The Rise of the Smartphone: Why Some Regional Banks are Outpacing the Big Banks


7-11-13_Deloitte.pngThe current arms race by banks to win market share appears to have largely been aimed at offering customers the most technologically advanced and convenient branches in the industry. While the return on these more recent investments may not yet be fully measured, the industry should consider the new channel that is changing banking and exciting many—mobile banking. 

Today’s threat—and one that will be a game-changer—is banking by smartphone.

It eliminates the need to make the journey to a branch or ATM for the one remaining fiduciary function that you couldn’t handle remotely until now, depositing a check. With new smartphone applications offered by a growing number of institutions, consumers can cross off an essential and frequent reason for going in the doors of a bank.

Customers appear to be adapting more rapidly to the mobile banking channel than previous changes, like Internet banking. Many large banks have not embraced the level of functionality or remote deposit that their regional competitors have in their mobile channel, according to our research. They do so at their own expense. The cost of a teller transaction in a branch is $1.34, while the same transaction on a smartphone is estimated to cost about one tenth of that, according to CEB TowerGroup.

Setting the pace today are a number of regional banks which adapted to mobile banking earlier, offering higher limits for deposit transactions from the mobile platform. They have recognized that mobile banking is more than a fad as demonstrated by the speed that they are rolling out new mobile services.

The institutions that have jumped on board have likely concluded that acceptance of mobile banking is not limited to younger demographics. Once people use a phone’s camera to shoot a check and deposit it, they are likely to be hooked. And with half of all Americans already possessing and utilizing a smartphone, many feel the growth of mobile banking is limited only by the rate of smartphone ownership.

The banks with the most built-in advantage to drive mobile uptake could be those that are already operating on a purely online and mobile platform with no physical branch footprint, including such organizations as USAA. Not being encumbered by an expensive legacy branch operation allows virtual banks to be able to focus their capital on faster time to market enhancements when compared to traditional big branch organizations.

But given the current fluidity in the market, banks that are early adopters should consider continuing to expand their mobile banking capabilities. This could come in many ways, such as:

  1. Banks could use mobile banking to offer more products to customers where they are physically located. Utilizing the customer information made available through mobile banking, banks could use the smartphone as a cross-selling platform, bundling or highlighting products that cater well to a specific customer. With the decreasing frequency of branch interactions, providing the perfect suite of products via mobile phones may reinforce bank loyalty and increase share of wallet.
  2. Institutions could partner with merchants to enhance the Point of Sale process for increased interchange revenue. For example, some mobile applications such as Uber store a customer’s banking information on a smartphone and then use the information to automatically debit the customer’s account once the service, in this case a taxi ride, has been performed. Not only can this enhance a customer’s experience, it may also decrease transaction costs for both the bank and the merchant.
  3. Banks could use their mobile capabilities to increase customer connectivity and touch points. While select functionality already exists in the form of balance text messages as one example, the new possibilities could be virtually limitless. These include customer communications such as checking loan application status, spending trends or location based financing products. Imagine a future where a bank can give credit approval for a specific item in any store where a customer’s phone is.

The standard physical branch model appears to be becoming more obsolete with each passing year. The shift in consumer preferences and cost pressures that traditional bricks-and-mortar banks face in order to remain competitive makes it an imperative to develop and steadily upgrade mobile and online banking capabilities.

The opportunity is there for banks to truly change their operating model, but it will require an upfront investment, consistent monitoring of customer requirements and usage, and an organization with a clear direction to quickly adapt to changing consumer behaviors.

Avoiding Liability for Online Banking Fraud


security.jpgIf you are a community bank executive, imagine facing this unpleasant scenario:  Your head of operations calls to tell you that one of the bank’s largest customers suffered a computer hack and millions of dollars were transferred out of the customer’s accounts. 

