Indian Bank Core Conversions Show It’s Doable

You would think American and European banks would be snapping up the modern core processing platforms they need to comply with Basle II and SEPA (Single Euro Payments Area), and enjoy better operating margins in the bargain. Instead, they seem to be reacting to the prospect like someone facing a flu shot.

And yet the recent experience of India’s major banks in switching from what amounted to no core systems at all to the most advanced platforms available, proves that it’s not so awful, says Robert Hunt, research director at Tower Group’s retail and wholesale banking group.

The objections of Western banks tend to be internally focused, and not a reflection of the real problems of conversion, he says. “What banks need to do is to create a vision of their future operating environment, and adopt a plan of how we get there from here,” he says. “It’s absolutely doable. I would not minimize the fact that there is risk, but once you have a direction to go in, and find the right partners, you can manage that risk. And that’s proven in these (Indian) banks.”

Hunt recently studied the conversion of India’s six largest banks from a 1960s-level bank operation with little or no central computer platform to real-time, integrated, modern platforms, a process involving 240 million accounts comprising $220 million in assets (10 billion rupees).

The results were dramatic: Before conversion, the institutions were deeply attached to in-branch banking with teller-based transactions accounting for 94% of typical bank transactions. Today, that figure is 25%. Now, 38% of transactions are conducted at ATMs and 27% over the Internet.

This impressive result is even more astounding when you consider that much of India’s population still lives in rural villages, far from modern conveniences like reliable telephone service. But the task was achieved with minimal pain, while Western banks are still dithering.

The Indian process began in 2000, when ICICI, the only private bank in the group, began grabbing share from its state-owned rivals. Since ICICI is based in Bangalore, India’s Silicon Valley, this was a serious blow to the state banks. Bangalore is the engine of India’s explosive economic growth. It’s also home to much of India’s middle class, which is roughly the size of the U.S. population. These tech-savvy customers, many of whom spend all day making their living in the global economy, were flocking to the only institution in India that gave them the sort of retail-banking environment they’d grown used to while attending school in the West.

Naturally, the nation’s most important banks wouldn't allow an upstart to walk away with the most important sector of their country, says Hunt, and they turned to global consultants to help them make the switch. Boston Consulting, Gartner Inc., Hewlett-Packard, IBM, Infosys, and Tata Consultancy Services helped them install BANCS, IBM, iFlex, and Infosys UNIX systems, and they all went live within the past year. No unreasonable problems have been reported to date.

A similar story is playing out in China, which is building a modern banking infrastructure based on wireless telephony, and what is probably the most advanced wholesale banking system in the world. That system was built in the 1990s with much Western help. All payments information goes through the Bank of China.

These experiences are distinctly different from that of the West, where deeply entrenched legacy systems need to be replaced. European banks must invest an estimated $10 billion by 2010 to create the SEPA. In the United States, the nation’s largest banks stand to save 200 basis points in regulatory capital if they can demonstrate to the Bank of International Settlements that they possess the sort of real-time, risk-management systems they must have to comply with the Basle II regime by the end of 2007.

And yet, reports from the field indicate that progress is slow to nonexistent. We hear that European banks are slowly beginning to move, but in the U.S. the very large banks that would stand to benefit the most by Basle II compliance have not. One major core processing company reports that 50% of the European banks they approached about selling new systems backed out of deals after due consideration. Instead, that company began selling to individual departments. This will create the same sort of hodgepodge that is hampering these banks today. Similar stories are told about U.S. banks.

This is puzzling. The Basle II guidelines were created because the world’s big international banks lobbied for them, arguing at the time that they possessed such advanced risk-management systems that they could safely operate with less risk-based capital than was required in the Basle I guidelines. And yet CitiGroup, which has replaced all its overseas branch platforms with modern i-Flex systems, has not announced plans to overhaul the systems it cobbled together over the years. Rumors persist that Citi’s core systems are the same mainframes that Sandy Weill bought when he acquired Commercial Credit Corp. in the 1980s, and used as Citi’s foundation.

