Three Common Mistakes Banks Make

In my work as a research analyst, I run into three particularly common mistakes. Banks aren’t the only ones that make these mistakes. I make them too and have to be vigilant to avoid them.
1. Failure to appreciate diversity of needs or preferences
2. Failure to appreciate the shrinking half-life of facts
3. Failure to skate to where the puck is going
Let’s look at each one briefly…

Failure to appreciate diversity of needs or preferences This is utterly common. You see it in headlines all the time. “Millennials this…”, “Small businesses that…”, Community banks are…”. The trap involves extrapolating limited data to an entire population. Two current examples illustrate: The Use of AI in Banking is About to Explode. Apart from confusing AI with predictive analytics (which is more broadly used), the article asserts “explosive” future adoption of AI right around the corner. I’ll just say that this assertion vastly overstates planned adoption of AI among North American banks based on recent Celent research. Bank on Changes. Among other things, this pleasant article states “Smaller community banks like Edison, which emphasize personal service, said they have no plans to scale back drive-through or other services at brick-and-mortar locations.” While referring to a small number of community banks interviewed for the article, it projects those results on the entire community bank population.

So, are community banks planning on maintaining their current brick-and-mortar services in their entirety – despite the growth in mobile banking utilization? Some are and some aren’t. the figure below displays results a very question posed in a December 2016 Celent survey of North American financial institutions. “Compared to your current branch count, how many branches do you expect your institution will operate five years from now?” The report is not yet published. The idea is simple: banks serve diverse markets and make a diversity of decisions as well. The diversity of expected response is glaring in this data! So as not to give away too much of the report’s contents, I refrain from graphing the results of that question by asset tier. Failure to Appreciate the Shrinking Half-Life of Facts Assertions abound about customers, what they do, want and value. Some data points supporting these assertions are dated. This is increasingly dangerous. Samuel Arbesman argues for a shrinking half-life of facts in his book, The Half-Life of Facts. Most substantive change takes a while to accomplish – particularly among large organizations. I think many banks are at risk by assuming the facts as they knew them at the beginning of a protracted initiative will remain after the initiative is finished. When it comes to mobile, for example, six months is a long time and a year is eternity.

Failure to Skate to Where the Puck is Going Even those of us who aren’t hockey fans are familiar with the famed Wayne Gretzky quote about skating to where the puck is going instead of where it has been. I saw this up close and personal as part of a research effort exploring the current and likely evolution of retail delivery channel technology. Omnichannel delivery clearly remains aspirational at most institutions (I’ll defend that assertion thoroughly in the upcoming report). Yet, even as most surveyed institutions concede the importance of omnichannel delivery, the significant majority are not yet meaningfully engaged in bringing it about. How could that be? Many banks – particularly those with below industry average mobile banking customer utilization – aren’t feeling the pain yet. They are skating to where the puck has been. When they do feel the pain, it will likely be the result of much damage already inflicted.

Silicon Valley? No, Chilecon Valley

In previous blog posts regarding fintech in Latin America my position was, and remains, that one of the reasons for being behind is that it lacks of a “Silicon Valley” equivalent. Efforts to create a fintech ecosystem, as Finnovista is doing, become a good alternative to overcome the absence of a geographical pocket of innovation. Particularly consider the market fragmentation of Latin America comprised by 19 countries, some of which have 3M inhabitants to Brazil having +200M. People in most countries may speak the same language but markets are far from being similar just for that. Under (or against?) these circumstances, Chile is working to become Latin America’s Silicon Valley. One of its most attractive initiatives is “Start-Up Chile”, created four years ago to transform the Chilean entrepreneurial ecosystem. It began with a question: “What would happen if we could bring the best and brightest entrepreneurs from all around the globe and insert them into the local ecosystem?” The initiative offers work visas, financial support, and an extensive network of global contacts to help build and accelerate growth of customer-validated and scalable companies that will leave a lasting impact on the Latin American ecosystem. The idea is to make the country a focal point for innovation and entrepreneurship within the region. Start-up Chile, with only four years, is a start-up itself but it has a good starting point and great potential:
  • Chile has demonstrated for years its entrepreneurial spirit, with Chilean companies competing successfully in various industries (air transportation, financial services, and retail, just to mention a few) and a stable economy.
  • This year two Chilean start-ups were the winners of the BBVA Open Talent in Latin America:, aiming to financial inclusion by creating a credit scoring based on utility payments; and Bitnexo which enables fast, easy and low cost transfers between Asia and Latin America, using Bitcoin.
While other countries and cities in the region are working in offering support to start-ups, it seems Chile is leading the way. Hopefully this triggers some healthy competition in the region, which in the end will benefit all. In the meantime, let’s meet at Finnosummit in Bogota – Colombia next February 16th. Join financial institutions, consultants, tech vendors, startups and other digital ecosystem innovators, to learn how startup driven disruption and new technologies are reshaping the future of financial services in the region. Remember to use Celent’s discount code C3L3NT20% for a 20% discount on your conference ticket.  

