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American Banker released figures for 2005 online advertising expenses for financial services companies. Among banks, Bank of America was first with $20 million spent online in 2005, no surprise there. Five others spent $10 million or more including two direct banking efforts, ING Direct and Emigrant Direct, which spent 96% of its media budget online (click on the table below for a larger version).
2005 Advertising Expenses, in millions
We've seen a number of banks enter the direct banking business, primarily through high-rate savings products. Late last year, Sunmark Federal Credit Union <sunmarkfcu.org> joined the fray with a private-branded direct Web offering at RateEdge.com (click on screenshot below for a closeup).
The Internet-only savings account pays 5.25% interest on all balance levels with no fees and no minimum balance. Rates are five times higher than the credit union's regular share account, which pays 1% on balances of $5000 or more. The credit union's money market pays 2% on a $25,000 balance.
The only possible fee is for transferring money OUT of the account more than twice in a month. The third and subsequent withdrawals are charged a fee ranging from $2 to $5 per transfer depending on the amount. Refer to its fee schedule for more information.
This would be the best savings account in the country, except that it is limited to residents of six counties in upstate New York (Albany, Montgomery, Rensselaer, Saratoga, Schenectady and Schoharie). However, anyone in the country can open an account if they have a relative in any of those counties, or at least claim* they do.
*The application asks for the name of the relative living in the six-county area, but no other identifying information. According to an online posting, the credit union's customer service department requires the address and phone number of the relative prior to opening the account. We did not test it ourselves.
Margins are thin, markets are tight. New customers are hard to find. Compliance issues are multiplying. New technologies threaten to disrupt established operations.
Some companies wonder if there’s a future for them in payments, but not Fidelity National Financial Corp. (FNF). The Jacksonville, Florida, firm is executing a war plan that could give it the same sort of market domination it already enjoys in title insurance—50 percent of the market. To prove it, Fidelity’s Fidelity Information Services (FIS) said late last month that it was taking up a complex deal that would in effect give FIS freedom to build its business without reference to title insurance, Fidelity National’s original line. Wall Street liked the news; FIS's stock soared 24 percent on the news before closing at a mere 17 percent rise.
In the deal:
The deal creates two publicly traded companies: a new FNF, trading under the FNF ticker symbol, and FIS, which will keep its FIS symbol. The FNT symbol will disappear.
The move follows on a tortuous road that chairman William Foley II embarked on in 2003, when he stumbled into the payments industry by buying Alltel Information Services, and its ACBS mortgage-servicing products, for $1.06 billion. That acquisition gave Fidelity the databases of eight of the top nine home-mortgage lenders; 50 percent of the outstanding home mortgages; and a clear view of the cash-flow opportunities in the payments business.
Since then, he’s spent more than $2.5 billion to assemble a payments-processing operation that could dominate the industry. This latest move, say informed observers, is designed to simplify the financial structure of the parent company by shifting the debt load associated with the FIS acquisitions away from the title company (FTN owns about 50 percent of that industry). That, in turn, will get FIS what it considers a proper valuation on Wall Street and get a listing on the Standard & Poor’s 500, in the process making it easier for FIS to raise money in the capital markets and thus continue to grow through acquisitions.
“The motivation was to eliminate the holding company structure, move the assets to two individual companies, and make those companies, independently, more able to pursue their strategies,” says Geoffrey Dunn, a senior vice president of Keefe, Bruyette & Woods Inc. (KBW). “FIS gained freedom from a controlling parent, and more flexibility to pursue its strategy and capital management going forward. Foley has historically not sat around if he’s created value in the market.”
FIS's main business idea is that banks will become marketing operations, and increasingly outsource their payments-processing operations, says Executive Vice President Grace Brasington.
“If they’re going to outsource their payments capabilities, we’re going to provide those capabilities to them, so they can focus on the marketing aspects of their business,” she says. “From a marketing perspective, banks won’t have to worry about how to get the additional volume [to turn a profit from payments]; it will be Fidelity’s problem.”