We expect that the Western banks will eventually come around due to competitive and regulatory requirements. But it’s difficult to understand why it’s taking so long. (Contact: Tower Group, Robert Hunt, 732-768-7871)

Debitman Card Co. Poised for Growth

Debitman Card Co. made three important announcements this week:

  • Raised $8.7 million in a Series B financing from Cardinal Venture Capital, Selby Venture Partners, and HSBC Retail Services
  • Received a U.S. patent on the company’s idea of an interoperable, merchant-based debit system
  • Designated HSBC to market Debitman to its customers

 

Debitman_logoDebitman has been struggling for years to make good on the promise of its merchant-based, debit-card network. However, despite having built a significant merchant base that includes some of the nation’s largest retail chains, the market’s reaction so far has been less than enthusiastic. To many, it seems to demonstrate that merchants really aren’t so much looking to save on card fees in general, but rather to save on MasterCard and Visa fees specifically.

 

Armed with support from HSBC, the new financing, and patented debit system, Debitman may finally have achieved a breakthrough. HSBC, one of the world’s largest issuers, has consistently proven its willingness to innovate in payments. While it may just be hedging its credit card bets, gaining access to HSBC’s customer base is an enormous win for Debitman, and it could form a base for real market penetration.

 

It’s unlikely HSBC North America and its innovating chairman, Bobby Metha, were just acting on a casual whim when hooking up with Debitman. The bank must sense an opportunity. Metha, after all, came to HSBC after a long career at Boston Consulting, and he knows how to think for himself.

 

It’s likely that Metha put his finger into the wind and felt it moving against credit cards. And not so much because of lawsuits fermenting in Judge Gleeson’s courtroom in Brooklyn, but because consumer behavior is changing. In the U.K., debit-card spending outstripped cash spending last year. Similarly, in the United States, credit card balances are falling as consumers pay down or convert credit card debt to equity-secured balances.

Another 26 Million Social Security Numbers Enter “The Public Domain”

The recent revelation that the Veteran’s Administration lost the data files of more than 26 million veterans when an employee’s laptop was stolen in a burglary is just another reason for payments providers to tighten internal security standards. It’s also another reason to stop complaining that disclosure, not the loss of the files, is the real problem.

In the VA case, it took three weeks for the loss to come to the attention of the agency head. Even then, he stumbled across it. Apparently, nobody had thought the event important enough to tell him. Naturally, he was vilified before Congress. But the real problem was in cyberspace, where the number of Social Security numbers available for sale more than doubled in the weeks following the burglary.

The liabilities created by this theft—and the hundreds of others we’ve read about in the past 18 months—are not merely theoretical. The victims will be dealing with the effects for years, and financial institutions have a duty to make them whole.

–AR

Email: US Bank “Spring Clean Your Finances”

Emailmarketing_logoEvery month we receive dozens of emails from the many financial institutions where we have accounts and also, increasingly, from non-customer mailing lists at others. As part of our expanded coverage of email marketing, we plan to post many of them here. You will be able to access the entire sample collection by clicking on the "Email Archives" subject on the right-hand navigation. Alternatively, individual emails will also be filed within their pertinent product areas, in this example, "Loans & Credit" and "Personal Financial Management."

Today's message is from US Bank <usbank.com>, which sent the following solid, but fairly boring financial organization email to current customers.   

Here's a screenshot of what appeared in my inbox. You can also view the clickable version by following this link

Usbank_email_heq

On the landing page for the "Credit Card Clean Up" link in the blue-shaded area on the right, US Bank offers a useful calculator to determine the benefit of reducing credit card debt (see below).

Usbank_email_springcleaninglanding

If you'd like to learn more about the financial email marketing, check out Email Marketing in Financial Services: Leveraging the Inbox from our sister publication, the Online Banking Report.

Profiting from Preauthorized ACH Debits

Bai_transpay_logoold_1We spent the past few days at BAI’s TransPay Conference <bai.org>. It featured much talk about the displacement of paper checks with electronic transactions. This is not a new story, but the implications for banks make good fodder for presentations. We'll cover a few of the key points in this and subsequent articles.

