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Fis strategic insights vol 7 may 2012

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Strategic Insights is a newsletter published by FIS that provides research, throught leadership and strategic insights on banking and payments.

Strategic Insights is a newsletter published by FIS that provides research, throught leadership and strategic insights on banking and payments.

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  • 1. VOLUME 7 • MAY 2012Innovation or Disruption? IN THIS ISSUESix New Financial • Innovation or Disruption?Instruments that Could Six New Financial Instruments that Could Change the Face ofChange the Face of Banking and Payments • Engaging CustomersBanking and Payments through Loyalty Programs • Large vs. Community Bank Customer By Fred Brothers Demographics and Rewards Program EXECUTIVE VICE PRESIDENT, STRATEGIC INNOVATION Participation ™ This month I’m going to discuss a few financial • Walmart MoneyCenter – instruments that didn’t exist a few years ago, some of Friend or Foe? which are already changing the way people pay for things. Several of these innovations could potentially turn the current payment system on its side. I also want to discuss a fast-growing form of lending, which could transform the historically symbiotic connection between a small business and its local bank into a relationship between a small business and anyone in the world. Here’s my list:1. Mobile-assisted checkout 3. Merchant-funded rewards 5. Social media payments2. Dual debit and credit cards 4. Square 6. Person-to-person (P2P) lending1. Mobile-assisted CheckoutWatch for more pilots and rollouts of mobile solutions that speed the checkout process at retail. Mobile-empoweredretail payments are emerging faster than anticipated and in multiple forms. Several high-profile retailers such as OldNavy®, Urban Outfitters and Nordstrom have followed Apple’s lead by “bringing the terminal to the shopper” to reducefrustration in packed stores and to provide a more personalized customer experience even when stores aren’t jammed.FIS STRATEGIC INSIGHTS • V 7 MAY 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved. 1
  • 2. Last holiday season, one of my colleagues went gift shopping at Old Navy when the lines were long and shopping timewas short. While standing in line, she was approached by an Old Navy employee who asked her if she was paying witha credit card. When she replied “yes,” the employee pulled out his iPod Touch®, scanned the tags, totaled the sale,swiped her card, asked her to “sign” the screen with her finger and e-mailed her receipt to her.Another version of facilitating the checkout process in “bricks and mortar” retail is exemplified by Jeni’s SplendidIce Cream – known to us locals as “Jeni’s.” Jeni’s has gained notoriety even outside of Columbus, Ohio because ofits unusual flavors such as goat cheese with cognac figs and Queen City cayenne. During warm weekends, a line ofcustomers wraps around Jeni’s as “lickers and tasters” sample several flavors before ordering. The long queue becomesan obstacle to the optimal customer experience for those of us who: 1) know what we want, 2) don’t want to sample,3) don’t want to talk with strangers for a half an hour, or 4) have limited time to engage with ice cream no matter howsplendid. To accommodate these customers, Jeni’s developed a mobile app for avoiding the line. Customers can noworder, pay and proceed to a separate pickup area and get their cones in less than a minute from entering the front door.2. Dual Debit and Credit CardsDual debit and credit cards made a re-entry into the U.S. last summer via Fifth Third Bank’s Duo CardSM about the sametime that IDBI launched its debit/credit card – the Magic Card – in India. A year earlier, People’s Bank (POSB Bank ofSingapore) debuted its Multi-tude card in Singapore – a debit card with micro credit tied to it and targeted to youth.While the reasons why banks are introducing these dual cards differ depending on country and target, the main messageto consumers is universal. The cards offer financial flexibility to people who need it.Dual cards look like a win-win-win proposition.• The dual cardholder gets access to a line of credit, automatic overdraft protection and perks associated with credit cards, which are diminishing for debit cardholders.• The U.S. retailer can (and will likely) steer the transaction toward debit, thereby reducing merchant service fees.• The issuer makes money on monthly card fees for those who don’t meet minimum balance requirements and on the double-digit interest rate attached to revolving credit – for Fifth Third’s Duo, after the introductory promotional period with zero interest expires.Credit cardholders who pay off their bills monthly are unlikely candidates for dual cards. The target for dual cards is thetraditional debit card user who needs a line of credit until payday. For banked consumers who are able to access a line ofcredit, dual credit cards make a lot more sense and are more convenient than payday loans.3. Merchant-funded RewardsGroupon™ launched at the end of 2008 and LivingSocialSM morphed into a daily deal company the following year. TheAmerican public was in the grips of a deep recession and daily deals on restaurant fare, no doubt, kept some smallbusinesses afloat while providing consumers a rationalization for dining out. Flaws in these types of merchant-fundedrewards (MFRs) have included: 1) until an individual displays a pattern of response to MFRs, offers are scattershot, and2) the deals have to be so compelling to motivate consumers that merchants operating on thin margins sometimes evenlose money. The only way these merchants can justify participation is through turning trial into repeat business.Fast forward to post-Durbin when MFRs become an attractive substitute for debit card points. Financial institutions –especially those with customer loyalty programs in place – have a competitive advantage in the MFR arena. They havethe ability to leverage marketing analytics to target customers with relevant offers. And, they have direct ties to localmerchants to develop programs that benefit these small businesses.FIS STRATEGIC INSIGHTS • V 7 MAY 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved. 2
