they get involved in industry disruption? Celent firmly believes that banks should dedicate efforts towards not only innovation, but disruption. It’s a necessary part of competing, and has to be led and sponsored by senior management. Most banks need at least a handful of projects that  are disruptive – that’s no easy task since managing technology and culture change is never a quick fix. What do you think? How should startups approach the market? How can banks play a meaningful role in the digital world?  

We All Can Be Trendspotters

As the festive season approaches, this is the time of the year when Celent analysts reflect on what kept us busy through the year and what the future might hold for the next 12 months in our respective coverage areas. We usually publish the results of this thinking and analysis in various trends reports – from Top Trends in Banking to Top Trends in Payments to IT Spending. And we seem to strike a chord with our clients – these reports always tend to rank highly in our “most downloaded” lists. I had the pleasure of attending a very interesting event in London yesterday afternoon. Intelligent Environments, a digital banking software company, was launching Interact, its new platform for “connecting money to people.” It was great to learn more about the new solution and to discuss with the company where digital banking and payments are heading. No one disputes anymore that digital channels have become critical for retail banks. However, one statistic stood out and was probably unexpected to many people in the room – according to the latest research by IE and YouGov, 51% of UK consumers now see digital channels as the primary driver of their bank loyalty, even ahead of customer service. Another highlight of the day was the guest keynote speaker, Magnus Lindkvist, who was introduced as “Trendspotter & Futurist.” Unlike some of the other futurists who predict that soon we will be walking with chips in our heads, Magnus wasn’t making any predictions at all. Instead, he talked about how difficult it is to spot some of the trends and what companies can do if they want to not just compete (i.e. offer slightly better/ cheaper products/ services), but to genuinely create something new and innovative. The answer is experimentation (although increasingly difficult to do in risk-averse and compliance-driven environments), failure recycling (e.g. not all dot com ideas were bad), and (perhaps the hardest one of all), patience & persistence. Magnus is an incredibly engaging speaker and it was an hour filled with wonderful examples and memorable quotes, such as “technology needs to become boring to change the world” and “we are the last generation to believe connectivity is special.” No one can predict the future, but all of us can tune our antennas better to increase our chances of catching that next big trend. Have you spotted a new trend in banking or payments? Let us know – we would love to hear from you!    

Are Spanish Bankers More Farsighted?

When Citibank announced they were moving from an internally developed core system to Systematics, I wondered why a bank would take all the trouble of doing a core banking migration, but not moving to a modern real-time system. The answer was that there would be too much operational risk in both moving to a new core system and changing the operations of the bank from batch to real-time. I just attended an announcement from BBVA and Accenture describing the deployment of the Alnova core banking system at BBVA Compass, the US subsidiary. The news is stunning. BBVA Compass has gone live with an overseas, real-time, modern core banking system for all deposit products. While savings and loans and credit unions have been running real-time core systems for years, commercial banks have stayed on batch / memo post. This has huge implications on both the customer experience and back-office operations. Banks no longer have the ability to sort transactions because they are processed as soon as they arrive. This will change overdraft revenues for those banks that sort from largest to smallest transaction before processing in the overnight batch. Processing in real-time also dramatically reduces or eliminates back-office overhead. One and done is the rule. Celent has noticed that credit unions have dramatically lower efficiency ratios than banks of the same asset size, and one of the contributing factors is that the credit unions are running running real-time systems. Please see the Celent report EfficienCU: An Examination of Bank and Credit Union Efficiency Ratios by Asset Tier, November 2011 for more details. BBVA is thinking boldly about the US market. They believe that underinvestment by US banks in modern core banking technology has created an opportunity for them to exploit. Virtually every commercial bank in the United States has a batch memo post system with product siloed (as opposed to customer centric) architecture. Each channel is managed separately and plugs into the core independently. BBVA believes that by creating a business that is customer centric, multichannel, real-time, with straight through processing and related lower cost, they can make even greater inroads into the US banking market. The goal is to have an improvement in their efficiency ratios of 10% in the midterm. This is shy of the efficiency advantage credit unions have over banks:  

Credit unions enjoy an efficiency advantage over banks.

