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Fis strategic insights vol 3 october 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 3 october 2011

  1. 1. FIS ENTERPRISE STRATEGY VOLUME 3 • OCTOBER 2011The “Digital” Trends in IN THIS ISSUEthe Big, Global and Digital • The “Digital” Trends inBanking Marketplace the Big, Global and Digital Banking Marketplace • Can You Be a “Relation- ship Bank” When Most By Fred Brothers Other Banks Are, Too? EXECUTIVE VICE PRESIDENT, ENTERPRISE STRATEGY • Mobile Remote Deposit Capture: Capturing Early In recent articles, I’ve talked about four trends related Adopters to how the concept of “big” is dominating banking and how banking has become “global” [Insert hypertext • What’s in Store for Paper link to last month’s article]. These four trends — 1) Checks? Ask a Small Busi- competing in the land of the giants, 2) customer ness Owner expectations being defined outside of banking, 3) operating in a global banking system, and 4) building personal relationships with customers from anywhere —are among eight trends highlighted in a presentation I delivered at FIS™ ClientConference and FIS InfoShare entitled “Competing in a Banking Market that is Big, Global and Digital.”This month’s article addresses four digital trends that are shaping the future of banking: 1) mobile is the new web; 2)privacy is being surrendered voluntarily; 3) relationships can be remote, virtual and personal; and 4) social media isevolving fast. These are key trends that are increasingly affecting the way your customers communicate and do business.Mobile Is the New WebFirst, let’s talk about the convergence of smartphones, web and mobile, and how it’s affecting our industry. Smartphones,mobile web and mobile banking are exploding. That’s not news. By 2015, Forrester predicts that one in five U.S. adultswill be using mobile banking.1 That’s 48 million adults.2 Personally, I think that’s conservative.Mobile banking and payments enable new interactions and transactions that didn’t exist before, such as remote depositcapture. It’s convenient to deposit a check by taking a picture of it, making a deposit and getting your confirmationof the deposit in less time than it takes to go through the drive-through window at the bank, especially on a Fridayafternoon. But current applications only scratch the surface of how people will use mobile in the future.FIS STRATEGIC INSIGHTS • V3 OCTOBER 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 1
  2. 2. When I was young, my mother bought my sisters and me a set of Collier’s Encyclopedias. She bought them so we wouldhave information at home for our school reports without having to go to the library or multiple libraries to get the sameinformation. She made monthly payments on them and they were probably obsolete by the time she was done payingfor them.I think about my kids, growing up in a post-web world. They’ve never known anything except a world where most of theFIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011knowledge of mankind is available at their fingertips, any time of the day or night, for free. Now, we can access most ofthe knowledge of mankind on devices we carry in our pockets.Apple sold more than 20 million iPhones in the fiscal third quarter this year — up from about 8 million last year for thecomparable quarter — plus it tripled sales of the iPad to more than 9 million during the same time period.3 Microsoft hasinvested huge money in their mobile operating system and other web-enabled devices like the X-Box. Android-poweredphones are taking huge market share — 39% of the U.S. market according to a July study conducted by Nielsen.4The voluntary surrender of privacyAre any of you amazed at what people will post on the web for the world to see? We’ve all heard the stories of collegekids who didn’t get a job because a human resource manager saw their party pictures on Facebook. They’ll post anythingfor the whole world to see and gladly trade privacy for a good search engine like Google — the company that giveseverything away for “free” but manages to post $29 billion in FY2010 revenue and double-digit growth. As we know,nothing is free. “Free” come at the expense of privacy. But younger generations really don’t care about the cost of“free” even though security risks are at an all-time high.Not only does “free” cost you your privacy, but so do discounts. For example, Progressive Insurance’s Flo will chat withyou online and tell you about how you can get a discount on your car insurance if you install their SnapshotSM trackingdevice in your car. It tracks how fast you drive, the number of trips you make, your “hard” brakes and how long you drive.Imagine if we took the same approach to lending — discounts for monitoring DDA and credit and debit card activitiesto ensure customers are paying their bills on time and managing their money responsibly. Banks already have the data.We’re just not using it.Relationships that Are Remote, Virtual and PersonalThere are many examples of how companies are using remote and virtual communication to launch and maintainpersonal relationships with their