Kristin Moyer

I read an article this morning that discussed the low interest of consumers in contactless (see “Contactless Cards Go Untouched”).  Consumers are rather uninterested in contactless, with 39% of consumers in one study saying they are unlikely to use contactless and 43% saying they are neutral.  Analysts commenting on the results of this study said that the reason contactless adoption is low is that the industry isn’t doing enough marketing.

Marketing is not going to drive contactless.  Contactless adoption is dependent on the type of transaction and incenting usage – not marketing.

Catalyst applications are important.  While consumers in Gartner studies have said they are not interested in contactless, they do express interest in contactless transactions such as transit, buying a newspaper, buying a soda from a vending machine and similar.  The industry needs to use catalyst applications like this for consumers to get into the habit of using contactless.

The ability to convince consumers is also important.  Rewards for contactless must match or exceed those for other types of transactions.  Security guarantees, presentment and analytics (to avoid being exposed to new charges and control spending activity), wallet integration (the new instrument should be integrated to customers’ financing accounts) and strong merchant brands are also important.

Contactless is not about marketing, it’s about using catalyst applications and incenting customers.

You might not want to try robbing a bank in the US city of Phoenix, Arixona. In Phoenix they have billboards that can show high-quality pictures of suspected bank robbers within minutes.

I haven’t seen bank robbery statistics from Phoenix, but in the US there were 5, 500 bank robberies in 2009 (see here).  This is down 18% according to US Justice Department records.   In fact, the number of alleged bank robbers in the court system hit a 10 year low.

The real battle right now in “bank roberry” is electronic crime, particularly real-time e-banking like mobile, Internet and ATM:  “By 2013, crime and flawed practices will make the cost of providing real-time e-banking unacceptable (Gartner clients see “Predicts 2010: In Banking and Investment Services, Business as Usual Won’t Meet New Customer Demands”).

Modern criminals understand bank processes and can obtain the same training, technology and resources that banks can. They are more willing to innovate in pursuit of profits than banks are. Faster payment cycles are driving increased fraud risk by eliminating the clearance and settlement delays previously used to detect, review, and prevent or recover from fraudulent payment requests.  Data theft and leakage are also accelerating. The ubiquity of spyware and the rise of social networks that are rife with vulnerable personal information have made almost everything ever recorded about a person open to scrutiny. E-criminals may be able to mimic that person flawlessly.

This is Juergen Weiss from the insurance research team. The Head of the German regulator, Jochen Sanio, did articulate concerns about the future business model of life insurers. The current interest rate on the capital markets and the interest rates guaranteed by life insurers wouldn’t match he said. Mr. Sanio added hat insurers will have to plan in more detail which guarantees they can afford and how they will be able to finance these.

Gartner has published a number of research notes on this aspect including one which deals with variable annuity products and another one that analyzes the aftermath of the economic crisis. Although the life insurance industry has weathered the economic turmoil quite well in the last few months (compared to their banking peers) there are no reasons to believe that the situation will become better in 2010. Unemployment rates are high, many markets are saturated and customer loyalty is eroding.

IT will play an increasingly important role in this environment to help life insurers to deal with these challenges. Being able to reduce operational costs, to improve straight-through-processing and to increase the number of interactions with clients will for example be key to remain competitive. And all of these goals will have to be achieved in an environment of flat IT budgets. According to Gartner’s latest IT Key Metrics data IT spending in the insurance industry will even slightly shrink in 2010 compared to the previous year.

But without better IT support including the modernization of outdated legacy applications the business model of life insurers will be at an even greater risk as it is already because of the economic environment.

US President Obama, and other world leaders for that matter, have been criticized this past year for not being hard enough on China and its human rights track record (see here).  While human rights are generally viewed as a political issue, they are fast becoming a (bigger) business issue as well.

Google announced a sophisticated attack that originated in China.  They suspect hackers were trying access Google e-mail accounts of Chinese human rights activists.  These attacks combined with free speech issues are leading Google to consider exiting China (see here and here).

This move will impact banks and technology vendors viewing China as a growth opportunity.  Chinese officials are likely to be outraged.  A deeper protectionist stance may emerge as a result, which has been growing in force lately anyway (with new government procurement rules, for example – see here).

Financial institutions and technology vendors must therefore re-evaluate and re-calibrate human rights issues into their market strategy for China (and other countries with human rights issues) – from both a risk management and market opportunity perspective.  If attackers are interested in the e-mails of human rights activists, imagine how interested they are in their bank accounts and financial transactions.

Alistair Newton and Kristin Moyer here.  “First Tech Credit Union has warned that a malicious application designed to steal banking details has made its way onto Google’s Android Market (see here).”

What is interesting about this is not so much the fact that it’s a virus on the phone, or that it’s attacking the mobile banking application.  We’ll be expecting more of those. But more the advice on what to do to ensure it is removed.  The credit union tells people who have downloaded it to “remove it from your phone and take it to your mobile provider to ensure it’s completely removed.”

Now I know what would happen if I took my phone to my mobile phone provider – they would look at my incredulously and shrug their shoulders. At the very best they might take my phone off me and send it away to be repaired.  Leaving me phone-less for weeks.

I wonder how many more of these type scares will be needed before we see a subtle under-mining of people’s desires to use their phones for higher risk banking transactions.

Christophe Uzureau here – The changeover to 2010 has left many German cardholders unable to use their cards at ATMs and POS. An estimated 30m payment cards seemed to have been impacted by a software glitch. The technical reasons behind the issue and the moves undertaken to correct the issue are not well identified at the time of writing this post. To avoid a very disruptive recall of those 30m cards, the German banks and Gemalto (the smart card supplier) appear to be working on delivering a software update to the card via the ATM network.

