I presented at the CARTES America conference in Las Vegas last week. It was a great event with many interesting conference sessions and good opportunities to network. One of the highlights for me was the opening keynote with panelists representing various merchant organisations, such as Merchant Advisory Group (MRA), National Restaurant Asociation (NRA) and The Association for Convenience and Fuel Retailing (NACS).

The message was pretty clear – merchants are not convinced about EMV, certainly not in its present form. At the very least, they have genuine concerns about costs, some of the decisions to-date and the issues that remain unresolved:

• According to the panelists, “even if the fraud rates were to double to 8bps, that is still not enough to cover capital expenditure paid over 30 years,” the “ROI is just impossible.” While it is easy to dismiss merchant cost concerns as bargaining, merchants are not looking just at the cost of terminal replacement. For example, apparently many US fuel stations today do not have sufficient bandwidth for EMV transactions, which means ripping off and upgrading station forecourts. And while that in itself is expensive, many such changes would require certifications and approvals from Environmental Protection Agency (EPA) further escalating the costs.
• Merchant training is also likely to be a significant undertaking – “smaller members don’t know what the letters (EMV) even stand for”, they are “behind on education.”
• Merchants are concerned about the decision not to go uniformly for Chip and PIN. In their view, the continued presence of signature as a cardholder verification mechanism only confuses the market.
• Rightly or wrongly, they are also concerned about the chip being a “property of a few stakeholders” and what it means to them in terms of transaction visibility. “We will not buy information back from the issuers about our customers.”
• Also, ambiguity on Durbin stifles progress by merchants. While the panelists described Durbin amendment as “the most significant positive change for merchants”, the requirements to have two unafilliated network applications on the same card complicate EMV implementation for debit cards.

At worst, some seem to view EMV as yet another conspiracy of banks and card schemes against merchants. As one panelist described the situation: “Liability for signature transactions in brick-and-mortar environment today are with the issuers, while we (merchants) pay premium for the e-commerce transactions. With EMV, you are now transferring the liability to us for brick-and-mortar transactions (assuming merchants don’t migrate to chip), while doing nothing to solve e-commerce issues. And as we know, with EMV, fraud migrates to e-commerce, so we are getting hit twice.”

So what does it all mean? It is very likely that 2015 deadlines will not be met. Or in other words, the merchants will not be ready and if the issuers are, the merchants will be hit by the liability shift. As I understood, if merchants had their way, they would:

• Get rid of signature and move to a “common customer experience around the world”, i.e. Chip & PIN;
• Get rid of PCI, or at least reduce the scope;
• Get interchange relief or help with terminalisation;
• Solve e-commerce.

Banks and schemes can agree or disagree with these positions. What is important is that there is a dialogue and all parties are involved. Merchants are a crucial constituent in the payments equation and their voice has to be heard. I know merchants are already active participants in key forums (e.g. EMV Migration Forum), and they should continue to collaborate with the industry to find the best solutions for the market.

Last Tuesday, 23 April, a hacked Twitter message from the Associated Press about an attack on the White House that injured President Barack Obama, turned out to be bogus. But the tweet sparked a brief 145 point market selloff that dramatized the power of algorithmic trading – sophisticated computer software that analyzes language using algorithms to allow high-speed trading in financial markets. More on the event is available here.
I’m not qualified to comment on algorithmic trading (more than I already have…), but do see a teachable moment in this event for banks exploring the use of data analytics for less controversial applications such as marketing and risk management. Two points come to mind.

• Algorithms are stupid. For all their elegance, algorithms have no wisdom. This is not to say that data analytics is not highly useful (it is!), but the underlying algorithms are powerless to perceive their impact. That step requires perceptive humans willing to undergo some rigor and discipline.
• Models are fiction. Data analytics is based on the construction of simplified models of things that have relevant business interest. Their simplicity is important, because it allows modelers to isolate variables that are relevant and available. But, it is all fiction – an approximation of reality. For this reason, models must be validated and results treated with care. Next best product prompts will be wrong some of the time. Virtual agent prompts will be nonsense some of the time.