  • 3. 4. SquareI was in a cab the other day and had to pay with a $100 bill for the ride because the driver’s credit swipe system wasdown. I asked the driver why he doesn’t use Square™ and he told me that his taxi company wouldn’t let him use it,because they want to charge him 10 percent of the fare for using their system instead. Square only charges 2.75 percentper swipe.Regardless of my recent anecdotal experience with taxis and Square, Square is making friends with New York City TaxiCommission and is testing in-taxi devices with a simpler and cooler-looking setup – a combination of the Square creditcard acceptance app with an iPad® secured in a black metal case. Riders swipe, sign with their fingers and receivereceipts via e-mail or mobile text.5. Social Media PaymentsMy nephew plays FarmVille™ and pays for his equipment and livestock in Facebook Credits™. I’m floored by thenumber of channels that exist for buying and earning Facebook Credits. For example, leading retailers such as Target™,Walmart™ and Best Buy™ sell Facebook Credits gift cards. Through ifeelgoods™, a promotional company for FacebookCredits, online retailers such as 1-800flowers.com™ and CPG companies such as Coca-Cola™ offer Facebook Credits aspromotional incentives – which are more interesting to my nephew than coupons.According to Facebook’s S-1 filing, 15 percent of its $3.7 billion in 2011 revenue came from payments. That’s a ton of10-cent Facebook Credits and 30 percent interchange on games. As Facebook receives money transmitter licenses acrossstates – 15 as of February according to Bank Technology News – speculation about what Facebook will do with its licensesranges from arming itself for potential run-ins with state regulators to expanding its payments business to P2P transfers.16. Peer-to-peer LendingPeer-to-peer (P2P) lending in its current form emerged around 2006 – 2007 with the founding of Prosper and LendingClub™ – the largest players in the U.S. Despite halting operations at the height of the financial crisis when the SEC shutdown Prosper, both companies were able to resume business in 2009 after complying with SEC rules. Neither Prospernor Lending Club represents a pure P2P model because they are intermediaries in the transaction – charging fees tofacilitate the transaction and using WebBank for funding the transaction.Gartner has forecasted that P2P lending will grow to $5 billion in outstanding loans by 2013.2 Growth in P2P lending isbeing fueled by factors associated with the current economic climate and the current P2P models:• Loans have been hard to get and expensive for entrepreneurs, especially those without sterling credit histories. Because P2P lending cuts out additional expenses associated with traditional financial intermediaries, loans are often made at lower-than-market rates.• Investors are looking for opportunities that provide higher rates of return and diversification of their portfolios.• The act of staking a struggling small business owner can provide “feel good” benefits to an investor. Prosper encourages social networking among borrowers and lenders to foster a sense of community.All of these new financial instruments are not just interesting, but potentially game-changing for financial institutions. Infuture articles, I’ll delve deeper into some of these topics and other innovations that are reshaping our industry. In themeantime, we’ll continue monitoring, analyzing and strategizing these opportunities and threats so FIS™ can help you tobetter serve your customers and compete more effectively. As always, I welcome your insights.1 Sean Sposito, “Facebook Fast-Tracks Its Payments Business.” Bank Technology News 21 February 20122 Gartner, “Gartner Says 50 Percent of Banks Will Still Lack an Innovation Programme and Budget by 2013,” 5 January 2010FIS STRATEGIC INSIGHTS • V 7 MAY 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved. 3
  • 4. Engaging Customers throughLoyalty Programs Interview with Bob Legters SENIOR VICE PRESIDENT, LOYALTY SERVICES Background Today’s marketplace is crowded with loyalty programs and “deals.” Loyalty programs are so common in some industries they have become “cost of entry” in attracting and retaining the most desirable customers. However, growth in loyalty programs overall is slowing as the market becomes saturated. The average U.S. household is enrolled in more than 18 loyalty programs, though only active in 8.4 of them according to Colloquy. During the 2008 – 2010 period, growth in financial services loyalty programs declined precipitously from previously robust growth to a meager 1.6 percent due to cutbacks in credit card offers from financial institutions and credit card charges byconsumers.1 Today, a resurgence of credit card loyalty programs is occurring as large financial institutions, in particular, migrateloyalty program participation from debit to credit and as consumers regain their appetites for using credit cards.Primary research conducted by FIS (see this issue’s article by Paul