This situation will deliver a severe stress test to your bank’s operational systems. Were the right procedures in place?  Were they followed?  Are you liable and is the loss insurable?  When your biggest customer has taken a crushing financial loss and is desperately looking for a source of recovery, you don’t want to be discovering for the first time that there were some basic steps you could have taken. While hacking can never be prevented entirely, a careful bank can avoid liability for a hacking incident. A careless bank can be forced to absorb the customer’s loss, plus interest and other amounts.

In most cases, the fraud is discovered well after deadlines for reversing or cancelling the transfer.  However, depending on applicable state law, there may be a way to impose a freeze on the funds by delivering the correct affidavit and/or indemnity.  Sometimes, if there is a reasonable basis for believing the funds have not left the destination account, the bank’s attorneys can impose a temporary restraining order to freeze the funds in place.  The success of such measures is highly uncertain, given the strict deadlines that apply to funds transfers.  If the funds were sent outside the U.S., then legal recourse is usually limited or unavailable as a practical matter.

Insurance of course is vital and all community banks should ensure that they (and hopefully their customers) have a policy directly covering losses caused by unauthorized online transfers. It is well worth the time to “stress test” your policy by running through a common online fraud scenario. Does your insurance application accurately describe all of your online banking operations?  And, is the coverage amount adequate if a criminal drains all the funds in your largest business deposit account? Because these cases are almost always litigated, you need to know that your defense costs are squarely covered and that the policy limit is enough to cover defense costs and the dollar amount of your customer’s loss. 

After a loss, observe the basics in obtaining coverage such as not agreeing to settle with your customer without the insurer’s express consent.  Even if all of these issues are adequately addressed, a bank may still face an insurer that denies coverage for at least a portion of the bank’s costs, delays a coverage determination or obstructs a settlement, forcing the bank to litigate with its customer. 

Far better than relying on only an assumed insurance coverage is a thorough review of the bank’s policies and account documents to ensure the bank can withstand a massive online fraud on one of its business customers. Do your operations, Bank Secrecy Act and information technology teams understand what the other is doing with regard to online fraud prevention? Are you positive that your team has pored over the Federal Financial Institutions Examination Council guidance on “Authentication in an Internet Banking Environment” (supplemented in June 2011) and made a thoughtful choice as to the online banking security and anti-fraud procedures the bank will follow and offer to its customers? 

Keep in mind a recent harsh federal court decision in the Patco Construction Co. case (July 2012, First Circuit Court of Appeals in Boston) that faulted a bank for not using features of its computer system that the court theorized could have been used to prevent the account hijacking. The court also faulted the bank for taking a uniform approach to fraud prevention, i.e., not taking the customer’s particular circumstances into account. It is generally worth the investment to seek written assurance from legal and/or security experts as to compliance of the bank’s online security with FFIEC guidance and those in Uniform Commercial Code Article 4A.

There is a continuing clash between the security a bank wants its customers to implement and what the customers are actually willing to do. A bank is not required to force its customers to adopt and follow all security best practices, but it should carefully document its offer of additional security precautions and the customer’s rejection of the offer. 

Once a bank has designed a suitable online security program, the bank must ensure careful compliance with those procedures. Banks’ security procedures do evolve and change over time. It is critically important to know what the bank’s actual procedures are so that new personnel can seamlessly comply and the bank’s auditors can accurately audit compliance. 

A bank should also inventory and review the agreements, certifications and other documents that affect the relative rights and obligations of the bank and its customers with respect to online fraud. If the bank’s form documentation is outdated, then those documents may allocate far more liability to the bank than banking regulations require or that is acceptable in the industry. 

Designing and following robust and compliant online security procedures is necessary to avoid catastrophic liability for a bank. It is also smart business. Senior management that thoroughly understands the bank’s security system is a management team that can then communicate the value of that system to customers and enhance the value of the franchise.