Retention Benefits of ACH

Echeck_1Common sense tells you that if bill pay is good for customer retention, then preauthorized debits would be even better. They are usually more difficult to setup and much harder to unravel. However, we'd never seen numbers to back this up until yesterday. In a presentation by Fiserv’s Mark Sievewright, he cited internal figures from a national retail bank first presented by Dove Consulting <doveconsulting.com> that quantified attrition rate by type of ACH payment used:

                               Annual           Annual Net
    ACH Usage      Attrition Rate  Income (pre-tax)
No ACH activity            37%                $190
ACH deposit only          7.9%               $360
ACH deposit and pay    3.4%               $470

Implications
It costs just a few pennies per month to process preauthorized direct debits, whereas pay-anyone bill payment can cost as much as $5/month. If you have 25,000 bill-pay customers, you could add $1 million to your bottom line by reintroducing a $3.95/mo fee for the privilege. However, it won't be easy putting the free-bill-pay genie back in the bottle. You'll have to go slow, introducing fees to certain segments, such as lower-balance checking customers, or checking customers who have not opted in to electronic statements.

For more on alternatives to free bill pay, see Online Banking Report #109, "Pricing."

JB

Remote Deposit Capture Creates Buzz at TransPay

If there was one universal recommendation from BAI's TransPay Conference it was this:

Offer remote deposit capture NOW!

Remote deposit capture, the scanning and depositing of checks from the user's own location, rivals online banking in terms of utility for businesses of all sizes. In an interesting general session yesterday, three small business principals from companies in the $5 million to $10 million category were on stage with two bankers. When the subject of remote deposit capture came up, two business owners were ready to install the system immediately. The third only received a few checks each month and wasn’t interested, however he said his spouse who runs a retail operation is very interested.

The business owners were willing to pay a considerable fee since it would save many hours of labor each week. And maybe more important, they liked how it made remittance processing easier to manage. With small staffs, they often have to find replacements to make the "bank run." And sometimes checks sat idle for days at a time when someone was unexpectedly sick.

Mainstbank_remotedeposit
Main Street Bank <mstreetbank.com> features check scanning in its Main Street Connect package.

The predicted remote deposit capture adoption curve resembles online banking in the late 1990s. Celent estimates there will be 100,000 remote locations by the end of this year, about 5% penetration of the corporate market. In five years, the research company predicts more than 1 million business locations will use the service, along with a quarter million branch locations for 1.4 million total locations in 2012 (see below).

Remotedepositcapture_celent_graph
Source: Celent, 5/06

So far, only 50 or so banks are offering, but all top-20 banks either have it now or are in the final testing phase. By this time next year, as many as 500 banks may offer it, and it will soon be an expected part of a full-service, business-banking offering.

JB

The Right Stuff for AML Means the Right Software

One phrase says everything about anti-money laundering (AML) enforcement: Mission creep. Since 9/11, federal agencies supporting the financial war on terror have developed a number of new regulations, apparently designed either to create the perfect trap for every money-laundering scheme, or to build its power base.

Whichever it is, the burden to comply falls on financial institutions of every stripe. And not every new regulation is the fault of over-zealous bureaucrats: The fertile minds of money launderers are always finding new ways to do business, and government needs to keep up.

The real battle with money laundering is a matter of forensics, not mere compliance. At the end of the day, going after people dumb enough to use banks or money-service businesses is the anti-terror equivalent of busting street dealers: Moving real money can’t be done $9,000 at a clip, and it’s easier to get money from Miami to Bogota or Peshawar by smuggling it, taking out life policies on dying relatives, or buying a shack for $10 million, than trying to evade the ever-narrowing gaps in the established financial system.

Nevertheless, even if AML compliance is more a matter of politics than of having any real effect, it’s a serious matter. Non-compliance can mean big legal bills, a loss of reputation, and multi-million dollar fines—or even being shut down—for institutions foolish enough to give the task short shrift. And with most institutions processing thousands—if not millions—of payments daily, this task is clearly beyond any sort of manual monitoring.

The result, says Eva Weber, an Aite Group analyst, is that financial institutions must take the necessary steps to satisfy the regulators. "The size of the problem is continuing to grow, and not going away," she says. "Regulators are always saying that the focus for banks should be on preventing money laundering, and not necessarily on compliance, but of course, one can’t exist without the other, so the focus has been heightened on AML compliance."

As for the cost, expect no slack from Washington: "It’s natural for regulators to expect more from financial institutions when they know there are many tools available to them," she says. "They’re mindful of the cost, but the goal of AML compliance is, in their minds, more important than the price tag."