On the cusp: regional integration in Asia

It’s 2015, the mid-point of the decade and a good time to start looking at major trends in Asian financial services over the next five to ten years. One of the major themes will be regional integration, which is another way of saying the development of cross-border markets. There are at least two important threads here: the ongoing internationalization of China’s currency, and the development of the ASEAN Economic Community (AEC) in Southeast Asia. RMB internalization is really about the loosening of China’s capital controls and its full-fledged integration into the world economy. And everyone seems to want a piece of this action, including near neighbors such as Singapore who are vying with Hong Kong to be the world’s financial gateway to China. The AEC is well on its way to becoming a reality in 2015, with far-reaching trade agreements designed to facilitate cross-border expansion of dozens of services industries, including financial sectors. While AEC is not grabbing global headlines the way China does, we see increasing interest in Southeast Asia among our FSI and technology vendor clients. From Celent’s point of view, both trends will open significant opportunities across financial services. In banking, common payments platforms and cross-border clearing. In capital markets, cross-border trading platforms for listed and even OTC products. In insurance, the continued development of regional markets. Financial institutions will be challenged to create new business models and technology strategies to extract the opportunities offered by regional integration. It’s the mid-point of the decade, and the beginning of something very big.

FIS To Acquire Clear2Pay

Rumours of this purchase have being down the rounds for months (I was discussing it in June at EBADay), although the acquirer has only been ever referred to as a “US Vendor”. In discussions with clients over the last few months, I’ve highlighted 5 potential suitors (including FIS), and of those, four for very similar reasons. All four have broad FS offerings, but have little or nothing in the core payments space, making Clear2Pay an obvious solution to plug a gap.(Clients – ping me for a discussion of who the vendors are). For FIS, there are some additional benefits to the gap filling, as in addition to their OPF hub, Clear2Pay have card assets (including one of the largest install bases in chargeback management systems) and testing capabilities.Testing is a huge part of payments, but one which often gets overlooked. For Clear2Pay the existing relationships that FIS has, particularly in the US, and the breadth of resources at their disposal, should have definite benefits. There are some obvious challenges ahead, not least the fact that few “big company subsumes smaller company” stories come without casualties in the smaller company. With Clear2Pay being a very entrepreneurial company, with some very visible and involved leaders, it’ll be even more important than ever to address this early on. More broadly for industry, it continues a trend of consolidation in payment vendors. Clear2Pay came close to being acquired a couple of years ago. That suitor, and the other three I highlighted in my conversations, now find themselves with both still with a gap, and now an arch-rival who has the largest and arguably most visible player in the market. One of the vendors I highlight has repeatedly approached one of the other payment hub vendors over the years. ACI, already a hub vendor, bought Distra, a payments framework, to strengthen their offerings. In short, this is a very important deal, signalling the coming of age of payment services hubs, and we very much doubt the last significant transaction in this space.

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.

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!

Leading the Bird: What Bankers Can Learn from Duck Hunting

Every duck hunter knows that in order to avoid coming home empty-handed, one must aim ahead of the bird – lead the bird as it is commonly referred. The idea is that if one aims directly at the bird, every shot will be a miss no matter how precise the aim. That’s because by the time the bird shot gets in the vicinity of the duck, it will have flown out of the shot pattern.

How Much to Lead is the Tricky Part
How Much to Lead is the Tricky Part
What does this have to do with financial services? Tons! Today’s financial services landscape is challenged with astonishing array of changes, and the rate of change is faster than most have seen in our lifetimes. It’s my observation that most financial institutions aren’t leading the bird. One example lies with retail banking delivery channel priorities. With astonishing consistency, banks and credit unions respond to surveys indicating that channel priority is simply a function of channel usage. The more the usage, the higher the priority. Simple enough, except for the fact that doing so doesn’t lead the bird. Instead, doing so guarantees that financial institutions that behave this way will forever lag the market. The faster the bird, the greater the miss. Other examples in banking: • Overreliance on the branch channel for sales even though all indications point to continued declines in foot traffic. • Slowness in deploying mobile RDC even though most major retail brokerage now offer. • Waiting for Americans with Disabilities Act (ADA) mandates to invest in deposit automation ATMs even though ATM usage skyrockets among FIs that deploy them. An example of leading the bird is PayPal. EBay Inc.’s top brass made it clear in a recent earnings call that mobile technology is dominating strategic thinking at PayPal Inc., even though it does not yet account for a significant share of transaction volume for the eBay unit. As reported by Digital Transaction News: Addressing stock analysts during eBay’s quarterly earnings call, eBay chief executive John Donahoe lauded the expansion of PayPal’s point-of-sale payments service to some 2,000 U.S. Home Depot Inc. stores earlier this year. “This is just the beginning,” he said. “We have signed contracts with several additional retailers.” Leading the bird doesn’t mean having to be on the “bleeding edge” of technology. Even fast followers can lead the bird. And, leading the bird isn’t the same as being proactive. It’s not a matter of attitude. Instead, leading the bird is a way of aiming. It means taking action based on where things are going, not where they have been – or even where they are. It’s analogous to the difference between predictive analytics and business intelligence. Both are useful, but they serve two very different purposes. Leading the bird doesn’t mean you come home with all the spoils, but it does invite doing so. At the very least, it ensures you come home with… something.

