Will ISOs claim the RDC market as they have done with credit cards?

Will ISOs claim the RDC market as they have done with credit cards?
Remote deposit capture (RDC) has taken financial institutions by storm. In just over three years since its debut, more than half of all US banks have adopted solutions, along with a significant number of credit unions and retail brokerages. But this extraordinary adoption among financial institutions has thus far led to comparatively tepid client adoption. Based on multiple research efforts, we can conclude that this lopsided picture is not the result of an exaggerated view of the market opportunity. The rationale for such historically temperate sales and marketing efforts among banks is defensible in many cases. But RDC is no longer a nascent market. The time has passed for financial institutions to take a more aggressive stance. RDC: The Perfect ISO Opportunity? The credit card business isn’t what it used to be. Market growth has cooled, with stiff competition and challenging margins. Independent sales organizations (ISOs) appear more than eager for the opportunity to expand their product lines beyond card services. For ISOs, the opportunity is two-fold: cross-selling RDC to current merchants and expanding reach beyond card-heavy clients into entirely new markets within existing geographies. From a market development perspective, the scenario is close to ideal. Compared to financial institutions, ISOs appear to be in a good position to act on the opportunity. But, how is this going to work? ISOs will need to provide remote deposit capability that allows businesses the ability to maintain existing bank relationships. Ironically, that won’t likely be done using the image based processing that Check 21 envisioned. That’s because most banks aren’t ready to receive image cash letter (ICL) deposits, and those that are limit such arrangements to large volume clients because of the time-consuming file certification and management overhead involved. Instead, ISOs are likely to utilize a third party aggregator and a presentment financial institution, into which all the collective small business check deposits will be sent via image. Then, the presentment financial institution will settle with multiple banks of first deposit using ACH credits, while presenting items to paying banks via image exchange (Figure 1). In so doing, banks of first deposit maintain deposit relationships, businesses enjoy the benefits of remote deposit, presentment banks earn fee revenue, and ISOs do what they do best – sell and service clients. It might actually work. picture122 Not All Roses As attractive as RDC may be for ISOs, success won’t be a slam dunk. ISOs don’t know check payments like they know cards. Thorough training will be an imperative. Additionally, the RDC value proposition is highly varied among market segments. Many ISOs enjoy specialization, and won’t find their target market segments a good fit for RDC. Unlike merchant acquiring, RDC is not required for check acceptance. Some segments (restaurants, for example) will make lousy targets for RDC. ISOs will need to sort this out. Secondly, the processing model presents significant return item risk to presentment financial institutions. To mitigate this risk, presentment banks will wait until all funds are good before originating the ACH credit to banks of first deposit. Client funds availability will likely be delayed compared to bank direct RDC models. It’s too early to tell if this will be a factor in selling. But, the biggest risk to the success of ISO RDC delivery is the business model itself. Today’s bank direct RDC pricing leaves plenty of room for ISO profit. But, if free scanners and lower monthly maintenance fees become the norm, there may be insufficient profit opportunity left for an ISO in the middle. Will ISOs claim the RDC market as they have done with cards? It’s simply too early to tell. Many banks regret what has occurred with merchant acquiring and won’t let that happen again with RDC. But that won’t stop ISOs from getting a foothold in this large and diverse market. Some banks, those primarily seeking core deposit growth, welcome third party involvement to take care of the hardware deployment and provisioning. So what can be predicted with certainty? Just this: it’s going to be fun to watch!

Move Over Token! My Phone Can do The Trick.