These two aspects create both challenge and opportunity for banks seeking to leverage data analytics for competitive advantage. Culturally, doing so requires a deep commitment to a “test and learn” way of doing things. One is never finished in this new world. There is always opportunity for improvement. Models get stale and must be continually revisited. Celent observes a useful data analytics process in place in a number of banks (below).

It’s hard work. That may be one reason why so few banks are broadly deploying these new technologies. But, it’s rigor that can’t be avoided if you want the good without the bad.

Bank revenue is the hot topic today. How are banks performing in spite of the regulatory costs imposed on their business model? More importantly, what does the future look like?
Let’s start with current events and performance. The press headlines these days reflect a poor performance from US banks in terms of revenue and performance. Examples include a decline in profit from Bancorp South, Bank of America, Bank of Hawaii, BNY Mellon, Capital One, Fifth Third, Huntington, JP Morgan, Sun Trust, and Wells Fargo. However, a few banks have demonstrated a better performance such as City National, and Zions. Many of these banks are attributing their poor performance due to the housing loans. There is another important element. Banks have been spending more on regulation and these costs are impacting the bottom line. According to the Federal Register, Dodd-Frank alone has imposed $14.2 billion in direct compliance costs since its passage and will require 25,679 full-time employees to file 51.2 million hours of paperwork annually (as of Q3 2012).
In the global arena, some of the largest commercial banks are pulling out of high growth markets in the Middle East and certain regions in Asia. This appears to be in response to the tightening regulatory rules on anti-money laundering and will contribute to further declines in revenue.
So what does the future hold for bank financial performance? Let’s be clear on one point – cost of compliance to regulations is not going away anytime soon. With Basel III, this has impact to all large banks (over $50 billion in assets) beyond the US marketplace. The regulatory implications will likely require banks to invest heavily in technology to meet the dynamic reporting demands. In sum, cost will go up for banks.
It’s really a simple formula – Profit is equal to Revenue minus Expense. So banks will need to find a way to boost revenue. This is easier said than done. The regulatory implications expect to cause lower revenue. According to a Standard & Poor’s report last year, “The Dodd-Frank Act could reduce pre-tax earnings for the eight large, complex banks by a total of $22 billion to $34 billion annually – higher than our previous estimate of $19.5 billion to $26 billion”.
So what should banks do to get better performance? At the end of the day, businesses need banks and their services. Banks have been successful at selling deeper into the client value proposition – although there is competition from non-banks. Banks need to continue on this trajectory if they want to be successful. Instead of cutting costs across the board, they need to invest in new products and services. This does not limit bank options to product development. There are other ways to get there. For instance, banks can leverage partnerships (domestic and foreign) for market and vertical expansion. We have seen lots of activity in the press around bank M&A. My question is “why aren’t banks buying non-banks?” Banks should be buying technology firms, firms to augment distribution of their products (e.g. small business solutions), etc.. You don’t even need to buy the firm; you can conduct a joint venture. It’s okay for banks to try something new and different. Banks will need to change their traditional ways of doing business and act slightly more entrepreneurial. It’s not like they need to bet the bank away. We did see some of this many years ago when a few leading US banks bought firms in the payments and healthcare space to penetrate that market. The results were not fantastic. It doesn’t mean they should give up.
How will the economy be impacted by these events in the financial sector? There are two sides of the answer. The taxpayers will be less at risk for another systematic risk to bail out banks. This is the good news. However, there will be a price to pay (rightfully or wrongfully). According to a report published by Oliver Wyman last year, “The Volker Rule cost American businesses up to $315 billion, increase borrowing costs by up to $43 billion per year, require 6,600,000 hours of implementation, dramatically which reduces liquidity”. I think that Small Business will be hardest hit. The smaller banks, those that are over $50 billion but still regional, will need to abide by the same liquidity regulatory requirements as the biggest global banks. This will translate to less lending to small businesses and have downstream effects on the economy.

I’ve had several recent conversations about channels and mobility. The discussions often start from different points, but they all are trying to get at how to characterize and address the differences between online, smartphone and tablet.

