When it comes to technology, it’s “been there, done that” for many banks. By now, online banking is standard, check imaging is nearly universal, electronic bill pay is the norm, and more banks than not are offering advanced services such as merchant remote deposit capture. All of these technologies were considered cutting-edge not so long ago.
Now, with another decade under way, banks have a whole new set of technologies to consider. Probably the biggest advances in the coming years will come in mobile banking and related applications, such as payments and remote deposit. Spurred on by America’s love affair with cell phones, mobile banking already is growing at a faster rate than online banking did during its heyday.
Other forces—demographics, the recession, customer demand, and a need to differentiate—are propelling the advance of future technologies. To help banks better prepare for the way ahead, Bank Director rounded up 10 of the following technologies that are expected to attract outsized interest in 2010 and beyond:
Mobile banking is in a serious growth phase. TowerGroup estimated in June that the number of mobile banking users would grow to more than 53 million in 2013. Javelin Strategy & Research is even more optimistic, predicting 99 million users by 2014.
Customers seeking greater functionality from their phones are one of the biggest drivers behind the push into mobile banking. A December study from Boston-based consulting firm Mercatus LLC found customers are extremely responsive to mobile banking offerings, services that can increase new customer acquisition by as much as 60%, according to the study. The research also found that banks that highlighted mobile in their promotions outperformed those that didn’t by nearly 30%.
Eastwood Bank, a $470 million bank in Rochester, Minnesota, has fully embraced the notion that mobile banking is necessary to attract and retain customers. Eastwood is one of more than 100 institutions that have signed on to use Harland Financial Solutions’ mobile system.
“To be a player, we have to be able to offer these types of products because our customers expect it,” says Diane Meyer, core banking systems manager at Eastwood. She notes that Eastwood is located near the Mayo Clinic, putting it in one of the most technical areas of the country. “Our customers demand it and we want to be there,” she says.
As much as mobile banking may please or even delight customers, most banks have discovered that on its own, mobile banking is not really a moneymaker. That’s where mobile payments come in.
While mobile banking, much like online banking before it, is generally offered for free, banks have an opportunity to impose fees for mobile payments, particularly if they’re performed in an expedited fashion. Now is the time to move in that direction. “It is imperative that the financial services industry move beyond the confines of mobile banking in order to fully realize the potential of the medium,” noted TowerGroup in an August report.
The industry is just in the beginning stages of untangling the bewildering array of options for supporting mobile payments. So far, the Financial Services Technology Consortium has identified about two dozen mobile payment options that it thinks have potential. Says Lloyd L. Hamm Jr., chief administration officer of the $6.6 billion Boston-based Eastern Bank, “It’s the wild, wild West out there right now. Everyone thinks they have the next best solution.”
That complexity is not proving to be a deal breaker. According to the Independent Community Bankers of America’s 2009 payments study, nearly half (47%) of community banks with more than $500 million of assets plan to offer mobile payments by 2011. Even the smallest banks are getting into the act. Seventeen percent of banks with less than $100 million in assets expect to offer mobile payments.
A three-branch bank in Colorado has already laid claim to being the first in the country to offer the most futuristic, sort of mobile payment—the ability to wave a mobile phone in front of a terminal to execute a payment at the point of sale. The State Bank of La Junta, with just under $100 million in assets, started offering its Redi Pay Bling service, supported by Bling Nation of Palo Alto, California, in May.
Within 90 days, State Bank had acquired 23 new business accounts as a result of Redi Pay Bling, which is twice as many as it had acquired in the previous two years through standard credit and debit card services, says Brad Rose, vice president of information technology and security. Within five months, 80% of State Bank’s merchant base had adopted Redi Pay Bling. “It’s easier than a debit card,” Rose says.
Person-to-person payments are not new to financial services, but a twist appears to be breathing new life into this category. It seems that mobility might be just the thing to make electronic payments from one person to another catch on in a big way.
Javelin Strategy & Research found in a July report that the number of consumers likely to use mobile P-to-P payments and transfers has increased sharply to 26 million, six million of whom have expressed interest since 2008. “The opportunity for mobile P-to-P is growing faster than we expected,” says James Van Dyke, president and founder of Javelin.
The growing intrigue with P-to-P represents a big shift from 10 years ago when three big banks—Bank of America, Wells Fargo & Co., and Bank One—offered P-to-P payments online. By 2002, all three had shut down their services.