That being the case, those few banks still struggling with the task—and the many non-banks about to be faced with it—had better get their ducks in a row. There really is no way out of it, and any bank chairman who doubts it need only read one of the many cease-and-desist orders on the website of the Office of the Comptroller of the Currency (OCC).

Compliance means more than a software installation. AML forces change in managing a typical bank over and above computer issues. To take just one example: Almost every OCC cease-and-desist order includes a directive to train staff in AML issues, including being familiar with a written AML policy and procedures manual.

Software is unavoidable. The job is just too big. "Compliance officers are really stretched these days, because they’re the sole person responsible for complying with all those regulations, and it’s too time consuming to go through all a bank’s transactions, manually go through all the lists, and check for all the red flags," says Weber.

However, software is not good enough, and an institution that over-relies on it, and does not go to the trouble of knowing their customers—usually number one in any compliance regimen—is asking for trouble.

Consider, for instance, a wine importer who decides to hold a November nouveaux Beaujolais festival, and orders 40 cases of wine from 10 vineyards for roughly $9,000 each. That transaction would be flagged by any software package as suspicious, and generate a Suspicious Activity Report (SAR). But automatically sending it on to the Financial Crime Enforcement Network (FinCEN) would only lose you a customer, and annoy FinCEN. Appropriate procedures need to be in place to avoid a stumble like that.

"The most common reason for filing a SAR is structuring (making numerous payments just below the reporting threshold), but it’s not always people looking to avoid filing a CTR (currency transaction report). A lot of times, it’s just the nature of their business," says Weber. "It’s difficult for a larger institution, but you should know your customer pretty well, and hopefully, you’ve already spoken to them about this particular sort of incident. But you still need to investigate it."

The cumulative effect of AML implementation shouldn’t actually change the bank, she adds, as long as the bank has already been vigilant. "If you haven’t been doing this already, then this is going to hurt," she says. "Training your staff about what the red flags are and the importance of complying, and that any form that needs to be filed, is filed, is too important to ignore."

"Everything should begin with your risk assessment," she adds. "That means knowing what sort of transactions your customers execute and what sort of businesses that you’re dealing with, so even when you implement the technology, things shouldn’t change that much. You should already know what you should be looking out for."

At the end of the day, says Weber, the AML task is a chore that’s only going to grow, if only because regulators will be constantly thinking up better ways to do their job, and look better before a Congress hungry for ways to look like it’s doing its job. "The enforcers are always going to want more information, and not less," she says. (Contact: Aite Group, Eva Weber, 210-688-0123)

Huntington’s Online Game Boosts Blue Jackets’ Affinity Marketing Efforts

Huntington_bluejacket_game_1As part of its sponsorship of the Columbus Blue Jackets National Hockey League franchise, Hungtington Bank has created an online Flash game. The simple hockey-themed game is easy to play and apparently addictive, at least for "Chuck Norris" who had all five weekly high scores, ranging from 250 to 350 times my score of 1,162 (see left).

At the conclusion of the 45-second game, users are invited to play again or "challenge a friend," a great way to spread the word virally. The bank's logo in the upper right clicks through to its regular homepage.

Huntington_bluejacket_homeAccess to the game is from a "Blue Jacket's Banking" page <huntington.com/ bluejacketsbanking> at Hungtington (click on inset for a closeup). The bank dresses up its checking accounts with Blue Jacket checks, ATM card, and mousepad. Any of the bank's checking accounts can be ordered with Blue Jacket adornment.

Unfortunately, the online application process requires "blue jackets" to be manually typed in the promotion code field or the customer will receive regular old Huntington colors.

–JB

Bottomline Technologies Slips but Damage May Be Slight

Bottomline Technologies Inc. shares have slipped since rumors began circulating on Wall Street in early April that it would miss its expected quarterly earnings. When the firm finally announced on April 14 that it would miss its earnings estimate by as much as $0.07 per share, Bottomline’s stock fell 17 percent in one day. Shares in Bottomline closed last Friday at $10.17, down from $14 per share in early April.

