Capgemini, the 40-40 Rule, and the rise of the robots

Mar 13th, 2015

Capgemini recently hosted a few dozen consultants and industry analysts to Chicago for their two-day Analyst and Advisor Day event. The presentations were held at the firm’s very impressive Accelerated Solutions Environment facility, with its dramatic curved glass exterior and prime views across the Chicago River to the famous Merchandise Mart.  Unfortunately, it was typical Chicago winter weather with sub-zero windchills and snow flurries, but for those who braved the conditions it was a very interesting and informative event.

Things appear to be going well at Capgemini. Even though organic growth in revenue was only 3.4% in 2014 (to EU 10.5B), bookings were up 13%, operating margins were improved by 70 basis points (to 9.2%), and profit jumped by a full 31%.  The financial services business (covering banking, insurance, and the securities industries) provided Capgemini with significant sales momentum into 2015, with Q4 growth of 9.2% (second only to the firm’s public sector services business).   In the financial services sector, Capgemini’s business theme was digital transformation, which in their view would be driven by the replacement of knowledge workers by automation and algorithms.

During Q4, Capgemini signed an important deal with First Data Corporation (FDC) to take over application management responsibility for its VisionPLUS card processing platform. VisionPLUS is FDC’s international card platform and serves over 180 clients in 70 plus markets in Central and South America, Europe and the Middle East, and Southeast Asia.  John Elkins, FDC’s Chairman of International, came to Chicago to talk up the new partnership, and it appears that FDC is very pleased that Capgemini is taking over responsibility for maintaining and expanding the functional coverage of VisionPLUS. Essentially, Capgemini will work with FDC to continue the build out of the platform, FDC will use the software to drive its own processing business, and the partners will share certain license and managed services revenues for new bank clients.

Paul Nannetti’s made an interesting key note presentation covering emerging trends in Capgemini’s business, and several times he mentioned the “40-40 Rule”.  This was a new buzz word for me, so I was happy when another analyst asked Paul what he meant by the 40-40 Rule.  According to Paul, the 40-40 Rule says that 40% of the scope of new outsourcing contracts will be suitable for digitization (automation), and that within this realm, digitization will drive out 40% of existing labor content. In other words, global outsourcing companies like Capgemini will need 40% less FTEs to process the same work load due to the introduction of automation to its business processes.

This brings us to the issue of robots.  A few weeks ago, I had read an article about the opening of a futuristic hotel in Japan called Henn-na Hotel (apparently translated as “Strange Hotel”) that will be almost entirely staffed by robots. The hotel will employ robots to clean rooms, staff the front desk, and run the bag room, and guests will be able to unlock their rooms through facial recognition.  Hotel president Mr. Hideo Sawada was quoted in the Japan Times as saying “We will make the most efficient hotel in the world. In the future, we’d like to have more than 90 percent of hotel services operated by robots.”

Capgemini’s Global CTO Lanny Cohen shared that indeed robotics and artificial intelligence technologies were under close scrutiny at the firm, and the firm maintains a global network of 40 innovation labs to investigate this and other areas of emerging technologies. For a firm like Capgemini whose financial success over the past 10 years has been in large part based on managing a very large off-shore workforce, this is indeed a bold strategy.

And that’s also very good news for Mr. Roboto, who may have a future in banking and insurance if he ever tires of his current gig at the Henn-na Hotel. Stay tuned.

You can follow the conversation about the day on Twitter here.

Upcoming Celent discussion at the American Banker Retail Banking conference

Stephen Greer

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Mar 6th, 2015

Next week I will be moderating a panel discussion at American Banker´s Retail Banking Conference in Austin about the competitive pressures of community institutions. It’s an important topic that Celent discussed in a report published last year: And Then There Were None: The Disappearance of Community Banks. The figures below outline the decline of banks in the US, going from 11,462 at the end of 1992 to 5,809 in 2014.

Picture1Picture2

The challenge for many of these institutions has been organically growing their deposits despite shifting consumer demands and new alternatives to traditional financial services (e.g. prepaid services, P2P lending, etc.). The business model of banking is changing, and viability is increasingly dependent on tech investment.