McAdam) found that participation in loyalty programs ishigher among profitable customers, but lags significantly among community bank customers. We recently talked with BobLegters, senior vice president of Loyalty Services, about how smaller financial institutions can leverage loyalty programs todifferentiate themselves and improve the quality of their customer bases.Time to Evaluate LoyaltyWhy is it critical right now to re-evaluate your current loyalty program or establish a loyalty program if you don’toffer one?Bob Legters: Much has been included in the marketing communications and offer space people call a loyalty program. At FIS,we define a loyalty program as one that drives customer engagement and keeps customers connected to your products. Thethree key components of any rewards programs are:1. The earnings ratio – how many points per transaction;2. The content of the redemption offer – cash back, merchandise, travel or something unique such as gifts to charities; and3. Engagement in the marketing engine – the way the program is messaged and marketed to drive desired behavior.In both financial and retail industries, loyalty programs are table stakes for the vast majority of companies. A steady streamof deals and rewards has trained consumers to expect added-value benefits. Only low-cost leaders – selling an everyday lowprice value proposition instead of an engagement proposition – can afford not to offer a loyalty program. Unless you canbe the low-cost leader in your industry, you’re going to have a competitive disadvantage without some type of incentive orrewards program.Logic tells you that if you have someone’s primary checking account but not their primary credit card, a competitor has it. Andthat competitor is likely to pursue their checking account. The points-based rewards card is a staple in the marketplace. And ifyou don’t offer rewards, you are at risk of losing the banking relationship because someone else is talking to your customer atleast 12 times a year through their credit card statements and other communications.FIS STRATEGIC INSIGHTS • V 7 MAY 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved. 4
  • 5. How do we know that loyalty programs Figure 1: FIS loyalty valueare worth the investment? How muchparticipation does a bank need to make aloyalty program worthwhile? Rewards vs. Non Rewards Comparison (+/-)Bob Legters: To gauge the performance of loyaltyprograms, we measure acquisition, activation, usage Percent of Active Accounts 4.22%and retention. We measure number of transactions Sales Volumn/Active/Year $2,359per month, dollar amount per transaction per month Average Ticket $6.00and percentage of active accounts (Figure 1). Our Transactions/Active/Month 2.13loyalty programs have rarely failed to increase the Finance Charge Income/Active/Year $20transactions, the dollar amount per transaction and Interchange Income/Active/Year $37the percentage of active accounts. Average Outstandings/Active/Year $684There are additional benefits that financial Source: FISinstitutions gain through loyalty programs, but wedon’t count those in our performance statistics. Forexample, if the financial institution meets certainrequirements, it can get incentive-based points from MasterCard™ or Visa™. It’s also generally the case that engaged customersbuy additional products from you. But we steer clear of taking credit for everything the cardholder does to ensure we don’toverstate the value of the loyalty program.You need to have a program that has sufficient scale. We used to say that 500 or 1,000 cards were a minimum to offer anaffordable loyalty product, but we have clients with as few as 50 loyalty cards. Those small programs are part of an overallvalue proposition to exclusive customers because the cost of losing those customers exceeds the back-end expense ofthe program. That being said, our experience says that 500 − 1,000 cards is usually a barebones number to make a loyaltyprogram worthwhile. At that level, the loyalty program is keeping the financial institution competitive, but not generatingsignificant revenue. While the direct revenue a financial institution generates through these smaller loyalty programs may notbe significant, the program increases the level of customer engagement and greatly reduces the odds a competitor will stealthe credit card relationship.Total Relationship BankingFIS research has shown that when a customer has their primary credit card with their primary checking accountprovider, their overall deposit and loan balances and the profitability of that customer is significantly higher. How doyou build that total relationship?Bob Legters: The biggest challenge for total relationship rewards programs is breaking down the silos among departmentswithin financial institutions. Typically someone is in charge of loans, another person is in charge of deposits and a third personmay be in charge of payment mechanisms. Often, there isn’t an overarching strategy that connects the products.A powerful tactic for building a successful relationship rewards program is householding all the points into one pool. Once youcan offer that, you are in the consumer’s consideration set for any financial decision. Your customer will consider what you cando for them before looking at other options because the rewards points just keep pouring into their pool.How do you strike the right balance between offering rewards that help retain and strengthen relationships withcustomers and overwhelming them with so many messages that they stop responding to key selling messages?Bob Legters: There are a lot of people trying to determine the answer to that question especially with the adventof merchant-funded rewards (MFR). The MFR model is one of the few models in the market that is win-win-win. Themerchant gets an incremental transaction, the financial institution gets a self-funded rewards offering and the consumergets to earn more.FIS STRATEGIC INSIGHTS • V 7 MAY 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved. 5