Like many knotty issues, it’s important to frame the question correctly. I’d like to frame this issue by asking, “Is the notion of channels still relevant to consumers?” My response is that not only is the traditional notion of a channel outdated, its continued use can be detrimental to banks. I’ll give you my bullets, and then elaborate a little more.

• Mobile is part of the digital channel, which today consists of online, smart phone, text and tablet (and even some elements of ATM)
• Devices are ways to access the digital channel; each has distinctive characteristics
• Banks should formulate their digital channel strategy holistically; strategies and tactics with respect to one device will affect, and should inform, others

Channels originally existed because they were distinct means of interacting with customers for different sorts of transactions. The original channel was the branch. Then came the call center, and ATMs, and then online. Each of these channels had a different group looking after it within a bank. And yes, they ultimately came together nominally under the head of retail banking, but banks were (and still are!) tremendously siloed organizations. That siloed organizational structure has persisted, even with the advent of online, mobile phone and tablet. In the worst case, different channel organizations can work at cross purposes due to their different success metrics (who wants to have their domain shrink, for example?).

Consumers, on the other hand, don’t think in terms of channels. They simply think in terms of getting access to what they want, when they want, and how they want it, and generally as easily as possible. Conditioned by great digital experiences from retailers and other service / app providers, they wonder why banks can’t deliver equivalent services. Part of the reason is that the different product organizations in a bank don’t coordinate very well, and as each pursues its own agenda with different emphases, the customer is underserved.

Banks are getting to the point where they truly think of the needs of the customer, rather than the needs of the bank, first. They need to think about the customer and her use cases (checking a balance while waiting for the bus is mobile phone; looking at a check image on the couch is tablet; serious bill pay is a PC online, for example). But there’s ultimately just one digital channel. There are different ways of accessing the digital channel, but they should all derive from the same source data, and they should all ultimately provide the same experience to consumers – not the literal experience, but one that’s comparable in terms of general navigation, look and feel, and vibe. And that’s where the art comes in – the experience is visceral, subjective, and unquantifiable — and the customer doesn’t care through which channel the bank deems the experience to have been delivered.

I was at International Payments Summit in London last week. I spoke on a panel on real time payments, the insights of which will be the basis of a later blog.  But here are the highlights for me:

IPS may well be back

I last attended IPS 5 or 6 years ago. I stopped going for a number of reasons. Firstly, cost. After Sibos it must be about the most expensive conferences on the circuit – the most expensive flavour is over £3,500 (although cheaper options are available). One doesn’t mind paying for quality, but at the time it failed to deliver. IPS suffered from a probably deserved reputation of, er, “over influence” from sponsors. Frankly, I’d heard some of the vendor pitches so often I could have given them. I don’t begrudge the vendors as they’d paid for that opportunity, but equally it didn’t add value.

This year the quality of speakers and sessions was dramatically up. A few “usual suspects” appeared but who can generally be relied upon to say something, let alone something interesting. Indeed, one positive over Sibos was the willingness of the panelists to actually discuss things rather than read prepared statements that sometimes happens at Sibos.

Based on this event, whilst it hasn’t gone back to “Must”, it’s certainly moved to 3rd slot behind EBADay and Sibos. It’s Catch-22. If this event can significantly increase the audience size, then its value will significantly increase as well. I wish Katie and her team well for next year.

SEPA

With less than 12 months to go, you’d think that everything that could be said, has been said. Wrong. Even the experts seemed to be learning things, particularly from the panels with corporates. Key issues include the cost of compliance (one corporate suggested over 10m€); readiness of banks, particularly around direct debit; and the misunderstandings that pervade. On the latter point, it is worth pointing out that some of these are perhaps self-inflicted. For example, there is a belief that the regulation now means that the requirement for a BIC has been removed. Yet few – including myself – had realised that if customer arrangements put in place as a result of the PSD, the requirement for a BIC still holds. As a result, whilst the one party may not require a BIC, another may, and with no easy way of telling.

