Same-day ACH: is anyone excited?

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May 22nd, 2015

This week’s NACHA vote in favor of mandatory rules changes enabling same-day ACH settlement is no surprise. Some of the press coverage suggests this represents some sort of significant achievement. Really?

By March 2018 (when the network is currently expected to be able to fully support systemwide changes) I predict there will be industrywide consensus on the inadequacy of the measure.

Even proponents of the measure suggest the vast majority of ACH traffic will remain the next-day float-neutral type – for good reason. The majority of payments will not see a change for the same reasons the ACH has served the industry so well for so long. Specifically:
• Dependability
• Low-cost

With this vote, we’re now going to burden this lowest cost of payments networks with perpetual, systemic cost increases for all participants. And we’ll do so for a very small percentage of network volume.

NACHA’s own estimates predict that by 2027 (I don’t make predictions that far into the future) a whopping 1.4 billion same-day payments. That’s 6% of 2014 ACH network volume – presumably a much smaller percentage of 2027 volume. NACHA estimates industrywide implementation costs of $118 million initially and $49 million annually. So, by 2027, the industry will have spent nearly $500 million so banks can offer customers a premium priced same-day payment option using the ACH when other, faster options already exist.

I think the NACHA volume estimates are optimistic and find the characterization of same-day ACH as “modernizing the payment system” curious. What’s modernizing about running the same batch system a few times each day instead of once each day? If demand is for real-time payments, this initiative will be found sadly lacking. It’s like installing more pay phones as a way to compete with mobile devices.

Am I missing something?

Reflections on Nacha Payments 2015

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May 20th, 2015

As many of you know, I’ve been on something of a world tour, which started with Nacha Payments in New Orleans in mid-April. Expect a flurry of blogs as I pass on my impressions from my travels, starting with the Nacha show.

Whilst I may live in London, I have global coverage. Payments is an interesting business – whilst its perhaps one thing that unites all businesses and consumers in all countries, and we are moving increasingly to global standards, the finer details show that it is still a parochial business. I don’t mean that negatively, more that payments have evolved over decades, if not centuries, to address specific local needs. That’s why the SEPA project was so difficult – even what we meant by certain terms turned out to be not straight forward.

Nacha Payments this year was in New Orleans. For those not familiar, it’s a long standing show focused primarily on the ACH business. It has a very active conference schedule – I was on a panel with Dwolla and BBVA talking about real-time payments – and an exhibition floor. The US is the single largest payments market, so it’s not surprising that the show is very US in focus. What still surprises me, even now, is the fact that in a shrinking list of exhibitors each year, every time I attend there are vendors I’ve never even heard of, let alone am familiar with their products. This demonstrates the size of the market rather than my lack of knowledge!

Take-aways for me:

What a difference a year makes. Last year, one senior banker said real-time payments wouldn’t happen in the US in his lifetime. This year, it’s seen as a when, no question about if. Indeed, all the talk was about the “secret” (so secret that every meeting I attended asked me about it!) meeting the key Clearing House banks were having to build out the requirements for the Clearing House solution. The general opinion is that the Clearing House is seeking to go live long before the Fed working groups even get close to having a plan for requirement gathering. More on this soon.

Business is alive and well. At first glance, the exhibition floor looks notably smaller than the previous year. One thing to note is that the conference is often attended by more junior people, who also get re-certification credits for attending sessions – with so many sessions to choose from, the exhibition hall is often very quiet. Yet all the vendors reported greater numbers of good meetings, with tangible next steps – in short everyone was happy. Which several said wasn’t the case of some of the new sexier shows as Money2020. It strikes me that they’re very different events.

Looking overseas. Payments are largely domestic in nature and what works in one country doesn’t always work in another. For example, check technology from the US (which writes 2/3rds of all checks globally) won’t be of interest in Finland (as checks were abolished in 1993!). As such, payment conferences tend to be very domestic in focus. Not a criticism, just pragmatic. Given the changes the US is facing, and given that many other countries have already faced many of the challenges, it was interesting to see such a noticeable increase in conversations seeking an international viewpoint. I don’t think we’re anywhere close to a global market – but the US seems to have taken a significant swing from “not invented here=not relevant” to “don’t re-invent the wheel”.

