The “Davids” of the HSA Market

The “Davids” of the HSA Market
I recently attended an credit union roundtable session that focused on the health savings accounts (HSAs). This was my first professional exposure to the credit union industry, which introduced me to an entirely new lingo including “SEGs” (Select Employer Groups), “dividends” (interest) and “CUSOs” (Credit Union Service Organizations). By talking with the roundtable participants, I came to respect their dedication to their communities, something that I often find missing when I talk with bankers. Whereas banks try to “go wide”, credit unions often don’t have that option and instead try to “go deep” by offering more services to their customers (I even heard a story of a credit union that opened a used car lot to sell discounted automobiles to its customers!). The credit unions also won my respect in the healthcare banking context. The number of credit unions that offer HSAs is increasingly rapidly — from 244 in Dec ’06 to 585 in Dec ’08. During the same period, HSA assets grew from $53 million to $139 million. However, in a growing HSA market, the threat of the credit union industry “Davids” would appear to be of little concern to the bank industry “Goliaths”. After all, credit unions only hold about 2% of HSA assets market-wide. Howevever, embedded within the credit unions’ success, there is a cautionary tale for banks. As the HSA market matures and account holders become more aware of their portability options, any rollovers between credit unions and banks will largely flow one way — to the credit unions. The reason for this is the community presence that credit unions hold. All else being equal, account holders looking to rollover a more prone to choose a local financial institution over a remote one. However, all is not always equal, including interest rates, which are often higher at credit unions. Combined, these factors will likely work to credit unions’ advantage. Proof of this is already emerging; one of the roundtable participants announced that it had won a rather significant block of account holders away from one of the largest HSA custodial banks in the country. David’s slingshot is beginning to hurt…

Reducing Complexity in European Banking

Reducing Complexity in European Banking
In its fourth quarter 2008 results presentation, ING Group, the European banking and insurance conglomerate, has clearly identified that reducing its operational complexity was key to weather through the crisis and reduce dramatically its operational cost.

However, ING is certainly not an exception in the market, and the issue of complexity reduction is core to the cost reduction strategy of numerous European banks.

In fact, while most of the European banks have implemented best practices to reduce their operating cost and increase revenue, very few have addressed an issue well identified by industrial organizations: reducing operational complexity.

In the past decade, in order to decrease the impact of commoditization on their revenues, banks have dramatically increased the complexity of their product offering, their distribution reach, their pricing structure, etc. In addition, the level of complexity in European banks has dramatically increased during this period because of consolidation and acquisitions. An apparent paradox exists between scale and complexity (i.e., larger financial institutions are not able to consistently leverage economies of scale to mitigate the effects of complexity or reduce the amount of proliferation/duplication). In fact, as financial institutions grow, they tend to get more complex because of :

– Complexity of business model: Larger financial institutions tend to have more variety and differentiation in the customer segments served, products/services provided, and the countries/regions (and their respective regulatory requirements) covered.

– Incomplete or inadequate integration: Many large financial institutions are an amalgamation of smaller businesses that have been acquired over the years; however, in many cases the integration of processes and systems is incomplete or inadequate, thereby increasing complexity.

– Decision-making process: Decentralized decision-making is more common in larger banks, but this allows (and often rewards) business leaders to optimize their own products/services, channels, geographies, and business units vs. optimizing for the corporation.

– IT System strategy: Some organization grow so quickly that applications don’t keep pace. This often leads to IT customization, patchwork, and add-ons to support product/geographic and channel proliferation, leading to more complex systems

While implementing best practices at the operational level has certainly generated cost reduction, it has often failed to achieve the full potential of a strategic approach to cost management by not solving the consequences of complexity. Therefore it is crucial for banks, especially retail, to address the issue of complexity in a full front-to-back approach. However, this will require fundamental changes (e.g., change of business model) which are essential to achieve the long-term cost optimization of financial institutions.

Banks need to jump onto the PFM bandwagon

Banks need to jump onto the PFM bandwagon
Wesabe announced today that they will start to sell their PFM offering (dubbed Springboard) to banks and credit unions. Wesabe is not the first vendor to start selling directly to banks. Earlier this year, Geezeo made a similar announcement. These are win-win moves for both the banks and the software companies: – Bank PFM tools cannot compete with the rich solutions offered by non-bank providers. They need to update their offerings in order to remain competitive and keep clients attracted to their sites. For more info see my post on PFM Meets Social Networking. – The non-bank PFM providers have been struggling to make money. Their products are offered free of charge to consumers and their online business models are questionable. Direct sales to banks will provide a much needed revenue stream. Expect to see more of this trend as we move forward. It will be interesting to see how this software will affect PFM usage growth at the banks.

