ACH: The Glory Days may be Over

ACH: The Glory Days may be Over
NACHA and the ACH have been on a roll for most of the decade, posting impressive network transaction growth rates year after year. From 2000 through 2008, total ACH volume (network + off-network) has almost tripled from 6.9 billion to 18 billion transactions. But from our perspective, the Glory days are nearing an end. This can be seen in the recently released Q1 2009 network volume statistics, with total network volume up just 1.9% versus year ago. Prior to the invention of check conversion SECs (ARC, BOC, POP, RCK, TEL and WEB), the ACH was used almost exclusively for recurring transactions. Indeed, it was designed specifically for this purpose. Network volume was dominated by cash concentration activity and prepaid credits (direct deposit of pay checks) and debits (recurring bill payments). But after years of promotion, the growth engine slowed to an idle. Then came check conversion, beginning with POP introduced in 1999. The collective check conversion introductions have produced impressive results. Through 2008, check conversion activity accounted for 38% of total network volume (32% of total ACH volume), up from just 6% in 2002.
Check Conversion has Rapidly Become a Significant ACH Contributor

Check Conversion has Rapidly Become a Significant ACH Contributor

For the multiplicity of eCheck SECs, the vast majority of check conversion volume has come from ARC and WEB. ARC was adopted by a significant number of large billers and retail lockbox operators because, at the time, ARC offered compelling savings versus paper check clearing methods. WEB has been propelled by PayPal transaction activity, with significant growth over the past two years in particular.
ARC and WEB Dominate eCheck Volume

ARC and WEB Dominate eCheck Volume

But, what lies ahead for check conversion? We see growth, but a far cry from the glory days gone by. In large measure, this is a direct result of the inexorable decline in consumer check writing. There are at least two additional factors. • Electronic bill pay will likely continue to grow at 5% to 7% annually for the next few years, but a good portion of that growth will cannibalize ARC volume as electronic initiated payments displace ARC conversions of mailed remittance. • Even though POP and BOC will see continued adoption by retailers, the resulting ACH volume will be unimpressive.
POS eCheck Volume will Decline Amidst Continued Retailer Adoption

POS eCheck Volume will Decline Amidst Continued Retailer Adoption

This likely outcome is perhaps why NACHA and the network operators have begun merchandizing same-day ACH. We provided a position on that initiative in an earlier post, Same-Day ACH: Whose Interests Would be Served?

Celent’s anti-money laundering vendor report: 2009 update

Celent’s anti-money laundering vendor report: 2009 update
Celent’s AML vendor evaluation reports have become something of a de facto standard, referenced by banks and regulators around the world. We began covering the sector in 2003, and are about to start work on our 3rd edition of the report. AML has not gone away as a concern for banks; indeed it has expanded, across both banking tiers (reaching down into community banks and credit unions in the US, for example) and across geographies (I recently spoke at an AML conference in Malaysia that drew over 500 delegates). The behavior detection technology that underpins AML software has also expanded its boundaries within the financial institution. Celent has been behind the “enterprise risk” approach, that is, consolidating AML and anti-fraud efforts, since our first AML report back in 2002. But until the last few years there were few real-life examples to point to. Recently, however, financial institutions have become increasingly concerned with fighting fraud, including fraud committed by customers as well as employee fraud. And a growing number of firms are beginning to take a wholistic approach to these issues. So this time around our report will take an enterprise risk approach as well, by including in our evaluation the anti-fraud products of the AML vendors. We’re calling it “Evaluating the Vendors of Enterprise Risk Management Solutions 2009.” We’ll be starting research on the report this month, beginning with qualifying vendors for inclusion in the report. The last edition evaluated 19 vendors and was 100 pages long. As the market has shifted, with new products emerging and others fading from sight, there may be some shuffling in order to keep the field of vendors representative of the marketplace. And although we are constantly looking at this space, we’d welcome any comments on vendors we should consider that we may have missed. As a reminder, the AML software providers evaluated in the 2006 edition of the report were: Accuity, Ace Software Solutions, ACI Worldwide, Actimize, ChoicePoint/Bridger Insight, Experian/Americas Software, Fortent/Searchspace, FircoSoft, LogicaCMG, Mantas, Metavante/Prime Associates, Fiserv/NetEconomy, Norkom Technologies, Northland Solutions, SAS Institute, Side International, STB Systems, Top Systems, Wolters Kluwer Financial Services/PCi

Celent Launches Corporate Service

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

PSD: Payment Services Directive or Payment Services Distress?