  • 6. Our MFR strategy was predicated on rolling out a merchant-funded destination site to offer additional engagementopportunities for the consumer. We didn’t want consumers to feel as if they were being spammed or their privacy was beinginvaded. You want:1. The MFR to be easy to find;2. The message to be tailored; and3. The message to be conveyed at tolerable intervals.We do caution clients that MFRs have the potential to drive consumers’ loyalty to the coupon rather than the financialinstitution. You don’t want to turn customers into deal-seekers because when the financial institution across the street offers abetter short-term deal such as a teaser rate, you could lose the customer.Differentiation from the Large BanksWith the big financial institutions refining their loyalty programs, where should smaller financial institutions direct theirattention to get the best return on their investment and how can they differentiate their programs?Bob Legters: The financial institutions with more than $10 billion in assets are using very aggressive offers to migrate therevenue opportunity they lost on debit to the credit side of the business. If I ran a small- to mid-tier financial institution,I would: 1) have a competitive credit card program because it’s very profitable and without one, I’m vulnerable tocompetition, and 2) leverage the advantage I still have in debit to offer a program that’s richer and more enhancedthan what the large financial institutions can offer. A good, competitive client might say, “I see what the large financialinstitutions are doing in debit and while they’re backing down, I’m going to step it up and steal business.” On the creditside, the playing field is very level, which means you must be competitive to retain market share. The best thing you cando to differentiate your loyalty program is to incorporate it into your overall strategy.Next Generation LoyaltyWhat’s on the horizon? What does the next generation of retail financial services loyalty offerings look like?Bob Legters: I believe that mobile and GPS-oriented space for the deal is the next “big thing.” Instead of being targetedwhen they are on their banking site, consumers will receive messages when they are engaging in shopping activities andconsidering payment choices.There may be some new currencies for rewards, but consumers respond well to cash back and points so I don’t anticipate asea change in that arena. The points programs work today because they are relevant.The future includes social media for deal shopping as well as rewards earning. As we move forward, social media currencycould provide an earning opportunity for consumers who spend a lot of time in the social media space. Social networkingcould drive comparison shopping – including shopping for financial produces – to new levels. That’s another reason why it’s socritical right now to re-evaluate or establish customer loyalty programs.1 Colloquy, “The Billion Member March: The 2011 COLLOQUY Loyalty Census: Growth and Trends in Loyalty Program Membership and Activity.”April 2011FIS STRATEGIC INSIGHTS • V 7 MAY 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved. 6
  • 7. Large vs. Community BankCustomer Demographics andRewards Program Participation By Paul McAdam SENIOR VICE PRESIDENT, RESEARCH AND THOUGHT LEADERSHIP In my past two articles I’ve discussed challenges and opportunities associated with community banks and credit unions that are driven by the characteristics of their retail customer bases. Although community bank customers and credit union members are more loyal to the financial institutions where they have their primary checking account relationships, they are not as profitable to their institutions as the average bank customer. The affluence gap between community bank customers and the average bank customer limits opportunities. In contrast, the level of affluence of the credit union member base is consistent with the average bank customer, but credit unions capture a smaller share of the financial wallet from their members.This month’s article analyzes the characteristics of the U.S. “large bank” customer base. Our analysis defines large banksas the 12 institutions that have more than 1,000 branches. In particular, I’ll talk about differences between communitybank and large bank customers, differences in reward program participation, and how these factors drive variations inconsumers’ financial behaviors.Analyses cited in this article are generated from primary research conducted with a sample of 3,345 adults with checkingaccounts conducted by FIS in August 2011. Large bank customers account for 52 percent of the representative sample.And, because they are such a large percentage of the bank customer population, their characteristics are often similar tothe norm.Demographic Differences Figure 1: Relative to community bank customers, large bank customers are concentrated in mid- to large-sized marketsOne big difference between large bank andcommunity bank customers is their place of Concentration of large bank and community by marketresidence (Figure 1). Large bank customers are (national average = 100)less than half as likely to live in a small town or 331a rural area while community bank customersare concentrated in small towns, rural areasand small metropolitan markets. Large bankcustomers tend to reside in mid-size or large 138metro areas – areas where growth tends to be 116 Nationalfaster, job opportunities more plentiful and 81 Average 53incomes higher. 42 = 100 Small town/rural Small metro Mid-size/large metro Large bank Community bank * Read as: Within rural and small towns, consumers are less than half as likely to bank with a large bank (index = 42). Source: FIS primary consumer research, August 2011; n = 3,345FIS STRATEGIC INSIGHTS • V 7 MAY 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved. 7