Consumers now expect a certain basic level of technological capabilities driven by their experiences across other industries. To accommodate, financial institutions are pressed to implement products such as customer analytics, mobile, CRM, etc.

Yet these challenges come at a time of decreased interest margins and broadly defined regulations that require community banks to increase compliance spending and capital reserves at pace with large players. Online banking platforms are often basic, many have no mobile apps, and business platforms like treasury management are severely outdated. Even labor saving technology (e.g. video teller) often does not lead to short term cost savings, and new services typically run in tandem with other operations, adding operating expense to already thin margins.

These conditions have made it difficult for community institutions to compete and have challenged the viability of many. Community institutions, however, operate in an extremely diverse landscape of micro-localities with varying competitive dynamics and local needs. This often carries with it a number of advantages over large multinationals with few local connections and an often impersonal understanding of the community. Small banks won´t be able to go head-to-head with large institutions on tech spending, but identifying the organization´s value proposition will enable a tighter strategic direction for meeting consumer demands while delivering a competitive community experience.

In Celent´s upcoming panel, we´ll be exploring what community institutions are doing and some of the lessons that others can learn.

Cashless Britain – not coming to a town near you soon

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Mar 4th, 2015

There have been a number of reports in the UK since the beginning of the year heralding a cashless Britain, suggesting that cash “dies” this week. Of course, I’m being somewhat tongue in cheek, but it was suggested that February 2015 would be the last month that cash was king.

That’s true in many ways – the share of cash on a total transactions basis will drop below 50% for the first time in the UK this year. But that doesn’t really tell the whole story.

Firstly, “not cash” isn’t a single payments type of course. There are debit and credit cards, ACH payments,  still (shudder) some cheques.

Fact 1 – by volume of transactions, cash is by far the most dominant, as at 50% share, it’s obviously the same size as all the other payment types …combined. So cash isn’t dead, and not even mildly under the weather!

Secondly, the decline isn’t quite as dramatic as it may first seem. There are lots of new payment occasions being created (iTunes, mobile phone subscriptions, cable TV etc) that are electronic only. And conversion from cheque to direct debit generally sees an increase in payment volumes (ie quarterly cheques becoming monthly direct debit).

Fact 2 The net result is significant growth in the overall size of the pie, biased to electronic payments – yet the share of cash has only decline by a few percentage points rather than the significant drop implied.

This is particularly important to remember in the coming months. Early indications suggest a significant increase in contactless is coming.

Fact 3 It’s a migration from Oyster that will drive massive contactless growth this year, rather take-up of contactless.

This is important as Oyster had already forced a conversion from cash, with individual cash transaction (ie for each journey) into a single top-up transaction. The switch to contactless is unbundling this back into individual transactions, albeit applying a daily cap. We’re not saying that contactless isn’t going to grow impressively, just we mustn’t simply look at the headline numbers and draw conclusions.

It’s not all negative. That Oyster habit converted to cards will help create a contactless habit which will spread. Coupled with the raising of the limit of £30, and with many cash payments being below that value, there is the possibility to see some levels of cash replacement that could move the needle.

Cash is far from dead but we are certainly moving into a LessCash rather cashless world.

 

Alipay Entering into South Korean Market

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Mar 2nd, 2015

During the Lunar New Year, more than 100,000 Chinese visited South Korea. The way people shop in a duty free shop, or in a convenience store is quite different than before: They pay with the world’s well-known Chinese mobile payment, Alipay, the most successful case of Fintech in the world.

In Seoul main streets and on Korean internet sites, we can easily find advertisements of Alipay. China UnionPay already entered into the South Korean market, and even a brand of my credit card issued in South Korea is UnionPay. They partner with BC Card, South Korea’s card issuer and they have been expanding their business in South Korea.

China’s payment has entered into South Korean market in earnest and South Korean players have been getting into the game. T-money, the largest prepaid card player in South Korea and Hana Bank, the fourth largest bank in South Korea partnered with Alipay.

As an example, Chinese tourists in South Korea can pay back to Alipay’s account after using T-money for foreigners if they have any remaining credits. T-money is available not only transportation including metro, bus and taxi but also for payments at convenience stores and other selected shops. Also, T-money has introduced a new service for domestic users, providing compensation system for Mobile T-money when a user loses a phone, providing a safer environment for T-money users.

