fis strategic insights vol 2 september 2011

FIS ENTERPRISE STRATEGY VOLUME 2 • SEPTEMBER 2011

FIS STRATEGIC INSIGHTS • V 2 SEPTEMBER 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries.

1

By Fred Brothers EXECUTIVE VICE PRESIDENT, ENTERPRISE STRATEGY

In last month’s article, I talked about two trends related to how the concept of “big” is dominating banking (http://www.fisglobal.com/solutions-insights). These two trends — competing in the land of the giants and customer expectations being defined outside of banking — are among eight trends highlighted in a presentation I delivered at FIS Client Conference and FIS InfoShare entitled “Competing in a Banking Market that Is Big, Global and Digital.”

In this month’s article, I’m digging further into the two “global” trends from that presentation, specifically: 1) we operate in a global — not a U.S. — banking system, and 2) we can build personal relationships with customers from anywhere. These are two important trends reshaping your financial institution’s market and deserving of more attention than I could provide during a 10-minute presentation segment at the conferences.

The U.S. banking system has evolved into a global banking system. The biggest U.S. banks are multinational. Despite the fact that the U.S. is the most over-served banking market in the world, numerous Global 100 banks have purchased mid-tier U.S. banks (Figure 1). Foreign-owned banks are buying U.S. banks because having a U.S. market presence is critical to their business strategy. Although the U.S economy is not growing as fast as other markets, our economy still accounts for 23 percent of global GDP. And as money transforms from paper to digital, the global movement of money is becoming faster, cheaper and even more strategically important.

The “Global” Trends in the Big, Global and Digital Banking Marketplace

I N T H I S I S S U E

• The “Global” Trends in the Big, Global and Digital Banking Marketplace

•Customer Loyalty Does Not Translate to Cross-sales for Community Banks

• The Value Proposition for U.S. Mobile Payment Adopters

• The Cost of Uncertainty … And the Impact on Bank Earnings

FIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011


2

Institution Number of Offices

Deposits ($B)

TD Bank 1,121 $128RBS Citizens 1,524 $94HSBC 486 $92Union Bank 400 $66BBVA Compass 759 $49M&T Bank 759 $47Sovereign Bank 747 $46Bank of the West 721 $46Harris Bank 356 $31RBC Bank 427 $19

Source: FDIC, Summary of Deposits, 2010

Figure 1: Top-50 U.S. Bank Holding Companies Owned or Substantially Owned by Foreign Banks

Here’s one example of how important the global movement of money has become. About $50 billion is remitted to other nations from the U.S. annually versus about $3 billion of inward flows. U.S. banks only process about 3 percent of outward flow dollars — largely because much of the foreign-born population sending money back home is unbanked or underbanked in the U.S. The rest of those dollars are moved by global banks and non-bank providers such as Western Union and MoneyGram. From the foreign-born worker’s perspective, the process of sending funds to relatives is as easy as sending a MoneyGram at the Walmart Money Center, where they’re already going to buy groceries and goods at the same time. It’s not cheap, but it’s easy.

Global remittance growth was on a rapid growth track until the recession slowed down cash flows (Figure 2). As global economies recover, we expect growth to rebound. Estimates for 2011 indicate that global remittances have nearly reached the amount registered in 2008 prior to the recession.

Next, I’d like to offer a few thoughts on how banks can provide personalized service to their customers from anywhere. I believe customers care less about the home location of their services than they care about the quality of the services they are receiving. This enables banks to build personal relationships with their customers, even when they’re using remote and virtual technologies (more about that in my column next month).

Online banks, self-service merchandise check-out, in-store kiosks, and automated recommendation engines have introduced consumers to building personal relationships with companies that don’t interact with them physically in person. As an industry, this trend can benefit us. Bank transactions are on the increase via Web and mobile while the number of branch visits is decreasing. Branches won’t go away, but the branch system is already evolving into a more rationalized one.

