Transparency is the new black in banking

Banks need to refocus on their essential social and economic functions if they are to rebuild trust in the eyes of the public, argued the head of the UK’s Financial Services Authority in September. Lord Turner also called for a return to basics, rather than “over-complex products of no real use to humanity”.

It’s a message that seems to be resonating with the industry, with tentative steps being made to simplify messages and fee structures.

ANZ has put simplicity at the heart of its new branding strategy, but only time will tell if it is able to deliver on the promise. The bank’s decision to remove 27 fees on personal accounts was necessary and goes part of the way, but more interesting is the admission from ANZ head of brand Louise Eyres that: “Unless we could be transparent about it (the fee), we removed it”.

It seems transparency is the new black in banking – it’s getting airplay in Bank of America’s latest ad campaign, with the bank also extending its “Clarity Commitment” – a one-page summary of key loan terms designed to let borrowers review their loan details in plain language, to its entire range of credit products.

Unfortunately, banks in the US face an uphill battle to restore their credibility as questions are asked about how bailout money is being spent, and the US Government probes executive salaries and bonuses.

In the November/December issue of Retail Banking Review (out Friday), we investigate how the CEO remuneration of Australia’s leading retail banks compares to others in the region and globally, and the trend towards more long-term performance incentives. Our leading bankers are paid very well, with ANZ CEO Mike Smith leading the pack.

Earlier this year, the Australian Government asked the Productivity Commission to examine the remuneration of Australia’s top executives and directors. Discussion about executive salaries is expected to continue into 2010, following the likely December release of the Productivity Commission’s final report.

The Australian Bankers’ Association says there is no evidence in Australia to suggest executive salaries have contributed to excessive risk-taking and are inconsistent with performance. But in a global environment where less than one in three people trust the banking industry (Datamonitor), improved transparency of bonuses and other incentives is inevitable and necessary if the industry is to successfully improve its image.

Last month car maker BMW decided to arrest the widening remuneration gap by linking the bonuses of its top managers to those of its assembly line workers. In this issue of Retail Banking Review, Elton Cane argues perhaps if banks want to truly demonstrate a sustainable and reasonable approach to executive remuneration, they could bring the humble teller or branch manager into the equation too.

What do you think? Salaries may be frozen now, but should they be entirely restructured? What metrics or benchmarks should banking salaries be tied to? Will salary changes help restore faith in the industry in the eyes of the public?

PayPal dances with developers to drive innovation

Back in July , following a discussion with Jeff Carter (who is back in Australia for this month’s Innovative Marketing conference), I asked : What if a bank were to open up development of applications to others in the same way Facebook does?

The discussion Jeff and I were having revolved around the future-proof bank, and what banks will need to do to ensure their offering doesn’t become commoditised.

Not long after, PayPal, a business that has done a great job taking market share from banks around the world, announced it was planning to open up its platform to third party developers.

Launched officially this week at PayPal’s first developer conference in San Francisco, the Adaptive Payments API allows developers to build applications that enable payments from PayPal account holders to anyone with a web presence, be it a mainstream retailer or someone with a widget running on their Facebook page to collect donations.

At the launch, PayPal president Scott Thompson made an important acknowledgement: “The whole world is going digital, and the future of how we communicate, how we get information, and even how we transact, is in the hands of developers”.

Mint.com founder Aaron Patzer, who I spoke to following the sale of his business to Intuit, says, banks will always face a challenge getting the best talent to help build the best platform. “No developer, programmer or user interface designer out of school or, say, Apple, is going to go work for Citi or Chase. They want to work for Google, Mint or Apple.”

But what if you could tap the collective wisdom of freelance developers that wish to remain independent? PayPal is banking on this strategy, today announcing plans for an inaugural Australian developer program, kicking off in January 2010.

PayPal says the competition will challenge the Australian developer community to create the most innovative payment application using Adaptive Payments. It says the winner will receive a “substantial cash prize” to help them commercialise their application.

The move comes at a time when innovation in Australian payments is arguably at an all time low. So much so that the Reserve Bank is threatening the industry with regulation in order to get some movement.

PayPal may not be able to provide the answer to system innovation, but the concept of harnessing talent outside the organisation deserves more attention from the banking industry.

What do you think? Are we moving into a world where developers will hold more power? Is it realistic for banks to open up development of some applications to outside parties, and can their vendor partners play a role in doing this?