Bulking up Fidelity’s processing volume will in turn boost its earnings by creating scale, and profit. Fidelity has been doing this by, among other things, buying a customer base through acquisitions—last year’s acquisition of Certegy for $235 million in stock, for instance—and then migrating those acquisitions to a simplified clutch of standardized offerings that pretty much cover the waterfront of bank-payments operations. This has allowed them to avoid the expense of supporting obsolete products still used by important customers, a trap that some of its competitors have not eluded.
Meanwhile, the simplified financial structure will allow FIS to continue buying customers by buying companies, a strategy that will be greatly helped by FIS’s roster of institutional investors, all of which are looking for homes for their investor’s money.
Among those investors: Texas Pacific Group and Thomas H. Lee Partners, two private equity investors that together paid $500 million in 2004 for 25 percent of FIS after an uninvited, and failed, attempt to buy the the parent.
These companies had their stakes reduced to 17 percent after the Certegy deal, which among other things gave Chairman Foley the public vehicle he had been seeking for FIS for years. But according to FIS’s SEC filings, both investment groups, which own their FIS shares through a maze of offshore accounts, have remained active owners even though—thanks to a September 2005 shareholder’s agreement—their holdings have largely disappeared into FIS’s 156.6 million outstanding shares.
And both firms have also been working closely with Foley to acquire more companies. In January, according to FNF’s March 10-Q, FNF, Lee, and Texas Pacific together bought 40 percent of Sedgwick CMS Holdings Inc., an insurance claims outsourcer, for about $126 million. That transaction will probably become part of the FNT portfolio.
But this partnership, combined with the splitting of FNT and FIS, will probably be of real help to FIS’s acquisition strategy going forward, says KBW’s Dunn. “If FIS goes and does additional acquisitions eventually, I wouldn’t be surprised if the private equity guys would be involved,” he says. “Once Foley’s found an area that makes sense, he’ll be aggressive to build out a platform, and he’s not afraid to find companies that are underperforming and fix them. He's got a great track record of doing that.”
This sort of resource will lead over time to a larger, increasingly dominant FIS. “Near-term and longer-term, they’ll be very focused on cross-selling opportunities. But they’ll also round out their offering through acquisitions. I would absolutely expect them to be a major player in the M&A front, going forward,” says Dunn.
FIS’s Brasington wouldn’t deny that assertion for a minute, pointing out that risk management and merchant acquiring, both of which came to FIS with the Certegy deal, are natural directions for FIS to take. “We’re always, as a company, going to evaluate the right opportunities from an acquisition perspective as those opportunities come up,” she says in perfect corporate-speak. “We want to exponentially increase our capabilities.” (Contact: Fidelity Information Services Inc., 904-854-5043; Keefe, Bruyette & Woods Inc., 860-722-5902)
An unpublished study being completed by Market Platform Dynamics says there’s little data to support assertions that mobile payments will become the payment vehicle of choice for the people under the age of 40 called Gen X and Gen Y. According to the company’s multi-year research, 62 percent of respondents said they think using cell phones as payment vehicles is unnecessary, and 38 percent said they don’t use their cell phones enough to make it worthwhile. The good news: People born since 1977—Gen Y’ers—like the idea better than their Gen X elders. Last week, founder Market Platform founder David S. Evans spoke with NetBanker about his findings, and their implications.
NB: Tell us about the difference in attitude between the 16-to-19-year olds and older people.
Evans: The very young people indicated they’re more interested in using their mobile phones as a payment device, and the very old people—real geezers in their late-30s to early-40s—are less enthusiastic. Everyone else is about the same [as the geezers]. But still, even 50 percent of the real kids say ‘not really interested.’
NB: Most of the enthusiasm for mobile payments is based on the idea that these children are going to be flocking to use their cell phones like they do in Asia, and that therefore, mobile payments is not only the wave of the future, but also the demise of the credit card and the credit card brand as we know it.
Evans: Let’s be careful about a couple of things there. First of all, and despite the survey results, I’m still bullish on mobile phones eventually becoming payment devices. The thing you need to keep in mind is that people can’t really imagine what it is like to use one of these things until you actually present them with the goods. So, despite these numbers, I’m still bullish on mobile phones.
