Digital technology is spurring straight through processing (STP) in financial services industry

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Jan 26th, 2015

The media has been abuzz with reports of Toppan Printing’s plan to introduce an electronic system to facilitate the sale of home loans. In light of this, in this edition we want to consider straight through processing and its possibilities and implications in the financial services industry.

The proliferation of bank ATMs has largely driven cash transactions from banks, bank branches, and cashier windows. Meanwhile, as banking services have migrated online, online banking and online trading have resulted in small-value, high-frequency financial transactions becoming increasingly self-service in nature.

Similarly, the Internet has and continues to transform the insurance industry. Online insurance premiums payment and online requests for insurance materials have already become the norm. However, documentation and message formats particular to an industry or specific to individual financial institutions are a challenge. Today the technology is still a far cry from being able to automate business processes for complex products. As such, this inability—in addition to administrative costs and financial transaction risk—has also become a major obstacle to sales channel diversification.

Bank home loans could be called the poster child for products that have fallen behind the digitization and STP curve. However, if digital technology could be used to handle financial products—in this case home loans—that need to be processed manually, then it would be possible to recommend and compare products so that consumers can obtain the optimal loan product at the right time and place. Banks are the companies that create financial products—home loans; homebuilders and house manufacturers are the companies that market or sell these products. Digital technology is driving the decoupling of product creation from product sale, and profoundly transforming this business model.

A glimmer of this and things to come appeared on in the December 22 edition of Nikkei (1). This glimmer was an article reporting on a new initiative by Toppan Printing, in conjunction with realtor Tokyu Livable and four banks—the Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Trust Bank, Sony Bank, and Mitsubishi UFJ Trust and Banking Corporation.

Today the proliferation of digital technology is spurring the automation of business processes. Digitization is a key technological development that promises to bring improvements and advancements in many areas. Indeed, processes that cannot be digitized are likely either extremely high value-added or, perhaps, should be eliminated.


(1) The Toppan-developed system will be set up at Tokyu Livable’s network of real estate offices. It is designed to streamline the home loan application process by allowing customers to use a tablet computer to apply for a mortgage from any of the four banks, and to as many as three at once.

December 22 edition of Nikkei


Tokyu Livable

The quest for Omnichannel continues

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Jan 23rd, 2015

Earlier this month, Celent published a report providing an analysis of an October 2014 survey among North American banks and credit unions. The effort sought to understand the state of retail banking channel systems. It should be no surprise to find that revenue growth broadly remains bank’s #1 strategic priority. Or, that digital banking channel development and omnichannel delivery are statistically tied with customer analytics in being considered the most important technologies in delivering revenue growth.

What may come as a surprise is how far most banks have to go in terms of actually delivering what they say is important. Here’s one example; mobile banking.

Everyone knows mobile is so hot right now, yet many institutions have difficulty monetizing those investments. That’s because precious few sales are closed in the mobile channel (at present) and institutions struggle with proper attribution when multiple channels are involved. What seems clear is that institutions find several compelling reasons for the mobile channel’s high priority, and cost reduction is the least likely reason. Institutions across the asset tiers have a similar strategic basis for mobile banking. However, valuing mobile for its ability to attract new customers is a sentiment largely held among large banks.

Source: Celent survey of North American financial institutions, October 2014, n=156

Source: Celent survey of North American financial institutions, October 2014, n=156

Customer engagement and upselling customers through the mobile channel? That’s a tall order for most banks when historic mobile channel development investment has been all about migrating “low-value” transactions. Even if consumers would be disposed to enroll in products or services on their device (a reasonably fast growing trend) precious few banks even offer that ability.

Source: Celent survey of North American financial institutions, October 2014, n=156

Source: Celent survey of North American financial institutions, October 2014, n=156

Moreover, simply having the ability means little if the user experience is less than satisfactory. A future Celent report will explore digital account opening experiences among large US banks.

The quest for omnichannel continues indeed – and will be continuing for some time.