See you next year, in Phoenix!

Finovate and SAP SAPPHIRE: more in common than you might think

Dan Latimore

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May 15th, 2015

Over the last ten days I’ve spent time at two different conferences, Finovate and SAP’s SAPPHIRE NOW. Two very different conference models generated serendipity where I wouldn’t necessarily have expected it.

Both shows were rife with partnership possibilities. SAP spoke continually of the partnership ecosystem, realizing that one of its values is bringing partners together, while at Finovate, the notion of small companies going direct to consumer by themselves was basically dead – they realize they need partners. So if providers are demonstrating that they’re willing partners, all they need is someone on the other side – and that’s where banks come in. As banks strive to compete with upstarts, they’re going to need help, which means they’re going to need to work with others. And today, they just don’t do a very good job – ask anyone who’s ever been stuck in procurement hell. Banks must get better at working with outside parties, from streamlining the vendor approval process, to designing compensation models, to navigating the shoals of procurement. Speed is of the essence, and banks are woefully slow.

But I digress…

At SAPPHIRE NOW I participated in a panel: “Disrupt or Be Disrupted to Survive in Financial Services.” Partnership was one of my key themes.

SAP earlier gave center stage to its recent acquisition, Concur, its T&E management solution. The presentation’s available here (go to 41:30 where Bill McDermott introduces Concur).

Along the very same lines, one of the Finovate Best in Show winners was Shoeboxed, for its Receipt Capture for Banks solution, which boosts the functionality of online and mobile banking apps while providing fraud protection. While they have different perspectives on the expense problem (SAP goes for an integrated enterprise travel solution, including the T&E, while Shoeboxed focuses on letting banks provide its white-labeled expense solution to smaller business customers), both have focused on a particular pain point for employees and developed solutions to address it. Simplifying expense reporting may not seem like a big deal, but it’s some pretty low hanging fruit for digitization and disruption.

And disruption, of course, is one of the main themes of Finovate. A who’s who of Fintech, the conference this year was outstanding. Best of show winners were the aforementioned Shoebox, together with Alpha Payments Cloud, Avoka, Money Amigo, Moven, Namu Systems and Stratos. More can be found here.

What were my impressions? After having had a couple of days to assimilate all that was thrown at us, a couple of thoughts coalesced:

  1. There was only one bitcoin demo.
  2. The Apple Watch made it’s first set of demonstrations, with three demos featuring it on day 2. Two out of three had glitches, not because of the programs (it seemed), but because of the watch itself. While mobility is going to be a very powerful force, I’m still going to wait for the Apple Watch 2.
  3. Personal Financial Management (PFM) was rarely mentioned, even when the demos concerned. This TLA (three letter acronym) has acquired a questionable connotation, and presenters avoided it (with some, like Moven, even declaring it dead).
  4. There were a lot of different concepts discussed. Here’s the wordcloud I created on Day 2, based on my impressions of the concepts that presenters were trying to get across.

Finovate World Cloud

As always, please let me know of your feedback or questions.

Predicting the future

May 5th, 2015

Monday was the UK bank holiday, so some of us just came back to work after a long weekend. Many across the country used the extra time to do a bit of spring cleaning. I also found myself rummaging through some old materials and came across an interesting paper on how financial markets might look in 2020.

Let me share a few quotes:

  • “The basic financial functions […] will not change, although how we perform these functions will change.”
  • “By 2020, a true global marketplace will be established, with everyone – individuals, companies, investors, organizations and governments – linked through telephone lines, cables and radio-wave technology. With the touch of a button, people will have access to other individuals and vast databases around the world. Such access will be readily available through phones, interactive television, workstations or hand-held “personal digital assistants” that combine all these functions. […] There will be no special need for retail financial branches because everyone will have direct access to his or her financial suppliers through interactive TV and personal digital assistants. […] True “global banking” will have arrived, as every household will be a ‘branch.'”
  • “A key feature of 2020 is that nearly everything could be tailored to a client’s needs or wishes at a reasonable price, including highly personalized service from financial companies. Firms will be selling to market segments of one.”
  • “Supplying financial assistance will be a free-for-all. It will not be limited to those calling themselves “financial institutions” […] That means an organization that specializes in financial matters may at times find itself competing directly with its clients.”
  • “The progress is geometric because each element – computation, availability of data, communications and algorithms – feeds on the others.”