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

Same-Day ACH: Whose Interests are being Served?

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

The Online Corporate Cash Management Market is on Fire!

The Online Corporate Cash Management Market is on Fire!
Consumer online banking gets a lot of attention in the industry. It’s important to remember however that online banking reaches far beyond the consumer space. Businesses of all sizes bank online and they require more sophisticated solutions. We recently evaluated the vendors who provide online corporate cash management solutions. The report, The Next Generation of Online Corporate Cash Management Solutions is of particular importance for 2 reasons:
  • Online corporate cash management is taking center stage this year in the wholesale banking space.It is receiving increased attention as banks look to upgrade or augment their aging platforms to woo additional business. Growing corporate relationships is a major theme as banks aim to offset the lackluster growth on the retail side and focus on higher margin businesses that contribute to noninterest income. In fact, spending growth on online corporate cash management solutions by far exceeds IT spending growth of the overall banking industry.
  • Celent believes that a great opportunity exists for one or more vendors to stand out from the pack by demonstrating a differentiated Web 2.0 user experience. This has already started as a handful of the vendors we evaluated showed off differentiated experiences using Web 2.0 elements. Dashboards, interactive reporting, and improved user interfaces are starting to pop up as the vendors recognize the need for change and improvement.
If you want to find out how the vendors stack up using our ABCD methodology, please read my new report, The Next Generation of Online Corporate Cash Management Solutions. Celent can also customize this report for your financial institution to provide further information, and help you choose the vendor that is the best fit for your requirements. Please send me an email if you would like more information.

NCR’s Mobile Deposit Move

NCR’s Mobile Deposit Move
On 28 April, NCR announced its integration of Mitek Systems’ ImageNet Mobile Deposit to its’ APTRA Passport imaging platform. The NCR decision follows integrations already completed by J&B Software and RDM Corporation. This was a smart move on NCR’s part in our opinion. Others are sure to follow. Mitek announced its ImagNet Mobile Deposit platform in January 2008 and followed with announcements of Blackberry support in September 2008 and Apple iPhone compatibility in October. To be sure, Mitek is pushing the envelope with remote deposit in an environment where the industry is barely adept at small business RDC using specialized check scanners and “consumer capture” is largely offered among credit unions alone. But all this is changing. In our opinion, mobile remote deposit is destined to succeed for two reasons: convenience and device ubiquity. Apple shipped 2.3m iPhones in 2007 and 13.7m in 2008. RIM boasts about 25 million BlackBerry subscribers through February 2009. The world is quickly going mobile, and mobile banking is riding the wave. Bank of America alone boasts well over a million mobile banking users (June 2008). Apart from risk concerns, why wouldn’t mobile RDC be an obvious feature for select mobile banking users? We’re not alone in expecting mobile remote deposit to catch on. In research derived from a Fiserv-sponsored online survey of roughly 300 customers in October 2008, one third of respondents see a need to offer mobile deposit capture services to their business customers. The majority of respondents indicated that businesses that sell products and services at the buyer’s location (such as home appliance repair businesses and food and beverage distributors with trucks in the field) are their primary target market for mobile deposit capture. We agree. Banks would do well to launch mobile RDC first to business clients while there may still be fee income to be had. But banks clearly aren’t rushing into mobile RDC as they had with RDC’s original incarnation. Caution is understandable, but scoffing is short sighted. Celent’s position is that viability of mobile check deposits rests on four requirements: 1. Client usability – the application must be fast, simple to use and provide reasonably consistent performance despite widely varying lighting conditions, steadiness of hands and check stock characteristics. Obviously, mobile deposits introduce greater variability in image characteristics than images captured on specialized scanners. 2. Operational viability – even the most enriching user experience would be for naught if mobile deposits wreak havoc in the back offices of deploying financial institutions. 3. Security – image and data transmissions would need to be secure. Any security vulnerabilities would prove disastrous. 4. Broad device support – part of the value proposition for mobile deposits rests on not having to invest in image capture devices. To provide some direct experience in using ImageNet Mobile Deposit, Celent requested a test account from Mitek and experimented using the authors AT&T Tilt device. Installing and learning the simple application took no longer than 15 minutes. Sample deposits were performed using a mix of personal and business checks after lining out the check codeline for security. Overall user experience was favorable – even for this novice camera phone user. And, the image analytics appear to have been up to the task. With intentional carelessness toward lighting, contrast and steadiness of hand, resulting check images appeared Check 21 ready. Mobile RDC is clearly a nascent market, and banks have lots on their hands these days. But sitting on the mobile RDC sidelines may leave banks wishing they hadn’t.
Checks captured on the author's device with intentional carelessness