Getting m-POS ready for EMV in the US

Jan 23rd, 2015

As we highlighted in our recent report The Update on EMV Migration in the US: Leaving the Station and Building up Steam, the US market is finally making a strong progress towards EMV. While many of the barriers we discussed in the past have been dismantled, there are still challenges that remain.

One such challenge is the upgrade to m-POS platforms. Square has created an entirely new market a few years ago with a simple ‘dongle’ that a merchant could connect to his smartphone’s or tablet’s headphone socket and start accepting cards. The customer would swipe the card, sign on the phone and that would be it. Now Square and its many competitors have to bring out new devices that support EMV cards. That also means a change for merchants, and they will have options.

Square announced its new device in November last year. Unlike most of m-POS solutions in Europe, it will not support chip and PIN, but will be a standalone chip card reader and will support signature as the cardholder verification method. It will start shipping in spring, but will not be free – merchants will have to pay $29 for the mobile chip card reader and $39 for the accessory to Square Stand.

Earlier this month PayPal Here also announced that it will be bringing its EMV reader already available in the UK and other markets to the US. And in addition to iOS and Android, it will support Microsoft Surface Pro 3, and other devices running Windows 8.1.

First Data’s Clover has launched Clover Mobile, a mobile and EMV compatible version of its Clover m-POS platform. Unlike Square’s readers, Clover Mobile also supports NFC transactions, including Apple Pay.

And then there is Poynt, launched at last year’s Money2020. Poynt is described as “a future-proof device that accepts magnetic stripe, EMV, NFC, Bluetooth and QR code payment technologies. You are ready to accept your customers’ favorite payment methods: Apple Pay, chip-and-pin, mobile apps, and whatever else the future brings.”

Of course, there are other options, above solutions are just a few examples. The challenge for merchants is deciding if and when to upgrade the readers and whether to stick with their existing provider. As always, risk-based assessment will be key. For example, whenever I am in Vegas, I try to visit a small shop that sells vinyl records, which accepts card payments via Square. If I were the owner, I would look to upgrade to an EMV reader as soon as possible – while it’s not a coffee shop in terms of frequency of transactions, most payments are tens and hundreds of dollars. On the other hand, a local dry cleaner who already knows most of its customers will be less compelled to upgrade. Clearly, not everyone will be ready by the liability shift deadline in October, but merchants with the risky profile should make sure they are.

P2P lending makes it to main street?

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Jan 23rd, 2015

Can old dogs learn new tricks? What about banks?

Banks are trying; not only by making interesting bets around digital but also social.

On the social aspect of banking, Banco Colpatria in Colombia offers credit cards to individuals using Lenddo’s social scoring. Lenddo has created and extensively tested an algorithm that analyzes the connections of people in their social networks to determine their character and willingness to pay. Lenddo is leaving behind its start-up origins as a micro-lender and entering into partnerships with financial institutions to take advantage of this scoring which can extend the traditional loan customer base to include new segments with no credit history (college students for example).

In this same line, Banco Galicia in Argentina has a very interesting offering – Galicia MOVE – aimed to college students based on a totally digital proposition, underpinned by the use of digital channels and a targeted marketing strategy. Galicia MOVE includes a savings account, a debit card and a credit card. Jumping into social based propositions is just around the corner for them.

Clearly, digital and social are terms that go together and could certainly benefit those banks that want to bet on these. Another look at the same issue is that it seems inevitable that banks begin to incorporate business models that otherwise threaten their own business from the periphery. Change or die.

Peer to Peer (P2P) lending is one of those situations and banks have started to experiment with it, taking P2P lending to main street. Santander Bank through a lead generation model in partnership with Funding Circle’s and RBS using a 3rd party platform are perhaps the most significant cases right now, but we are aware of more movements in this direction. Banks are certainly not playing hide and seek with P2P lending.

In our research, our conversations with key financial industry stakeholders and as collaborators at bringing together banks, fintech start-ups and VCs, P2P lending appeared as an area that banks should explore to attract customers through a different value proposition. P2P lending provides a way for the bank to acquire customers not covered by their traditional offering while making some money in the process and retaining a customer that can eventually move into financial products from traditional banking as their business / financial condition makes them a subject fit for bank credit.