For Hana Bank, they haven’t started a service with Alipay but it will be launched soon. After launching a new service with Alipay, Chinese tourists will be able to pay with Alipay at merchants of Hana Bank. In other words, they can use Alipay in broader places like orthopaedics, nail salon and hair salon than what T-money service offers.

The similar case has been seen in South Korea and Japan. Cashbee, South Korea’s mobile payment card partnered with Japan’s three major MNOs, NTT DoCoMo, KDDI and Softbank. Japanese tourists can now pay with their smartphone in South Korea after installing a dedicated application.

A wave of Fintech has come to Korea. The country is attempting a different approach with the use of Fintech. Some players already recognized their current approach is not acceptable anymore hence it is the time to shift their strategy for future growth.

Payments area has been getting global and more attractive for users. For example, Alipay gives 4.5% interest when a user deposits money. Yes, it’s attractive. However, players should evaluate what is important for their future growth without tapping into the current trend. Establishing an initiative for business growth should be the overriding concern now amid mounting attention to Fintech.

Towards an OS/device-based mobile wallet

Feb 27th, 2015

Over a year ago, we published a 2014 edition of our annual Top Retail Payment Trends Report (2015 edition is here), in which we distinguished between app-based wallets – majority of mobile payments solutions in the market at that point – and device-based wallets. We suggested that payments would become ever tighter integrated into the device and the operating system (OS) and that we will see the emergence of device-based wallets, “which store securely on the phone a token associated with payment credentials, which can be discovered and summoned as needed by any app or a site reached via mobile browser.”

Then Apple Pay came along and demonstrated to everyone the beauty of a payments solution tightly integrated into the OS and the device itself. There is no separate wallet app; customers can configure the solution via the Settings page and store their cards in Passbook. And the token of the credentials can be summoned for an in-store or an in-app transaction. Apply Pay raised the stakes for everyone in mobile payments.

The challenge for Google is that the Android ecosystem is nowhere near as tightly controlled as Apple’s. Yet, in the last couple of weeks, we’ve seen a few interesting moves that indicate steps towards OS and device-based wallets in the Android ecosystem. First, Samsung, the leading Android device manufacturer acquired LoopPay, which uses Magnetic Secure Transmission (MST) technology to enable mobile payments at the existing POS devices. Then, Google announced it was buying Softcard’s technology. Finally, the news just emerged that Google would be launching Android Pay at its Google I/O conference in May.

LoopPay’s wallet today requires additional hardware, such as phone cases or fobs. I am convinced that Samsung will seek to get away from that and would integrate the technology into its devices. The big question is – why continue to invest into “mag-stripe technology,” and isn’t it a step backwards? It certainly feels that way, although I don’t think it indicates Samsung’s shift away from NFC; my view is that this is a pragmatic move recognising that even with EMV migration underway, the US will continue to accept magstripe-like transactions for the foreseeable future. After all, Visa has also invested in LoopPay back in the middle of last year.

The big question with Google’s purchase of Softcard’s IP is whether Google would go back to SIM-based secure element, now that the mobile operators would finally play ball. My guess is that it won’t. HCE gives everyone more flexibility, and leverages the investments the issuers and networks have been making into tokenisation. Visa just announced yesterday that it has been partnering with FIs around the world to enable HCE-based digital services. HCE is also what would enable Android Pay, which would allow third parties to build in payments features into their apps, either for in-app or in-store purchases. Instead of going back to SIM-based SE, I suspect Google will make use of Softcard’s loyalty functionality and will gain access to the MNO distribution networks. According to the announcement, Google Wallet will come pre-loaded on the handsets sold by the operators, which I assume will get paid a distribution fee.

As various solutions get tighter integrated into device hardware and operating system, it will be interesting to watch how they would co-exist. Could the latest Samsung Galaxy device support a PayPal app with biometric authentication, LoopPay, Google Wallet and Android Pay without at least confusing the customer? Or are the two giants in the Android ecosystem on the collision path here?