Checks captured on the author's device with intentional carelessness

From Connectivity Hubs to Collaborative Infrastructure

From Connectivity Hubs to Collaborative Infrastructure
The current economic climate forces corporate treasurers to be more tactical and have an even more direct control of cash operations that determine the value of corporate liquidity. From an organizational perspective, this calls Treasury departments to move to centralized structures, enabling a better response to efficiency demand and cost control. From a technology point of view, the drive is toward a centralized repository of data, to more effectively manage and consolidate credit exposures. The purpose of this brief article is to analyze how technology is evolving in the continuous pursuit of ensuring key priorities for Treasury: data consolidation; process optimization; and visibility. Indeed, an ecosystem of suppliers, buyers, banks, data providers, and trading partners can be properly integrated by a centralized platform that offers process optimization and workflows, together with connectivity and collaboration. I like to call such a platform a “Connectivity hub”. Financial supply chain transactions, going from accounts payable and accounts receivable processes, to EIPP (electronic invoice presentment and payment), to electronic invoice and settlement, are connected through gateways that link the internal (i.e., corporate) and external (i.e., trading partners; banks; service providers) financial flows. An example of this is Sungard’s Avantgard Collaborative Financial Management, described as an “underlying connectivity platform [which] acts as an integration layer, allowing suppliers, buyers, banks, vendors, data providers and other external stakeholders to improve velocity of cash and improve response time. This infrastructure acts as a backbone for supply chain management & financing”. This, also, creates an infrastructure platform on which the corporate Treasury manager can plug additional players of choice. But, because of company size (e.g., multinational) or industry sector (e.g., commodity-driven), group treasurers are faced with the need to expand the basic front-, middle- and back-office treasury management system (TMS) functions with more advanced “best of breed” processes. An integrated set of best of breed solutions that support treasury transformation can be applied to the existing TMS in two ways: • Company-centric: Plug & play the applications through the gateways of a Connectivity hub • Process-centric: Embedded as integral components of a TMS Collaborative Infrastructure I like to call this second scenario a “Collaborative Infrastructure” because it moves from the concept of a platform that creates gateways to a set of solutions provided by a compound of trusted partners. Wikipedia defines an infrastructure as “the basic physical and organizational structures needed for the operation of a society or enterprise”. With corporate Treasury being the beneficiary, a “collaborative” infrastructure opens the platform to a network of catalyzed stakeholders (i.e., suppliers, buyers, banks, data providers, and trading partners). The portfolio of services available to the single company is immediately expanded to the entire set of connections, thanks to an extended network of associated entities that maximize their level of participation to the infrastructure, according to a dynamic of progressive collaboration. To validate the concept of the Collaborative Infrastructure, I can mention “Wallstreet Treasury” from Wall Street Systems, which creates a “Treasurer’s Desktop”, and offers access to additional core Treasury services via integrated partner offers, enriching its own set of TMS applications: • Fides: Global bank interface solutions • Speranza: Bank account management services • Reval: Hedge Accounting • 360T – Trading platform for enabling electronic trading ensuring the best prices and also improving the STP (Straight Through Processing) element of the solution • Misys – Confirmation matching system for automatically verifying the deal details against the bank system Bottom line: market commentaries predict that the current economic turmoil will see first signs of recovery by 2010. Once fully out, corporations will reward treasury offices that have demonstrated ability to maintain a cash positive financial profile. Treasury will move to a more strategic role, and investments in technology will be focused to enrich its application portfolio, traditionally (and culpably) kept too lean and basic. Corporate treasurers will need a more robust system to support them in this new responsibility, where best of breed applications and services will make the difference. I believe that the future will be promising for those solution vendors who will aggressively target the market offering Collaborative Infrastructure-type of solutions. They will put business processes at the center of attention, and will envision the corporate client as an element within a wider ecosystem of stakeholders, where the value will be generated by collaborative efforts and community of intents. The true competitive differentiation will be in the set of partnership solutions that will compose the Collaborative Infrastructure mosaic, where the objective will be to cover the widest portion of processes that fall under the control of a corporate Treasury office.

