Fis strategic insights vol 1 august 2011

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

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Fis strategic insights vol 1 august 2011

  1. 1. FIS ENTERPRISE STRATEGY VOLUME 1 • AUGUST 2011The “Big” Trends in the IN THIS ISSUEBig, Global and Digital • The “Big” Trends in theBanking Marketplace “Big, Global and Digital” Banking Marketplace By Fred Brothers • Retail Channels EXECUTIVE VICE PRESIDENT, ENTERPRISE STRATEGY Never Die At this spring’s Client Conference and InfoShare • Mobile Banking: sessions on “Meeting Customers on Their Terms,” Clearing the Runway I talked about eight trends shaping the future of banking. The trends are framed within a banking market that is increasingly big, global and digital. For those of • Economic Insights you who missed the session or would like to pass along these ideas to colleagues who couldn’t be there, I’ve written this article about two of the eight major trends.In 2008, Thomas Friedman, a New York Times columnist with three Pulitzer Prizes, wrote a great book entitled “Hot, Flat,and Crowded.” It focuses on the impact that global warming (hot), globalization (flat) and population growth (crowded)are having throughout the world. After reading the book, I thought about how hot, flat and crowded the banking worldhas become — with a few modifications.We’re competing in a banking market that is:1. Big: The players competing for consumers’ financial attention, both within the banking industry and from outside it, are more massive and influential than ever before.2. Global: We are now a global banking system, and consumers care less about the home location of their services than the quality of the services they are receiving.3. Digital: Mobile Internet connections and social media are profoundly affecting the attitudes and expectations of banking consumers.In this month’s column, I’m going to talk about the trends behind our newly “big” banking market: the still-growing sizeof the biggest financial institutions and the other huge players that are influencing the financial marketplace.FIS STRATEGIC INSIGHTS • V 1 AUGUST 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 1
  2. 2. We are competing in the land of the giants. U.S. banks have been consolidating for years, but the new shift is themassive consolidation of deposit share within the largest financial institutions. Twenty years ago, commercial banks withdeposits of $10 billion or more held about one-third of commercial bank deposits in the U.S. Today, banks of that sizehold nearly 75 percent of all deposits. And, due to several high-profile mergers of huge institutions during the recentfinancial crisis, four now have more than a trillion dollars in assets each. Banks of this size were unheard of only a fewyears ago. These are massive financial institutions, both domestically and globally, with very large presences in retailFIS ENTERPRISE STRATEGYbanking, commercial banking and capital markets (Figure 1). VOLUME 1 • JULY 2011 Figure 1: Competing in the Land of GiantsThe “mega” financial institutions have enormous resources. They will be the market-makers, setting the standards inour industry, including efficiency ratios, innovation, and online and mobile products. When you include in this equationthe huge Global 100 financial institutions that have purchased mid-sized banks in the U.S., it’s clear that the competitivelandscape has changed enormously in the past few years.Let’s look at one example of how these “mega” financial institutions define the competitive marketplace. Mobile isexploding. We all know that. Some of the largest financial institutions launched mobile banking applications earlyand aggressively. The result is quite telling. Last February, we completed a primary research project with 4,000 U.S.consumers. Thirty-seven percent of our survey respondents reported that their primary DDA is with one of the top-10financial institutions. But, of the consumers who are active mobile banking users, more than half (52 percent) have theirDDA with a top-10 bank. For these largest financial institutions, their share of mobile banking customers is nearly 50percent more than their share of deposits.Despite how big and influential the mega banks are, they’re not the only influencers who are setting your customers’expectations. Let’s look at who else is doing that.Have you noticed how good Amazon.com is at recommending products and telling you what else people who boughtyour item also purchased? I’ve never seen this done in banking. The discount offers from Groupon are relativelyunsophisticated in their targeting, but their offers feel (and are promoted as) personalized. The Walmart® Money Centerlooks, feels and acts like a bank branch, but with the store hours of Walmart. These companies are our competitors —both now and in the future — and they are redefining our customers’ expectations of personalization, availability andconvenience.FIS STRATEGIC INSIGHTS • V 1 AUGUST 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 2