  • 8. Another significant demographic difference Figure 2: Large bank customers skew younger than national normsbetween large bank and community bank while community bank customers are oldercustomers is lifestage (Figure 2). On average, largebank customers are younger than community bank Composition of large bank and community bank customers by generation (national average = 100)customers. Lifestages of large bank customers tilt 143toward Gen Y (20- and early 30-somethings) and, 117 114to a lesser extent, Gen X (mid-30s to late-40s) 113* 105 Nationalwhile community bank customers are older and 91 93 93 Average 84 = 100particularly concentrated in the Mature lifestage,which is composed of consumers who are more 62than 65 years old. Differences in lifestage drivea large part of financial behavior as youngerlifestages are nest-building and accumulating andolder lifestages are clearing out their nests and Gen Y Gen X Younger Boomers Older Boomers Maturepreparing for retirement, if not already retired. Large bank Community bank * Read as: Large bank customers are 13% more likely than the national norm to be membersThe geographical and age differences between of Generation Y (index score = 113).large bank and community bank customers Source: FIS primary consumer research, August 2011; n = 3,345influence other demographics, which affectsfinancial behaviors. Large bank customers are: Figure 3: Large banks capture higher deposit, investment, loan and• A little more likely than the national average to credit card balances on average be employed while community bank customers Average balances consumers hold with primary checking account provider are much more likely to be retired;• Seven percent more likely than the national $35,861* average and 28 percent more likely than $31,029 $32,240 $30,306 community bank customers to be college graduates; $24,016• About as likely as the national average but $16,539 $16,273 15 percent less likely than community bank $13,389 customers to be married/living with a partner;• Above the national household income average by about five percent, but well above (18 percent higher) the average household income Large bank Regional bank Community bank Credit union for community bank customers. Deposits and investments Loans and credit card debt * Read as: Consumers who identified a large bank as their primary checking accountThe favorable demographics of large bank provider hold an average of $35,861 in deposit and investment balances with the bank. Source: FIS primary consumer research, August 2011; n = 3,345customers help these financial institutions capturehigher deposit and investment balances aswell as higher loan and credit card balances onaverage (Figure 3). Among customers who have their primary checking account relationships with large banks, they holdan average of nearly $36,000 in deposits and investments and about $31,000 in loans and credit card debt with theirinstitutions. Community banks are able to capture about $32,200 in deposits and investments but, at about $16,300, fallwell short of the amount of loans and credit card debt that large bank customers have with their institutions.Because older customers tend to hold higher deposit balances, the older community bank customer base’s depositbalances are relatively high given their earning power. Older demographics are a double-edged sword, however,because they also dampen the need for loans. The biggest difference between large bank and community bankcustomers in lending behaviors is found in the category of first mortgages on the primary residence. We see significantlygreater dollar amounts in first mortgages held by large bank customers with their primary financial institutions, which isreflective of their younger, more accumulative lifestages as well as higher real estate costs in the more urban areas wherethese customers tend to reside.FIS STRATEGIC INSIGHTS • V 7 MAY 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved. 8
  • 9. Figure 4: Large banks have higher percentages of profitable customers Demographic differences between the twobut significantly lower percentages of loyal ones customer bases contribute to large bank customers’ greater likelihood of being profitable Percentages of Customers Who Are Profitable and Loyal to their Primary compared with community bank customers Checking Account Provider (Figure 4). An estimated 41 percent of the 60% 60% 54% 55% primary checking account relationships of large 50% 47% 50% bank customers are profitable compared with 39% only 34 percent of community bank customers. Loyal 40% 40% Our research took several factors into account Profitable 30% 30% in computing estimated profitability including fees, interest income and payment and channel 20% 41%* 20% usage. Other factors that contribute to the higher 37% 34% 36% 10% 10% profitability of large bank customers are higher fees charged by large banks and usage of lower- 0% 0% cost channels by their customers. Large bank Regional bank Community bank Credit union * Read as: 41% of consumers who hold their primary DDA relationship