fis strategic insights vol 3 october 2011

FIS ENTERPRISE STRATEGY VOLUME 3 • OCTOBER 2011

FIS STRATEGIC INSIGHTS • V3 OCTOBER 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries.

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By Fred Brothers EXECUTIVE VICE PRESIDENT, ENTERPRISE STRATEGY

In recent articles, I’ve talked about four trends related to how the concept of “big” is dominating banking and how banking has become “global” [Insert hypertext link to last month’s article]. These four trends — 1) competing in the land of the giants, 2) customer 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™ Client Conference 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 is evolving fast. These are key trends that are increasingly affecting the way your customers communicate and do business.

Mobile Is the New Web

First, 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. adults will 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 deposit capture. It’s convenient to deposit a check by taking a picture of it, making a deposit and getting your confirmation of the deposit in less time than it takes to go through the drive-through window at the bank, especially on a Friday afternoon. But current applications only scratch the surface of how people will use mobile in the future.

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

I N T H I S I S S U E

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

•Can You Be a “Relation-ship Bank” When Most Other Banks Are, Too?

•Mobile Remote Deposit Capture: Capturing Early Adopters

•What’s in Store for Paper Checks? Ask a Small Busi-ness Owner

FIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011


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When I was young, my mother bought my sisters and me a set of Collier’s Encyclopedias. She bought them so we would have information at home for our school reports without having to go to the library or multiple libraries to get the same information. She made monthly payments on them and they were probably obsolete by the time she was done paying for them.

I think about my kids, growing up in a post-web world. They’ve never known anything except a world where most of the knowledge of mankind is available at their fingertips, any time of the day or night, for free. Now, we can access most of the 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 the comparable quarter — plus it tripled sales of the iPad to more than 9 million during the same time period.3 Microsoft has invested huge money in their mobile operating system and other web-enabled devices like the X-Box. Android-powered phones are taking huge market share — 39% of the U.S. market according to a July study conducted by Nielsen.4

The 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 college kids who didn’t get a job because a human resource manager saw their party pictures on Facebook. They’ll post anything for the whole world to see and gladly trade privacy for a good search engine like Google — the company that gives everything 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 with you online and tell you about how you can get a discount on your car insurance if you install their SnapshotSM tracking device 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 activities to 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 maintain personal relationships with their customers. For example, I love online footwear retailer Zappos even though they are a full-price merchant. Last year I ordered seven different pairs of black dress shoes on Zappos to find just one comfortable and stylish pair. I opened the boxes, tried them all on in the comfort of my home, kept one pair and shipped the other six back to Zappos at their cost. They sent me a thank-you note for buying one out of seven pair of shoes. And now Zappos knows my size and style preference, and has formed a more personalized relationship with me by recommending other shoes that interest me.

Financial institutions have the potential to develop remote and virtual relationships with their customers by analyzing and applying the information they already have in their databases and customizing the delivery of the information in the way their customers prefer.



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Social Media Is Evolving FastAccording to the 2011 Pew Internet and American Life Project, nearly two-thirds of the U. S. adult population uses social network sites.5 That statistic is consistent with results from FIS’ study conducted last February of 4,002 mobile phone owners. Among our sample of mobile phone owners, seventy percent use Facebook, more than one-quarter use YouTube and fourteen percent are on Twitter.

Social media is changing how we communicate not just in the U.S. but globally. Although political experts disagree about how much social media has contributed to the recent overthrow of Middle Eastern dictatorships, social media facilitates communications for collective actions — from flash mobs to revolutions.

Jeffrey Ghannan, the author of a recent report on social media in the Arab world, points out that the under-25 generation makes up at least half the population in six Arab countries. Social media is the currency of communication 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’ll do everything we can to help you compete more effectively by winning more customers, retaining the customers you already 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.

26%*24%

33%31%

33%

23%

18%

11%

6% 6%

Gen Y Gen X YoungerBoomers

Older Boomers Matures

Conversation with a representative at my local bank branch

Email or text message sent to my mobile phone

* Read as: 26% of Gen Y members selected conversation with representative at my local bank branch as a preferred way to communicate with the financial institution where they have their primary checking account

Source: FIS™ Enterprise Strategy, August 2011; n = 3,000

Figure 1: In-person Contact vs. Mobile Phone as Preferred Way to Communicate with Primary Financial Institution



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Can You Be a “Relationship Bank” When Most Other Banks Are Too?

By Paul McAdamSENIOR 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 of this data is the vast majority (91 percent) of financial institutions want to differentiate based on customer intimacy, which essentially boils down to knowing and serving customers better than any competitor could. That’s great, but it’s a tall order when nine out of 10 competitors in the market are doing the same thing.