SEPA#2 

Based on the corporate forums, and polling sessions, some things were very clear. Neither banks nor corporates see any benefit from SEPA, that they view it as a compliance issue, and that they, the corporates, will be worse off. Hardly a ringing endorsement, but equally not new news. But I think the level of terror and the antipathy from the clients still shocked many. One corporate estimated that they will receive approximately 15,000€ benefit from SEPA, but it has cost them over 400,000€ to achieve SEPA compliance.

Real time

There is a real belief that real time is the future. But what is less clear is what that means. Some of the systems held up are real time, in the strictest sense, aren’t. They authorise the payment in real-time, and the client may access the money straight away, but settlement takes place later. Furthermore, many are conflating real-time with “always on”. The trend I certainly to have greater availability, but understanding the difference is important in understanding the impacts on the back-end systems in a bank.

Operating model

Several conversations I had and a number of the presentations referred to the need for banks to address the cost of service/execution, with a number of banks undertaking significant projects to move to a different operating model. ING is one example, with Mark Buitenhek using an unusual but effective analogy of pasta! They’re moving from spaghetti (lots of long processes, interwoven and difficult to untangle) to lasagne (multiple discrete layers of service, creating building blocks of components).

USAA Federal Savings Bank was an early-adopter of mobile RDC (mRDC) with its Deposit@Mobile product introduced in 2009, which followed the 2006 introduction of its desktop RDC product, Deposit@Home. This offers user impressions of its newest app version, currently available for the iPad and available for the iPhone and Android shortly. The upgrade offers two significant capabilities:
• The option for automatic scanning, much like how most QR code readers operate.
• The ability to deposit multiple checks in each deposit.
The capabilities were developed in-house. Both are significant in Celent’s opinion and demonstrate USAA’s continued leadership in this space.

Like many users, I upgraded USAA’s mobile app without hesitation and without knowing what was new. The next time I logged into the app, the new Deposit@Home capabilities were front and center with a pop-up window merchandizing the “automatic check capture” feature (below).

Once I navigated to “Deposit Checks” I was greeted with a more detailed explanation of what was new. Both features were clearly explained and I was able to deposit using automatic scanning or using the old workflow. Naturally, I tried the new capability.

Once Deposit Checks was selected, the scanning began immediately. As shown below, what to do was rather obvious. The image capture occurred within about two seconds once I had the check reasonably outlined by the green band. Rear image capture occurred identically.

Once both sides were captured, I could continue with additional items using the same process. I scanned two items. Once image capture was complete, the application took me quickly through each item to indicate the deposit amount as well as the deposit account. The straightforward way to deposit into multiple accounts was rather clever. Although most users won’t likely have the need to deposit multiple checks, small businesses surely would along with the “power user” segment.

The deposit confirmation (below) was detailed and immediate. It showed with clarity, where the funds were deposited and confirmed availability of each item.

Overall, I found the app brain-dead easy to operate, and the deposit was successful on the first attempt – more than can be said of many mRDC applications in service. The process was a bit faster than the old approach for single item deposits, and significantly faster for multiple item deposits. The application is refreshingly flexible compared to the rigidity of most available mRDC apps, while not sacrificing usability.

In the spirit of full disclosure, I have been a USAA member since serving a tour on-board nuclear submarines (SSBN 658) in the mid 1980’s. Originally an insurance subscriber, I now enjoy a broader range of USAA services.

There is a reason that user adoption of PFM is so low. Well several reasons in fact, and you can read about it in this report. Thankfully, steps are being taken to more tightly couple PFM and online banking – one of the MANY key elements required to improve adoption.  Intuit announced last week that the time has come for them to integrate aspects of their popular Mint.com consumer offering with Intuit online banking. I think it’s a great move, and it’s high time that Intuit moved forward with a more cohesive approach to online banking that includes PFM. The big question on my mind – is this move too little too late? Celent has been promoting the concept of an integrated online banking/PFM for several years now.