Clearly, there is no respite from interesting developments in mobile payments. I am sure we’ll see another wave of interesting announcements next week at Mobile World Congress in Barcelona. I had the privilege to serve as a judge for GSMA Global Mobile Awards, and I am certainly looking forward to the ceremony and the rest of the Congress. I’ll make sure to blog my impressions when I am back. In the meantime, drop me a note if you would like to meet in Barcelona next week.

Why the branch banking controversy will continue

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Feb 26th, 2015

The branch is dead, long live the branch! Controversy around the wisdom (or not) of investing in the branch channel amidst rapidly growing digital banking adoption is showing no signs of letting up. Consider three articles published in the past week:

  • Bank Innovation covering Associated Bank branch closures to fund digital channel initiatives.
  • BTN coverage of Wells Fargo branch/digital convergence alongside the banks’ steadfast advocacy for maintaining its massive branch presence.
  • Brett King’s Op Ed in Banking Exchange, critical of the recent FDIC report, Brick-and-Mortar Banking Remains Prevalent in an Increasingly Virtual World

 

I’ve observed that most advocacy is binary; either branches are next to worthless or the branch is king. Where is the middle-of-the road position?

 

I’d like to offer one. For starters, retail banks serve a diverse market with diverse needs and preferences. Why then do so many critics insist banks must react to digital banking’s growth in lock-step? How many times have you heard the comment, banks are lemmings? Well, this time they’re not. Get over it! We will continue to see a diverse response to the digital ascendency.

 

But, I do struggle with the sustainability (or even desirability) of the current branch density in many markets – particularly in the US. I don’t think it will be defensible for very long. Let’s put it into perspective. Between 2000 and 2010, US bank branch density grew from 230 to 270 branches per million. Celent looked at a dozen other retail categories and couldn’t find a single one (except banks) that grew store density over the same period. Just the reverse happened, even though digital commerce remains less than 20% of total retail sales.

Source: US Department of Commerce, FDIC, Datamonitor, Celent analysis

Source: US Department of Commerce, FDIC, Datamonitor, Celent analysis

Like retailers, banks have certainly embraced digital channels. But, unlike retailers, banks have not invested in digital engagement. Until recently, digital channels weren’t about sales and servicing (that’s what branches are for…) but about facilitating transactions. Rare is the retailer of any size that does not have a digital presence designed to conduct commerce. But, the significant majority of banks do not yet have that capability. And, in some cases, the user experience is poor. Why? In part, because banks have focused on transactions, not sales and service in the digital channels. As this changes (and it is), I believe we will see a corresponding contraction in branch densities – just like in most other retail segments. Until banks demonstrate the ability to sell and service customers digitally, they will be overly reliant on the branch channel.

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

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

The next few years will be telling. What do you think?

Start-up of internet-only banks in South Korea

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Feb 26th, 2015

South Korea’s government has begun to move to permit internet-only banks. It is in discussion with a group of financial institutions, vendors and other institutions, and the outline for internet-only banking services will be set up around April.

In South Korea, most banks, we can say all banks, already offer direct banking including internet, mobile and smartphone, and many customers are accustomed to them. However, dedicated internet banks have not been allowed to date due to regulatory and other issues.

Currently, there are two main challenges to setting up an internet-only bank in South Korea.

1. Identity confirmation through direct channel: the current law requires customers to open a new bank account at a face-to-face channel with their ID. So people visit a bank branch at least once to start banking transactions, although direct banking services are at a quite mature level in South Korea. The requirement for identity confirmation should be revised accordingly when permission is granted for dedicated internet banking.

2. Relaxation of the Separation of Banking and Commerce: in the current law, institutions belonging to the commerce sector cannot provide banking services, and their ownership share in a bank is stringently limited at 4%, compared to 25% in US and 20% in Japan. To encourage the entry of various kinds of sectors into the internet-only banking market, the relaxation of this law is one of the important issues.

Currently, a number of institutions including banks, vendors and other sectors are negative on entering the market and will keep a wait-and-see attitude for now. Before entering the market, they should learn from case studies of overseas internet–only banks. To cite a case, there are many good examples of online account opening using the advanced facial recognition tools.