with a large bank are profitable The Loyalty Advantage Source: FIS primary consumer research, August 2011; n = 3,345 Although large bank customers are more likely to be profitable, community banks hold the edge on the issue of customer loyalty. Only 39Figure 5: Large banks’ customers are much more likely to participate percent of large bank customers exhibit somein a rewards program degree of loyalty, but 54 percent of communityPercent of consumers who participate in each type of loyalty program with bank customers are loyal. Our research scored their primary checking account provider customers’ loyalty to their primary checking account providers based on several factors, 31% including: trust in their institutions and 26% 23%* willingness to recommend; willingness to make a repeat purchase and consolidate funds; and 13% identification with the institutions’ brand values. 10% 10% The gaps between customer profitability and loyalty highlight the key challenges faced by both Checking account rewards Debit card rewards Credit card rewards large and community banks. Large bank Community bank • Large banks have a higher portion of* Read as: 23% of consumers who hold their primary DDA relationship with a large bank primary checking account relationshipsparticipate in a checking account rewards program with the bank. that are profitable, but could perform evenSource: FIS primary consumer research, August 2011; n = 3,345 better if they increased the portion of loyal customers.• Community banks generate strong loyalty, but capture lower profitability due to customer demographics and lower cross-sell of loans to existing checking account relationships (particularly first mortgages and credit cards).Our research also reveals significant differences in rewards program usage among customers of large and communitybanks and suggests how these programs can provide remedies for both types of institutions.When comparing the customer bases of large and community banks, a much higher portion of large bank customersparticipate in their providers’ loyalty programs (Figure 5). Twenty-three percent of large bank customers participate intheir primary checking providers’ checking account rewards programs, 31 percent participate in their providers’ debitcard rewards programs, and 26 percent participate in the rewards programs of the credit cards offered by their primarychecking account providers. Participation rates in these same rewards programs by customers of community banks aresignificantly lower (ranging from 10 − 13 percent).FIS STRATEGIC INSIGHTS • V 7 MAY 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved. 9
  • 10. These rewards program participation rates contribute Community banks face a different challenge. While it’s truesignificantly to the customer profitability differential that some community banks do not place a high degreebetween large and community bank customers because: of strategic emphasis on retail credit card programs and residential mortgage lending, there is evidence that1. Banking customers who participate in any of these card-based and relationship rewards programs can boost three rewards programs (regardless of the size of the profitability. Recall from Figure 4 that although community institutions’ offering the programs) are 100 percent banks have a large loyalty advantage relative to large more profitable than customers who do not. Large banks, this doesn’t necessarily lead to wallet share and banks realize rewards program participation rates 2 − customer profitability advantages. As this article points 3 times higher than community banks. out, customer demographics certainly influence this,2. Among all primary checking account customers who but there’s no reason to believe that community banks participate in any of these three varieties of rewards cannot also use rewards programs to their advantage programs, large banks generate higher levels of to significantly increase wallet share and profitability. profitability than community banks. Community banks excel at a model of providing high service levels through local presence and decision making.Drilling deeper into this second point on the profitability Driving customer rewards program participation beyondgap between large and community banks, our data the current levels of 10 to 13 percent of primary checkingreveals the following: account relationships can fortify the community banking business model and help attract younger customers.• Among large and community bank customers who participate in their primary providers’ checking account I’d be interested in your perspectives and experiences rewards programs (the 23 percent and 13 percent in on the impacts that customer rewards programs have Figure 5), large banks generate average customer had at your institution. Feel free to contact me at profitability 48 percent higher than the profitability paul.mcadam@fisglobal.com with your comments attained by community banks. or questions.• For debit card rewards programs, the average profitability differential between the participating customers of large and community banks expands to 199 percent − three times the profitability.• Among large and community bank customers who participate in the credit card rewards programs offered by their primary checking providers the average customer profitability gap narrows to a four percent difference in favor of large banks.So clearly the large banks have a rock solid business casefor driving customer utilization of rewards programs. Inaddition, there’s strong evidence that rewards programsare the secret sauce that encourages some large bankcustomers to consolidate balances and keep the bank’spayment card top-of-wallet. In other words, while theseconsumers may not feel a particularly strong sense of“loyalty” toward the large bank, they value receivingcompetitive products and the benefits associated withrewards programs. Thus in the expansive, mass-marketdistribution networks of the large banks − where achievinghigh levels of sales and service consistency will always be achallenge − rewards programs are the glue that encouragessome customers to expand and maintain their relationships.FIS STRATEGIC INSIGHTS • V 7 MAY 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved. 10