Number two, you say ‘Displace the credit card industry.’ There are two issues: One, whether the mobile phone is going to become the new form factor—just a physical thing that people use instead of a magnetic stripe card. The other question is whether the possibility of the mobile phone carriers being in the loop has an implication for the card system.
Those are two different questions. For the second question: What is currently happening in the U.S. is that the mobile carriers are not expressing, at the moment, great enthusiasm to be card systems. But having said that, it’s ultimately the mobile operator that has the relationship with the customer, so the mobile operators are being injected into the payment eco-system, and it’s possible that that could have some implications for the card associations. But it’s pretty complex.
NB: It seems to me that the real impetus here is going to be the first question—will the form factor impel the cell phone operators into the loop.
Evans: That’s correct: If consumers are interested in using their mobile phones as payment devices, then you can be sure that ultimately, the mobile phone operators are going to want to figure out some way to get a piece of that action.
NB: Based on your research so far, what are those indications?
Evans: Based on what’s happening in Asia, and looking at the U.S., our sense is that in the long run, and despite the lack of enthusiasm that we get in the survey, the mobile phone has many advantages as a form factor, because of the possibility of its being a contactless device with a graphical user interface—able to do lots of different stuff and being ubiquitous as well. So it’s a natural thing for them to become an important—if not the—form factor for paying for things.
NB: So I take it that your ultimate conclusion here is that this will happen, but it will take longer than some enthusiasts may be suggesting.
Evans: That’s correct, and I think the survey results indicate that people aren’t going to flock to this thing just because it’s new, and whoever is trying to push this form factor on consumers, or on merchants, is going to have to present a solid value proposition to the consumers. Consumers will have to be able to do something with this device that they can’t do with their current, easy-to-use magnetic stripe card. It underscores the fact that the introduction of a new technology in the payment card space is always an uphill battle.
NB: So first of all, the way to accelerate adoption will be to offer something the cards don’t do, aside from being able to use your cell phone as a gizmo; and number two, the people who want to push adoption will have to be willing to buy market share by accepting lower margins today.
Evans: I don’t necessarily agree with that. If you can come up with a clever, valuable thing on the mobile phone that is of interest to consumers, consumers will be interested in it. And that can happen without necessarily taking a hit on margins.
NB: Would that include rewards programs?
Evans: It may turn out that mobile phones make it easier for card issuers and merchant participants to have rewards programs, because you have a graphical interface on the phones. That implies that you can basically beam rewards to people. There are more clever things you can do with a computer than you can do on a mag stripe card, or even a contactless chip card. So that’s one of the value propositions that one can start thinking about with mobile phones: Are there ways to turn the mobile phone into something that’s valuable to both consumers and merchants?
NB: And what do you think?
Evans: Once you start moving towards a smart computing device with a screen, there is an enormous amount of things, including rewards, that people in this business can start thinking about—things we can’t even imagine. The mobile phone is most interesting because it truly is a computer. And in other parts of the information technology world, we’ve seen that once you start talking about software platforms for computers, developers come up with all sorts of ideas about how to use that computing power. That’s the true excitement of the mobile phone.
NB: So the payments mechanism will just be included in the phone, and over time, people will use it more.
Evans: We have to be careful about one thing, though: When you think about people using mobile phones, we’re talking about contactless, and therefore the adoption of mobile phones as a payment device is tied to the adoption of contactless at the point of sale by merchants.
NB: Which is the chicken-and-egg issue.
Evans: It’s a chicken-and-egg issue. There are all these contactless cards out there now, but there aren’t a lot of merchants that accept them. But if consumers wind up really liking the idea of contactless mobile phones as a payment device, and people start getting those sorts of phones, it could propel adoption of contactless. Having said that, if I gave you a mobile phone with a contactless chip today that was an incredibly powerful payment device, you could use it at your local McDonald’s to buy a Big Mac, but not much else.
NB: Everything you’ve said is contingent on a screen. What does your research tell you about what people say will be the generation after cell phones—a chip embedded in a wristwatch or token?