Figure 1: Value propositions supporting customer intimacy dominate

60%*

31%

2%

2%

2%

1%

2%

Relationship leader

Customer service leader

Advice leader

Convenience leader

Product performance leader

Price leader

Other

Executives’ perceptions of their financial institutions’ market positioning

* 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=351

Customer intimacy

positioning



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Delivering on relationship and service quality value propositions has become increasingly more challenging due to the accelerating commoditization of the retail banking landscape over the past decade. Senior executives recognize the need to move up the value chain and monetize the value of relationship and service quality, but they also acknowledge significant gaps between the desire to pursue these value propositions and their ability to actually fulfill them. For instance, in the same survey, 96 percent of executives scored “efficiently and affordably providing a high level of customer service” as being an important initiative to their institution. Yet only 57 percent indicated their institution currently had the capabilities to deliver customer service at this high level (Figure 2).

An even wider gap between importance and capabilities surfaced in “understanding customer preferences and having the ability to tailor banking solutions to meet their unique needs.” Eighty-three percent of senior executives scored it as an 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, than understanding their customers’ preferences and targeting them effectively. This is probably acceptable short term since customers generally perceive high service quality as a precursor to relationship formation. But longer term, this gap must be closed.

Figure 2: Large gaps between the importance of initiatives and the capabilities to support them

96%*

83%

57%*

38%

Efficiently and affordably providing a high levelof customer service

Understanding customer preferences andhaving the ability to tailor banking solutions to

meet their unique needs

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)

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=351

Gap = 39pct. points

Gap = 45pct. points



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Restoring Healthy and Profitable Customer Relationships Though the vast majority of institutions are striving to differentiate based on relationship and service quality, customers remain wary. An August 2011 FIS Enterprise Strategy survey of 3,000 consumers with checking accounts found that 45 percent of customers fit the profile of “loyal” based on loyalty metrics such as consolidation of assets or loans with the primary checking account provider, belief that their provider has product and service expertise, level of trust in their provider, and willingness to refer their provider to friends and family members.

But the disturbing research finding is while 45 percent of customers fit the definition of “loyal,” only 17 percent of current 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 loyal to their primary financial institution.

These results suggest the traditional relationship banking model that’s been deployed in the industry during the past decade will no longer suffice. Execution gaps in service quality and the inability to understand and honor customer relationships are taxing customer relationships. Plus, institutions are no longer able to afford having such low portions of retail customers that are both loyal and profitable.

These problems exist, in part, because when the banking industry purports to discuss “customer relationships,” it’s usually oriented around benefits to the institution. Customers are not oblivious to this disparity and realize that in many cases: 1) the “relationship” benefits they receive are not particularly valuable, and 2) they are being treated as a means to a financial institution’s ends. This is why banks only have both loyal and profitable relationships with 17 percent of their customers.

Investments in technology, data analytics, sales and marketing programs and the like will surely help, but the loyalty/profitability gap will not really start to close unless financial institutions can authentically demonstrate that they are acting with customers’ best interests in mind. Given the level of financial uncertainty that many U.S. consumers are currently experiencing, I have to believe this customer-centric philosophy will ultimately be beneficial to both financial institutions and the customers they serve.

As mentioned above, FIS Enterprise Strategy just recently completed the research that generated the loyalty/profitability customer segmentation. In the coming weeks we will further analyze the research results and will address specific opportunities 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 [email protected] to let me know.



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Mobile Remote Deposit Capture: Capturing Early Adopters

By Mandy PutnamDIRECTOR, 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, mobile

RDC 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 population as of February 2011 according to our FIS™ Enterprise Strategy survey (Figure 1). However, that 3 percent represented about 12 percent of smartphone owners and nearly 60 percent of smartphone owners who were active mobile bankers. There’s a lot of trial going on among early adopters of banking technologies.

Figure 1: Penetration of Mobile Remote Deposit Capture

No22%

Yes and it is available for my mobile phone

7%*

Yes, but it is not available for

my mobile phone6%

I don’t know60%

I don't have a primary checking

account5%

Use RDC3%

Don't use RDC4%

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 = 4,002

Awareness Utilization



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In order for Mobile RDC adoption to accelerate, challenges of both limited supply and limited demand must be addressed. Limited demand reflects lack of awareness of Mobile RDC among the general mobile phone population and a 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 offer mobile banking apps that enable their customers to “point, shoot and deposit” with their smartphones. The majority of mobile phone owners — 60 percent — do not know if their primary checking account provider offers a mobile RDC app. This is no surprise since a very small percentage of banks offer a Mobile RDC solution. It wasn’t until July 2010 that a 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, though Bank of America is reported to be launching its solution in 2012 and some banks other than the top-20 have already launched apps.