  • 11. Walmart MoneyCenter – Friend or Foe? By Mandy Putnam DIRECTOR, RESEARCH AND THOUGHT LEADERSHIP My friend Dan’s niece is in need of a cash infusion routinely, but doesn’t have a checking account. Before Dan became the hapless benefactor to his niece, he was a member of the small part of the population that never shops at Walmart. Now he’s on a first-name basis with the woman who handles wire transfers at the Walmart MoneyCenter. Walmart MoneyCenter brings together a number of services – credit cards, prepaid cards, money transfers, bill pay, money orders, check cashing, etc. – under its umbrella and makes it possible, as well as convenient, for people such as Dan’s niece to have access to financial services. Even if she becomes solvent enough to have a bank account, I’m not sure she’ll become banked. Like many members of her generation, she’s embraced alternative ways of navigating the financial waters.We recently completed a consumer survey, which focuses on trends in payment methods. One of the survey questionsasked how many transactions consumers made in the past 30 days at the Walmart MoneyCenter. Of our 3,205 respondents,five percent had made at least one transaction there. MoneyCenter users in our survey averaged 2.2 transactions permonth. That’s about as many trips that banked consumers make to their financial institutions (not counting ATM-only trips).One of the outputs of our payments survey is a Figure 1: Walmart MoneyCenter users are most likely to be cash userspayment typology. We segmented adult consumersinto five categories based on the payment methodsthey favor: 45%* Cash users (27%)1. Cash users typically pay with cash, prepaid 26% cards or gift cards and represent 27 percent of 25% Debit carders (34%) the sample. 34%2. Debit carders are the biggest segment, at 16% 34 percent. Innovators (2%) 2%3. Innovators – a very small two percent of the sample – are generally young folks who make 7% Paper check writers (11%) 11% Walmart MoneyCenter Users a relatively high percentage of their payments via mobile and/or contactless devices. Credit carders (26%) 7% 27% Non-users4. The dwindling Paper Check Writers currently account for 11 percent.5. Credit Carders represent 26 percent. * Read as: 45% of Walmart MoneyCenter Users are in the Cash user segment. Source: FIS Payment Survey, February 2012; n = 3,205Walmart MoneyCenter customers areconcentrated in the Cash User segment thougha disproportionately high (16 percent) number ofthem are Innovators (Figure 1). Both segments also exhibit higher-than-average usage of prepaid cards, but similaritiesbetween the two segments end there. Demographically, the two groups differ dramatically. Cash Users are very similar inage and income to Debit Carders while Innovators are much younger and more affluent.FIS STRATEGIC INSIGHTS • V 7 MAY 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved. 11
  • 12. The Cash User segment also is well-known at Figure 2: Indices of Walmart MoneyCenter users show concentration inpoint-of-sale (POS) in Walmart, not just at the Fiscal Fledglings and Working Class USA P$YCLE segmentsWalmart MoneyCenter. Mike Cook – a vicepresident at Walmart who’s described as “the Younger Years Family Life Mature Yearsmost powerful man in payments” – is working 267*on systems to make cash payments easier andfaster for Walmart to accept at POS because many 177 138customers pay in cash. Credit cards only account 114for 15 percent of Walmart’s transactions.1 55 69 68 41 33Walmart has yet to exhibit much enthusiasm 28 8for existing mobile payment technology, whichcould incentivize Innovators – a segment that willexpand with technology diffusion – to engage insignificant shopping beyond the MoneyCenter ifits members don’t already. Recently, the mother- * Read as: Walmart MoneyCenter Users are more than two-and-a-half times as likely thanof-all-retail-giants has joined forces with other non-users to be in the Fiscal Fledglings P$YCLE segmentretail giants to explore a merchant-led mobile Source: Nielsen and FIS Payment Survey, February 2012; n = 3,205wallet solution, which, no doubt, will be focusedon lowering transaction costs either directlyor indirectly. (Slicing one second off average Figure 3: Walmart MoneyCenter users are less likely to havetransaction time saves Walmart $12 million checking accountsannually in cashier wages, according to Walmart’sCFO Charles Holey).1 37%* National Bank 46%We also looked at the relationship between 17% Regional BankMoneyCenter customers and Nielsen P$YCLE 16%lifestage groups (Figure 2). Indices point to two 14% Credit Unionsegments – Fiscal Fledglings and Working Class 20%USA – with well-above-average percentages of Community Bank 9%MoneyCenter customers. Both segments have 11%limited discretionary funds for investment though Other 4% 3%Working Class USA members often have homemortgage loans. Do not have checking account 20% Walmart MoneyCenter Users 4% Non-usersDemographic comparisons between MoneyCenterusers and non-users reveal that users are likely to * Read as: 37% of Walmart