There are a number of banks that have already gone down the more tightly coupled online banking/PFM path, some in more depth/detail than others. Why has Intuit waited so long to make this move? It’s also important to note that this is just an announcement. According to an American Banker article, “pilot tests with banks are starting later this spring, with general availability expected to hit by early next year.” Early next year? I think it’s great that Intuit went ahead and made an announcement – I’m all in favor of stirring up excitement for refreshed online banking. However, assuming Intuit sticks to its timeline, this announcement is still roughly a year in advance of us seeing a generally available solution. A lot can happen in a year, particularly with the constant flow of non-bank startups, innovation and updates to competing online banking solutions, and moves by other financial institutions.

Don’t get me wrong, I’m excited about the next generation of Intuit online banking, but things have to move faster if they want to remain a relevant player.  A few key questions need to be answered:

• Will Intuit’s existing online banking customers move to this new version? The overwhelming majority likely will if this becomes a standard component of online banking (Intuit’s online banking is run in an ASP model). Those that won’t want to move, and that number could be substantial, are ripe for being poached by other digital banking solution providers.  This could also be examined from a different angle. Perhaps Intuit’s bank customers have been pushing for these types of changes. If so, then this could be a great way for Intuit to retain existing customers and go after new ones. Too bad it’s approximately a year away, as that still makes Intuit’s customers ripe to be poached by other providers.
• How will Intuit’s online and mobile banking customers feel about the changes to the solution? The pilots will provide more information. Intuit has been making iterative changes to its online banking solution, and the frequent changes could prove challenging and frustrating to banks and their customers.
• Will Intuit be successful at selling this revamped offering to larger financial institutions? That’s difficult to say at this stage. Some of the larger banks are pretty deep into the PFM space already, and they are working with other providers. There are still quite a number of mid-tier and large banks that haven’t touched this space that could be great prospects. Intuit will however need to differentiate itself in a very crowded market.  

Intuit’s updated online banking solution brings many welcome changes. The folks at Netbanker have put together a nice list of the positive changes including, an attractive and refreshed UI, and the ability to import data from an existing mint.com account. The solution holds a lot of promise, and I’m hoping that Intuit can move a little faster in order to provide financial institutions with the digital banking solutions that they desire.

The UK government’s ban for merchants from imposing “excessive” surcharges when customers use their debit and credit cards to pay began on Saturday, April 6th. Card surcharges have become a hotly debated topic over recent years. Many consumers feel it is unfair that they have to go through a complicated checkout process only to find out that there is a hefty fee for the privilege to pay, often irrespective of their chosen payment method. The ban is designed to outlaw such practices. But I don’t think it goes far enough.

Under the new rules, payment surcharges will have to reflect the actual cost to the retailer of processing the card transaction. Yes, it’s a step forward, as it should start differentiating between types of payments. Debit cards cost less for the merchants, so customers should expect to pay less. However, I think that the new rules leave too much ambiguity and leeway for merchants to decide what they consider processing costs.

According to the government guidelines, “for card payments the attributable costs could include direct costs such as:

• The Merchant Service Charge, which traders pay to their acquiring bank.
• IT and equipment costs used for particular means of payment such as card terminals, for example point of sale devices.
• Risk management – active fraud detection and prevention measures which vary depending on their business and whether transactions take place face to face or remotely.
• Processing fees such as charges for reversing or refunding a payment.
• Any operational costs that can be separately identified as internal administrative costs arising from activities dedicated exclusively to card payments. For example, where traders opt to buy in services from intermediaries who provide equipment, fraud detection and processing services (especially online payments) for card payments, they should be able to recover the costs they incur through a payment surcharge.”

While the government expects that “in many cases, these costs could be evidenced by invoices from equipment and service providers,” in practice, I believe it will be difficult to prove what the true costs are for individual retailers, and those that want to continue surcharging, will be able to hide behind the rules.

Regular readers of this blog know that the US has recently allowed surcharging. And the rules are pretty clear and unambigous – Visa only allows surcharging on credit cards, and the surcharge amount must not exceed the cost of acceptance for the credit card which is capped at 4%.