Online savings threatened by new prudential framework

The providers of Australia’s most popular online savings accounts are preparing to go head to head with APRA over proposed changes to prudential standards that could threaten their entire business model.

The regulator is updating Prudential Standard APS 210, which deals with liquidity risk management, to ensure it meets principles set by the Basel Committee on Banking Supervision in response to the global financial crisis.

Under the plan, authorised deposit-taking institutions will have to hold far more capital and liquid assets, and be more transparent about these holdings.

But the thing that has online brand owners worried is the assertion by APRA that Internet accounts are less stable sources of funding than branch-based accounts.

APRA is calling for an extra 30 per cent runoff for Internet deposits under the proposed new stress testing methodology.

The changes will have far reaching implications for online savings providers, particularly those that rely heavily on Internet sourced deposits for funding, such as ING Direct.

Bankers say the proposed revisions to the standard will be bad for competition – at a time when the big four banks hold more than 75 per cent of all retail deposits.

They also argue splitting out Internet accounts makes little sense given most customers use multiple channels.

The changes could see the viability of the entire online savings market challenged. In the same way interchange reform led to a rethink of credit card products, treating Internet deposit products differently for liquidity purposes could result in a reduction of products on offer, and pressure on already tight margins in deposits.

APRA is currently in consultation with the industry and will release a revised draft APS 210 for further consultation early in 2010.

What do you think? The global trend towards more transparent liquidity reporting is warranted, but will it drive unintended consequences?

Tales of customer service

Two recent tales of customer service from banks have shown that the luck of the draw when it comes to a bank and its staff has a lot to do with customer satisfaction.

Take the experience of Sundeep Kapur, Director Strategic Marketing - Ecommerce at NCR Corporation. While on a business trip to India he found himself without cash and his ATM card on a public holiday. His contacted his bank online explaining his circumstances.

The result? Within 15 minutes a branch manager had contact him to investigate the situation. Within an hour the branch manager was at his hotel providing him with some cash from her personal account. Kapur repaid the money a few days later after the ATM card situation was resolved.

His experience is reminiscent of a friends’ similar situation in Iceland several years ago. The ATM machine ate her card in error and she was left without cash on a weekend. She called her bank in Paris expecting lip service that it would be resolved once she had returned to France. Instead she was advised to wait and within 15 minutes the branch manager arrived and retrieved her card and stayed to ensure that she could successfully access her funds.

Branches remain an alien experience for many customers given the ease of internet and mobile banking. While banks endeavor to provide a seamless and high level of service across its branch network, ultimately it comes down to the people in each branch to embody that strategy.

Compared to the controlled and consistent environment of electronic channels, where technology may fail but the customer experience is replicated with each transaction, human interactions are fraught with inconsistencies.

Now to the second tale of customer service, one that is markedly different to the ones experienced in India and Iceland.

An established business undergoing a restructure required a new business bank account to be opened. The company directors attended the branch where they had their existing personal accounts. They were informed that the bank did not like their type of business; an online business.

They were informed that internet banking was possible and it was highly secure, unlike all other internet businesses which are risky. This was why this bank did not like online based businesses. Other questions were also met with curt answers. They were charged $40 for an ASIC search despite having all the documentation required to open the account. Needless to say this bank did not win the business banking account. Plus the personal accounts will now also be transferred. All this from Bank of Queensland, the bank that advertises that as every branch is run by a franchisee manager they understand small business.

No matter how grand the strategy, image and reputation can be undone in a single conversation. And of course thanks to these ‘risky internet businesses’, the world can now hear about this conversation.

Fee crackdown should drive innovation

They’ve done it in the UK, it’s headed to Australia, and they’re debating it in the US. Cracking down on bank penalty fees is all the rage in the developed world, as legislators ponder the fallout from GFC-induced industry consolidation.

Reduced penalty fees from Australia’s major banks came into force this month, although customers will have to read the fine print, as not all fees have been abolished by all banks.

When NAB became the first Australian bank to pre-empt new unfair contract terms and drop penalty fees entirely in July, it chose to give up $100 million a year in revenue. It was an acknowledgement from the bank that the days of dumb profits are over.