customers. For example, I love online footwear retailer Zappos even though they are afull-price merchant. Last year I ordered seven different pairs of black dress shoes on Zappos to find just one comfortableand stylish pair. I opened the boxes, tried them all on in the comfort of my home, kept one pair and shipped the othersix back to Zappos at their cost. They sent me a thank-you note for buying one out of seven pair of shoes. And nowZappos knows my size and style preference, and has formed a more personalized relationship with me by recommendingother shoes that interest me.Financial institutions have the potential to develop remote and virtual relationships with their customers by analyzing andapplying the information they already have in their databases and customizing the delivery of the information in the waytheir customers prefer.FIS STRATEGIC INSIGHTS • V3 OCTOBER 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 2
  3. 3. Social Media Is Evolving Fast Figure 1: In-person Contact vs. Mobile Phone as Preferred WayAccording to the 2011 Pew Internet and to Communicate with Primary Financial InstitutionAmerican Life Project, nearly two-thirds ofthe U. S. adult population uses social network Conversation with a representative at my local bank branchsites.5 That statistic is consistent with results Email or text message sent to my mobile phonefrom FIS’ study conducted last February ofFIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011 33% 33%4,002 mobile phone owners. Among our 31%sample of mobile phone owners, seventy 26%*percent use Facebook, more than one-quarter 23% 24%use YouTube and fourteen percent are on 18%Twitter. 11%Social media is changing how we 6% 6%communicate not just in the U.S. butglobally. Although political experts disagreeabout how much social media has contributed Gen Y Gen X Younger Older Boomers Maturesto the recent overthrow of Middle Eastern Boomersdictatorships, social media facilitatescommunications for collective actions — from * Read as: 26% of Gen Y members selected conversation with representative at my local bankflash mobs to revolutions. branch as a preferred way to communicate with the financial institution where they have their primary checking accountJeffrey Ghannan, the author of a recent report Source: FIS™ Enterprise Strategy, August 2011; n = 3,000on social media in the Arab world, points outthat the under-25 generation makes up at least half the population in six Arab countries. Social media is the currency ofcommunication of younger generations. It’s too powerful to ignore.So, get ready to compete in a world that is Big, Global and Digital. The pace of change isn’t going to slow. At FIS, we’lldo everything we can to help you compete more effectively by winning more customers, retaining the customers youalready have, and selling them more products…all on their terms.1 Forrester Research, “U.S. Mobile Banking Forecast, 2010 to 2015,” January 31, 2011.2 Population Projections Program, Population Division, U.S. Census Bureau, 2011.3 Wall Street Journal Earnings, “iPhone Powers Apple Sales,” July 20, 2011.4 Nielsen, July 2011.5 Pew Research Center, “2011 Pew Internet and American Life Project,” June 2011.FIS STRATEGIC INSIGHTS • V3 OCTOBER 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 3
  4. 4. Can You Be a “Relationship Bank” WhenMost Other Banks Are Too?FIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011 By Paul McAdam SENIOR VICE PRESIDENT, RESEARCH & THOUGHT LEADERSHIP A recent FIS™ Enterprise Strategy survey of 351 U.S. banking and credit union executives underscores the industry’s desire to cultivate customer relationships. When asked to describe the primary value proposition their institution represents, 60 percent of the mostly “C level” respondents indicated it’s based on being a “relationship leader.” Nearly a third (31 percent) believed their value proposition is based on being a “customer service leader” (Figure 1). In banking, service quality and relationship formation are closely related. My interpretation ofthis data is the vast majority (91 percent) of financial institutions want to differentiate based on customer intimacy, whichessentially boils down to knowing and serving customers better than any competitor could. That’s great, but it’s a tall orderwhen nine out of 10 competitors in the market are doing the same thing. Figure 1: Value propositions supporting customer intimacy dominate Executives’ perceptions of their financial institutions’ market positioning Relationship leader 60%* Customer intimacy Customer service leader 31% positioning Advice leader 2% Convenience leader 2% Product performance leader 2% Price leader 1% Other 2% * Read as: 60% of respondents believe relationship banking is the primary value proposition their financial institution communicates to the marketplace. Source: FIS Enterprise Strategy, July 2011; n=351FIS STRATEGIC INSIGHTS • V3 OCTOBER 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 4