It is interesting that the US is allowing surcharging while the UK is banning it. However, it appears that the US permission is more restrictive than the UK ban. As a consumer, I prefer the US version.

We are seeing continued cost alignment from banks both on the retail and commercial side. The trend is nothing new and we keep getting steady news and development to support this focus on cost re-alignment.
Most recently on the retail side of the house, there are continued down-sizing on branches. The number of branches keeps going down year-over-year – at least in the US market. According to SNL Financial in Charlottesville, Virginia, 2,267 branches were shut down in 2012 within the US bank market. That places the branch count at about 93,000 according to AlixPartners and expected to reach about 80,000 within the next 10 years. According to banks, branches are too expensive to operate and each shut down saves a bank between $250, 000 to $500,000 annual depending on the source. And before you think it, it’s also the big banks clamouring down on these costs. Bank of America closed over 200 branches last year according to The Wall Street Journal.
On the commercial side, it seems as though costs are equally shuffling but appears somewhat more complicated. For instance, some costs are going up due partially to regulatory forces and also to technology.
Banks are investing in technology to reach new market segments. Small banks are trying to move up market while large banks are trying to move down market and everyone is trying to protect their base from the bank next door. There is a perception that their market is saturated and the avenue to growth lies in a new market segment. Often the best way to get there (assuming a bank can get there) is via technology. For example, larger banks with more R&D capital are developing more comprehensive small business suites. The use of new technology such as mobile tablets is hot.
For the regulatory aspect, new laws and bills such as Basel III and Dodd-Frank are causing banks to invest – yes more cost. But it doesn’t stop there. These new regulations will also cause banks to re-align their lending since more liquid capital will be required to remain compliant. So this will impact margins and arguably cost to revenue ratio. Then there is the resource and technology cost component associated to these regulations. It appears Basel III will require more technology investment than Dodd-Frank based on the reporting requirements. Banks are generally not wired to offer those types of reports today.
All of these investments (or costs from the banker’s point of view) are good for the market. It improves the quality of services from banks which will serve them well in the long-term. Banks will continue to see third-party companies drive innovation into the payment (financial) space and their ability to compete in the long-term will ensure their health and potentially survival.
On the next blog, I will explore the other side of the equation… revenue. Banks need to offset these expenses with new revenue. They should be paying attention to vendor partners to dig deeper into the corporate client value proposition. There are several ways they can do this. If they don’t, someone else will! More to come on this topic for the next blog – stay tuned.

Earlier this week, RBS launched a mobile chat feature, available to its business mobile banking users.  RBS isn’t the only one jumping onto the mobile chat bandwagon – San Diego County Credit Union announced a similar offering . The concept is pretty straightforward, and is similar to the online chat tools that some banks have incorporated into their web sites and/or online banking. I’m a big fan of online chat tools, though many banks I speak to have mixed feelings about them.  The launch of mobile chat capability raises a few pertinent questions:

• Will users take to texting with their bank? Mobile chat is quite similar to texting with a bank representative. It’s a familiar experience to most mobile users and therefore could catch on. On the other hand, mobile banking is very much about quickly taking care of banking activities. Users get in, do what they need to do, and then get out. I question if mobile chat falls into the category of quick activities. Mobile chat on a tablet is an entirely different story, as the experience and activity type is similar to classic online banking.
• Will text chat evolve to video chat? I have heard rumblings about this at a couple of banks, and I think it’s a great idea for specific markets where high touch service is required. Wealth management and business banking are great examples. It’s not a perfect solution as often customers in these segments often have dedicated representatives, and they can’t be available by video chat 24×7!
  

The larger question is, how can banks most effectively service their customers across channels? What is the most efficient way to service the growing number of mobile users in a multichannel environment? Chat is but a piece of the puzzle. Banks have to effectively service customers across channels, and bank representatives require a full record of all past interactions. For example, branch staff should be able to effectively service a customer, if  the customer originally initiated a mobile chat session and subsequently walks into a branch.

What are your thoughts on mobile chat? Is it a passing fad or a key mobile capability?