Why Wholesale Lockbox Belongs in the Headlines

The American Banker published an unlikely article this morning. In its article written by Jackie Stuart, Maryland Bank to Use Wausau Lockbox Service, the article waxed eloquent about the benefits Sandy Spring Bank will realize with its outsourced wholesale lockbox solution. Really – wholesale lockbox making headlines? A 50 year-old product? I was encouraged to see the article for two reasons. Wholesale lockbox (WLBX) is traditionally associated with the largest banks. Sandy Spring Bank is a $3.7 billion asset financial institution. Not long ago, wholesale lockbox would be a rarity among banks of that size. Image workflow and check truncation changed all that. Now, a number of solution providers offer flexibly outsourced solutions making a wholesale lockbox product offering viable for small banks. Observing this opportunity, all leading remittance processing software platform vendors now offer outsourcing services. After 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-oppty Processing efficiencies from image workflows and hub and spoke processing models enable lower price points than a short while ago. Moreover, since extraction and image capture can be geographically separated from lockbox processing, competition among outsource processors knows no geographic bounds either. This is good news for banks and fits well with the idea of WLBX adoption moving down market. With checks likely to dominate business-to-business payments for the medium term and WLBX is here to stay.

The Canopy Aftermath

Many of our healthcare banking readers have by now heard of the recent turn of events at Canopy Financial, a tech vendor offering CDH (consumer-directed healthcare) account processing platforms for banks and health plan carriers. As has been reported in TechCrunch and the Wall Street Journal, serious allegations are being made regarding financial report falsification. It has been reported that members of senior management have resigned/stepped down and the majority of employees have been let go. The company’s web site has been reduced to a single contact page. How the allegations will be pursued and decided will be done by appropriate parties within the legal system. In the meantime, there are a number of business questions that come to mind. First, what will become of those banks that were Canopy’s publicly-stated clients? Sovereign Bank and Wachovia were listed as clients, but they have largely exited the HSA scene (Wachovia was taken over by Wells, Sovereign by Santander). Canopy’s fate will therefore be more relevant to customers still in the HSA space, such as Comerica and Fifth Third (as well as BCBS of Michigan). This news has got to hurt for such clients, as they are now in the throes of the health plan/HSA open enrollment cycle. Second, who will benefit most should Canopy permanently shut down? Competitors such as ConnectYourCare, DST, HealthEquity, Lighthouse 1 and FIS/Metavante must obviously be watching this situation closely. However, given the allegations against Canopy, the installed account base may be far lower than has been publicly stated previously. Third, will some party (a competitor? a customer?) try to acquire Canopy’s IP? As was reported in Celent’s January report, “Processing Health Savings Accounts: Paths to Success“, Canopy has strong technology — other industry reports have also looked favorably upon Canopy’s products. Surely, the platform that Canopy developed over 4 years has got to be worth something to somebody.

The Most Wonderful Time Of The Year

For our U.S. readers, most of you have begun (or are about to begin) your healthcare enrollment process. Once again, we will have to face the daunting task of trying to understand the myriad of complex benefit designs among the differing health plan options offered by our employers. The whole process is as fun as, well, a gall bladder operation. This time of the year has a special meaning for the healthcare banking industry. It is the brief period of time after most product development & marketing efforts have taken place, and when attention is turned to how many employees/consumers sign up for high-deductible health plans (HDHPs). Of course, HDHP enrollment is the leading driver of HSA growth, so HDHP numbers provide a pretty good clue about the direction of the HSA business. For the near-term, the healthcare banking industry just received some good news — General Motors (GM) will only offer HDHPs to its 24,000 salaried employees for the 2010 plan year. GM’s decision is likely a bellweather for a shift among large, iconic employers — more and more will move from offering HDHPs as an option, to offering HDHPs exclusively. This should come as no surprise, as employers are expecting health care costs to go up by 6% in 2010 and HDHPs usually come with lower costs to employers. As explained in Celent’s report, HSA Acquisitions: Hare-Like Market, Tortoise-Like Dedication, we expect HDHPs to grow by about 25% in 2010 over 2009. An important question is whether or not the near-term will impact the long-term, especially in the context of health care reform. As I’ve written in the past, a key indicator to watch is Congress’ definition of minimally-sufficient coverage. Right now, the Senate’s default definition is that health plans must cover a minimum 66% of the average person’s healthcare costs. It is generally felt that an HDHP (excluding contributions) would only cover 60% of average healthcare costs. As such, HDHPs don’t meet the definition threshold and are under some threat. At the same time, in his keynote healthcare address to Congress last month, President Obama promised that, “…nothing in this (healthcare reform) plan will require you or your employer to change the coverage or the doctor you have. Let me repeat this: Nothing in our plan requires you to change what you have.” Before signing any bill that could potential diminish the role of HDHPs, President Obama now has 24,000 more people to consider.