NCR Corp. says that Buffalo’s M&T Bank bought 390 NCR Personas 77 ATMs. Separately, NCR says that Europe’s KBC Group will replace its current ATMs in Belgium and France with NCR Personas M Series ATMs. (Contact: NCR Corp., 937-445-3784)

US Bank says it’s issuing a Rewards Visa Platinum Card for Sierra Trading Post and for Sportsman's Warehouse. (Contact: US Bank, 612-303-0732)

ACI Worldwide says it has a new version of its BASE24-es product designed for the British market. (Contact: ACI Worldwide, 402-390-8906)

bcgi says it has a reseller agreement with Telogic in which Telogic will be offering bcgi’s M-payments platform in Indonesia, Malaysia, Thailand, China and other Asian markets. (Contact: bcgi, 781-904-5026)

 

CheckFree Corp.’s CheckFreePay unit says that Boost Mobile’s eRe-Boost “top-up” service is available at some CheckFreePay walk-in locations. (Contact: CheckFree Corp., 678-375-1595)

 

Electronic Clearing House Inc. says it hired Karl Asplund as senior vice president of sales, a new position. Asplund was last senior vice president of Genpass Technologies. Also, Ryan Granard joined the company as vice president of datacenter operations. (Contact: Electronic Clearing House Inc., 800-262-3246)

 

Hypercom Corp. says its Optimum P2100 PIN-entry payment device was qualified for Sociedade Interbancaria de Servicos' (SIBS) operations in Portugal. (Contact: Hypercom Corp., 602-504-5383)

 

Netvantage says that Merkle will be using Netvantage’s ItemAge payments engine for the lockbox operations Merkle runs for charities. (Contact: Netvantage, 301-459-9700)

 

Misys Banking Systems says that China Bohai Bank is using Misys Opics and its risk management module, Misys Opics Risk. Bohai is a new bank in China.(Contact: 852-2230-2302)

 

Open Solutions Inc. says that Pittsfield, Mass.-based Greylock Federal Credit Union is using its Complete Credit Union Solution. (Contact: Open Solutions Inc., 860-652-3153)

 

Payment Processing Inc. says that United Systems Technology Inc. will be re-selling Payments Processing’s credit card processing for utilities billing. (Contact: 510-795-4988)

 

Paymetric Inc., says it hired Ken Naumann for a new position, senior vice president, sales and marketing. Nauman was last vice president of worldwide sales for Guidance Software. (Contact: Paymetric Inc., 713-895-2066)

 

Viewpointe says that SunTrust is the first bank to use its image-exchange connection with the Federal Reserve. (Contact: Viewpointe, 704-602-6654)

 

VeriFone Holdings Inc says that MICROS Systems Inc. has integrated VeriFone’s Vx 670 mobile payment system into its MICROS RES 4.0. payments system and will be selling it on North American restaurants. (Contact: VeriFone Holdings Inc., 508-283-4112)

 

 

New to Market

New deals and announcments for the past week.

NCR Corp. says that Buffalo’s M&T Bank bought 390 NCR Personas 77 ATMs. Separately, NCR says that Europe’s KBC Group will replace its current ATMs in Belgium and France with NCR Personas M Series ATMs. (Contact: NCR Corp., 937-445-3784)

US Bank says it’s issuing a Rewards Visa Platinum Card for Sierra Trading Post and for Sportsman's Warehouse. (Contact: US Bank, 612-303-0732)

ACI Worldwide says it has a new version of its BASE24-es product designed for the British market. (Contact: ACI Worldwide, 402-390-8906)

bcgi says it has a reseller agreement with Telogic in which Telogic will be offering bcgi’s M-payments platform in Indonesia, Malaysia, Thailand, China and other Asian markets. (Contact: bcgi, 781-904-5026)

 

CheckFree Corp.’s CheckFreePay unit says that Boost Mobile’s eRe-Boost “top-up” service is available at some CheckFreePay walk-in locations. (Contact: CheckFree Corp., 678-375-1595)

 

Electronic Clearing House Inc. says it hired Karl Asplund as senior vice president of sales, a new position. Asplund was last senior vice president of Genpass Technologies. Also, Ryan Granard joined the company as vice president of datacenter operations. (Contact: Electronic Clearing House Inc., 800-262-3246)

 

Hypercom Corp. says its Optimum P2100 PIN-entry payment device was qualified for Sociedade Interbancaria de Servicos' (SIBS) operations in Portugal. (Contact: Hypercom Corp., 602-504-5383)

 