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Cash may no longer be King, but…

Cash may no longer be King, but…
Lest there be any thought about cash going away, use of cash in the US continues to increase despite the rapid growth in the use of electronic payments. The Federal Reserve reports the dollar amount of currency in circulation has grown 88% in the past 10 years to US$770 billion in 2007 and US$889 billion in late 2008. Meanwhile, the amount of cash ordered and deposited through Federal Reserve Banks has increased 75%, to over 27 billion banknotes annually. This trend may seem reasonable in light of the US economic and population growth over the period. For perspective, per capita cash in circulation grew from US$183 in 1985 to US$2,537 in 2005 based on US Bureau of Census population estimates, or at a rate of 6% CAGR – well above the 4.2% inflation over the period. Cash usage is growing – absolutely. Meanwhile, cash usage at traditional point of sale locations has been remarkably steady alongside the dramatic growth in debit card usage. As a percentage of POS mix, cash declined from 39% in 1999 to 29% in 2008 according to recurring research by Hitachi Consulting. The data suggests debit card growth has primarily come at the expense of check usage at point of sale which has dropped from 18% to 8% over the period. There appear to be two dynamics at work. The first is our stubborn affinity for cash payments. Immigration trends as well as grey market economic activity also contribute to the sustaining popularity of cash payments for obvious reasons. Another factor has been the worsening economic conditions of late. 2008 has seen a return to an 8% CAGR of cash in circulation. The fourth quarter alone witnessed a 5.4% growth corresponding to US$45 billion in additional cash in circulation. This suggests the worsening recession impacted holiday spending, reversing the long-term trend favoring credit and debit card usage at point-of-sale. On top of that, there is clear evidence of cash hoarding as seen by the significant rise in the number of high value notes in circulation. Celent expects cash in circulation to peak in the next two years. So in addition to investments in alternative payment mechanisms, Celent encourages banks to revisit their cash logistics management systems. In many banks, there may be significant opportunity for cost savings. On the product side, a growing number of banks are being rewarded for their support of remote cash capture solutions. Remote cash capture will be the topic of a forthcoming Celent report.

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.

Indian Banks : Safe and Sound in a Protected Economy

Indian Banks : Safe and Sound in a Protected Economy

Indian banks enjoyed a competition-free era, operating under a protectionist regime, till 1991. The competition from private and foreign banks was hardly noticeable till the government liberalized the Indian economy in 1991. Ever since, the number of foreign banks has grown considerably and currently India has 29 foreign banks operating with around 277 branches and 1034 ATMs (as of March 2008). With the announcement of further liberalization on the cards, how has it affected the local banks?

In 2004, Reserve Bank of India, the central banking authority, announced the roadmap for the presence of foreign banks in the country. During the first phase, between March 2005 and March 2009, foreign banks will be permitted to establish presence by way of setting up a wholly owned banking subsidiary (WOS) or conversion of the existing branches into a WOS. At the end of the first phase, the government would conduct a review and decide on the further actions related to the extension of the national treatment to WOS and permission for mergers/acquisitions of any private sector banks in India by a foreign bank. In a way, this move has been a boon to the Indian banking system, as the local banks have vastly improved their banking processes and services in order to compete with the private and foreign banks. While it is unlikely that the foreign banks would compete in the rural and semi-urban segment, they have captured a good percentage of the urban customer base, from the public sector banks, with their customer-centric operations.

As of last year, many foreign banks were keen to open branches in India, including Royal Bank of Canada and Glitnir, an Icelandic bank. The public sector banks in India like Bank of Baroda and Canara Bank underwent rebranding exercises and image makeover, anticipating competition from foreign banks. However, one set of words played a spoilsport on all such plans : Global Financial Crisis.