The convenience of being able to make payments on the fly from a mobile device, rather than a stationary computer, seems to be resonating with customers. For banks, the path to mobile P-to-P is being made easier by the involvement of seasoned veterans, including the dominant P-to-P provider, PayPal.
Once regarded as stiff competition, PayPal is now working with banks. It announced in late 2009 it would ally with online banking provider S1 to help banks support mobile P-to-P payments. $1.9 billion Mercantile Bank, based in Grand Rapids, Michigan, expects to be the first to go live with the service this spring.
Mobile P-to-P payments offer a chance to offset more expensive check, cash, and ATM transactions while adding “a huge layer of convenience,” says John Schulte, senior vice president and chief information officer at Mercantile. “It’s an opportunity to grab at” and it dovetails with Mercantile’s strategy to be a leader in convenience, he adds.
Users will not have to be PayPal customers to send money. They will need to enter the e-mail address or mobile phone number of the recipient, who needs to have a PayPal account. By working with PayPal, “we’re tapping into an existing market,” Schulte says.
Even without the advantages of mobility, P-to-P payments are making inroads into the banking infrastructure. PayPal also announced in late 2009 that it would work with FIS, the banking and payments processor, to integrate its P-to-P functionality into FIS’ bill payment system. That followed a month-earlier announcement that PayPal would let customers use debit cards to fund their PayPal accounts through an agreement with First Data’s STAR Network.
Mobile Remote Deposit
The idea of customers using their mobile phones to take pictures of checks and send them electronically for deposit is just zany enough that many banks seem poised to reject the possibility outright as too risky. But if they do, they may miss out on a chance to significantly change the cost structure of branch banking, while wildly impressing customers with convenience.
Mobile check capture lets users deposit checks by using the standard camera found in most of today’s mobile phones to snap a picture of the front and back of an endorsed check. The system then conforms the images to Check 21 standards and transmits them securely over a wireless network to the bank as a remote deposit.
Many observers are calling mobile remote deposit a game-changing opportunity. In its December study Mercatus found 59% of today’s mobile banking customers are likely to adopt the service. “We expect consumers to significantly embrace mobile remote deposit capture and it will be the killer app,” says Bob Hedges, a Mercatus managing partner.
The biggest success story by far in mobile remote deposit is USAA, which introduced its Deposit@Mobile service through the iPhone in August 2009. Within the first five months of the offering, USAA customers sent more than 450,000 check deposits worth $260 million.
As a branchless bank serving military personnel, USAA may be an unusual case since its members are already accustomed to dealing with the bank remotely. But the appeal of mobile remote deposit is resonating with other banks as well, including the $1.3 billion Royal Bank America, based just outside Philadelphia. “I’d be lying if I didn’t say this technology is going to be table stakes, and we’d love to be on the forefront if we can,” says Marc Sanders, the bank’s director of marketing.
Financial Planning Tools
With 80 million baby boomers about to retire and U.S. retirement assets hitting $15.6 trillion in the third quarter of 2009, financial institutions are seeing new value in financial planning tools. In a September report, TowerGroup predicted nothing less than “an explosion” in the use of financial planning tools, even though only 23% of Americans currently have a formal financial plan.
The most significant change for the planning profession is the dramatic increase in the population of people hitting retirement age. At the same time, the TowerGroup report notes heavy hits to retirement savings caused by the financial crisis will likely spur retirees to take more control of their financial futures. Finally, advances in technology are making it much easier to efficiently produce and deliver financial plans to clients.
As a result of all these factors, TowerGroup is predicting that 75% of advisers will offer financial planning services by 2012. Traditionally seen as a sideshow to portfolio and investment management, financial planning will become the lead offering at many firms as they begin to increasingly view investment management as a commodity, the report concludes.
FineMark National Bank & Trust, based in Fort Myers, Florida, embodies this new attitude. Opened in February 2007, it has one agenda: “Our goal is to work closely with clients and, in time, to develop a financial plan,” says Richard Riley, executive vice president of the $220 million bank, which has $300 million of assets under management.
FineMark uses financial planning software from AdviceAmerica to gather client information and develop plans. Riley acknowledges that many clients can be overwhelmed by the process of inputting data, so FineMark makes the task more digestible by gathering the data in segments over the course of a year. So far, about one-third of the bank’s customers have completed a financial plan. “It gives us an opportunity to see the details and big picture for a client,” Riley says. “It helps to foster the relationship.”