Move Over Token! My Phone Can do The Trick.
2009-04-01_1643Banks have been issuing tokens to their business and corporate customers for some time. These multifactor authentication devices typically generate a one-time password that the user is required to provide upon login or to confirm a specific activity (e.g. the release of a wire transfer). Customers with multiple banking relationships end up lugging around a bunch of different tokens. They are easily misplaced, and the cost of these devices can also add up quickly (whether they are being paid for by the bank or the customer). Is there an alternative to the good old token? The mobile phone could be a great alternative in the form of out of band authentication (typically a text message sent to the phone containing the one-time password) or an one-time password generating application that resides on the phone. Out of band authentication hasn’t caught on too quickly in the North American marketplace, but Celent predicts that adoption will gather speed as business users rely more on their mobile devices. The password generating application holds a lot of promise as well. Yesterday, Verisign announced the availability of a one-time password generating iPhone application (dubbed VIP Access) that would be a great alternative to a token. The app will be available for other devices as well (Blackberry, etc.). It can currently be used on select consumer sites (PayPal, EBay, AOL, etc.) and a handful of Australian credit unions (click here for list of supported sites). It will be interesting to see which US bank is the first to use this app for online banking MFA. I doubt US banks will be too keen on integrating this into consumer online banking as the bother factor is too high. Consumers are finicky and can get thrown off by too much technical change and interruption. It’s a great small business banking idea however and could have ramifications in the corporate space, particularly if it’s available for Blackberry models.

Fidelity acquires Metavante

Fidelity acquires Metavante
The boldness of this move is a shocker. FIS has a market cap of $3.32 billion. Metavante (NYSE:MV) has a market cap of $2.7 billion (as of today’s announcement). If someone were acquired, I would have imagined it to be Jack Henry or Open Solutions, which are much smaller companies with core systems that would be folded into a portfolio. Metavante has a large hosted system, which Fidelity doesn’t really have. Fidelity hosts Fiserv’s ITI Premier. Fidelity may resent writing checks to Fiserv and this would be a way out with their own hosted platform. Convincing their Premier customers to move is another matter…. I would expect that Metavante IBS (core) would be integrated into Fidelity Xpress middleware and therefore the Touchpoint Sales and Service, Internet Banking, etc. In order to truly benefit from scale, platform consolidation will be necessarly. Both Fidelity and Metavante have payments business. Fidelity has Certegy and eFunds among others. Metavante has NYCE and card processing. I am most interested to see how the organizations are merged.

IT innovation: any good for banks?

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

Promising Future of Islamic Banking

Promising Future of Islamic Banking

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

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

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

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

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

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

Treasury, Payables, and Receivables: The alignment of the planets

Treasury, Payables, and Receivables: The alignment of the planets

Liquidity and cash management are the paradigms to measure current enterprise performance. Corporations strive for a holistic approach from their strategic banking partners made of “end-to-end” solutions and services that cross the traditional silos. Financial forecasting and planning are absolute prerequisites for a corporate treasurer. Under the current conditions of inadequate liquidity, invoice discounting is becoming a best practice: vendors offer discounts on the invoice’s face value if they receive immediate payment.

From an income statement perspective, this brings value to the buyer because it reduces the cost of goods sold (COGS).

But the treasurer must question whether it does the same for the balance sheet. Can the buyer’s company increase its debit level to benefit from the discounted invoices? What was to be paid after 60 days must be paid now, if the discount is to be taken. The first action would then be to ask for an increase in the credit line. The financial institution would immediately ask for a projection of future flows, and therefore for a better forecast. A reliable and timely forecast of cash flows before embarking on any initiative is mandatory for corporate treasurers. The sources of the financial flows are, principally, payables and receivables. Their dynamics, managed within the corporate ERP, must be constantly reflected in the treasury management system (TMS). This is, usually, a separate add-on suite of applications. Especially today, under credit restrictions and Basel II directives, banks are cleaning up their portfolios. A corporation that scores poorly on the financial institution’s credit scoring would suffer from an immediate write-off. The treasurer must be able to anticipate the financial consequences of operative decisions and duly report them to the banking counterpart. Therefore, the integration between operational and treasury management systems must be properly secured. Technology can now play a significant role in making the concept of financial collaboration a reality by correlating the functions of treasury, payments, and receivables.

FFIEC RDC Guidance

FFIEC RDC Guidance
The Federal Financial Institutions Examination Council, FFIEC, issued its long-awaited guidance on remote deposit capture risk management in January 2009. In our view, the guidance provides prudent measures for financial institutions to consider as they seek to fully-leverage RDC for deposit growth and customer convenience. Importantly, the guidance contained no surprises, and did not impose fundamental limitations on what banks could do with RDC. We welcome this outcome.