Regulation is an important issue for banks to get into P2P lending and depending the country, there may be restrictions. Perhaps the P2P lending company that has best understood and dealt with this issue so far is Afluenta; working with regulators in each country to adapt its model and operate under authorization of the financial regulator. For example in Argentina it was the first P2P lender to operate with the approval of the regulator, under a trust structure where Afluenta administers the trust and the money is out of its estate. Money is owned by lenders (peers), which is in the spirit of the P2P proposition.

From my point of view in order for banks not to get trapped between their traditional business model, processes and restrictions imposed by the regulator there are some models that banks can explore before deciding to dive into P2P lending all by themselves: lead generation as Santander, a partnership to use the platform of an existing player or possibly an acquisition of an existing player (as BBVA did with Simple to speed up in the digital race). The end game will have banks incorporating services based on digital and social, leveraged by the use of data. I believe it will have them as main actors, therefor competing directly with the fintech-startups, such as the P2P lending companies. In the meantime, coexistance may be possible.

Because I also wanted the view from someone working in the heart of this business I spoke with Alejandro Cosentino, a seasoned financial services executive and founder of Afluenta, who until now remained very skeptical about banks entering into the P2P lending space. Nevertheless he believes in its potential: since launching, Afluenta started to transform personal finances into the greatest and most participating peer-to-peer lending community across Latin America with AR$ 25M, 1300 loans, +90,000 investments transactions and covered +1,000 in social networks, blogs, news and traditional media. Afluenta originates loans at a cost which is 25% of the cost incurred by a bank. In Mexico he believes that loans could have a return of 12% against 3% which is the return for money invested by an individual in a bank.

Following some of his impressions, which he gently accepted to share with you and me.

P2P lending is first and furthermost a financial business and only then a technological business. Many P2P companies approach it the other way round and that is why they fail. P2P lending has to be played in a (highly) regulated and complex environment where you need to understand what risk management is about. This is why he works on 3 key issues (in order of importance):

  1. Regulation
  2. Credit
  3. Technological

He recognizes having been recently contacted by banks looking to enter the P2P space but in his opinion central banks, regulators and securities commissions will not easily allow banks to enter directly into this market. Authorities are not concerned about the systemic risk; their main concern is banks’ responsibility regarding delinquent or bad credit. In the heart of this issue is who owns the risk? who owns the money? the bank or the peers? Authorities’ view, he says, is that if a bank is in the business it will have to take the risk of delinquency or bad credit because they are trustees of that money. This is the view in Mexico, where P2P lenders have to constitute SOFIPOs (micro-finance institutions), not representing the true spirit of P2P lending because risk is taken by the financial institution and not the peer. With such a framework of legislation it is understandable that banks don’t find P2P lending attractive. The Mexican regulator is expected to review the legislation to provide a better framework to operate P2P lending by August 2015, though he believes it will take some more time than that.

The issue of addressing the business without financial expertise, including poor risk management, has some P2P companies working with credit delinquency over 26 % (100 loans over 350 loan portfolio with debt for more than 90 days), making it unbearable . Afluenta instead has less than 3% with a much larger volume of loans. They have analyzed loan portfolios from banks and there have been cases where, based on their P2P lending underwriting, they would have not granted loans (which subsequently became delinquent), showing the level of intelligence and accuracy in risk analysis capable of being used in P2P lending.

From his perspective banks are tepid regarding P2P lending. It is not a general trend or something that comes as a strong directive from top management, even though some banks are engaging for the sake of innovation or because they still have doubts about the future of P2P lending but don’t want to just watch the ship sail out of the harbor, in case the journey ends being successful, with them not on board.

Alejandro believes that the way to go for banks interested in taking a shot to this market is through a model where they act as an online trading agent, going from lead generation to a more stronger partnership where they can direct their own institutional investments through the P2P platform. An Argentinean insurance company for example has agreed to use his P2P platform as a vehicle to directing investments, having a preferred option to finance the cases submitted by peers.