If you attended any recent conferences on digital banking, this will sound very familiar – just replace “personal digital assistants” with “smartphones.” However, these quotes are not from a recent conference presentation. They are from a paper given by Charles S. Sanford, Jr., serving as the Chairman of Bankers Trust at the time, at the Kansas City Fed’s economic symposium. The date? August 20, 1993…

Many of these predictions ring true, although we are not quite there yet, 22 years after the paper has been delivered with only five more left to go. Why? The clues might also be in the paper:

  • “Human nature will not change. […] A very basic element of that nature is a hunger for security – law and order, job security, retirement security, decent and affordable health care and financial security.”
  • “Dishonesty will be around in 2020 as it is today. Voice recognition, DNA fingerprinting and secure data encryption will instantly verify transactions, preventing today’s scams. But new forms of “information crime” will appear.”
  • “Technology will never replace the subtlety of the human mind. People will be the most important factor in 2020, just as they are now. We must learn how to grow wise leaders from the ranks of specialists, a difficult task.”

As humans we also bring the baggage of unpredictability, irrational behaviour and desire for comfort and the familiar. We should bear this in mind next time as we contemplate how technology is changing our lives and what the future might bring.

P.S. The entire paper is available here.

Pushing beyond apps

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Apr 30th, 2015

It struck me while I was driving this morning: First-gen mobile apps are fine, but virtually everyone is missing high-volume opportunities to engage with their customers.

Allow me to back up a step. I was stuck in traffic. Not surprisingly, that gave me some time to ponder my driving experience. I found myself thinking: Why can’t I give my car’s navigation system deep personalizations to help it think the way I do? And how do I get around its singular focus on getting from Point A to Point B?

I explored the system while at a red light. It had jammed me onto yet another “Fastest Route,” disguised as a parking lot. My tweaks to the system didn’t seem to help.

I decided what I’d really like is a Creativity slider so I could tell my nav how far out there to be in determining my route. Suburban side streets, public transportation, going north to eventually head south, and even well-connected parking lots are all nominally on the table when I’m at the helm. So why can’t I tell my nav to think like me?

I’d also like a more personal, periodic verbal update on my likely arrival time, which over the course of my trip this morning went from 38 minutes to almost twice that due to traffic.

The time element is important, of course. But maybe my nav system should sense when I’m agitated (a combination of wearables and telematics would be a strong indicator) and do something to keep me from going off the deep end. Jokes? Soothing music? Directions to highly-rated nearby bakeries? Words of serenity? More configurability is required, obviously, or some really clever automated customization.

Then an even more radical thought struck. Why couldn’t my nav help me navigate not only my trip but my morning as well? “Mr. Weber, you will be in heavy traffic for the next 20 minutes. Shall I read through your unopened emails for you while you wait?” Or, “Your calendar indicates that you have an appointment before your anticipated arrival time. Shall I email the participants to let them know you’re running late?” Or (perhaps if I’m not that agitated), “While you have a few minutes would you like to check your bank balances, or talk to someone about your auto insurance renewal which is due in 10 days?”

What I’m describing here is a level of engagement between me and my mobile devices which is difficult to foster, for both technical and psychological reasons. And it doesn’t work if a nav system is simply a nav system that doesn’t have contextual information about the user. But imagine the benefits if the navigation company, a financial institution, and other consumer-focused firms thought through the consumer experience more holistically. By sensibly injecting themselves into consumers’ daily routines—even when those routines are stressful—companies will have a powerful connection to their customers that will be almost impossible to dislodge. Firms like Google have started down this path, but financial institutions need to push their way into the conversation as well.