  3. 3. We’re also watching social media sites closely. Some are moving into payments directly, while others are offering servicesthat are radically changing consumer interactions. Google predicts the search results you need before you’ve finishedtyping in the request. Smartphone app stores are providing you with all the content you need — anywhere, anytime —and suggesting more content you might like, as well. These are the companies shaping the expectations — and settingthe bar — for our customers.FIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011Non-traditional providers of financial services have proven they can capture significant market share from financialinstitutions. According to the latest reports from these companies, PayPal® has 94 million active accounts. NetSpend®encompasses 30,000 purchase locations and over 100,000 reload locations. MoneyGram® has 227,000 locations in 190countries. Walmart® Money Centers process five million transactions each week. Prosper® has one million members andhas funded $223 million in loans. Apple® holds more than 200 million credit card numbers in iTunes® accounts. Thesenumbers keep growing as non-financial institutions process more and more financial transactions.Put your customers in the middle of your market landscape. See where they connect and how they interact in their dailylives. Think about the lessons that could be applied from companies that have built market value because they areexperts at connecting with their customers in unique ways. Success in today’s banking market will depend on meetingcustomer expectations that have been set by very big players, most of them unconnected with traditional banking.FIS STRATEGIC INSIGHTS • V 1 AUGUST 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 3
  4. 4. Retail Channels Never Die By Paul McAdam SENIOR VICE PRESIDENT, RESEARCH & THOUGHT LEADERSHIPFIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011 Consumers want options when it comes to accessing their banking information, adding or removing account funds, and resolving service issues. When accomplishing these tasks, some consumers prefer self-service banking, some prefer a more traditional in-person approach and many actively use all delivery channels. Despite the expansion of self-service banking, consumers’ person-to-person interactions with branch staff and live phone reps remain significant. As certainly as we can say that self-service banking is the way of the future, it seems we can also say that old banking channels never die — or at least they don’t die quickly.These are some of the key findings from recent primary consumer research completed by the FIS™ Enterprise Strategyteam. The implications for financial institutions are significant.Consumers Want a MultichannelExperience Figure 1: Majority of Consumers Use Two to Four Banking ChannelsWhen we asked consumers about theirinteractions with their primary checkingaccount provider, we learned that themajority (61 percent) of consumers usebetween two and four channels within a30-day time period (Figure 1). Nearly aquarter of consumers (24 percent) reportedusing five or more channels. Consumershave proven that there isn’t a retail bankingchannel they don’t like.Generational differences have a huge impacton channel usage. When looking at theconsumers reporting use of five or morechannels, 41 percent were Gen Y but only9 percent were classified as Mature (bornbefore 1946).In-person Service Remains EssentialGiven the acceleration in self-service banking and electronic payments adoption over the past decade, it’s easy to overstatethe importance of self-service channels while downplaying the importance of the in-person experience. But in reality, aconsumer’s choice of banking channels is situational.FIS STRATEGIC INSIGHTS • V 1 AUGUST 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 4
  5. 5. Consumers want the flexibility to use whateverpoint of contact suits their needs at any given Figure 2: Most Consumers Are Multichannel and Use a Mix oftime. The auto insurance provider Esurance® Self-service and In-person Bankingcaptures this spirit perfectly in its recentlydeveloped marketing tagline, “Peoplewhen you want them, technology when youFIS ENTERPRISE STRATEGYdon’t.” Our research validates this concept. VOLUME 1 • JULY 2011Of retail banking consumers, 57 percent aremultichannel, having used both in-personand self-service channels of their primarychecking account providers within the past30 days (Figure 2).Only 20 percent of consumers are completelyself-service customers. These consumersdon’t use any in-person channels — onlyonline, mobile, ATM and/or automatedtelephone banking. This segment