A lasting legacy of the 80-million-strong baby boomer group are the 70 million children they raised, now known collectively as Generation Y. Banks with any aspirations of attracting the attention of this large and tech-savvy group need to get hip to the tools of social media.
For banks that may still be getting accustomed to having a website, navigating the terrain of social media can be daunting. Not only is the lingo—Twitter, Yelp, blog, Facebook, Kudzu, and YouTube—all new, so is the concept of conducting interactive conversations with customers in a public forum. Part of the bargain is that customers and prospects are free to manipulate the message, opening the door to possible misunderstanding or embarrassment.
But social media may be the best way to engage the attention of Gen Y, a skeptical group that is doubtful of product claims unless a blog or comparison website can bear them out. Financial institutions able to fulfill Gen Y’s expectations for honesty and transparency through social media are more likely to fall into favor as this group ages and becomes more financially powerful.
Seattle-based Verity Credit Union, with just $380 million in assets, may well be the mother of all financial industry social media. It started a blog in 2004, when few people even knew what one was, and now has four blogs, two Twitter accounts, a Facebook page, and a presence on Yelp, the business-rating site. Its blogs are a featured element of its home page and include contributions from more than a dozen writers affiliated with the credit union.
“I’m a firm believer in two-way conversation whenever you can have it,” says Shari Storm, the credit union’s chief marketing officer, blogger-in-chief, and resident author (she just published a book on management and motherhood). Storm noted that the customers who are most loyal to Verity are those who have personal relationships with a teller, loan officer, or other employee. “With two-way communication, you have a more solid relationship,” she says.
Verity’s newest blog, called Verity Mom, is the underpinning for a major marketing campaign aimed at attracting mothers, and in turn, their children, to the credit union. Verity’s social media efforts already are responsible for attracting 1% of the credit union’s new members every year, a figure that does not take into account word-of-mouth impact. Now Verity is hoping to capitalize on the fact that 60% of kids bank where their parents do. “We figured this is a smart business niche,” Storm says.
Personal Financial Management
Pushed partly by the recession and partly by the innovation of nonbank competitors, banks are practically being forced to embrace personal financial management software in 2010.
The competition first enlightened banks about the opportunities that exist to entice customers online beyond simple account look-ups and money transfers. With funky names like Geezeo, Wesabe, and Mint, these nonbank sites gave users a wealth of money management functionality not found at banks, including the ability to know, say, your clothing budget still has $80 in it three days before the end of the month.
Through nifty tools and compelling content, including online discussion groups that share money-saving information, the nonbank sites have seriously raised consumer expectations of what money management is all about. At the same time, the recession is causing consumers to be more focused than ever on monitoring and managing their finances.
The good news is that the nonbank sites, despite their head start, are far from owning the market. Banks, meanwhile, are positioned to be leaders. Seventy-one percent of consumers say they trust banks more than Web-based personal finance sites when it comes to security, according to a September report from Javelin Strategy & Research.
For $860 million Byron Bank, personal financial management tools are a way to help customers cope with six years of increasing unemployment in recession-weary Michigan. Byron began offering FinanceWorks from Digital Insight as a free service just over a year ago. “It’s really helped our customers become more aware of their spending habits and manage them better,” says Robert Powers, first vice president of operations.
Now, just over one-quarter of Byron’s online banking customers use the personal financial software. These customers are Byron’s best: They have the most products and the highest balances. They are also aggregating their accounts at Byron. “They’re using our website to look at their other financial relationships nationally,” Powers says.
Byron Bank is not alone. More than 400 financial institutions began offering FinanceWorks over the past year, according to Digital Insight. It found that users of the service are up to four times more profitable than average bank customers and log into online banking twice as much as active online banking users.
One of the most successful marketing moves in financial services history was the introduction of reward points for credit card spending. So it’s no surprise that the rewards concept has spread, first to debit cards and now to deposit accounts.
Initially, only the biggest banks could afford to create and support deposit reward programs. Bank of America’s innovative Keep the Change program, which deposits the change portion of a debit-card transaction into a customer’s savings account, led the way and spurred creative efforts from other big banks.
Now the availability of turnkey deposit reward programs is making it possible for smaller institutions to offer valuable rewards, mostly in the form of higher interest rates on checking accounts. With the advent of the turnkey programs, TowerGroup predicts that reward checking will “proliferate” in 2010 and 2011.
BancVue introduced the concept about five years ago and has witnessed interest pick up in recent years. It now has nearly 700 bank clients around the country, which have opened more than 900,000 consumer accounts worth more than $8.5 billion.