Figure 2: Total Global Remittances

$325

$380

$445 $420 $425

$441

2006 2007 2008 2009 2010(e) 2011(e)

Billi

ons

Figure 2: Total Global Remittance

Global recession effect

Sources: The World Bank, 2011; eCommLink, 2009; SWIFT, 2010



3

For example, a study conducted by the Marriott School of Business at Brigham Young University recently found that four out of five consumers are willing to use a video banking system to receive personalized banking services, and one in three would switch banks for after-hours access to a video banking service. The use of video via ATMs and kiosks is becoming more common and could help banks gain more efficiency from their investment in “brick and mortar” locations. Imagine visiting a small, well-located bank branch that services its customers either mostly or solely via video, call center and sophisticated ATMs. Or imagine using video banking to communicate from home or work to an individual at a bank branch or call center. We’re in a world where this is not far-fetched. Skype reports that it has 30 million users online during peak times.

Remote and virtual channels can be serviced personally — at a lower cost — from anywhere. The FIS™ people services business is one of the fastest-growing lines in the company because financial institutions are outsourcing front-office and back-office process that are: 1) expensive to operate internally, and 2) don’t help them differentiate themselves from competition. They are outsourcing a range of functions ranging from mobile tech support to after-hours and overflow call support to fraud management to item processing. Most customers who need to resolve an issue after normal banking hours don’t care if the customer service rep works in Milwaukee or Manila. They care that someone who’s competent and courteous is available to fix their problem.

The new global marketplace is both bad and good news. The bad news: your competition is bigger and broader — often not a bank, and very possibly not down the street from your branches. The good news: tools are available to help your bank remain competitive while enabling you to focus resources on strengthening your real, compelling competitive advantages that are visible to your profitable customers.



4

Customer Loyalty Does Not Translate to Cross-sales for Community Banks

By Paul McAdamSENIOR VICE PRESIDENT, RESEARCH & THOUGHT LEADERSHIP

Community banks generally have a customer loyalty advantage over their large bank competitors. Whether the metric is customer satisfaction, likelihood of repeat purchase, or Net Promoter Score®1, community banks consistently receive higher marks. Numerous consumer surveys have demonstrated this over the years, including research conducted by the FIS Enterprise Strategy team.2

But, unfortunately for community banks, customer loyalty advantage does not translate to superior cross-sales performance. Our analysis reveals that customers of large banks3 hold an average of 3.13 deposit and lending services with their primary checking account provider, compared to only 2.61 among community bank customers (see Figure 1). Community banks experience a similar disadvantage in terms of deposit balances per primary checking account household, with average balances that are 14 percent lower than those captured by large banks.

Figure 1: Although Community Banks Enjoy a Customer Loyalty Advantage, Cross-sales Performance Lags Large Banks

23%

14%2.61

3.13

1.00

1.50

2.00

2.50

3.00

3.50

0%

5%

10%

15%

20%

25%

Community Bank Customers Large Bank Customers

Depo

sit &

Loa

n Se

rvic

es p

er D

DA

Hous

ehol

d

Net

Pro

mot

er S

core

Net Promoter Score® Services per DDA Household

Comparison of Net Promoter Score® and Cross-sale of Deposit & Loan Services

Source: FIS Enterprise Strategy, September 2010; n = 1,808



5

While cross-sales is not the only metric that matters, it’s certainly a key indicator of a competitive retail banking franchise. Plus, from an efficiency standpoint, it’s also less expensive to sell additional products to an existing customer than to generate a new customer. Dick Kovacevich, former chairman and CEO of Wells Fargo, reminds us of this in his renowned quote, “The cost of us selling a product to an existing customer is only about 10 percent of selling the same product to a new customer.”4

But why is community bank cross-sales performance falling short? Community banks generally achieve higher customer loyalty due to their high-touch service and emphasis on local community involvement, ownership and decision making. Many community bank customers consciously select a smaller bank over larger bank options in the marketplace for these reasons. This generates tangible customer longevity advantages. According to our research, 68 percent of consumers who hold their primary checking account with a community bank have had that relationship for five years or longer, compared to 58 percent for customers of large banks.

Despite these advantages, community bank cross-sell performance falls short. Product selection is a key factor as larger banks generally possess a broader suite of product offerings. Larger institutions certainly have the ability to leverage their scale to invest more in advertising and analytic marketing capabilities. They also benefit from expansive branch and ATM networks and some are consistently on the leading edge of self-service banking and electronic payment deployments.