MoneyCenter Users have their primary checking account with a national bank.be members of the “working poor.” Compared Source: FIS Payment Survey, February 2012; n = 3,205with non-users, they are more likely to be:• Young – 30 percent are members of Gen Y (18 – 32 years old) and 30 percent Gen X (33 – 48 years old)• Employed full-time for someone else (48 percent)• Renters (52 percent)• Single (46 percent)• Not college graduates (70 percent)• Low income (38 percent with annual household incomes less than $30k)Walmart MoneyCenter users are less likely to have checking accounts than non-users (Figure 3). One-fifth doesn’t havechecking accounts, but the flip side of that is 80 percent do have checking accounts. Among those with checking accounts,a higher-than-expected percentage is composed of regional bank customers.FIS STRATEGIC INSIGHTS • V 7 MAY 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved. 12
  • 13. Walmart MoneyCenter customers are heavy Figure 4: Walmart MoneyCenter users exhibit high usage ofusers of alternative financial services, including alternative financial servicesthose offered through MoneyCenter (Figure 4).Purchases of prepaid cards (42 percent in the past Used prepaid card in the past 30 days 42%*30 days) and money transfers (40 percent in the to make in-person payments 11%past 30 days) are especially high. More than one Used a service to transfer money 40%in five MoneyCenter customers have used a walk- oversease or domestically 3%up, short-term loan service and just about as many 35% Used a check-cashing servicehave used an Internet short-term loan service in 4%the past 30 days though the MoneyCenter does Used a walk-up bill paying service 34% 7%not currently offer payday loans. (Walmart does Used a walk-up short-term 23%offer small cash advances via its credit card to loan/payday lending service 2%customers who make purchases.) Used an Internet short-term 21% Walmart MoneyCenter Users loan/payday lending service 2% Non-usersWe also asked our survey respondents torate the importance of a variety of attributes * Read as: 42% of Walmart MoneyCenter Users used a prepaid card in the past 30 days toassociated with various payment methods. make paymentsOf the list of attributes, three rise to the top Source: FIS Payment Survey, February 2012; n = 3,205in importance among Walmart MoneyCenterusers (Figure 5). Figure 5: Walmart MoneyCenter users are more likely to choose• Two-thirds (65 percent) of MoneyCenter users payment methods that help them control their spending and timing want a payment method that helps them of payments maintain spending within their means. Cash fills that bill for many of them. 65%* Helps me to not spend beyond• Six out of 10 need payment methods that allow my means 50% them to control the timing of when funds are deducted from their accounts. This reflects a Allows control over the timing “living from paycheck-to-paycheck” lifestyle of when funds are taken out of 60% and jibes with heavy usage of short-term loans. my account 52%• Nearly half (46 percent) want payment methods which allow them to pay for goods or services Allows me to pay for 46% over time. Walmart MoneyCenter customers goods/services over time 25% Walmart MoneyCenter Users generally have credit cards – 75 percent have Non-users some type of credit card, most often a Visa or MasterCard – but the penetration of credit * Read as: 65% of Walmart MoneyCenter Users believe that “helps me to not spend beyond cards among MoneyCenter users falls short of my means” is very or extremely important when making any kind of payment in person for goods or services. credit card penetration among non-users, at Source: FIS Payment Survey, February 2012; n = 3,205 82 percent.So is Walmart a friend or foe to banks? One side of the debate could argue that although recent users (i.e., past 30 days)of Walmart’s MoneyCenter represent potential customers, most of them are people with limited profit potential andfrom whom financial institutions are willing to walk – or run – away. The other side of the argument could point out that,according to Walmart, 85 percent of the U.S. population shops at Walmart at least once a year. Much of that populationis exposed to MoneyCenter’s offers, which compete with at least some services potentially provided by their primaryfinancial institutions.I’d like to hear your opinions about whether you perceive Walmart MoneyCenter, and other alternative financial serviceproviders, as allies or competitors. Please contact me at: mandy.putnam@fisglobal.com. Respond and we’ll share yourcomments, with your permission or anonymously, in future newsletters.1 Jessica Leber, “The Most Powerful Man in Payments” Technology Review published by MIT 29 March 2012FIS STRATEGIC INSIGHTS • V 7 MAY 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved. 13
  • 14. Strategic Insights is a newsletter that provides research, thought leadership and strategic commentary on recent events inbanking and payments. The newsletter is produced by the Global Marketing and Communications team at FIS. FIS is oneof the world’s top-ranked technology providers to the banking industry. With more than 30,000 experts in 100 countries,FIS delivers the most comprehensive range of solutions for the broadest range of financial markets, all with a singular focus:helping you succeed.If you have questions or comments regarding Strategic Insights, please contact Paul McAdam, SVP, Research & ThoughtLeadership at 708.449.7743 or paul.mcadam@fisglobal.com.FIS STRATEGIC INSIGHTS • V 7 MAY 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved. 14

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