In the US, a market where banks will collect an estimated US$27 billion in 2009 on overdraft fees alone, Bank of America is facing a reshuffle of its business in the face of reduced fees. Last month it eliminated fees on overdrafts below US$10, a move which has many analysts asking: Where will the fees move to?

Locally, NABs competitors have been busy tweaking fees, but there’s not a marked difference between any of the major banks. Collectively Australia’s four major banks hold around 75% of all retail deposits, so any moves to reduce fees can have a significant impact on the overall market.

In the US the three largest banks hold a little less than a third of retail deposits, yet some analysts are still calling for the largest banks to be broken up into smaller entities. There’s also the likelihood that proposed legislation requiring banking giants to hold proportionately larger capital reserves could force them to break up. The plan has been called a “tax on size”.

With Australian banks running significantly more profitable operations than their US counterparts, there have been few calls from those in power for the banks to be broken up. Why try and fix something that isn’t broken?

But global pressure on banks to justify fees, combined with scrutiny on competition from policymakers, ultimately mean the business model for financial services must change. The margin on deposits is currently razor thin for many banks, so bankers will need to innovate if they are to find new ways to deliver the kind of value the customer of the future will be willing to pay for.

Customers, not regulation, will determine the fate of our banking industry. What do you think?

The wrap from Finovate 2009 - where were the bankers?

It’s sometimes said that New York has its back to the water. Manhattan may be an island, but you can wander the streets and avenues of the city for days without ever seeing a glimpse of the water that surrounds it.

Which is a shame, because it turns out the islands surrounding Manhattan are home to a thriving and now protected community of water birds. Quite an achievement given they live alongside a city populated by more than 8 million people.

Like the dive bombing, often imposing and somewhat predatory cormorants of Swinburne Island, a gaggle of innovators, venture capitalists, journalists and bloggers descended on Manhattan last week for the third annual Finovate conference.

The Finovate concept is unique in financial services events – organisers Jim Breune and Eric Mattson personally select the 32 companies that are given seven minutes to demo their wares, resulting in a hectic, but ultimately very efficient, 8 hours designed to help attendees “See the future of finance first”.

Sadly, like the New York locals and thousands of visitors that give only a passing glance to the waterways and islands of the city, only a handful of bankers took the time to attend Finovate to get an understanding of the companies they may be disrupted by, or could work with to bring new services to market in the future. Vendors, venture capitalists and bloggers made up the majority of the 400+ strong audience.

Of the Australian banks, only ANZ bothered to send a representative – something not lost on head of innovation Peter Dalton who was quite happy to blend into the crowd and soak up the learnings without competition.

The first expense to get cut in any downturn is often travel and conferences, but, as innovation writer Jeffrey Phillips (inspired by the Harvard Business Review) argues, cutting ourselves off from interaction with people in other markets and industries does little to foster innovation.

For those of you who missed Finovate, some excellent summaries are available including this from Techcrunch blogger Larry Chiang, and this from Visible Banking director Christophe Langlois who did a fantastic job conducting video interviews with the Finovate elite.

On the back of the sale of Mint.com to Intuit for US$170 million, Finovate saw renewed interest in personal financial management (I’ll be publishing my interview with founder Aaron Patzer in the upcoming issue of Online Banking Review).

However it is the broader theme of personalisation that seemed to be the driving force behind many of the companies seeking to hit on the next big thing in financial services. iGoogle-type dashboards, drag and drop functionality, and the ability for consumers to micro-manage their own data were common features on display at Finovate.

Anyone managing online banking platforms should take a look at the interfaces being continually developed by Backbase, Intuit, Mint.com, Simplifi, Strands, and Yodlee.

And if I were a venture capitalist, these are the top 5 companies I’d be investing in:

Bling Nation (www.blingnation.com – US$13.2 million raised, 28 employees)

Bling Nation enables consumers to use any mobile phone to pay for purchases at the point of sale. That’s right ANY mobile phone. How? By using special stickers containing RFID chips that can be attached to the phone to enable contactless payments.

Tap & go payment trials conducted by Bling Nation have seen 70 per cent of merchants in the trials accept the payments & 20 per cent payment option penetration

Contactless mobile payment trials in Australia have been limited to single bank/telco and card scheme tie ups which reduce the benefit to merchants. Bling Nation is helping to make mobile payments more universal. Of course the usual hurdles remain in the deployment of contactless readers and merchant acceptance.