  They already have a top 25 US bank. If BBVA is able to reduce costs through real-time processing and better deployment of cost-saving channels, other banks will be in trouble. If BBVA can also develop customer centric pricing and use that to gain share, other banks will be in deep trouble. This announcement puts Accenture in the cat bird seat. They own the Alnova software asset and have demonstrated the ability to deploy the overseas real-time system in the United States at a commercial bank. This is not easy. There have been notable failures by other vendors in the recent past. Any bank looking to make the leap to a real-time customer centric system will likely look very hard at Accenture. Another bank, famous for its real-time core processing is Santander, BBVA’s Spanish competitor. They have an internally developed core system called Parthenon that they deployed quickly in the UK after acquiring of Abbey National, Alliance & Leicester and Bradford & Bingley. This rapidly drove down operating cost in the UK acquisitions. Santander owns Sovereign Bank in the US which is moving at least in part to the Parthenon system. It seems that these two Spanish banks understand the value that modern technology can play in making a bank cost effective and customer centric. They learn these lessons in Spain, but will be teaching them in the US.  

Insanely Simple: Banks Can Learn From Apple’s Success

While at the AFP conference last month, I had the pleasure of hearing Ken Segall speak at a breakfast event sponsored by USDataworks. Ken worked closely with Steve Jobs as advertising agency creative director for NeXT and Apple. His experience inspired him to write Insanely Simple, published earlier this year by Penguin Books Ltd. Two events in the past week caused me to recall the wisdom of Apple’s obsession for simplicity. The first was the announcement that iOS again regained the #1 U.S. market share position over Android in the most recent quarter. This is an astonishing (and repeated) achievement in my opinion given the relentless competition in the smartphone market. After all, it is Apple versus the world. Equally impressive was the reported 40% of iPhone sales going to new users. The other event was prompted by the recent demise of my #2 son’s laptop. Such devices are a necessity for college students. I was immediately put in-charge of shopping for a new laptop we would present for his upcoming birthday (I’m assuming he doesn’t read my blogs). Since he is a Windows user, a MacBook was out of the question. After several evenings of reading and seeking advice, I narrowed down the search to HP – right before “Black Friday”. Perfect! My task was nearly over – or so I thought. HP offers 8 operating system choices, 7 screen sizes, 7 processor choices, 3 memory configuration options and 7 storage options across its 6 separate laptop product lines. Really? Apple, in sharp contrast offers two models (MacBook Air and MacBook Pro) with a handful of options each. Apple has its detractors, and its maniacal devotion to simplicity isn’t the only factor contributing to its success. But Successful it is. One look at its share price over the past few years ought to convince. What about your product line? Can your customers and prospects quickly distil the essence of your products and services unmistakably? Or, have you convinced yourselves, like HP apparently, that you provide inherently complex solutions that must be communicated as such? Read the book. It’s available for $15.26 in hardcover at Amazon.

Digital Wallets: Crossing the Chasm Between Online and Offline Payments

Despite increasing online-offline convergence in retailing, there is still a chasm between online and offline payments which today’s digital wallets are struggling to cross. It remains a challenge today to use secure element-based payment credentials online and cloud-based credentials at the physical POS, although various solutions to bridge the divide are emerging. The above statements form the central thesis of my new report to be published early next week under the same title as this blog post. With my report, I sought to address the following key questions:
  • Given the proliferation of solutions, how to differentiate between various digital wallets in the market today? How best to think about the solutions, economics and implications for various players?
  • Is there any consensus in the market on what is important in order to succeed? What are some of the big unknowns which could significantly influence the market? What are some of the key challenges that the industry as a whole needs to address?
  • How should financial institutions respond to these market developments?
During my research, I have been studying a number of digital wallets (or their announcements), including Google Wallet, Isis, LevelUp, O2 Wallet, PayPal, PayPass Wallet Services, QuickTap Wallet, Serve, Square Wallet, by Visa, MCX, Apple Passbook, Micosoft Wallet Hub, and FIS & Paydiant wallet, all of which are discussed in the report, along with a number of other solutions and ideas around mobile and digital payments. I am also proposing a framework how to analyse digital wallets, which should help banks and others understand the impact of wallets on the economics as well as customer and merchant relationships, availability of data, risk management and other key areas. If you are a Celent client, don’t forget to visit our website ( next week to download the new report. I hope you will find it interesting, but do let me know what you think. And to our American readers, a very happy Thanksgiving!