As a result of the crisis, many foreign banks in India are reworking their strategy. Some of the banks, like Royal Bank of Scotland (ABN AMRO) and Citibank, are trying to sell off their India businesses. The Reserve Bank of India, which had proposed the review, may not ease the current norms, considering that it would open the financial system to the banks which have been faring badly in other countries. For the time being, the local banks can heave a sigh of relief and concentrate on their own expansion. With the General Elections happening in the next couple of months and a possible change in the government, the proposed liberalization policies may not see the light of the day in the near future.

The Premature Reports of HSAs’ Demise

The Premature Reports of HSAs’ Demise
With the election of Barack Obama, there was much discussion about the overhaul of the U.S. healthcare system, a conversation which continues in earnest today and will likely go on for months, if not years. Many policy and industry analysts stated that under the Obama administration, the U.S. would move to a European-style single-payer system and that we would see the end of consumer-directed healthcare (CDH) plans (i.e., higher deductible plans coupled with tax-advantaged medical spending accounts). As a result, some declared, health savings accounts (HSAs) would soon go the way of the dodo bird. As a healthcare banking analyst, I watch healthcare policy from the sidelines, not from the middle of the playing field. However, I must say that in my research of President Obama’s policies as well as of state (e.g., Massachusetts) health care reform, I have never come across any indication that CDH plans are off the table. Furthermore, there does not appear to be any serious discussion about moving to a single-payer system anytime soon. Importantly, there are rumblings in Washington that health care benefits should be taxed to help pay for health care reform. This means that your employer’s health care subsidies (e.g., the portion of your health insurance premium paid by your employer) may begin to be taxed. Such a move would certainly drive more consumers to adopt CDH plans, as such plans have lower premiums and thus would be subject to less tax. More CDH plans = more HSAs, and the dodo bird analogy becomes untenable. However, all is not 100% rosy for HSAs. Many employers contribute to their employees’ HSAs; as health care benefit taxation details are still sketchy, it’s hard to say if such contributions would be taxed too. If so, this would mean very bad news for health reimbursement arrangements (HRAs), which are medical spending accounts that consist solely of employer-provided funds.

Bank of America Puts a New Spin on Cross Selling and Online Banking

Bank of America Puts a New Spin on Cross Selling and Online Banking
Bank of America recently introduced a new program called Add it Up. This creative program allows BofA credit or check card holders to receive cash back (on their credit card or deposited to their BofA checking account) when they shop online at a variety of merchants. It’s an interesting move as banks don’t typically tie themselves into other industries (retail in this case). The partnerships with retail merchants are certainly a creative way of marketing and relationship building. There is a long list of merchants to choose from and the cash back percentages are quite decent. A couple of things caught my eye: – This is a great way to cross sell.You need to enroll for this via BofA online banking. In other words, if you have a BofA credit card but don’t bank online with them, you must now open an account. Or vice versa (bank online, need to get a credit card). A good way to cross sell and tie complementary products together. – The offer is attractive since people are trying to save money. The rewards offered here are exactly what US consumers are looking for. Money is tight and folks will be more than happy to save wherever they can. – This is the time for banks to solidify customer relationships. Consumers are wary, banks are shaky. This is a move that cost-conscious consumers will appreciate and it can certainly contribute to the relationship stickiness factor. It is important to note that this is NOT a new concept. Receiving a discount or cash back for online shopping has been available for some time through a variety of consumer sites. Examples are www.fatwallet.com and Live Search. Users of these sites don’t have much incentive to switch to BofA. However, Existing BofA customers who are new to the cash back concept will find a lot to like.

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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.

Too Big To Fail

Too Big To Fail
In the US banking industry people talk about banks being too big to fail, but I am concerned about another phenomenon: the bank that is too big to save. At what point does a bank become so big that if it were to fail, the government would be hard-pressed to bail it out. The FDIC (note that the I stands for Insurance) has said that it is not willing to take a risk greater than 10% of the US deposit base. Some banks are getting dangerously close to this limit, and may perhaps be on the other side of it. Now is not the time to ignore risk management. The concentration of deposits is also a cause for worry [but I worry a lot]. The top five banks in 1995 had 11% of all deposits and today they have 37% of all deposits. Yet, it could be far more concentrated. Our neighbors to the north, in Canada, find themselves with the top five banks controlling 94% of deposits and the top six banks controlling 98%. Royal Bank of Canada (RBC) has over 25% of deposits and Toronto Dominion (TD) has over 20%. These banks might not only be too big to fail, but also too big to save!