Reward checking works by getting customers to engage in behavior that helps the institution save money, such as using direct deposit and bill pay, making frequent debit card transactions, and receiving e-statements. In return, customers receive an interest-rate bonus of 1% to 3%. “Most people already do these things,” says Don Shafer, chairman of BancVue, adding, “The product works.”
Verity Credit Union’s Velocity checking account offers a high rate to customers who make 12 debit card transactions a month, receive e-statements, and log in to online banking at least once a month. It is Verity’s most popular checking account by far, says Shari Storm, chief marketing officer.
Shafer says institutions that offer reward checking should expect to win about 10 new customers per month, per branch. While many banks fear cannibalizing their existing checking account customers, he says most institutions find that about half of the reward checking customers are new, while half switch from existing checking, CD, or money market accounts. In addition, existing customers who switch to reward checking typically increase their deposits by about 20%, he says.
Small Business Banking
Banks have talked for years about the need to pay more attention to the often-overlooked and undervalued small-business market. Now that talk finally seems to be turning into action.
In a January report, Celent found that spending on corporate banking is fueling IT spending growth in North America. The vast majority of the 7.1% increase in new IT investments will be in corporate banking, the report noted. That compares to the retail side where banks are “slashing spending” on new investments, Celent said.
Small businesses are expected to be a big beneficiary of banks’ increased investment in corporate banking. The planned investments “will trickle down to the smallest of businesses as banks also work on targeting additional small business customers,” the Celent report noted.
A development that should aid banks in reaching out to small business customers is the increasing availability of affordable software. Fundtech, for example, has introduced an on-demand version of its wire transfer system that lets small to mid-sized banks serve customers without having to make a large systems investment.
Similarly, Digital Insight has introduced a small-business version of its financial management software aimed at the 23 million small businesses in the U.S. that have fewer than five employees and, thus, fairly simple needs. The software aims to strike a balance between overly complicated cash management solutions and too-simple consumer-oriented online banking solutions that do not support such tasks as invoicing, payroll, and taxes.
Byron Bank, which has offered the consumer version of FinanceWorks for about a year and a half, added the small business version about six months ago. “The small business market is an untapped resource,” says Powers. “We’re really excited about the potential there.”
A particularly welcome feature for businesses that make house calls, say dog groomers, for instance, is the ability to accept credit cards by inputting the card numbers into the software. Powers noted that small businesses are logging in about three times a week to use the program. “We don’t have huge numbers, but we’re getting more loyal customers every day,” he says.
Anti-Fraud and Security
Security has always been top of mind for banks, as far back as the days when a thick steel vault door was considered a prime showpiece of any branch. Now, the potential avenues for fraud have increased exponentially, with all manner of electronic systems and transactions presenting a multitude of dangerous entry points for fraudsters.
In a March 2009 report, Aite Group found that financial institutions expect all forms of fraud to become more significant. “In almost all instances, financial institutions expect fraud attacks to increase, remaining a top concern over the next three years,” says Nick Holland, senior analyst at Aite.
And for good reason. Fraud is hitting banks of all sizes. In 2009, 49% of community banks experienced an increase in fraud, says Christine Barry, research director of Aite, during a presentation at BAI’s Retail Delivery conference.
The drumbeat of potential areas of concern is relentless. In February, Javelin Strategy & Research reported that the number of identity theft fraud victims increased 12% to 1.1 million in 2009, while the total dollar amount of identity fraud increased 12.5% to $54 billion.
The latest ABA deposit account fraud survey, released in November 2009, underscores how easily new fraud methods spread, even as the old ones persist. In 2008, check-related losses continued to rise, to $1.024 billion from $969 million in 2006, with 80% of banks reporting such losses. At the same time, the instrument largely responsible for replacing checks, the debit card, was behind fraud losses of nearly $800 million in 2008.
Banks also need to be concerned about threats to their online banking programs, money transfer systems, and internal systems. Insider attacks may be the biggest concern. They account for 60% of bank fraud cases involving a data breach or theft of funds, according to Celent.
So much technology, so little time
While this article certainly offers a wealth of information and ideas for board members to consider as they map out competitive strategies, it barely scratches the surface of the myriad innovations being developed to attract customers and produce more streamlined operational efficiencies. Still, the aforementioned 10 do provide some intriguing conversation starters next time the board has an opportunity to query IT and ask the big question in the room: Where should we be spending our technology dollars?