iscomprised primarily of younger generationsand self-directed, mass-affluent consumers.Conversely, 23 percent of consumersare primarily in-person banking customers. These are consumers who conduct in-person branch or live telephone reptransactions and reported no use of online or mobile banking channels. Many, but not all, of them are older.Sixteen years following the launch of Internet banking in the U.S., we are still at a stage in retail banking where thepopulation of primarily in-person banking consumers is slightly larger than the totally self-service crowd — and themajority of consumers are truly multichannel.Multichannel Delivery DilemmaThis situation sets up a strategic dilemma for many financial institutions. Given the host of revenue pressures facing theindustry, it is starting to become prohibitively expensive to simultaneously maintain branch-based and self-service deliverysystems that are equally robust. A balancing act must be achieved. Many financial institutions will be forced to ask theircustomers to support all of this multichannel access through one or a combination of the following:• Paying higher fees• Bringing the provider greater financial wallet share• Substantially shifting transactions to self-service channelsActing on these strategies for improving customer profitability involves addressing a complicated set of considerations inorder to execute them in a way that is perceived positively by customers. All of the strategies require convincing customersto change well-established behaviors. And, all of them hold a certain degree of risk of alienating customers who are unableor unwilling to make changes in their banking behavior. In upcoming editions of FIS Strategic Insights, we will discuss thechallenges and opportunities associated with specific strategies for improving customer profitability.FIS STRATEGIC INSIGHTS • V 1 AUGUST 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 5
  6. 6. Clearing the Runway forMobile Banking AdoptionFIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011 By Mandy Putnam DIRECTOR, RESEARCH THOUGHT LEADERSHIP Consumer interest in all things mobile is higher than ever, providing banks an opportunity to launch mobile banking applications that could potentially generate a great deal of interest. But is it worth the investment? FIS™ Enterprise Strategy studied the market and conducted an online survey of 4,000 mobile phone owners in February 2011. Our research indicates that three things are propelling mobile banking penetration:1. Better technologies for mobile devices. Recent double-digit growth in smartphone adoption has enabled consumers to expand the activities they can perform via mobile phone connections — from creating a video and sharing it (with one special person or with millions of people) to accessing just about any information, including one’s bank account, anywhere and anyplace.2. Proliferation of banking apps. Recent estimates place the number of mobile banking apps between 1,400 and 1,6001.3. Desire to stay connected. Nearly three-quarters (73 percent) of mobile phone owners “agree” or “strongly agree” that they don’t go anywhere without their mobile phone. How many other things could people cite that they don’t go anywhere without? Maybe their wallets today, but tomorrow, even wallets could morph into chips in smartphones.Who Are the Mobile Bankers?The number-one predictor of whether someone will engage in mobile banking is if they download a banking appfor their phone (rather than just accessing the bank’s site through their phone browser). Two characteristics of appdownloaders define who is most likely to use mobile banking apps:1. Generation. Gen Y accounts for 26 percent of mobile phone owners but more than one-half (54 percent) of banking app users — that’s double the representation. These mostly 20-somethings (the oldest ones are now 31) are beginning to build and feather their nests. They demand quick access to funds wherever they are and whenever they need them. Access to mobile banking is the cost of entry if you want to do business with Gen Y (Figure 1).2. Large-bank patronage. Because large banks have led the way in providing apps to their customers, customers of the top-10 banks account for nearly six out of 10 banking app users (Figure 2). According to our survey findings, large banks also have provided their customers with a more satisfying mobile banking experience, which makes them “stickier” customers.FIS STRATEGIC INSIGHTS • V 1 AUGUST 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 6