  5. 5. Delivering on relationship and service quality value propositions has become increasingly more challenging due to theaccelerating commoditization of the retail banking landscape over the past decade. Senior executives recognize theneed to move up the value chain and monetize the value of relationship and service quality, but they also acknowledgesignificant gaps between the desire to pursue these value propositions and their ability to actually fulfill them. Forinstance, in the same survey, 96 percent of executives scored “efficiently and affordably providing a high level ofcustomer service” as being an important initiative to their institution. Yet only 57 percent indicated their institutionFIS ENTERPRISE STRATEGYcurrently had the capabilities to deliver customer service at this high level (Figure 2). VOLUME 1 • JULY 2011 Figure 2: Large gaps between the importance of initiatives and the capabilities to support them Executives’ ratings of the initiatives’ importance to their institution and their current capabilities to successfully address them (Top-2 box on a 7-point scale) 96%* Efficiently and affordably providing a high level Gap = 39 of customer service pct. points 57%* Understanding customer preferences and 83% Gap = 45 having the ability to tailor banking solutions to pct. points meet their unique needs 38% Level of Importance Current Capabilities *Read as: 96% of respondents scored “efficiently and affordably providing a high level of customer service” in the top 2 box as being important. 57% of respondents gave their current capabilities a top 2 box rating. Source: FIS Enterprise Strategy, July 2011; n=351An even wider gap between importance and capabilities surfaced in “understanding customer preferences and havingthe ability to tailor banking solutions to meet their unique needs.” Eighty-three percent of senior executives scored it asan important initiative, while only 38 percent said they currently have the capabilities to deliver on it.In other words, institutions do a better job of providing a high level of customer service, as defined by the banks, thanunderstanding their customers’ preferences and targeting them effectively. This is probably acceptable short term sincecustomers generally perceive high service quality as a precursor to relationship formation. But longer term, this gapmust be closed.FIS STRATEGIC INSIGHTS • V3 OCTOBER 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 5
  6. 6. Restoring Healthy and Profitable Customer RelationshipsThough the vast majority of institutions are striving to differentiate based on relationship and service quality, customersremain wary. An August 2011 FIS Enterprise Strategy survey of 3,000 consumers with checking accounts found that 45percent of customers fit the profile of “loyal” based on loyalty metrics such as consolidation of assets or loans with theprimary checking account provider, belief that their provider has product and service expertise, level of trust in theirFIS ENTERPRISE STRATEGYto refer their provider to friends and family members.provider, and willingness VOLUME 1 • JULY 2011But the disturbing research finding is while 45 percent of customers fit the definition of “loyal,” only 17 percent ofcurrent customers are both loyal and maintain a relationship that is profitable to their primary checking account provider.The remaining 28 percent are loyal, but unprofitable. This leaves a majority (55 percent) of customers who are not loyalto their primary financial institution.These results suggest the traditional relationship banking model that’s been deployed in the industry during the pastdecade will no longer suffice. Execution gaps in service quality and the inability to understand and honor customerrelationships are taxing customer relationships. Plus, institutions are no longer able to afford having such low portions ofretail customers that are both loyal and profitable.These problems exist, in part, because when the banking industry purports to discuss “customer relationships,” it’susually oriented around benefits to the institution. Customers are not oblivious to this disparity and realize that in manycases: 1) the “relationship” benefits they receive are not particularly valuable, and 2) they are being treated as a meansto a financial institution’s ends. This is why banks only have both loyal and profitable relationships with 17 percent oftheir customers.Investments in technology, data analytics, sales and marketing programs and the like will surely help, but theloyalty/profitability gap will not really start to close unless financial institutions can authentically demonstrate that theyare acting with customers’ best interests in mind. Given the level of financial uncertainty that many U.S. consumers arecurrently experiencing, I have to believe this customer-centric philosophy will ultimately be beneficial to both financialinstitutions and the customers they serve.As mentioned above, FIS Enterprise Strategy just recently completed the research that generated the loyalty/profitabilitycustomer segmentation. In the coming weeks we will further analyze the research results and will address specificopportunities to improve customer loyalty and profitability in future newsletter issues.In the meantime, I’d like to know what you think. Feel free to e-mail me at to let me know.FIS STRATEGIC INSIGHTS • V3 OCTOBER 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 6