Among the small group — 4 percent — of mobile phone owners who are aware that they have Mobile RDC available from their bank but do not use it, security concerns (31 percent) slightly outweigh lack of sufficient check deposits to warrant 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 is lower than satisfaction with the more-established mobile banking technology among mobile banking users — 54 percent as opposed to 68 percent for comparable top-three box scores on an 11-point scale (Figure 2). Despite having some technical and user-error challenges — similar to ones I’ve experienced — with the app, Mobile RDC users report a high usage level — 5.2 checks within the past 30-day period on average.

So what is the business case for offering Mobile RDC? The answer is: nearly six out of 10 current mobile banking users want their apps to include Mobile RDC. And, today’s young innovator population, which is excited about Mobile RDC and represents two-thirds of current users, are members of Gen Y and will serve as bellwethers for their generation — a population segment of a size rivaling the Boomer segment. Assuming the supply of mobile RDC apps expands, consumers will ramp up their adoption of Mobile RDC as a desirable feature of their mobile banking experience.

This article is derived from a research brief entitled, “Mobile Remote Deposit Capture: Capturing Early Adopters.”

54%*

39%

7%Dissatisfied(bottom 3-box)

Neutral(mid 4-box)

Satisfied(top-3 box)

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”;

Source: FIS™ Enterprise Strategy, February 2011; n = 117

Average number of times used in last 30 days = 5.2

Figure 2: Satisfaction with Mobile Remote Deposit Capture



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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, and

consumer payments to small businesses constitute another 10 percent. The infrequency of all these transactions and often high dollar value of these payments require a universally-accepted payment method — currently, checks.

Different industries experience customer preferences for payment methods in different ways. Small businesses in retail, accommodations (restaurants) and personal care industries accept more payment types than small businesses in other industries. About 90 percent of small businesses in consumer-facing sectors accept checks, cash, and credit and debit cards as forms of payment. Credit and debit cards are convenient, inexpensive, and often offer rewards. Retail customers also slightly favor paying with cash versus using checks.

Small businesses selling goods and services to other businesses receive the most checks. In fact, only about one-half of small businesses in non-consumer-facing industries accept cash or credit and debit cards for payment. Transactions between these businesses often occur infrequently so there is little reason to use any form of electronic payment.

What’s in Store for Paper Checks? Ask a Small Business Owner

Figure 1: Where checks are used

B2B among Small Business

24%*

Consumer to Small Business

10%

Small Business Payroll

12%

Large Business Payroll

9%

B2B among Large

Business 8%

Consumer to Large Business

26%

P2P11%

* 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 2011



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Cash19%*

Checks31%

Credit & Debit Cards28%

Other Payments22%

*Read as: 19% of the number of payments made to a small business are in the form of cash

Source: FIS™ Enterprise Strategy

Figure 2: Distribution of payments made to small businessesAltogether, small businesses receive almost one-third (31 percent) of their payments in the form of checks (Figure 2). Credit and debit cards are the next-most-common form of payment at 28 percent, followed by cash payments (19 percent). The remaining 22 percent of payments received includes a mix of prepaid, preauthorized, ACH credit and debit, and wire payments.

In contrast to payments they receive, small businesses do have discretion over how they make payments. And here again, checks dominate. Small businesses pay more of their own bills with checks than with all other payment types combined (Figure 3). More than one-half (51 percent) of small business payments made are in the form of a check. Based on our survey data, payroll checks are estimated to comprise 22 percent of payments made by small businesses. Payment with a credit or debit card is the next-most-common method at 16 percent followed by online payments (bank website, biller’s website, etc.), which account for 9 percent of payments made.

Many small businesses have little reason to migrate away from paper checks to other forms of payment. From the small business owner’s perspective, other payment methods cost more than using a check, and establishing other forms of making or receiving payments is perceived as a hassle. However, the added convenience, error reduction, and time-savings benefits that can be derived from using electronic forms of payment will eventually outweigh the rising cost of using paper checks. Until then, checks will remain the payment method of choice for small business.

Cash4%

Checks (Non-Payroll)

29%*

Checks (Payroll)22%Credit/Debit

16%

Prepaid4%

Online9%

Pre-Authorized6%

Wire5%

Internet5%

* Read as: 29% of the number of payments made by a small business are non-payroll checks

Source: FIS™ Enterprise Strategy

Figure 3: Distribution of payments made by small businesses

This article is based on a survey of 2,249 small businesses that was conducted as a joint effort between FIS and NACHA in November 2010. The survey captured responses from small businesses with:

• More than one employee

• Revenue less than $20 million



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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 3 october 2011

Business

mobile banking

future of banking

digital trends

mobile web

digital banking marketplacecan

global banking system

mobile remote deposit

key trends