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Apr 29th, 2015

As analysts, we are often asked to predict the future. It’s a fun part of the job, and leads to some interesting conversations. Whilst we rarely are retrospectively scored on our accuracy, I suspect most analysts, myself included, keep a mental tally. The acquisition of Fundtech by D+H for $1.25bn is something of a tick for me, as we’d predicted both a number of large acquisitions, and also the drivers that will drive those acquisitions. Payments is hot right now, for a number of reasons, but not least because of the changes in technology and customer expectations. Real-time payments is being widely discussed, with a number of countries, including the US, heading towards adoption. Real-time also means single message and always on, something that most banks existing payment systems simply can’t handle. That’s why the Australian real-time system has been delayed – the banks need to do their internal upgrades before they can participate.

Fundtech ticks a number of significant boxes for D+H. D+H had no real payments capability, other than check. This fills a significant hole, particularly given that payments account for a significant proportion of a banks IT spend. It also leapfrogs straight to a payments hub, at a time where there is likely to be a significant growth in the market for hubs. In the conversations we’re having with US banks, the majority believe that they will need to invest to be able to process real-time payments – and virtually all believe a hub is the only viable solution.

The acquisition also brings a number of other interesting assets to D+H, including the products aimed at transaction banking, again broadening the footprint of D+H, and to significant pockets of spend they previously didn’t address.

There are questions though, but fairly obvious ones, and that come with any acquisition:

• Fundtech is a big company – will D+H get “indigestion”? The recent acquisition of Harland Financial Services for a similar price tag suggests that D+H feel its doable

• Fundtech is an international company, serving an international client base – will D+H be able to adopt the appropriate shift in culture?

• There is (we believe) very little overlap in client base – can the combined entity maximise the cross-sell opportunity?

For me the latter question is an interesting one. A recent conversation with a US FI who is a typical D+H target client (they may or may not be actual clients) stated to me with certainty that there are no live payment hubs in the US, and that hubs were a solely European issue. The bank in question may not be representative of course, but does suggest that at the very least a concerted customer outreach with a clear message about what it means to them is required. Again, the same as in any acquisition, but given the lack of overlap, even more important than in other cases.

On the margins

Stephen Greer

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Apr 27th, 2015

Celent recently released the report On the Margins: A Comparison of Banks and Credit Unions by Asset Tier, where community institutions of the same size are compared across a number of performance metrics, mainly efficiency ratio. One of the most interesting findings is that credit unions are becoming less efficient at a faster rate than banks of the same size.

Efficiency ratios measure how much it costs an institution to create one dollar of revenue. Looking at the data in previous sections, credit unions are increasingly spending more money to generate as much revenue as banks of the same size. Efficiency ratio can be dependent on a number of factors, but as a way to look at simple margins, it´s one of the more useful industry metrics.

At a glance it seems counter-intuitive. Credit unions are generally more customer-centric and have higher technology adoption. They use real-time systems, simpler product lines, invest in labor saving technology, and leverage community involvement like CUSOs and shared services to drive down prices.

But there are obviously distinct business model differences, where credit unions, being member-owned, generally run thinner margins, returning more benefit back to the customer in the form of better interest rates and/or lower fees. Although this is an intentional business decision reinforced by member-centric charters, it leaves the institution with fewer resources than similarly sized banks that may take a more profit-driven approach.

So what’s the issue here? It comes down to the effects of digitalization. Celent sees three challenges that may affect the credit union market going forward:

  1. As the complexity of business demands in financial services grows (e.g., technology), the resource requirements may present a challenge for credit unions (and all community institutions) running thin margins. Since raising capital is limited to retained earnings, non-profits need to be more intentional about how they prioritize tech investment.
  2. Banks in recent years have seen a significant shift in how they view customer service. Once a key point of differentiation for the CU market, banks are now coming on board to make customer centricity the new operating model, increasingly driven by the digital experience. While customer centricity is healthy for the industry as a whole, it’s unclear to what extent it indicates an erosion of credit unions’ key value proposition.
  3. As technology breaks down geographical barriers of financial services, customers are given more options, and the competitive landscape widens based on the availability of channels. Switching financial services providers is no longer a high-friction process, and the selection is wider than ever. Digital is also redefining what it means to be a part of a community, and it’s increasingly being decoupled from physical proximity. This puts pressure on institutions that have previously enjoyed relative isolation in well-defined localities.