Kasasa (www.kasasa.com – US$21.9 million in revenue, 164 employees)

Kasasa provides an aggregated marketing service for community financial institutions, helping them to compete on a national scale, but with localised marketing plans.

Parent company BankVue provides a platform of products, including an online savings offering that incorporates charity donations and rewards to promote customer loyalty.

By combining their marketing dollars the institutions that use Kasasa are investing in building their brands to a level where they can compete more effectively with the major US banks.

Mutual institutions in Australia have been trying to set up a similar collaborative marketing campaign for years, without success. Kasasa is a commercial model the industry could lean from.

Silver Tail (www.silvertailsystems.com - $US2.1 million raised)

Silver Tail provides online fraud detection capable of detecting the growing threat of man-in-the-middle attacks on online banking. The group’s Mitigation service manages the threat in real-time by detecting possible malware attacks and stopping funds transfers when fraud is suspected.

Fraud detection advances are the future for online banking fraud management as more institutions implement two-factor authentication and fraudsters become more adept at advanced attacks that bypass such point solutions.

SmartyPig (www.smartypig.com – 15 employees, more than US$250 million in deposits)

SmartyPig’s claim to fame is that it has managed to attract more than $250m in US deposits since launch, with zero advertising, and very little marketing.

SmartyPig allows customers to open goal-based savings accounts and invite family and friends to help them reach their goals using Facebook, MySpace, Blogger, and now Twitter.

SmartyPig has partnered with ANZ in the US and after recently hiring a new CEO is now on the lookout for other partner banks around the world as it seeks to expand through Asia and Europe.

The group is well-placed to capitalise on the growing trend towards saving emerging as a result of the GFC, and has achieved the envious position of being “a financial organisation that does no evil”.

Strands (www.moneystrands.com – US$55 million raised, 100+ employees)

Strands offers personal financial management solutions for financial institutions, and has successfully deployed its white label solution with Spanish bank BBVA. BBVA also happens to be an investor in Strands, proof that at least one bank believes personal financial management will become a viable business.

Strands is also behind the personal financial management pilot currently being run by ING in the Netherlands.

Strands continues to invest in its platform which works with mobile devices, and recently announced a deal with savings.com in the US to work out which coupon deals/offers are best to serve customers based on their transaction activity.

Well done to Jim and Eric for putting together a top-rate event, and to all of the companies presenting at Finovate. A special mention to Bob, Jon and Tiffany from SmartyPig; Aaron and Martha from Mint; John from Kasasa; and Murali from Billeo, for taking the time to personally share your vision with “the blogger from down under”. I hope to see you again at Finovate in 2010.

Mint.com sold to Intuit in US$170m deal. Will we ever see an equivalent launched by an Australian company?

Personal financial management service provider Mint.com has been sold to Intuit (the owner of Quicken) in a deal worth US$170 million.

Mint.com was privately owned, recently securing US$14 million in additional VC funding.

Mint.com makes money by charging banks and other service providers a fee when customers decide to switch providers as a result of a savings recommendation from Mint. Mint.com founder Aaron Patzer says the deal will see the service remain free for users, and the acceleration of new product functionality.

The deal makes sense for Intuit, whose monthly fee model was under pressure from Mint.

In just two years Mint.com managed to acquire over 1.5 million users, and more interestingly, is now sampling data from about 2 per cent of online US households, making for some interesting trend watching.

Australian use of personal financial management sites has been slowly growing, but is hampered by the fact that not all banks enable feeds of their data to be automatically provided to such sites.

An Australian version of Mint.com could gain traction in the current climate where consumers are looking for ways to trim the household budget. The question is, would our local VC market back such a venture?

Mint.com currently attracts about one million unique US visitors a month. In Australia, even our most popular financial comparison sites are only generating about 100,000 unique visitors a month.

It’s a big leap of faith to assume the money saving benefits of personal financial management sites would translate into a significantly higher number of users, and ultimately a strong return on investment.

Despite rumours of interest from Yahoo, Mint.com competitor Wesabe continues to push ahead with its white label offering, which so far is being used by two US credit unions and UK publisher the Daily Telegraph.

Wesabe is notably absent from the line-up at this months Finovate conference in New York, however Intuit will be there to address an audience already lining up to drink the PFM Kool-Aid.

I’ll also be in attendance and look forward to bringing you all the news from the event.