Evans: I don’t think that’s after mobile phones—I think it’s pre-mobile phones. One of the things that came out of our research is that our respondents exhibited utter lack of enthusiasm for fob-like devices.
NB: Yet most people have predicted that that is the next generation after this, and that’s what’s going to atomize the brand value.
Evans: The Gen Y people indicated slightly more interest in fobs than Gen X, but no one expresses a lot of interest in fobs.
NB: I infer from that that some of the anxieties that I’ve heard about the next generation of payment devices atomizing brand value is, at a minimum, overdone.
Evans: Yes. I don’t think there’s any reason to think that mobile phones are going to atomize the brand. I think that the major implication i
s that in the long run—five to ten years—mobile phone carriers are potentially important players in the eco-system, and whether they become allies of the card systems, or whether they think about becoming alternatives, or allying with someone else, remains to be seen. But it’s certainly not going to atomize the industry—it’s just going to inject another set of interested parties into the business.
NB: What’s happened in Japan [where DoCoMo already operates a thriving mobile payments system] could be done in this country just as easily. Do you think that could be the disruptive element that could marginalize cards?
Evans: It’s possible, but there are very important differences between Japan and the U.S. Japan has a poorly developed card industry and not a lot of interest in the use of credit cards. It has enormous interest in the use of mobile phones. DoCoMo got established in Japan mainly because people don’t have personal computers, and there is an extensive broadband penetration, so Japanese consumers standardize all their Internet activities on mobile phones. And you have companies that are able to push the mobile phone manufacturers around and tell them what to do. When you come to the U.S., you have totally different sorts of operators and a very, very well-developed card industry, with plenty of muscle behind it. So I think the [U.S.] mobile operators are an interesting set of entities that, as the mobile phone becomes a more important payment device and gets injected into the [U.S.] payments eco-system, could alter that eco-system. It could possibly take on a more significant role. But I think that’s a long time coming, and certainly not imminent. It remains to be seen whether that is even a plausible outcome in the U.S.
(Contact: Market Platform Dynamics, David Evans, 617-266-6839)
The latest new products and contracts.
The Canadian Payments Association issued new payment standards for electronic check clearing, part of an industry-wide plan to move the Canadian check-clearing system to an image-based process by December 31, 2006. (Contact: Canadian Payments Association, 678-781-7205)
CheckFree Corp. says it has a new product, the CheckFree Positive Pay Accelerator, a real-time software module of the CheckFree ARP/SMS product. (Contact: 678-375-1595)
Deluxe Financial Services says it’s now the exclusive provider of checks and related services for BancorpSouth. (Contact: Deluxe Financial Services651-483-7503)
DCI says that Syracuse, Kan.-based Valley State Bank is using a DCI interface that allows the bank to connect to AudioTel’s remote image capture and exchange product. (Contact: DCI, 678-781-7224)
First Data Corp. says Brookfield, Wisc.-based North Shore Bank will be using its STAR ATM network. (Contact: First Data Corp., 303-967-8646)
Fiserv Inc.’s BANKLINK unit says Union Bank of California will be using BANKLINK’s iLINK remote deposit product. Separately, Fiserv’s Credit Processing Services and BillMatrix units are issuing a new product that the company says lets its PLUS System customers use on-demand payment services to manage their credit portfolios. (Contact: BANKLINK, 212-419-3026)
Fundtech Ltd. says that FNB Corp.’s First National unit is live with CASHplus, Fundtech's cash-management system. Separately, Fundtech says four of their payments customers—EverBank Financial, Astoria Federal, Mid State Bank and Trust and Sterling Savings Bank—are adding the PAYplus USA interface to The Bank of New York's international payments service, Global F.A.S.T. Also, Fundtech says it has a new ACH product, OmniPAY, for International ACH, for international ACH operations. (Contact: Fundtech Ltd., 201-946-1100)
Global Cash Access says the San Manuel Indian Bingo and Casino in Highland, Calif., agreed to continue using Global’s products and services. (Contact: Global Cash Access Inc. 702-262-5003)