Notes from Sibos

Robert did a great job summarising many of the conversations we had during the week. I would perhaps add a couple of other elements that were part of every conversation.   Regulation It feels almost obvious to say so, but you can’t get too far in any conversation without mentioning at least one regulation. If we could do a word cloud of the conversations, I would rank them Basel III, SEPA, FATCA, and 1073, but certainly wasn’t an exhaustive list. What struck me were the levels of uncertainty raised by these regulations, despite the numerous discussion taking place. For example, despite the end date now being set, and the rule books being in place, SEPA is still causing consternation, from some outstanding details (such as declaration of the member state transition period exemptions) to individual bank readiness (currently far from 100%) to whether corporates are ready and willing to move. New broom, new Swift? This was the first Sibos since the changing of the guard at Swift. It would be too simplistic to say a move from the relationship style of the Spanish to the more direct commercial approach of the Dutch, but certainly some announcements by Swift at the partner meeting had a number of vendors muttering this. We’re still taking on board information to allow us to form a more considered view, but certainly at first glance there seems to be a renewed vigour at making sure Swift capitalises on its strengths. And as the saying goes, you can’t make an omelette without breaking some eggs in the process. Innotribe There were persistent rumours that Innotribe will be “offered a chance to spread its wings” circulating (i.e. dropped from Sibos), but it does seem increasingly out of place. I didn’t get chance to attend any sessions other than in passing, but few other people I spoke to who did either or saw the value. Out of context, and so almost uncertainly unfair, but when senior Swift colleagues were overheard at the Sibos party referring to Innotribe as the crèche, more than a few eavesdroppers agreed. But it highlights an issue in perception about what Sibos is about and what it should be about. That leads to the final point below. Whilst we all agree that innovation is important, it perhaps needs to be made more relevant and made more mainstream in terms of the conference. A possible model could be Celents very own Model Bank award which highlights and rewards real life innovation. Don’t forget by the way the deadline for this year is coming soon – more details here. Sibos For the first time, I heard people questioning the value of attending Sibos. The location and cost put many people off attending. Whilst the organisers claim 7,000, the exhibitors believe that it was closer 2,500. Whatever the numbers, I certainly know many people who didn’t make the trip, and have clients who also didn’t take a stand this year. Dubai next year (apparently counting somehow as a return to Europe) is causing the same consternation – for some it’s the cost, others the practicalities of visiting a country which some believe they can’t visit for a variety of reasons. I think Sibos is far from dead – you can argue that the lower attendance has filtered out the casual visitor, and we certainly came away with both new business and new insights. But it does pose a question about whether Sibos 2013 will respond in such away to encourage greater attendance. Whilst the attendance of the banks (and the seniority of the bankers) means it will maintain it’s relevance, the breadth of attendees and variety of exhibitors is what makes it a “must”.   Finally, a quick word on our host city. Despite the time it took to get there (door to door, 25 hours), I have to say the experience was fantastic. Rarely have I been to a city where everyone has been so friendly, polite and helpful and where I have felt safe wherever I was, whatever time it was. Given the opportunity, I’d gladly return.

Observations from SIBOS 2012, Osaka, Japan

I had the pleasure of attending the SIBOS Annual Conference in Osaka, Japan last week with several of my colleagues in the Celent banking team. I spent much of my time at the event in constructive meetings with clients and prospects. Several industry leading vendors have organized fantastic events. A few I would like to call out include Bottomline Technologies, Fiserv, NEC, and SunGard. The Clearing House equally organized a delightful evening and the closing event from SWIFT was entertaining. In terms of topics, I have heard several recurring themes through various meetings. These include: Risk Mitigation – fraud detection tools/processes, analyze client behavior from bank data for decision/alerts, advanced fund movement (e.g. country capital flight), etc. Cost Reduction – banks focus on reducing costs via technology/processes to remain competitive (e.g. replace non-differentiating processes with cheaper solution), operational efficiency, etc. Analytics – the top three value propositions include superior customer service, cross sell/revenue opportunity, and operational efficiency. I think the cross sell/revenue opportunity is the hot button for banks at this time. Mobile – continues to be a hot topic. The opportunity is likely in growth markets P2P and commerce in developed countries. Real Time/Near Time – processing of payments. Real time view of liquidity with clients – critical for regulatory which impacts front end so clients can have visibility. Banks at various maturity stages as it relates to real time with liquidity. Treasury Services – Cash Management Services in Asia growing. Asian banks appear eager to win back business from U.S. banks. BPO – corporates seek to speed up settlement. Asia market appears highly interested in BPO despite higher L/C uses (I heard 60% +). Core value appears to be the ability to get financing (i.e. BPO used as an instrument). Several open items around accounting perspective, regulatory perspective (ICC rulings), etc.

1.9.13: Celent Asia Webinar: China’s Second Generation Payment System: Implications for Banks and Third Party Providers

Celent analyst Hua Zhang This event is free to attend. Celent clients and the media will have access to the webinar’s PowerPoint presentation after the event. Please click here for more information.

What Makes USAA Unique?