Internet Banking: what it means for your institution


FirstData-WhitePape4.pngThe way we bank is changing. What used to happen at a branch now happens just about anywhere. Internet banking services have fast become a banking reality. And in today’s changing technology landscape, financial institutions must keep up with customer demands. So what does this mean for your institution? First Data created a white paper to help you understand the consumer technology expectations and trends in banking. We outline what a complete internet banking solution should look like, how to choose the right one, and best practices for a successful conversion program. We’ll cover topics such as:

  • Features and capabilities that an internet banking solution should have
  • A mini case study of a bank that utilized First Data’s Internet Banking Suite
  • Nine best practices for a successful conversion process

 To read the white paper, download it now.

Consumer Adoption and Usage of Banking Technology


FD-WhitePaper2.jpgToday’s consumers, especially those known as Millennials and Gen Y, are used to having technology integrated into most aspects of their work and personal lives. Banking is no exception. To respond to changing customer expectations, banks, credit unions and other financial institutions have incorporated online and mobile technology into consumers’ banking experiences. However, financial institutions still need to answer several questions pertaining to banking technology:

  • How well are financial institutions meeting the needs of consumers when it comes to offering high-tech products and services?
  • Whom do consumers view as the trusted provider of the mobile wallet?
  • How does adoption of banking technology vary for different consumer groups?

This white paper answers these and other questions that are critical to the ongoing success of financial institutions in a rapidly evolving marketplace. The paper is based upon the findings of a recent online research study of 2,000 U.S. consumers conducted jointly by First Data and Market Strategies International. The “New Consumer and Financial Behavior” study assessed consumers’ attitudes, behaviors, desires and technology adoption. This white paper is the third in a series of four based on results of the study and focuses on consumers’ attitudes and behaviors related to technology in banking.

Topics include:

  • Consumers’ attitudes about, and adoption of, banking-related technology.
  • Usage of mobile banking.
  • Perceptions of the mobile wallet by different consumer groups.
  • Usage of online banking and bill payment.
  • Steps that financial institutions can take to appeal to various types of consumers.

Social Media Series: Is your bank using?


In my last column, I wrote about social networking platforms presenting banks with powerful new ways to connect with consumers of all generations. This week, we look at the benefits of social media and clear up some misconceptions about the practice.

At a time when a number of institutions — both big and small — consider implementing new technology strategies to lower costs for retaining clients, improving operating efficiencies and differentiating brands and customer offerings, surprisingly few banks leverage social media as a communications channel. Considering the U.S. economy struggles to emerge from its bleakest conditions in 80+ years, one would think that most would readily embrace an opportunity to engage with anyone visiting them “digitally.”
 
diving-board.jpgIn today’s massively connected world, tools and technologies continue to present new ways to share/consume day-to-day information. According to a white paper put out by comScore, an Internet marketing research firm, this has significant impact on the industry. While its generally accepted that online banking continues to grow in importance for the average American, did you know that “in any given quarter, nearly 60% of the total U.S. Internet population visits at least one of the top 20 financial institution sites.

Those are some big numbers that any bank — community, mid-size or large — should take note of.  Now, I’m not suggesting you go out and start using social media to promote your latest credit card offer. A word of caution that banks using social media channels to sell products or hype their services will quickly fall behind those using such tools to boost their customer service quality. Resolving issues quickly; now that’s something people want that you can give them. 

This lines up with another point from last week: the fact that you no longer wholly control your message. This idea caught a few by surprise, so I reached out to Susan Jacobsen, the president of LUV2XLPR, for her thoughts. As her work bridges public relations and new media, we talked about ways her clients are navigating a rapidly changing social media landscape. While a daunting task to some, Susan suggested that executives look at social media as a means for “engaging with customers while balancing the legal, compliance and risk liabilities.” She continued that “once they make the decision to engage online, whether through Twitter, commenting on blogs or via LinkedIn, it has to be a commitment to continue the dialog and not disappear if they don’t like what they’re reading. Social networks will not go away and neither should they.”

Sage advice to anyone thinking about using these tools to expand their customer experience in 2011 and beyond.