Netvantage says that Merkle will be using Netvantage’s ItemAge payments engine for the lockbox operations Merkle runs for charities. (Contact: Netvantage, 301-459-9700)

 

Misys Banking Systems says that China Bohai Bank is using Misys Opics and its risk management module, Misys Opics Risk. Bohai is a new bank in China.(Contact: 852-2230-2302)

 

Open Solutions Inc. says that Pittsfield, Mass.-based Greylock Federal Credit Union is using its Complete Credit Union Solution. (Contact: Open Solutions Inc., 860-652-3153)

 

Payment Processing Inc. says that United Systems Technology Inc. will be re-selling Payments Processing’s credit card processing for utilities billing. (Contact: 510-795-4988)

 

Paymetric Inc., says it hired Ken Naumann for a new position, senior vice president, sales and marketing. Nauman was last vice president of worldwide sales for Guidance Software. (Contact: Paymetric Inc., 713-895-2066)

 

Viewpointe says that SunTrust is the first bank to use its image-exchange connection with the Federal Reserve. (Contact: Viewpointe, 704-602-6654)

 

VeriFone Holdings Inc says that MICROS Systems Inc. has integrated VeriFone’s Vx 670 mobile payment system into its MICROS RES 4.0. payments system and will be selling it on North American restaurants. (Contact: VeriFone Holdings Inc., 508-283-4112)

 

 

Ohio Savings Marketing CDs through AmTrust Direct

Amtrustdirect_homeOhio Savings Bank <ohiosavings.com> is marketing CDs through a direct-banking subsidiary, AmTrust Direct. The company is currently topping the 1-yr CD chart at BankRate.com with a 5.35% APY. Users can click through to the direct-banking site (see screenshot right) through an enhanced listing at BankRate.com.

The direct banking offer is only 35 basis points higher than the 5.00% offered at the parent, Ohio Savings, or its AmTrust Bank <amtrust.com> division.

JB

Union National Bank’s Gold Cafe

Unionnational_goldcafe_logoTalk about thinking outside the box: Instead of serving coffee in its branches, Union National Community Bank <uncb.com> is serving checking accounts in a cafe. Unionfinancial_goldcafe_pic_1The $400 million bank, headquartered in Mt. Joy, Penn., is using a strategy similar to ING Direct, except UNCB has gone as far as to remove its brand from the name, calling the financial store "Gold Cafe" (see picture right).

The cafe features a full retail coffee operation with coffee, lattes, tea, smoothies and so on priced at $1.45 to $4.45 and pastries and desserts from $1.75 to $2.25. The coffee service is run by Lancaster County Coffee Roasters.

Unionnational_goldcafe_homepageThe branding has also been extended to its website, GoldCafes.com, where the concept is supported with an emphasis on the lengthy hours, 6:30 am to 7:00 pm, Monday through Saturday, and noon to 5:00 pm on Sundays, 82 hours in total. The website also features information on an iPod giveaway during its May 11-13 grand opening. The only banking product mentioned is free checking in the lower-right corner (see screenshot).

The branch, er cafe, located near a major community college in Lancaster, Penn., includes a coffee bar, couches, an outdoor patio, fireplace, free Wi-Fi, and the ubiquitous plasma screen monitors. The bank has also created Sip, a "cultural newszine" available only in the cafe. A second cafe is set to open later this year in Centerville.

Analysis
We can't predict whether this concept ultimately works. Although we like the new-age branch concept popularized by Umpqua and others, this might be over the top. One of the biggest reasons to build branches is for their advertising value, placing the bank's brand in front of thousands of commuters and errand-runners each day. By calling it the Gold Cafe, the UNCB loses the normal branding value, but the highly unusual strategy will generate a large amount of publicity, overcoming the initial customer confusion of using a bank named "Gold Cafe." However, this is a unique situation that wouldn't readily work for other financial institutions.

Unionnational_goldcafe_homeThe initial website is just a single page (see above) and badly needs an upgrade to cash in on all the publicity. At a minimum, prospective customers should be able to get a virtual tour of the cafe and open an account online. The site will be heavily visited by banking analysts and reporters and should do a better job supporting the publicity it's bound to attract, although the parent's home page does include a series of photos of the new concept along with a Gold Cafe link in the main navigation (see screenshot right).

If anyone has a chance to visit the branch, let me know what you think of it.

JB