To be clear, these challenges aren’t all specific to credit unions. Financial services are increasingly becoming a game a sufficient scale, and community institutions of all size are feeling the pinch. Yet credit unions, given are the average institution size and business models, are disproportionately affected.

With the complexity and demands of financial services putting more pressure on the bottom line, will this difference adversely affect credit unions’ (and community institutions) ability to stay competitive?

More comments on the “branch is dead” debate

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Apr 23rd, 2015

*As mentioned in an earlier blog, the persistence of the “branch is dead” debate seems to be to betray the deeply invested interests on each side of the debate. In many financial institutions, digital and physical channels still have separate reporting structures (Figure 1). In Celent’s October 2014 survey of North American financial institutions, we found that less than a third of responding FIs have a single person responsible for all delivery channels. Interestingly, this appeared to be more likely among large banks.

Channel Org

Another observation is that much of the debate is deeply polarized – all or nothing – as if banks serve a static and homogeneous market. Neither is true. Most banks serve a diverse client base whose needs and preferences are in a state of change. Niche players, such as Moven, can take a more polarized (or shall we say extreme) position.

A third (and my favorite) observation is that all too often, inaccurate assertions are made about channel usage as if demographics were a sole and causal determinant. We hear it all the time; “Millennials don’t use branches.” “Old people don’t use digital channels” and so on. In March, the US Federal Reserve published its third instalment of comprehensive consumer research on the topic, Consumers and Mobile Financial Services 2015. It makes for insightful reading. One myth the report busts is that digitally driven consumers have little use for other channels. Nothing could be farther from the truth – at least for the present.

The survey (an online survey administered with a managed panel of nearly 3,000 consumers designed to be representative of the U.S. eighteen and over population) sought to understand how mobile banking users (35% of the panel, up from 30% in 2013 and 26% in 2012) used other channels. The results may surprise you. A few tid-bits:

  • Between 2011 and 2014, mobile banking usage has grown strongly across all age groups. Among 60+ consumers, usage has nearly tripled.
  • Hispanics reported the highest incidence of P12M mobile banking usage (53% of those having bank accounts, compared to 39% in the overall sample).
  • While mobile banking users are using the platform frequently and consistently, they also interact with their banks through more traditional branch and ATM channels. 72% of mobile banking users frequented a branch in the past month.

Channel Access Chart

*1 Of those who used channel in past 12 months
*2 Of those who used channel in past month

Separately, respondents were asked to rank the three main ways they interact with their bank or credit union. 21% of mobile banking users ranked the mobile channel first. 13% ranked the branch first.

Two implications from the diversity of channel usage that characterizes today’s consumers:

  1. Omnichannel is a legitimate pursuit. All channels need to be optimized.
  2. Banks neglect the branch channel at their peril.

Spring musings on UK banking innovations

Dan Latimore

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Apr 21st, 2015

One of the great advantages of being a Celent analyst is that we’re able to look at banking advances around the world and share what we learn with our clients and readers. This week I’d like to focus on a few interesting developments in the United Kingdom. The unifying theme this time around is innovation linked only by geography.

  • Barclays’ Blue Rewards
  • Nationwide NOW: remote video advisers
  • Lloyds’ plain English terms and conditions

Barclays Blue Rewards

The headline attraction of Blue Rewards is that customers can earn £180 back from Barclays. The catch? Consumers have to pay £3 each month to participate. This isn’t bad, per se: it insures that customers actually have some skin in the game, some incentive to participate so that they don’t frivolously sign up. To save you some math, the net benefit to the consumer can be up to £144, or about $215.