Global Payments Inc. will be providing merchant-acquiring services to retail and restaurant merchants of Diversified Acquiring Solutions Sales Corp. (Contact: Global Payments Inc., 770-829-8245)
JP Morgan Chase & Co. says that it’s issuing a Visa card for BP North America that features a five percent rebate on BP purchases, two percent rebates on most travel and dining purchases, and one percent on most other card purchases. (Contact: JP Morgan Chase & Co., 302-282-6150)
P&H Solutions says it’s expanding its Enterprise Enrollments product adding a small business front end that allows them to enroll in the Web Cash Manager Suite. (Contact: P&H Solutions, 781-235-3424)
SVPCO – Electronic Clearing Services,says that BB&T is now exchanging and settling check images through the SVPCO Image Payments Network. (Contact: SVPCO, 917-576-0957)
Tier Technologies Inc.’s Official Payments Corp. unit says the Minnesota Association of County Auditors, Treasurers and Finance Officers (MACATFO) recently launched a Tier-built, online portal Minnesotans can use to make electronic property tax payments. (Contact: Official Payments Corp. 571-382-1048)
Washington Mutual Inc. launched WaMu Free Checking, which features 100% online approval and opening. The offering includes: free ATM cash withdrawals; free checks for life; one free OD/NSF fee per year; a free gold debit MasterCard with rewards; free outgoing wire transfers; free ID theft services; and free e-alerts on account events. (Contact: WaMu, 212-326-6075)
Wausau Financial Systems says First Data Corp.’s REMITCO unit is using Wausau’s ImageRPS product for remittance processing at REMITCO’s lockbox operations. (Contact: Wausau Financial Systems, 715-241-4616)
Illinois-based West Suburban Bank <westsuburbanbank.com>, which offers an array of prepaid card services through its subsidiary, Prepaid Solutions USA <prepaidsolutions.com> is promoting payroll cards to employers.
The powercash card website, powered by FundXpress <portal.fxfn.com/c2wsbli>, includes a surcharge-free ATM finder that points to nearby machines within Allpoint's 32,000 ATM network <allpointnetwork.com> (click on inset for closeup).
Analysis
The surcharge-free ATM is an important benefit for payroll card clients, because it allows them to point their employees to ATMs where they can withdraw their paychecks without an additional charge.
—JB
One day after SunTrust announced free credit monitoring for checking customers (see NetBanker May 8), PayPal launched a similar service for its 50+ million U.S. account holders (see landing page below for details). Both services use Equifax to power alerts based on credit bureau info. 
However, SunTrust includes one free look at the customer's credit report. PayPal users would have to pay for that, or sign up separately at <annualcreditreport.com> to see their report free of charge.
While SunTrust bends over backwards trying to upsell users into a more comprehensive fee-based option, PayPal takes the high road, at least initially, simply redirecting users to an Equifax sign-up form devoid of sales pitches (click on screenshot below for closeup).
However, we expect the upsell offers will be along shortly. We'll keep you posted. As a previous Equifax credit-monitoring customer, we've witnessed the company's aggressive email marketing schedule.
—JB
Usually, when designing targeted offers, you focus on what you know about the prospect. Where do they live? What products do they use? What's their balance? What if you wanted to offer a product only to folks you know nothing about, such as new visitors to your website?
Suppose you had a hot APY offer you wanted to make only to new customers to avoid cannibalizing that cash cow, the passbook savings account. Using cookies, you could avoid showing the offer to online banking users, minimizing their awareness of the product.
Apparently, Citibank is using this approach. In a routine visit to Citibank's website in mid-April using our laptop, we were surprised to see advertisements for its 4.50% e-Savings account dominating the website (click on inset for a closeup). When the high-yield product was announced (NetBanker March 29), many observers believed it was a stealth offer made through a new "Citibank Direct" entity.
But when we returned to the office, the offer had disappeared from the homepage. We had to click on the small "special offers" link to find it listed along with several other offers. Apparently, the cookies on our office PC, which identify us as a Citibank online banking user, triggered the website to load a different homepage. We confirmed this through testing on other PCs.