Indeed, large institutions have some key advantages. But in most cases, community banks can obtain product, marketing and delivery capabilities that are very competitive with those of the large banks. And, many community bank customers aren’t interested in the expansive distribution networks of the large banks. They’re perfectly content with a local bank that has servicing options convenient to their home or work. It’s also true that while large banks are more likely to be in the enviable position of being able to afford highly-visible ad campaigns and sophisticated marketing capabilities, community banks can counteract these advantages through superior local-market knowledge.

So why the cross-sales disadvantage? More than any other factor, the answer resides in the income and future earnings potential of community bank customers. As demonstrated in Figure 2, community bank customers report significantly lower annual household income and education levels than large bank customers. Thus, on average, community bank customers have a lower degree of affluence, which leads to less demand for a wide range of banking services.

Figure 2: Community Bank Customers Are Less Affluent than Customers of Large Banks

Comparison of Education and Annual Household Income


22%

38%

$48,948

$58,266

$45,000

$50,000

$55,000

$60,000

0%

10%

20%

30%

40%

Community Bank Customers Large Bank Customers

Annu

al H

ouse

hold

Inco

me

Colle

ge G

radu

ate

or H

ighe

r

College Graduate or Higher Annual Household Income

Colle

ge G

radu

ate

or H

ighe

r

Annu

al H

ouse

hold

Inco

me



6

We also see this affluence gap in the total deposit balances consumers hold at all of their banking providers. Large bank customers reported total deposit balances of $33,876 compared to $26,260 for community bank customers — a 22 percent difference. Even though community banks capture a larger share of their customers’ deposit wallets (66 percent for community banks vs. 59 percent for large banks), the affluence gap translates into average deposit balances from primary checking account households that are 14 percent lower than the average balances captured by large banks (see Figure 3 for comparisons of community and large bank performance).

These affluence differences represent a dramatic strategic disadvantage and significant headwind for community banks. Investments by community banks to expand product offerings, sales and marketing capabilities will not realize their full promise unless this strategic issue is addressed.

To be fair, there are certainly a number of community banks that outperform their larger bank brethren in cross-sales and other relationship expansion metrics. It’s also the case that numerous community banks place a primary strategic emphasis on small business and middle-market banking and also compete very effectively with larger banks. But taken as a whole, our research reveals an urgent strategic priority for the community banking industry.

These research results have motivated FIS to launch a follow-up consumer research study to explore this issue more thoroughly and specifically investigate differentiation strategies for community banks. This consumer research has recently been fielded and we’ll be reporting results and recommendations in future newsletter issues.

Figure 3: Comparisons of Community and Large Bank Performance

Community Banks Large Banks Gap

% Customers Very Satisfied 54% 42% 12%

% Very Likely to Repeat Purchase 45% 38% 7%

Net Promoter Score® 23% 14% 9%

Deposit & Loan Services per DDA Household 2.61 3.13 (0.52)

% Primary DDA Households > 5 Years Tenure 68% 58% 10%

Deposit $s Held with all Deposit Providers $ 26,260 $ 33,876 $ (7,616)

% of All Deposit $s Held with Primary Bank 66% 59% 7%

Deposit $s Held with Primary Bank $ 17,284 $ 20,028 $ (2,744)

Annual Household Income $ 48,948 $ 58,266 $ (9,318)

% College Graduate or Higher 22% 38% -16%




7

I’d like to know what you think. Do you agree with the conclusion that community banks are at a significant cross-sales disadvantage? What steps you think community banks can take to close the gap in cross-sales performance? E-mail me at [email protected] to let me know.

1 Net Promoter Score®, or NPS®, is a loyalty metric based on the survey question, “How likely is it that you would recommend [Company] to a friend or colleague?” Developed by Satmetrix, Bain & Company, and Fred Reichheld, the concept was first popularized through Reichheld’s book The Ultimate Question, and has since been widely embraced as a standard for measuring customer loyalty.

2 The research results cited in this article are based on a primary research survey fielded by FIS in September 2010 that was completed by more than 1,800 consumers.