That said, we found two aspects of the guidance disappointing.

The guidance introduces remote deposit capture as a “deposit transaction delivery system” not simply a “new service”. We couldn’t agree more. But the guidance equates all forms of distributed image capture, branch capture, teller capture, ATM capture and merchant/client capture as RDC. While all forms of distributed capture share a common technology, the risks associated with each vary considerably. The focus belongs on distributed capture taking place by untrained ordinary non-bank employees. Financial institutions have been managing check image capture for well over a decade with good success. Guidance for those operations likely weren’t sought or needed.

The other troubling aspect of the guidance in our opinion is that it failed to recognize the many operational benefits of distributed capture. Arguably, the work process improvements enabled by modern image workflows can reduce risk, not elevate it. For example, instead of relying on tellers as a first defense against check fraud (e.g., 100% manual inspection) and antiquated day-2 rules-based fraud systems, RDC enables a highly automated and efficient set of deposit review and risk management tools that can be applied in near real time. Suspect items can be routed (via image) to trained operators for review well before posting.

With the sensible guidance issued, banks can now breathe a sigh of relief, and get busy leveraging this immensely popular technology instead of being paralyzed by highly over stated perceived risks.

Working Capital is not a dirty word, is it?

Working Capital is not a dirty word, is it?
There is no dispute that one of the hardest organizational barriers to break is the one between Finance and Operations. Accountants and treasurers do not go very well with manufacturing, logistics, and procurement. They have different tasks and different (if not necessarily divergent) objectives, which exacerbate the gap. It is often said, to explain such behavior, that neither side had a real reason to “mingle” and cooperate beyond the basic courtesy of being employees of a same company. But “today” is making things quite different, and models of the recent past will hardly apply to the future scenarios, as soon as the recession dust settles down. “Cash is king” is the refrain in today’s economy, and working capital is the most direct, and effective, metric that measures the health of a corporation. While Treasurers are very familiar and comfortable with the intricacies of what it takes to improve the value of the figure, operations people are not. Just yesterday I was at a meeting of logistics and supply chain managers. I was impressed to listen the presenters mention “working capital” quite a few times. My initial enthusiasm to listen logistics managers finally speaking the finance vocabulary came to a halt, however, when I heard comments along the lines of ”The benefit achieved from this project is that we increased (italic intentional) our company’s working capital.” After an unavoidable shiver, I calmed and realized that they wanted to express something quite different. As a matter of fact, the increase was in the final result of the corporate financial statement, thanks to a reduced need for working capital. Moving away from the semantic analysis of the various other statements heard on the subject of working capital, one item appears clear: operations people are still far away from confidently handling matters that traditionally belonged on the other side of the wall. It should be a priority for corporate decision-makers to ensure these barriers eventually tumble down. When definitions are mis-communicated, they surface an inherent lack of understanding of the subject. In a world continuously revolutionized by changing dynamics and paradigms, it is not an option to fumble for results. The first barrier to break down is the one of corporate language, and operations people should not shy away from terms that sound “financial” and, therefore, out of scope. Understanding of working capital, and of the levers needed to impact its value, should be the first practical test-bed where finance and operations meet to produce positive results for the corporation they both work for.

BAI Transpay

BAI Transpay

Going … Going … Going but not yet gone.

Greetings from BAI Transpay where bankers and vendors gathered to discuss payment issues. Check volumes are dropping and banks are racing to drop costs as quickly as customers are dropping volume. Checks are being imaged, converted to ACH and replaced by debit so that paper check handling is dropping dramatically.

Banks are making mighty efforts to drop costs in line with these decreases. JPMorgan Chase (plus WaMu) has dropped from 3200 people to 1400 in check processing and gone from 21 processing centers to 13.

BB&T has moved to 99% image exchange for sending and receiving images and has branch capture in 400 out of 1500 branches. Frost Bank has dropped head count in check processing by 30%. All banks are racing to reduce costs.

The most painful part of the process will be deciding when volumes get really low. A bank will need to decide whether to:

– Stop working with paper all together

– Keep what little remains in house

– Outsource the remainder

We aren’t there yet, but even the largest banks will soon get there.