But before you use this tactic, realize it has significant drawbacks. First, it doesn't work with users who delete or disable cookies, estimated to be as high as 40%. Also, an online banking user visiting from a different location, or with a different browser, will also see your offer.
There is also the risk of your clever marketing being outed to the press and public, which may find the practice deceptive (see SmartMoney, April 2006). Finally, you may be teaching users to game your system, deleting cookies more often, entering different zip codes, and so on. This could hinder your ability to deliver targeted promotions to the customers you DO know something about.
—JB
Note: Citibank isn't shy about putting the offer on Google, where it shows as the top paid result on searches for "Citibank" (see screenshot right).
SunTrust launched a new checking account acquisition strategy built around free credit-report monitoring (see personal homepage right). And this is not a low-budget identity-theft "insurance" policy (see PNC Bank, NetBanker Feb. 3 and Washington Mutual, NetBanker, Nov. 7, 2005), but full-blown Equifax Credit Watch Silver costing $6.95/mo or $50/year at the Equifax website.
Credit Watch Silver includes:
How it works
SunTrust is offering the free monitoring on most of its checking accounts, including its standard $9/mo account that is fee-free with a $1500 minimum balance. The free offer is not available to "free checking" or "senior checking" customers. However, they can buy it for a discounted rate of $3.45/mo or $35/year, a substantial discount from the regular price of $6.95/mo.
Of course, customers will have to wade through relatively gentle up-sell pitches for Equifax Credit Watch Gold, which will cost customers $6.95/mo or $70/yr, about one-third less than the list price of $11.95/mo or $100/yr; or Gold with 3-in-1 Monitoring for another $30/yr. Also, customers that want to extend the Equifax Silver coverage to both members of a joint account will have to pony up an additional $35/yr.
Credit Watch Gold includes:
Checking account customers must enroll for the free service at a co-branded Equifax website. It's a jury-rigged sign-up process that requires the use of an offer code that includes the customer's 13-digit SunTrust checking account number.
New customers must first open a checking account, then enroll at Equifax at least two days later. SunTrust offers online account opening, but there is no link to an online option from the credit monitoring landing page (click on inset for a closeup).
Analysis
This is an excellent value for SunTrust checking customers and could potentially have little out-of-pocket cost for the bank. The bank's costs depend on four factors:
The only real problem with the program is that it is not integrated with online banking. The separate enrollment and sign-on make it a hassle to use (of course, this holds down the bank's costs). We expect other banks to offer similar programs during the next 12 to 18 months.
—JB
Worldwide electronic payments are set to double over the next four years and will outpace the growth of the global economy, according to a Global Insight study sponsored by ACI Worldwide Inc.
Also in the study: The United States writes ten times the number of checks (35.25 billion) as France (3.7 billion), which writes the second-largest number of checks. And while the United State currently has the largest global share of electronic payments measured by percentage—31.5 percent, compared with the second-place United Kingdom’s 8.8 percent—the U.S. compound annual growth of electronic payments trails nine countries, including Poland, Mexico, and Russia, and is only about equal to worldwide transaction growth. 0Charts can be seen by following this link, courtesy of ACI Worldwide: http://www.aciworldwide.com/pdfs/2006_Payments_Market_Study.pdf
Much of that growth will take place in the world’s emerging economies, especially China, India, and Eastern Europe. This is partly because those economies are still largely cash-based, and any measured growth in electronic payments reflects expansion from a small statistical base. But it’s also because as emerging economies grow, increasing numbers of payments are made electronically, while much of the paper that needs to be wrung out of the global payments system originates in the United States.
While Europe, Canada, and the United States continue operating what are, at best, enhanced legacy systems, developing regions are installing the latest payments technologies. Trends taking shape today suggest that going forward, the world’s emerging economies will enjoy the benefits of advanced-payments technology, allowing stronger and very competitive financial institutions with greater liquidity to develop and grow, while the world’s established economies, constrained by slower payments processing, will experience some erosion of their current dominance.