3 A large bank in our analysis is defined as both: 1) a national banking institution that operates in many states across the country, and 2) a regional banking institution that operates primarily in a state or in neighboring states. A community bank is defined as a banking institution that operates only in a local area.

4 USA Today, “Wells Fargo’s Kovacevich Banks on Success as a One-Stop Shop,” March 26, 2007. Mr. Kovacevich also cited this information in multiple analyst presentations.



8

The Value Proposition for U.S. Mobile Payment Adopters

By Mandy PutnamDIRECTOR, RESEARCH & THOUGHT LEADERSHIP

Several years ago I worked on a project that involved watching commuters at Japanese train stations touch their DoCoMo mobile phones to vending machine readers to buy a Coca-Cola. Mobile payment offers great convenience to consumers in markets such as Japan with relatively underpenetrated consumer credit payment systems — not to mention an urgent need to make a quick payment before the train leaves the station. Japanese consumers understood the value proposition offered by mobile payment.

The value proposition for mobile payment is not as clear to U.S. consumers, who have a multitude of payment options — many offering rewards beyond convenience — at their

fingertips. Still, our online survey of 4,000 mobile phone owners in February 2011 conducted by FIS™ Enterprise Strategy found more than one-quarter of U.S. smartphone owners indicated they would be “extremely likely” or “very likely” to adopt mobile payment during the next year if near-field-communications (NFC) technology was available to enable it (Figure 1). That translates into an estimated 17 million plus consumers who are prepared to exchange their cash-and-card laden wallets for a different payment method.1

Figure 1: Likelihood of Using Mobile Payment During the Next Year

Unlikely30%

Neutral43%

Likely27%

Source: FIS Enterprise Strategy, February 2011; n = 4,002



9

Figure 2: Key Stakeholder Segments in Mobile Payments

Smartphone owners

Payment networks

Mobile network

operators

Financial institutions

Payment terminal suppliers

Smartphone manufacturers

Merchants

Source: FIS Enterprise Strategy

The U.S. mobile payment landscape changes continuously with new entrants and occasional exits. It includes a wide range of stakeholder segments, often with competing agendas (Figure 2). Also, many stakeholders’ game plans do not seem to be consumer-centric — based on a clear value proposition to consumers — and could fail as a result.

Payment networks and mobile network operator (MNO) alliances

Recently, Isis™ — the mobile commerce venture among AT&T Mobility, T-Mobile USA and Verizon Wireless — added Visa, MasterCard and American Express as additional payment networks beyond Discover Financial Services. This event likely ups the ante for Google’s Google Wallet, which has partnerships with Citigroup, MasterCard and terminal manufacturer VeriFone to offer contactless payment on Android devices.

Financial institutions

Looking to preserve as much payment revenue as possible, financial institutions are seeking alliances such as Citigroup’s partnership with Google and MasterCard that enable their debit and credit cards to retain or achieve “top-of-wallet” status.

Payment terminal suppliers

VeriFone’s CEO Douglas Bergeron told NFC World last spring that the company will include NFC technology in all new point-of-sale hardware, thereby removing some of the onus of reader technology investment from retailers’ plates. However, small independent retailers do not update their POS systems often and will not likely be ready to accept contactless payments for several years.

Smartphone manufacturers

Smartphone manufacturers are taking NFC into consideration in developing next-generation models but seem to be following the lead of the MNOs in terms of launching NFC-enabled phones. Google has installed NFC in its next-generation smartphones and RIM Blackberry Bold 9900 series will be NFC ready, but Sprint is the only carrier at this point promoting NFC in its version of the Bold 9900 according to Near Field Communications News. Google’s pending acquisition of Motorola could pave an easy path for Google to load Google Wallet features into its Android phones. However, Apple continues to keep speculators guessing about if and when it will release an NFC-enabled iPhone. A mid-May report from Business Insider indicates that the next-generation iPhone will not include NFC technology.