  7. 7. Mobile banking consumers are also marked bytheir frequent use of the Internet via mobile phone. Figure 1: Mobile Banking App Usage by GenerationNearly nine out of 10 mobile banking users(88 percent) describe their mobile phones’ Internetcapabilities and usage this way: “I have Internetaccess on my mobile phone, and I use it frequently.”FIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011So what else, beyond being young, connected and abig-bank patron, defines mobile banking users? Oneimportant thing that sets them apart is their financialhabits, which are driven by their above-averagemobility and online orientation.If you think that mobile banking is a substitute fora physical trip to the bank or ATM, think again.Mobility increases exposure to places wherefinancial transactions can be conducted. For mobilebanking users, mobile banking is an additional pointof contact with their financial institution, nota substitute.Mobile banking users also are likely to access onlinefinancial services outside of conventional financialinstitutions. If you don’t offer a person-to-person(P2P) payment solution, you are likely losingbusiness to PayPal: six out of 10 mobile bankingusers make P2P payments. Figure 2: Mobile Bank App Usage by FI TypeAre Mobile Banking Users Worth theEffort?The answer to this question is, unequivocally, yes.When compared against non-mobile banking userswithin their generations, mobile banking users havehigher asset balances. The young ones — Gen Y andGen X — also have higher credit and loan balances asa result of their acquisitive life stages.There is abundant runway ahead for growing amobile banking market beyond the early adopterswho compose today’s mobile banking segment. Keytailwinds include the continued growth in smartphoneand tablet adoption, as well as mobile paymentoptions on the horizon. Today’s mobile banking userswill become the early adopters of mobile payment —at least that’s what they told us.FIS STRATEGIC INSIGHTS • V 1 AUGUST 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 7
  8. 8. There are also headwinds to mobile phone adoption: to ensure mobile app success, financial institutions need to increase:1) awareness, 2) banking app penetration and 3) appetites for mobile banking among consumers who will become the“early majority.”1. Lack of awareness. Currently, 44 percent of mobile phone owners do not know if their financial institution offers mobile banking. Although no financial institution is going to run a campaign announcing that they don’t offerFISmobile banking, those 1,400 to 1,600 financial institutions that offer mobile banking apps need to improve their ENTERPRISE STRATEGY VOLUME 1 • JULY 2011 communications and onboarding processes for new app users.2. Lack of apps. Again, the number-one predictor of mobile banking usage is downloading a banking app. Increasing app availability will increase penetration.3. Lack of appetite. Preferences for online banking via computers and concerns about security also represent impediments to the diffusion process (Figure 3). One in five (19 percent) non-users report that they simply have not bothered to try mobile banking yet. Their indifference could be reversed through communication of a clear value proposition and “sampling incentives.” Those with security concerns (28 percent) will require different messages to assuage their worries. Figure 3: Reasons for Not Doing Mobile BankingThis article is derived from the recently-published white paper, “Clearing the Runway for Mobile Banking Adoption.”1 Interview with Jim Breune, netbanker.com. April 8, 2011.FIS STRATEGIC INSIGHTS • V 1 AUGUST 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 8
  9. 9. Record Earnings in the Midstof New Risks and RegulationsFIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011 By Jim Gamble DIRECTOR, RESEARCH THOUGHT LEADERSHIP Corporate earnings have been the brightest spot so far in the U.S. economic recovery. U.S. corporations have enjoyed strong gains in profits as a result of increased efficiencies and member companies of the Standard Poor’s 500 index are expected to show record-high earnings in 2011 and 2012 (Figure 1). Bank earnings are recovering, albeit more slowly than in most other industries. Although new regulations are forcing financial institutions to adapt their business models, bank earnings are expected to return to their historically high levels by 2015.While corporate earnings have benefittedfrom trimming payrolls, workers have not and Figure 1: Estimated SP 500 Index Earningsunemployment remains high. We are in a “jobless”recovery — reminiscent of the recovery after priorrecessions, but more severe this time. Improvementin the labor market has lagged improvement inthe broader economy, which has led to an overallmodest economic recovery despite bullishcorporate earnings.In order to stimulate the economy, the Fed loweredinterest rates to an unprecedented level. Until theeconomy chalks up sustained improvements in thejobless rate, the Fed is unlikely to raise interest rates(Figure 2). Banks will benefit from the wide yieldspread between long-term Treasury bonds and theFed funds rate. As long as inflationary pressuresremain mild, this wide yield spread will likely persistthrough the remainder of 2011 and into 2012(Figure 3).FIS STRATEGIC INSIGHTS • V 1 AUGUST 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 9