I will appear at a conference on internet-only banking in Seoul on March 10, and will present case studies and learnings from the Japanese market. Anyone interested in the event details, please visit http://fintechkorea.com/.

Samsung’s acquisition of smartphone payment solution vendor LoopPay

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Feb 25th, 2015

Last week, Samsung announced the acquisition of LoopPay, a US-based smartphone payment solution vendor. It has been receiving attention as it may be poised to bring further growth to Samsung’s smartphone.

The strength of LoopPay technology is broad versatility. Its technology enables smartphone payment at a touch to a magnetic card reader. Most existing smartphone payment services require the implementation of a dedicated payment terminal, and ApplePay is not an exception. However, dedicated terminals will now not be required with Samsung’s smartphone payment technology.

The fact that a merchant will not incur additional cost for a payment terminal makes this smartphone payment service more attractive. The LoopPay technology with its versatility and compatibility should become one of the future growth drivers for Samsung smartphone.

A preview of Innovation and Insight Day

Dan Latimore

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Feb 18th, 2015

Celent’s Innovation and Insight Day is about a month away, and I couldn’t be more excited. We have great external speakers bookending the day, and we’ll be exploring exciting technology implementations with 18 Model Banks in five categories (plus Celent’s Model Bank of the Year):

  • Digital
  • Omnichannel
  • Legacy and Ecosystem Transformation
  • Innovation and Emerging Technologies
  • Payments

Our first speakers, Betsy Hubbard and Debra Jasper, are from Mindset Digital, an online social media training firm. As financial firms grapple with their approaches to social media, Betsy and Debra’s perspective, delivered in a completely different style than what most banks are used to, will provide ample food for thought and some concrete next steps.

Suresh Ramamurthi, Chairman (and CTO!) of CBW Bank, will tell the story of how a fintech entrepreneur bought a small ($13 million in assets, 7 employees) bank in Kansas and is in the process of turning it into a bank of the future. You may have seen the bank profiled in this story in the New York Times.

Registrations are running well ahead of last year, and our Carnegie Hall venue may well get to Standing Room Only (although you won’t be able to buy tickets at TKTS on Monday morning). We hope to see you there on March 23rd; to learn more and to register, please visit our I&I day site.

 Model Bank Logo

Google entering UK P2P payments

Feb 3rd, 2015

Last week Google announced that it will be rolling its email based money transfer system to the UK. The feature was launched about two years ago in the US and allowed those with a Gmail account to hover over a $ sign and add money to an email message like an attachment. It is expected that it would work similarly in the UK, with a $ sign naturally replaced by £.

Why now? Why P2P, and not, for example, HCE-based NFC payments, ahead of the expected Apple Pay launch? We admit we don’t have insights into Google strategies (and if we did, we couldn’t blog about it), but here are some of my thoughts.

P2P payments has rapidly become a competitive space in the UK. Consumers can already choose between PayPal and other “wallets” or individual bank-based initiatives, such as Barclays’ PingIt and Natwest Pay Your Contacts. Also, last year, Paym, an industry-wide solution was launched in partnership with banks. Paym recently reported having signed up 1.8 million consumers who transferred £26 million. Admittedly, it’s not much yet, but with some banks so far it’s only possible to sign up to receive payments via Paym, but not send. While all these solutions are making more consumers more comfortable with the idea of sending money based on a mobile phone or an email address, at the same time, Google will have to differentiate to stand out from the crowd.

One clear differentiator is the email-based approach. While I don’t have specific numbers, my sense is that Gmail is a popular mail service in the UK, and all these customers will now be able to enjoy a new feature. Assuming they like what they see, and start sending money to each other, Google is likely to enjoy increased wallet balances, at least until the recipients are ready to cash out.

I also suspect this is a customer acquisition play for Google Wallet, which has not received as much publicity in the UK as it did in the US. Every Google email user can send money, but you do need a Wallet app to accept money. Once Google Wallet establishes a customer base, it can then take on Apple Pay more directly by rolling out its full wallet services to Android users in the UK. With Android representing ~60% share of smartphone users and a growing contactless acceptance infrastructure, the UK market might prove to be an attractive opportunity for Google Wallet.