10

Merchants

Most merchants have been resistant to the idea of upgrading their POS terminals to accommodate NFC mobile payments, but will likely be changing their perspectives in light of recent developments from VeriFone and Visa. At the early May Smart Card Alliance Conference, Walmart’s director of payment services indicated that Walmart’s payment initiative is clearly targeted toward bringing EMV (chip-and-pin technology) to the U.S. market to boost transaction security, not toward enabling NFC. All of Walmart’s terminals support EMV cards. Walmart Director Jamie Henry responded to a question about the role of NFC in the POS environment by stating, “There’s no business case for NFC yet.”2

With Visa’s recent announcement to accelerate migration from magnetic strip cards to EMV contact and contactless chip technology in the U.S., the adoption of mobile payments via NFC chip-based technologies will likely speed the adoption of mobile payments. In a contrarian perspective to Walmart’s stance, merchant Kevin Knight, executive vice president of Nordstrom, views Visa’s move as laying the groundwork for mobile payments and a positive development.3

The mobile payment ecosystem will ultimately evolve and sort out various players’ roles within it. However, it must be shaped by a value proposition that resonates with consumers and offers them a good reason to change their payment behaviors. Even enthusiastic early adopters will need a reason to exchange their current credit or debit cards for a mobile wallet, since it will take years for a large number of retailers to install new readers. Early adopters’ top concern about mobile payment — “stores where I like to shop might not have readers” — is justifiable (Figure 3).

Another barrier to consumer adoption is the fear that mobile payment is less secure than other payment methods. Though security risk is not perceived as an impediment to usage by a large percentage of likely early adopters, superior security offered by NFC-enabled payment could be coupled with the benefits of reducing time at checkout and wallet bulk to build a stronger value proposition for adoption across a broader group of smartphone owners.

This article is derived from the recently published white paper, “A Value Proposition for U.S. Mobile Payment Adopters.” Please follow this link to access the full report: http://www.fisglobal.com/Insightspapers/index.htm

1 The Nielsen Company, “Q2 Mobile Media Marketplace,” 2010. 2 Jamie Henry, director of payment services with Walmart treasury organizations, quoted by NFC News, May 2011. 3 Kevin Knight, executive vice president with store chain Nordstrom, quoted by nfcworld.com, Aug. 9, 2011.

Figure 3: Main Reasons Preventing Use of Mobile Payment

6%

7%

14%

20%

21%

24%

29%

34%

61%

I don't see the value in using it forpayments

I only use my phone or other mobiledevice for calls and/or email

I would rather use other paymentmethods I'm more comfortable with

Would be too easy to lose track of howmuch I spend

Would still have to carry loyalty cards

Would still have to carry identification

Would be less secure than otherpayment methods

Might not get points for using certaincredit/debit cards

Stores where I like to shop might nothave readers

Source: FIS Enterprise Strategy, February 2011; n = 4,002



11

By Jim Gamble DIRECTOR, RESEARCH & THOUGHT LEADERSHIP

Unprecedented events of the past few weeks — the impasse in Congress, the downgrade in the U.S. credit rating, the European debt crisis —have called the economic recovery into question. So what does this mean for bank earnings in the U.S.?

In last month’s edition, http://www.fisglobal.com/solutions-insights, I talked about how U.S. bank earnings are recovering and undoubtedly the riskiness of the forecast has increased since then (Figure 1). But, it is too soon to conclude that the bank earnings outlook will become as grim as the outlook for a continued turnaround in the economy.

The Cost of Uncertainty … And the Impact on Bank Earnings

Figure 1: Forecasted Bank Earnings Before Tax

(100)

(50)

-

50

100

150

200

250

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Estim

ated

Ban

k Ea

rnin

gs (

Inde

x 20

00 =

100

)

Bottoms Up Estimated Bank Earnings Before Tax

Macro Based Top Down Estimated Bank EBT

Sources: FDIC, Moody’s Analytics, Standard & Poor’s, FIS Enterprise Strategy



12

Uncertainly Reigns

One need look no further than Standard & Poor’s 500 stock market index to see that uncertainty reigns (Figure 2). The VIX index — a measure of stock market volatility — jumped as it has during previous times of distress. Yet there hasn’t been the corresponding drop in expected earnings per share. In fact, corporate earnings have been the bright spot in the economic recovery. During the second quarter of 2011, 70 percent of the companies in Standard & Poor’s 500 Index beat their estimated earnings. Something other than a drop in expected earnings has occurred.