  7. 7. Mobile Remote Deposit Capture:Capturing Early AdoptersFIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011 By Mandy Putnam DIRECTOR, RESEARCH & THOUGHT LEADERSHIP A couple of days ago, I received a rebate check from Purina™ for $5.99 — a nice gesture in exchange for my paying a little more than that for a small bag of prescription dog treats that my Bandit ultimately boycotted in gustatory protest. That evening, I pulled out my Droid, found a dark piece of paper that Chase recommends using as a photo backdrop, took my equipment to where the lighting is best, opened the app, took a picture of the front and back of the check while holding my breath and making sure I didn’t cast a shadow on the check, retook a picture of the front and back of the check because the first attempt failed, and deposited my $5.99 check. I received e-mail confirmation of the deposit about an hour later. Even with its challenges, mobileRDC still beats a trip to the ATM at night in the rain.Mobile remote deposit apps (Mobile RDC) had penetrated only 3 percent of the general mobile phone owner populationas of February 2011 according to our FIS™ Enterprise Strategy survey (Figure 1). However, that 3 percent represented about12 percent of smartphone owners and nearly 60 percent of smartphone owners who were active mobile bankers. There’s alot of trial going on among early adopters of banking technologies. Figure 1: Penetration of Mobile Remote Deposit Capture I dont have a Awareness Utilization primary checking account 5% No 22% Yes and it is Dont use Use RDC available for my RDC 3% mobile phone I don’t know 4% 7%* 60% Yes, but it is not available for my mobile phone 6% Read as: 7% of mobile phone owners bank where mobile RDC is offered and available for their mobile phones. Source: FIS™ Enterprise Strategy, February 2011; n = 4,002FIS STRATEGIC INSIGHTS • V3 OCTOBER 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 7
  8. 8. In order for Mobile RDC adoption to accelerate, challenges of both limited supply and limited demand must beaddressed. Limited demand reflects lack of awareness of Mobile RDC among the general mobile phone population anda variety of reasons for not trying it among those who are aware of RDC availability but do not use it.Although a majority of current mobile banking users (57%) without Mobile RDC are interested in it, very few banks offermobile bankingSTRATEGY enable their customers to “point, shoot and deposit” with their smartphones. The majorityFIS ENTERPRISE apps that VOLUME 1 • JULY 2011of mobile phone owners — 60 percent — do not know if their primary checking account provider offers a mobile RDCapp. This is no surprise since a very small percentage of banks offer a Mobile RDC solution. It wasn’t until July 2010 thata mega bank — Chase — introduced Mobile RDC. A review of the top-20 banks’ Web sites indicated that only four —Charles Schwab, Chase, PNC and U.S. Bank, which charges 50 cents for each RDC deposit— offer Mobile RDC, thoughBank of America is reported to be launching its solution in 2012 and some banks other than the top-20 have alreadylaunched apps.Among the small group — 4 percent — of mobile phone owners who are aware that they have Mobile RDC availablefrom their bank but do not use it, security concerns (31 percent) slightly outweigh lack of sufficient check deposits towarrant use (29 percent) and inertia regarding downloading the app (26 percent) as obstacles to trial.As is often the case with new technology,satisfaction with Mobile RDC among users Figure 2: Satisfaction with Mobile Remote Deposit Captureis lower than satisfaction with the more-established mobile banking technologyamong mobile banking users — 54 percent 7%as opposed to 68 percent for comparable Dissatisfiedtop-three box scores on an 11-point scale (bottom 3-(Figure 2). Despite having some technical and box) 39%user-error challenges — similar to ones I’veexperienced — with the app, Mobile RDCusers report a high usage level — 5.2 checks Neutral Average numberwithin the past 30-day period on average. (mid 4-box) of times used in last 30 days = 5.2So what is the business case for offeringMobile RDC? The answer is: nearly six out of 54%*10 current mobile banking users want their Satisfiedapps to include Mobile RDC. And, today’s (top-3 box)young innovator population, which is excitedabout Mobile RDC and represents two-thirdsof current users, are members of Gen Y andwill serve as bellwethers for their generation— a population segment of a size rivaling the Read as: 54% of users rated their satisfaction with RDC as 8 or higher on a 0- to 10-point scale with 10 equal to “very satisfied”;Boomer segment. Assuming the supply ofmobile RDC apps expands, consumers will Source: FIS™ Enterprise Strategy, February 2011; n = 117ramp up their adoption of Mobile RDC asa desirable feature of their mobile bankingexperience.This article is derived from a research brief entitled, “Mobile Remote Deposit Capture: Capturing Early Adopters.”FIS STRATEGIC INSIGHTS • V3 OCTOBER 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 8