If you pay in at least £800 each month into your current account, process at least two direct debits, and are enrolled in online banking, you’ll receive £7 off the top as a “loyalty reward.” A mortgage through Barclays gets you another £5 each month, and if you insure your home through the bank, that’s another £3.

Naysayers snipe that consumers can get better deals elsewhere, and that you have to have a lot of products at Barclays to reap the full benefit, but isn’t that the point? Barclays is explicitly tying rewards to the behavior it’s trying to incent, something that other banks should consider.

Barclays, incidentally, is the only bank that I know of with behavioral economists on staff – who am I missing? Betterment has a behavioral economist who’s a Barclays alum, according to LinkedIn, but it’s not a bank.

Nationwide NOW

The UK’s Nationwide Building Society launched a high definition video link service called Nationwide NOW in April 2014. Initially piloted to link remote mortgage advisers to customers in 61 branches, it helped more than 3,200 people with mortgage, banking and financial planning. Waiting times, particularly for rural customers, have been reduced from weeks to days. In a press release dated April 20th the institution announced that it was introducing the scheme to 100 more branches, with plans to roll the service out to a total of 400 branches by November of this year. Nationwide proclaims that it is the largest offering of this service of any FS company in the world, based on the number of terminals. It’s also been willing to tweak the service delivery: the remote specialist will offer the customer a cup of tea at the beginning of the conversation, and a local employee will bring it in, making the whole interaction seem much more personal.

Lloyd’s video terms and conditions

In a two minute and fifteen second video on YouTube (which some are calling an animated infographic), Lloyd’s simplifies the terms and conditions that the vast majority of customers ignore, sometimes at their peril. While still not riveting, it’s a whole lot more accessible than pages of legalese. Unfortunately, a month and a half after its original posting on March 11, it has had only 371 views (one of those was mine – I’m not used to skewing a sample!). It also makes the obligatory plea to read the entire T&C document. Nevertheless, becoming more human and highlighting some of the key points is a step in the right direction, even if it’s not yet perfect. You can watch it for yourself here:

What other concrete innovations are you seeing that bankers should be aware of?

E-invoicing making progress? Discuss!

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Apr 15th, 2015

There have been a few mainstream press mentions of e-invoicing and invoice financing over the last few weeks. For many readers not closely following the space, I suspect this will be the first thing they’ve really seen about the topic. Some of the numbers quoted in the articles have been eye catching – a trillion pound of untapped potential. This is what has attracted some big names to the market, and who has generated the coverage.

In short, one player, Ed Truell has “bet big” on the market – but not all in the market are convinced. Truell has bought one of the larger (but not largest) players OB10. OB10 has not been as successful as it had hoped – indeed many press mentions state that is has been loss making. To be fair, our understanding is that the vast majority of e-invoicers have yet to recoup their investments.

Truell then bought a small Israeli owned bank in London as a shortcut to gaining a banking licence, and therefore be able to offer invoice financing itself. The combined entity, rebranded as Tungsten, added a few other elements and went to market last year. Since then, a string of impressive customer announcements have been made.

The press activity has arisen from a leading investment analyst questioning (read, in order: article one, article two and article three )

In short, the analyst questioned both the potential market and the likelihood of Tungsten succeeding. The share price of Tunsten fell 34% the next day, taking £75m off the value.

As clients know, I’ve written a few reports on this topic and have advocated that banks investigate how they can get involved. At face value then, I agree with Tungsten. However, as I joke in my reports, every spring seems to be heralded by the claim THIS is the year for e-invoicing.

And for the 10+ years I’ve been covering the topic…. it hasn’t been.

Every year has seen progress, with greater numbers of e-invoices. But there are still issues. There are over 500 suppliers in Europe alone, many of whom are backed by investors eager to see a return on their investment. The U.S. operates in a different way, with more of a focus on bill pay organisations offering services. In short, whilst I share the optimism of Tungsten, history – and hard won personal experience – suggests that the market we both envisage is not happening today, and is unlikely to in the near future. The question, as it has been for many years, how soon is soon. How soon is soon enough for the investors?