  10. 10. Despite recent congressional agreement to raisethe debt ceiling after the contentious debate, lackof resolution about budget issues has the potential Figure 2: Fed Funds Rate Will Remain Lowto disrupt the current pattern of economic recovery.Potential cuts in entitlement programs and increasesin taxes remain uncertain. Also uncertain is theFIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011long-term impact on demand from abroad to holdU.S. debt. These issues could dampen consumerspending and borrowing as well as businessinvestment and hiring.Outlook for Bank EarningsThe improvement in the economy and, in particular,increased consumer appetite for borrowing and asustained wide yield spread produce a favorableenvironment for financial institutions to generateincreased earnings on deposit balances. Havingdeleveraged themselves during the recession,consumers will become more confident aboutborrowing again as unemployment subsides.The outlook for bank earnings is based on twoseparate methods of forecasting — a “top-down”macroeconomic model based on a long-term Figure 3: Treasury Yield Spreadcorrelation between the bank income statementand economic growth, and a “bottom-up” modelwhich is a summation of earnings estimates forindividual financial institutions.(See Figure 4 for key economic forecasts that drivethe “top-down” model.) The separate methodsproduce similar outcomes. Figure 4: Key Economic ForecastsFIS STRATEGIC INSIGHTS • V 1 AUGUST 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 10
  11. 11. 1. Top-down macroeconomic model (Figure 5). This earnings forecast is Figure 5: Estimated Bank Earnings based on the assumption that the rise in gross domestic product will drive increased lending. The combination of earnings gained from the wide yieldFIS spread between long-term Treasury ENTERPRISE STRATEGY VOLUME 1 • JULY 2011 bonds and the Fed funds rate on top of increased lending will provide a strong boost to net interest income.Examination of non-interest income showsits growth historically following growth ingross domestic product. However, recentchanges in regulation have added a newlayer of complexity to the forecast fornon-interest income as financialinstitutionslook to new sources ofnon-interest revenue.Recent financial institution researchconducted by FIS™ Enterprise Strategyfound that financial institutions view Figure 6: Provisions for Lossesimprovement in customer profitabilityas the primary way they intend to meettheir financial goals. They are lookingat new options for generating incomethat will not be jeopardized as a resultof regulatory changes. Assumingalternative options will fill in thenon-interest income gap are attained,the non-interest income growth will likelycontinue to parallel growth in GDP.Financial institutions also are likelyto benefit from reduced expenses asprovisions for losses decline in responseto economic improvement and a lesseningconsumer debt burden (Figure 6).2. Bottom-up earnings estimate (Figure 5). This estimate of earnings is based on the compilation of estimated earnings of larger, publicly traded banks — a good proxy for the broader universe of regulated financial institutions. These estimates are generated by a variety of financial analysts, typically employed at brokerage firms. The estimates take into account both macroeconomic forecasts and unique characteristics of individual financial institutions.FIS STRATEGIC INSIGHTS • V 1 AUGUST 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 11
  12. 12. ConclusionThe U.S. economy and banking organizations are both resilient. Even in the face of new challenges, there is sound supportfor an optimistic outlook and a return to normal levels of profitability for banks. For further proof, look at the stock market— another leading indicator of economic growth. As of late-July 2011, the SP 500 has roughly doubled in price since therecession low in March of 2009. The recovery will likely not move in a straight line, but it will occur, providing an optimisticFIS ENTERPRISE financial performance of banks.outlook for the STRATEGY VOLUME 1 • JULY 2011Strategic Insights is a monthly newsletter that provides research, thought leadership and strategic commentary on recentevents in banking and payments. The newsletter is produced by the Enterprise Strategy team at FIS. FIS is one of theworld’s top-ranked technology providers to the banking industry. With more than 30,000 experts in 100 countries, FISdelivers 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 1 AUGUST 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 12

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