An acquisition by a bank is possible if the P2P entity stays separate from the bank, otherwise it will face the regulation problems he described above.

You can believe banks are still tepid about P2P lending as Alejandro does, or that it is already hitting main street, which is what I believe. Whatever you choose to believe, rest assure that banks will not play hide and seek about P2P lending. The time to get this bull from the horns has come.


Apple Pay: A few surprises – or are they really surprises?

Jan 22nd, 2015

Apple Pay continues to provide excitement to many in the industry who are looking for signals indicating that Apple Pay is either doomed or is becoming a mass-scale success. In reality, it’s neither at the moment – it’s still early days.

A few recent stories also caught my eye. At first glance, they seemed a little surprising, although I don’t think they should be.

The first was the InfoScout blog discussing their research that 90.9% of iPhone 6/ 6+ users have never tried Apple Pay, and only 4.6% of those who could use Apple Pay during Black Friday, actually did, which has prompted some commentators to announce the death of Apple Pay. Considering that smooth consumer payment experience is one of the major Apple Pay’s attractions, low usage might appear a little surprising. However, if you think about the shortage of merchant locations, lack of awareness which merchants would accept the transactions, general stress of shopping on Black Friday and the fact that we are talking here about “normal” consumers (albeit early iPhone 6 adopters), not payment geeks, it starts to make more sense. Various other surveys found that consumers who have used Apple Pay, compared it highly favourably to using a traditional plastic card. And according to the same InfoScout blog, of those who have not used Apple Pay, 31% said they didn’t know if the store accepted it and 25% said they simply forgot – factors that will fall away over time with more training, communication and experience. Bank of America recently said that 800,000 of its customers have signed up with a total of 1.1 million accounts.

The second was a recent story in Digital Transactions that there are now 54 banks and credit unions supporting Apple Pay. Only 54? Didn’t the announcement from Apple in October state that it signed up another 500 FIs in addition to its launch partners? Well, there is clearly a difference between signing the paper and actually supporting customers and their cards from technical and operational perspective. Still, it is encouraging to see that the number of institutions continues to grow and includes issuers across the spectrum, from the largest banks to small(-ish) credit unions.

My final surprise was data from research that ACI Worldwide conducted at a recent National Retail Federation (NRF) show. ACI surveyed 200 participants, 85% of whom were based in the US and over half represented merchants. 47% of respondents expected that Apple Pay would “win the mobile wallet war” with Google and PayPal being other main contenders; only 6% opted for MCX. In our last year’s report assessing Apple Pay’s prospects, we predicted that the US merchants would be the most likely major barrier for Apple Pay’s success. However, if merchants start to believe in Apple Pay, they might start switching on the contactless capability on the new terminals they are installing as part of EMV migration. And if that happens, then mobile payments might arrive sooner than even the most optimistic of us expected.

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What I learned at IBM’s Watson for Financial Services briefing

Dan Latimore

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Jan 20th, 2015

Last week I attended an IBM Watson briefing geared toward Financial Institutions at Watson HQ on Astor Place in Silicon Alley. The event was oversubscribed, a testament to FIs’ interest in Watson. I learned three things.

  1. Implementing Watson is hard.
    IBM had a panel of three financial services firms (Nationwide (the US mutual), USAA, and Monitise). Of the three, USAA is farthest along, and is to be commended for experimenting with Watson, but there’s no getting around the fact that there’s no such thing as a turn-key Watson implementation right now. Ingesting the data to train Watson is, as they say, non-trivial, and then honing how agents can use it to augment their customer interactions takes time and persistence. Companies preparing to embark on a Watson journey should understand that it likely will take more than a single budget cycle to realize results.
  2. Negligent tugboat captains have something to teach banks.
    Bear with me here: in 1932, Judge Learned Hand found that a tugboat company towing a barge that sank in bad weather was liable because it did not use readily available technology. His opinion stated, in part,
    “Indeed in most cases reasonable prudence is in fact common prudence, but strictly it is never its measure. A whole calling may have unduly lagged in the adoption of new and available devices. . . . Courts must in the end say what is required. There are precautions so imperative that even their universal disregard will not excuse their omission.”
    This certainly seems to have some interesting implications for bank operations, even if Watson doesn’t quite meet the standard yet of “readily available technology.” (For more information on the case, see this itlaw wiki.
  3. Moving to pay for purchases, rather than pay for eyeballs / impressions, is getting closer every day.
    Alastair Lukies, the CEO of Monitise, had a very compelling vision of the future of payments, particularly with respect to mobility. One insight: the days of retailers or other sellers paying advertisers for impressions are dying more quickly than many thought. They’ll be replaced by paying for a referral only when a sale is actually made. The technology to track this accurately exists now, and banks who embrace the ecosystem approach will reap the benefits. For Celent’s take on Merchant Funded Rewards, see Using Data to Create Value for all Customers, by Zil Bareisis.