This result will obtain because modern payments processing is more efficient and less expensive than payments processing on legacy systems. In turn, this creates larger operating margins and greater profits for institutions not wrestling with cobbled-together legacy systems.
Institutions free of the relative operational constraints of such legacy systems also have access to better and more timely portfolio information, which in turn creates more balance-sheet liquidity and more effective risk management.
As a result, such institutions will qualify for the lower-risk capital requirements permitted under the Basle II accords, giving these institutions—and their customers—more money to invest or lend. Resources like that will enable both the institutions and their customers to be more competitive on the global stage, probably at the expense of U.S., Canadian, and European institutions and businesses.
“There’s certainly a need for some reinvention and recapitalization on our part in order to bring things up to a more competitive level,” says Mark Lauritano, Global Insight’s managing director of the lending and payments practice. “The margins are shrinking, which makes it more difficult (for the legacy system-based institutions), and it’s a big challenge, I think, for players in that industry.”
Going forward, and even though the operational risks and costs implicit in meeting the challenge posed by more modern payments systems are large, Western institutions have little choice but to make these investments, because India and China will be able to be quite aggressive on the world stage.
An institution with the modern risk management systems made possible by advanced payments and reporting mechanisms can, for instance, bid more aggressively for large loans, because they can more finely granulate any portfolio risks. That allows them to accept tighter margins, and thereby edge out less well-supported competitors.
The danger to Western economies posed by such modern systems in the hands of our competitors—but not in ours—is even more fundamental than mere business lost, thinks Lauritano, if Western institutions continue to outsource their operations to the lowest-cost provider.
“It’s definitely a competitive threat down the road, but you also have to wonder about the (national) security questions about having all your processing done in China or India,” he says. ”There are certain factors that will prevent a wholesale movement of transactions away from this country, but that having been said, there’s a certain class of transaction that will just go to the lowest-cost provider. I think it’s definitely something people in the industry are paying close attention to, and need to, to position themselves down the road.”
One horrible example: If India and Pakistan go to war again, India could easily choose to punish us—if we tilted towards Pakistan because of the war on terror—by curtailing, or merely slowing down, our access to our own payments transactions. Similar calculations based on perceived national interest could affect other nations, should we begin diversifying our outsourced operations from India.
As a result, thinks Lauritano, Western institutions need to start making the large but necessary investments implicitly called for in the study.
“One of the takeways of the study is that despite the relative growth patterns that are emerging by region, it in no way suggests that the level of investment should follow the same relative patterns,” he says. “There is a need to continue to invest and upgrade, because many of the emerging markets are getting the latest technology, and that will put them good position on a global competitive basis.” (Contact: Global Insight, Mark Lauritano, 781-301-9123)
The new headphones for my son’s eleventh birthday arrived last week with the usual advertising fliers dropped into the Amazon.com box. One of the three products caught my eye, a 4×6 glossy sheet advertising Citibank’s 4.5% e-Savings account. 
It looked much like their online ads with a blue-and-white theme emphasizing the APY (see right).
9
On the back, four benefits were highlighted:
Notice how the 13 words of benefits included “free” twice, “online” twice, along with the positive buzzwords “wireless,” “fraud protection,” and “check images.”
9
The bank used an easy-to-remember URL <offer.Citibank.com> with offer code CSA2 (click on inset to see the Citibank offer site prior to inputting the offer code). The fine print contained the usual requirement that it was not available in Citi branches. Interestingly, the bank elected to forego the usual toll-free number option.
—JB
Marketing Database –
If you'd like to learn more about past interactive financial marketing campaigns, check out the Interactive Financial Marketing Database from our sister publication, the Online Banking Report.
Some people think they’re the bridge to the future; some think they’re a fraud. But whatever your opinion, healthcare savings accounts (HSA) and flexible spending accounts (FSA), and the payments streams they entail, will be a reality in the U.S. healthcare system for the foreseeable future. And since many employers and providers are accepting various cards as payment vehicles, the system needs an integrated information network that includes authorized payments, says Cynthia E. Burghard, a senior analyst at Gartner Inc.