The decline in the stock market must be attributed, therefore, to a lower price-earnings multiple for the stock market as a whole. In order to remain within their fiduciary mandates, large investors are selling off some of their riskier holdings and rebalancing portfolios.These market moves, however, generally have a short-lived impact on the market. A better explanation for the reduction in the market price-earnings multiple is widespread perception that investing in the stock market has become riskier.

Tough Decisions Required

This perception of increased risk could be blamed on several factors: the U.S. credit ratings downgrade, acrimonious uncertainty surrounding the U.S. budget, the European debt crisis and disappointing jobs numbers. Many of these market influences can be directly correlated to actions, or more precisely, the inaction of lawmakers both here and abroad. While it is unusual for the market decline to be so directly attributed to the actions of lawmakers, it appears that is exactly what has happened. The highly visible and ugly process of the last-minute raising of the debt ceiling took its toll. And, despite the temporary resolution, the net reduction in the budget was insufficient to avoid a credit ratings downgrade for U.S. treasuries. Unlike prior occasions when the market has fallen sharply, lawmakers were in a position where they had the power to directly affect the direction of the market.

Figure 2: New Risk Prompts a Flight to Quality

Source: Capital IQ

10 Y

ear T

reas

ury

Yiel

d(%

)

VIX

Inde

x

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

0

10

20

30

40

50

60

70

80

90

12/3

1/07

2/29

/08

4/30

/08

6/30

/08

8/31

/08

10/3

1/08

12/3

1/08

2/28

/09

4/30

/09

6/30

/09

8/31

/09

10/3

1/09

12/3

1/09

2/28

/10

4/30

/10

6/30

/10

8/31

/10

10/3

1/10

12/3

1/10

2/28

/11

4/30

/11

6/30

/11

VIX Index 10 Year Treasury Yield



13

Ironically, U.S. 10-year treasuries have risen in the midst of this flight to quality. In a somewhat contrary opinion to Standard & Poor’s analysis, large investors still see U.S. debt as the best means to mitigate risk in their portfolios (Figure 3).

The immediate concern for financial institutions is that the economy could slide back into recession. As consumers lose confidence and feel their wallets shrinking, they buy less and are less willing to assume debt. As consumers cut back, so do businesses. Adding to the pain for financial institutions, low interest rates on both the long and short end of the yield curve squeeze the net interest margin.

It’s premature to say the economy is headed back into a recession and too soon to conclude that the outlook for bank earnings should be downgraded and, if so, by how much. Corporate earnings have been very strong and balance sheets remain healthy. Even if the economic recovery slows, companies are more prepared to endure a downturn now than they were three years ago.

Policy makers in the U.S. and abroad must craft credible strategies to solve their respective countries’ debt problems. Developing budget plans won’t be easy, nor will the solutions be popular among many constituencies. However, restoring this credibility of lawmakers and re-establishing rational policy would go a long way toward removing the uncertainty now driving the market down, and toward restoring the confidence necessary to resume the economic recovery.

Figure 3: Current 10-year Treasury Yield vs. Forecast

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00Ja

n-20

00

Jan-

2001

Jan-

2002

Jan-

2003

Jan-

2004

Jan-

2005

Jan-

2006

Jan-

2007

Jan-

2008

Jan-

2009

Jan-

2010

Jan-

2011

Jan-

2012

Jan-

2013

Jan-

2014

Jan-

2015

Yiel

d (%

)

Fed Funds Rate 10 Year Treasury Yield

10 Year Treasury Yield on 08/19/2011

Sources: Moody’s Analytics, Capital IQ



14

Strategic Insights is a monthly newsletter that provides research, thought leadership and strategic commentary on recent events in banking and payments. The newsletter is produced by the Enterprise Strategy team at FIS. FIS is one of 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 & Thought Leadership at 708.449.7743 or [email protected].

fis strategic insights vol 2 september 2011

Business

global banks

global banking system

bank banking

global economiesfigure

banks figure

global remittance growth

percent of global gdp

total global remittancerecover