USAA was kind enough to invite me with other opinion leaders to spend a couple days at their headquarters in San Antonio at their expense. I was impressed, not by the hotel, but by the way USAA punches above its weight, especially on digital channels. They were the among the first out with mobile remote deposit capture, and do an outstanding job of integrating across lines of business. Why is this?  
  1. USAA feels more like a credit union than a bank. Actually it is more of an insurance company than a bank, but that is different tangent, and one in which I have no expertise. Customers are called members and surplus profit is returned to the member owners, much like a credit union.  As Bob Meara has documented in his excellent report on branch transformation, credit unions tend to invest more in automation than banks. When banks ask, “What is the ROI?”, credit unions ask, “Does it improve member service?”
  2. In order to be a member, one must have some sort of tie to the US military: either active duty, honorably discharged, or a close relative. So USAA has a clear target market, which has specific needs. Their members are geographically dispersed across the globe, which places some unique requirements on USAA. And USAA understands these requirements viscerally; nearly one in five employees is a Veteran. USAA’s celebration of Veterans Day goes above and beyond what you would find at most other institutions, by an order of magnitude. While I don’t generally write about such non-technical topics such as corporate culture, it is absolutely palpable at USAA. Providing financial services, to members of the US armed forces is a mission, and pursued with a missionary like zeal.
  3. USAA has no, or today, very few branches. The difficulty in setting up a USAA branch near members stationed in Afghanistan, for example, forces USAA to think about how to serve their members via digital / non-branch channels. I say non-branch because USAA allows members to deposit checks at around 2,000 UPS stores. It is a non-branch channel, but involves brick and mortar. Since USAA isn’t investing in brick and mortar, they can invest more in digital.
  4. Active duty soldiers don’t bring PCs with them on deployments. They do have smart phones. It is my perception that the active duty service member is the most revered customer, though likely the least profitable. This drives innovations in mobile.
  5. LOB silos are much less pronounced due to the strong member service culture. USAA has an integration layer across the banking, insurance, and investment product lines and ties this all together with a single CIF. Now we get to the techie side and what it means for products and customers. Let’s compare what Citi, Capital One, First Republic, and USAA—all respected financial institutions — are able to do to achieve the 360 degree view of the customer on their Internet sites.

Citi lines of business

                            Capital One         First Republic

First Republic Lines of Business

                    USAA       The difference is telling. I’ve heard rumors that USAA may open up its membership to a much broader audience. On one hand I hope it is true. I think it would raise the game. On the other, I hope it’s not, because it would dilute the culture that drives USAA to really excel in its chosen niche.    

A Future for In-branch Self-service?

The idea of offering self-service solutions inside the branch remains a strangely controversial topic among North American bankers. This need not be. Self-service is rapidly growing across multiple retail market segments and has been a staple of Western Europe bank branches for a decade. Resistance among North American financial institutions is likely more cultural than pragmatic. As one community bank EVP stated in a recent research interview. “I’ll be damned if my customers are going to interact with a machine in one of my bank branches!”. O.K., so the topic is polarizing. But, is there a future for in-branch self-service in North America? We think so. Based on a Celent survey of North American financial institutions fielded in July 2012, in-branch self-service is destined to become somewhat commonplace – particularly among credit unions, who appear to be roughly twice as likely to adopt compared to banks. This should be a wake-up call to the curmudgeons who see no future in self-service based on the mistaken notion that consumers won’t be fond of the idea.

Credit unions are leading in in-branch self-service

From our research, when executed well using capable deposit automation and cash recycling devices, in-branch self-service can result in multiple benefits, including: • Reduced cost-to-serve • Extended service hours • Reduced cash handling costs • Fewer errors, fewer exceptions • Demonstrably improved customer satisfaction • Improved sales results ATM Marketplace posted an article extolling the virtues of in-branch self-service at BAWAG P.S.K., Austria’s fifth largest retail bank. There are, of course, many ways to skin a cat. We found the use of in-branch self-service at BAWAG P.S.K. straightforward. More interesting is its use within Austrian Post Office facilities (or is it vice versa?). Celent’s 2012 Model Bank of the Year, RHB Bank (Malaysia), was so honoured for its innovative and effective launch of Easy by RHB, which deployed multiple Retail partnerships to lower costs and deliver prime retail placement. These included partnerships with Tesco and the Malaysian equivalent of the U.S. Post Office, POS Malaysia. That concept (below) also includes in-branch self-service, but the devices are not apparent in the picture. Retail partnerships appear less polarizing than in-branch self-service in banking. Witness the thousands of in-store branches. Honestly though, most implementations are traditional and, well – boring. Easy by RHB offers an engaging and also wildly successful alternative – one deserving consideration as financial institutions struggle with branch channel costs and eroding relevance in the “new normal” of retail banking. Celent is welcoming submissions for Celent Model Bank 2013 through 30 November 2012. Submissions are made online at