Speaking of commerce, I also saw, at a different conference hosted by the Electronics Transaction Association, a great discussion of Allure (the women’s lifestyle brand) using MasterCard’s ShopThis to let consumers almost seamlessly buy items they see featured in Allure’s editorial content. They can click on a lipstick they like from one retailer, and a scarf from another, and both will be placed in a single shopping cart. MasterCard takes care of the (substantial) back-end heavy lifting to make the consumer’s experience incredibly simple.

Getting creative about banking alliances

Dan Latimore

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Jan 8th, 2015

I travel. A lot. And in the spirit of full disclosure, Delta and Starwood are my go-to airline and hotel chain. It helps that they have a mutually reinforcing arrangement whereby I receive miles for my Starwood stays and SPG points for my Delta flights. It just so happens that I’d already settled on these two, so I didn’t have to change my alliances, but on balance, even had I been another hotel patron, this alliance would have weighed heavily when deciding where to lay my head on the road. It helps, too, that Delta status gives me SPG benefits (late checkout, etc.), and vice versa. This is a nice extension beyond the airline code-share alliances of OneWorld, StarAlliance and SkyTeam.

Because of my travel I tend to pay attention to emails and offers that many might ignore. The most recent was a note that I recently received from Hertz offering to bump me up in Hertz status if I had a certain level on Delta. I rent cars much less frequently than I fly or stay at hotels, but it’s easy to guess which car rental company I’ll be sure to use in the future.

What does this have to do with banking? Credit card companies already partner with airlines (e.g., Delta and AMEX, American and Citi) and banks cooperate with merchants to offer Merchant Funded Rewards, but these are relatively superficial. What might the next, more substantive, level of partnering look like? Are there opportunities for deeper symbiotic relationships with retailers, phone or cable companies, or the like? The details will vary depending on the industry, but as we kick off the new year, it’s an interesting strategic question for banks to consider.

What does “Digital” mean in banking?

Dan Latimore

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Dec 30th, 2014

Everyone in banking is talking about “Digital.” Celent has hosted fascinating roundtables on the topic, and it’s the basis of one of our three themes. And yet, there’s a startling lack of consensus on what Digital means. There’s a famous proverb of a group of people in a dark room who touch different parts of an elephant; each describes a completely different experience. Digital is like that: how you experience it depends on where you’re coming from.

To help bring perspective to the Digital debate, Celent has put its own stake in the ground with a new report, Defining a Digital Financial Institution: What “Digital” Means in Banking.

We describe a framework that helps financial institutions make sure that they’re addressing all the possibilities of digital comprehensively, from the mundane to the sophisticated, from customer-facing channels to the back office.

Rationales for digital investment vary widely, as the graphic below demonstrates. All have validity; banks have to decide how digital aligns with their specific strategic goals.

rational for digital

There must ultimately be an economic rationale for digital investments. Celent clients can download the report for more information.

Getting Real About Real-Time Core Banking Systems

Dec 22nd, 2014

How much savings in back-end processing costs do real-time core banking systems really offer?

A 2011 Celent report entitled Why Change Cores?  was written in the wake of the news that BBVA Compass had decided to convert to Accenture’s Alnova real-time core platform.  At the time, the analyst community seemed to agree that we were approaching a tipping point for widespread core system renewal.