  9. 9. What’s in Store for Paper Checks? Ask aSmall Business OwnerFIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011 By Jim Gamble DIRECTOR, RESEARCH & THOUGHT LEADERSHIP As check usage in the U.S. dwindles, many wonder if and when checks will become a thing of the past. Small businesses will provide a large part of the answer. Despite their industry or size, small businesses still pay and get paid primarily with checks. Nearly half of the U.S. workforce is either self-employed or employed by a firm with annual revenue of less than $20 million. Nearly one-half of the checks used involve a small business in some way (Figure 1). The largest percentage of checks (24 percent) involving a small business is represented by B2B transactions. Small business payroll accounts for 12 percent of checks written, andconsumer payments to small businesses constitute another 10 percent. The infrequency of all these transactions and oftenhigh dollar value of these payments require a universally-accepted payment method — currently, checks.Different industries experience customer preferences for Figure 1: Where checks are usedpayment methods in different ways. Small businessesin retail, accommodations (restaurants) and personalcare industries accept more payment types than smallbusinesses in other industries. About 90 percent ofsmall businesses in consumer-facing sectors accept P2Pchecks, cash, and credit and debit cards as forms of 11%payment. Credit and debit cards are convenient, B2B among Small Businessinexpensive, and often offer rewards. Retail customers 24%*also slightly favor paying with cash versus using checks. Consumer to Large BusinessSmall businesses selling goods and services to 26% Consumer toother businesses receive the most checks. In fact, Small Businessonly about one-half of small businesses in 10%non-consumer-facing industries accept cash orcredit and debit cards for payment. Transactions B2B Large Small Businessbetween these businesses often occur infrequently among Large Business Payroll Business Payroll 12%so there is little reason to use any form of electronic 8% 9%payment. * Read as: 24% of the number of checks written are B2B payments involving a small business Source: McKinsey U.S Payments Map, 2009 − 2014, Release Q1 − 11 and FIS™ Enterprise Strategy 2011FIS STRATEGIC INSIGHTS • V3 OCTOBER 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 9
  10. 10. Altogether, small businesses receive almost one- Figure 2: Distribution of payments made to small businessesthird (31 percent) of their payments in the form ofchecks (Figure 2). Credit and debit cards are thenext-most-common form of payment at 28 percent,followed by cash payments (19 percent). Theremaining 22 percent of payments received includesFIS ENTERPRISE STRATEGY Cash Other PaymentsVOLUME 1 • JULY 2011a mix of prepaid, preauthorized, ACH credit and 19%* 22%debit, and wire payments.In contrast to payments they receive, smallbusinesses do have discretion over how they makepayments. And here again, checks dominate. Credit & Debit Checks Cards 31%Small businesses pay more of their own bills with 28%checks than with all other payment types combined(Figure 3). More than one-half (51 percent) ofsmall business payments made are in the form ofa check. Based on our survey data, payroll checksare estimated to comprise 22 percent of paymentsmade by small businesses. Payment with a credit ordebit card is the next-most-common method at 16percent followed by online payments (bank website, *Read as: 19% of the number of payments made to a smallbiller’s website, etc.), which account for 9 percent of business are in the form of cashpayments made. Source: FIS™ Enterprise StrategyMany small businesses have little reason Figure 3: Distribution of payments made by small businessesto migrate away from paper checks to other Cashforms of payment. From the small business 4%owner’s perspective, other paymentmethods cost more than using a check, Internet Pre-Authorized Wire 5%and establishing other forms of making or 6% 5%receiving payments is perceived as a hassle.However, the added convenience, errorreduction, and time-savings benefits thatcan be derived from using electronic forms Checks (Non-of payment will eventually outweigh the Online Payroll) 9% 29%*rising cost of using paper checks. Until then,checks will remain the payment method ofchoice for small business. Prepaid 4% Checks (Payroll) 22%This article is based on a survey of 2,249 Credit/Debit 16%small businesses that was conducted asa joint effort between FIS and NACHA inNovember 2010. The survey capturedresponses from small businesses with:• More than one employee * Read as: 29% of the number of payments made by a small business are non-payroll checks• Revenue less than $20 million Source: FIS™ Enterprise StrategyFIS STRATEGIC INSIGHTS • V3 OCTOBER 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 10
  11. 11. FIS ENTERPRISE 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 STRATEGIC INSIGHTS • V3 OCTOBER 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries. 11