NACHA Payments – Trends and Thoughts Related to Online Banking

NACHA Payments – Trends and Thoughts Related to Online Banking
I got back late last night from the NACHA Payments conference in Orlando. It was a good event, although not surprisingly, it was apparent that attendance was down. Sessions seemed to be well attended, although exhibit hall traffic was light (and much smaller this year to boot). I spent most of my time at the conference in meetings with our clients – a mix of banks and software vendors. Most of my meetings centered around online banking and payments, particularly for small businesses and large corporates. A few noticeable trends emerged:
  • Web 2.0 is finally arriving to the business online banking space. Almost all the vendors I met with either talked about or showed me fresh GUIs with better navigation and layout. This is long overdue. A couple of the vendors have been working on this for a little while, and their advances made it into my upcoming online cash management vendor evaluation report (the report is complete. It’s now time for it to be edited and for the vendors to review their profiles prior to publication). Bank of America had an interesting but basic presentation on next generation Web 2.0 cash management solutions. I was quoted in the presentation, and it’s nice to see a bank thinking about the next generation of solutions.
  • Dashboards are a key component of next generation online banking solutions. This was definitely the buzzword. I discussed this at length in my report, Web 2.0: A Quantum Leap for Wholesale Banking .
  • Banks still don’t get the importance of PFM for small business. I seemed to be the one asking the questions about this. I would have liked to see greater emphasis on PFM, particularly with the Web 2.0 demos and discussions.
I also gave a presentation together with Bremer Bank and Fiserv called, Courting a New Kind of Customer: Serving Small Business Online. The session was well attended and there were a few good questions at the end.

A bank’s low hanging fruit

A bank’s low hanging fruit
RBS just announced plans of a worldwide reduction of 9,000 posts. This, unfortunately, highlights the myopic vision of cutting sources of costs immediately available, in the attempt of restoring shareholders confidence long past declined. While there is significant time pressure, it is important for senior executives to take a step back and properly review cost-management techniques to ensure sustainability. The problems with the typical cost cutting program lie in the fact that cuts implemented are generally short-term tactical fixes, rather than long-term structural changes. While the current market conditions are acute, building a sustainable cost-management program requires more than sporadic/deep cost cuts throughout the business. Major organizations consistently stumble in cost-management initiatives because they do not properly involve business line experts, who work with the technology, clients and operations staff on a daily basis. Cost cutting in isolation without in-depth knowledge of business line activities can create more problems and costs than it alleviates. An effective cost cutting program aligns the right people with the proper organization, and within the right team structure to develop a sustainable long-term cost-management program. As they embark on cost initiatives, executives have the opportunity to make fundamental changes to the cost base. Banks can create a culture of cost-efficiency that will refocus business lines on sustainable growth and client service and allow stronger institutions to emerge from the credit crisis well positioned for growth.