The technological challenges alone to creating such a system are daunting. A workable system would need to, at a minimum:
Such a system doesn’t exist now, and building it won’t be easy, she says. Full, national integration is years away. But by 2008, she thinks, the company that creates a workable model, at least for a single health care system, will have a significant edge over its competitors as the two sorts of accounts gain traction in the healthcare marketplace.
“It’s about interoperability of existing systems and connecting the parts together,” she says. “We need standard (computer) language, so that when you’re trying to determine the eligibility of an individual, and determine how much is in an HSA account, there’s a common definition of what that request and answer is going to look like anywhere you go.”
A comprehensive, card-based HSA/FSA payments system will be a unique beast, explains Burghard, because it’s not just about the payment: Included in any message will have to be the patient’s medical history, as well as the ability to operate in real time, rather than next-day—the current model.
“The challenges that exist today are that the health care industry is not a real-time industry in terms of payments,” she says. “The bulk of the physician-office market is small offices with less than five physicians (where) the ability to manage real-time transactions doesn’t exist, and the willingness to invest in technology that accepts (real-time treansactions) doesn’t exist.”
This is a handicap, to say the least, since today a patient standing in front of a health care worker is treated first, while the paperwork follows. There’s no way to tell if the patient has the money in their HSA/FSA account to pay for treatment, or is even authorized by their insurance provider to receive certain treatments. As a result, the practice has no way to know if it will receive the insurance and co-pay amounts due it.
And, as things now stand, finding out can take a week to process—all after the expense has been incurred; if there’s no money to pay, the doctor eats the loss. The way to avoid that outcome, thinks Burghard, has to be a real-time system, even if it would be pricey; the alternative will be to persist in the sort of waste—in time, effort, and treasure—that threatens to drive the United States into bankruptcy as the population ages.
This is especially true because about 95 percent of healthcare expenses are incurred in the last 5 years of life, at which point the bills become very large. As a result, an account could be quickly drained, even if the patient has good medical insurance and is merely using their HSA/FSA account for their co-pay deductible. That would limit, to say the least, the ability of the hospital, physician, or pharmacy to actually provide the necessary services. An intelligently constructed, card-based system could avoid these dilemmas, posits Burghard.
“There’s the technology barrier on the physician side, and there’s the complexity of the insurance systems, which are very different from company to company,” she concedes. “In a typical financial transaction, you take your card anywhere and it’ll work, but there’s no similarly simple system in the medical industry, so that the information from the insurance company is readily available” to the provider when the patient is awaiting treatment.
This is a long way from debiting a retail transaction at the point of sale, but health care providers—including the vast insurance infrastructure—need to solve the technical challenges. According to Burghard, medical practitioners have few alternatives to creating such capabilities at the medical point of sale; if they do nothing, the system will continue to careen out of financial control—taking the nation with it.
For all its benefits, choosing to build such a system in this country would create a very large and expensive edifice, financial and otherwise. But such a system is necessary to avoid choices and results that would be even worse.
The solutions carry with them very large political and ideological elements, which tend to shut out reality in favor of arguing for an ideal model for the future, or resurrecting an idealized past. But for payment providers, these political issues are secondary; even if the country shifts to a government-sponsored, single-payer model—perhaps based on the Veterans Health Administration—the same information would need to be provided to a healthcare provider to create maximum efficiency and to minimize the fiscal impact of an aging population.
For Burghard, the interoperability issue is the biggest challenge. And by interoperability, she doesn’t mean one overarching system that subsumes the Kaiser Permanentes and Humanas of the world into a wholistic universe.
“That’s in a perfect world,” she says. “Let’s get it within the Kaiser system or the Humana system first.” “Meanwhile,” she adds, “it would be very nice, in the next 18-to-24 months, to use the third stripe on a mag card in some sort of efficient way to improve eligibility verification and real-time claims.” A payments company that can offer a medical practice something like that, thinks Burghard, will have a green field sales opportunity. (Contact: Gartner Inc., Cynthia Burghard, 975-323-6048)