The coming wave of core system transformation was claimed to be driven in large part from the apparent ability of real-time banking systems to create operational efficiencies and financial savings by “taking out some of the back-end processing cost” for the bank, as one industry analyst suggested.  This same analyst offered that back-office savings of 20 to 30% per year are required to generate the payback needed to justify the large investment involved in a major core system replacement project.

That seems like a very tall order for any new core banking system, even one built on newer technology that is presumably going to be easier (and cheaper) to maintain.  After all, the main difference between a real-time and batch processed core system is that the latter does in two steps what the former can do in a single step.  While it is intuitive that one step beats two steps, is that enough by itself to generate 20-30% savings in back-office savings?

My own view is that real-time processing is not the Silver Bullet that its proponents claim it is in terms of helping banks become efficient, customer centric, agile, and all of the other benefits ascribed to real-time systems.  To be clear, I am not suggesting that real-time systems provide no benefit to a bank (as they can), nor am I speaking against the notion that all banking systems will someday offer real-time capabilities (as they will).

Celent’s new report Why Change Cores? Reassessing the Drivers of Core System Renewal examines the traditional arguments for bank core system replacement.  This report revisits the key points made by the previous 2011 Celent report regarding the business, technical, and systems integration issues that drive core replacement.

Two key conclusions flow from the new Celent report:  first, no single consideration is big enough by itself to dictate that a new core system is needed, but rather a combination of many  smaller issues over time will push a bank over the threshold of wanting to make a change; and second, core system transformation is less of a question of “when”, but rather a questions of “how” the process will unfold.

For the moment, real-time banking is more technological eye-candy than it is a prerequisite for bank systems transformation.  Even if your bank is running on an “old-fashioned” legacy core solution, feel free to become more agile, reduce your costs, introduce innovative products and services, and generally operate your business more effectively and efficiently.  Your core system won’t mind!


The Resurgence of NFC

Dec 11th, 2014

This is the time of the year when we begin to cast our eye back to 2014 as well as forward to 2015, and reflect on the top trends we are seeing in the market. One of the constants over the last few years in our annual Top Trends in Retail Payments report (coming up again in January 2015) has been our commentary on the ups and (mostly) downs of NFC and contactless payments. Yet, for the first time in years, it genuinely feels that NFC has finally taken a large step towards establishing itself as a major technology standard in mobile payments.

Without a doubt, the biggest event in payments in 2014 was the launch of Apple Pay. Having resisted NFC for so long, Apple has finally added NFC capability to its latest devices, such as iPhone 6, thus opening up NFC to iOS. And, in a typical Apple fashion, it didn’t just add a bit of hardware, it created a fully-fledged solution with unparalleled user experience.

However, the first few weeks after launch seem to have confirmed our concerns that Apple Pay was not going to be an overnight success. While the early news was encouraging with more than 1 million credit cards activated in the 72 hours following the launch, so far too few consumers are actually using Apple Pay. According to the InfoScout blog, 90.9% of iPhone 6/ 6+ users have never tried Apple Pay, and only 4.6% of those who could use Apple Pay during Black Friday, actually did.

This has prompted some commentators to announce the death of Apple Pay and argue that its fate will be the same as that of many other attempts to revive NFC. The future of the payments industry remains hard to predict and the NFC “nay-sayers” may yet prove to be correct. However, we see a number of signs to be optimistic, both about Apple Pay and NFC adoption overall. The ongoing US migration to EMV and growing consumer awareness and adoption of new devices over time will help boost Apple Pay usage. More importantly, globally, as Apple Pay launches internationally and more banks become aware of Host Card Emulation (HCE) technologies, the issuers will have genuine options to deploy NFC solutions.

Of course, contactless and NFC payments, even when they do gain mass adoption, are not going to be the only mobile payments option in the market. However, if for so many years it felt that the NFC land has been gripped by a long and harsh winter, we expect that it will feel a lot more like spring in 2015.