We could argue that this is the result of the “let’s just comply with the basic EMV migration requirements and fast” mindset, which can be explained in part by the limited business case for German banks with regards to the EMV migration. As a result, it is possible that not all the related applications and processes have been tested taking into account all possible payment scenarios. Beyond the immediate technical issues, and the pain of having to update thousands of ATMs, there is the most damaging issue of impacting German cardholders’ trust in their card issuers, and in the ability of electronic payments to support their requirements.

German consumers tend to be cash centric. And this event is not going to help accelerate the transition to e-payments. We can expect some German consumers to increase their average cash holding in order to avoid being left without a payment method at the POS.

Banks should get the basics right first. Not responding to basic payment requirements would not only limit banks’ ability to increase usage of new payment solutions, but also damage overall consumer trust in the bank. This is an important issue since Gartner research shows that consumers trust their debit and credit card issuers in supporting their payment needs. This “trust” equity must be preserved. Cf. report “Consumers Trust Banks as Payment Providers: Now Is the Time to Think Beyond Product Silos”

Secondly, this also illustrates why banks should pay more attention to acquiring services. And the Bank of Queensland’s issue with its POS also points in that direction. Cf article http://www.finextra.com/news/fullstory.aspx?newsitemid=20916.

This is not to say that the issue with the German cards was caused by the acquiring side, but acquiring services are very important to the prevention and resolution of the issue.  The German HDE retail trade association is demanding new regulations to entitle retailers to compensation in case of bank cards not working. This is likely to lead to more scrutiny of the actual performance of the German card system, especially since some German merchants claim the existing system is not performing according to expectations. Taking into account the current debate on how the merchant service charge is set and its challenge by European retail associations and some regulators, this will add up to the pressures on the card industry. This is clearly an opportunity for retail associations to challenge the status quo.

This supports our views that banks should strive to better align issuing-acquiring operations. Not only this would potentially reduce the incidence of some of those issues, but also, if those occur, make sure they can be dealt with rapidly. Furthermore, as discussed in the report “Payment Information Value-Added Services: The Cornerstone of Customer Loyalty” – a stronger alignment between the issuing and acquiring side will improve banks’ differentiation on both the issuing and acquiring side.

And for banks which can not support the level of investment necessary to maintain a high level of service (issue compounded by new compliance requirements), new acquiring models are emerging. For instance, Evolution Payment Services from NAB in Australia and in the UK. This is one venue to explore for banks in order to keep providing innovative acquiring services (also supporting the issuing side) while making sure the underlying platform is robust.

Last summer I wrote about the importance of segmentation in banking (see here).  Alistair Newton and I have also written about the value of letting customers create their own cards and manage them, for example changing rewards options, over time (Gartner clients see “Using Social Networking and Personalization to Transform Your Payment Card Market Approach”).

Amex has just launched a purchase card called ZYNC that incorporates these ideas, but then takes the wrong approach.

Where Amex goes right with this card is customer segmentation.  The card is aimed at adults in their 20s.  A customer can choose from four different “packs” (which is essentially further segmentation):

• Go Pack – travel incentives and rewards
• Social Pack – restaurant and event incentives and rewards
• Connect Pack – mobile and cable incentives and rewards
• Eco Pack – green and carbon offset incentives and rewards.

Where they went wrong is fees (an annual fee of $25 plus a perk fee of $20 on three of the four cards) and forcing it to be a purchase card.  Many cards on the market provide equivalent or even better rewards without the annual fee, and it lacks the freedom a credit card provides or control that a debit card provides in terms of monitoring a bank balance.

The financial industry would do well to provide more segmented payment offerings, but needs to re-engineer its profitability in ways other than annual fees.

Strategic Planning Assumption: By 2013, 90% of bank services hub initiatives that are planned or under way will need to be re-architected on a global basis (Gartner clients see “Predicts 2010: Operational Technologies Present Threats and Opportunities in Banking and Investment Services”).

Mary Knox believes that most banks that are undertaking payment, lending and treasury management services hubs are doing so in an isolated fashion, without using common enterprise services.  Industry reference models to guide more holistic hub initiatives are immature. Vendor offerings are also often immature, unable to leverage common enterprise services and incomplete, in terms of functions to support a broad range of requirements from a single platform.

The implication of all this is that banks will need to migrate/upgrade services hubs as standards and practices become more mature.  This will occur in the next five to 10 years, when significant progress will have been made on industry reference models, messaging and process standards and SOA governance at banks.  These advancements will enable more holistic approaches to services hub designs along the lines of “virtual hubs” that leverage common enterprise services.

Strategic Planning Assumption: By 2013, the cost of regulatory compliance and risk management will have “priced” Tier 3 and Tier 4 U.S. banks from the market.

David Furlonger notes a combination of forces leading to this situation (Gartner customers see “Predicts 2010:  Operational Technologies Present Threats and Opportunities in Banking and Investment Services”):

• Regulatory compliance and risk management costs are rising.
• Tier 1 and Tier 2 banks need to recapture and reinforce market share.
• Tier 1 and Tier 2 banks have already built systems and expertise to accommodate a complex regulatory environment, and to absorb future legislative demands.
• Tier 3 and Tier 4 banks lack robust systems, processes, knowledge and financial resources to meet those legislative demands.

The implications are that Tier 3 and Tier 4 banks will face pressure to merge with larger competitors due to their failure to make money and meet compliance needs.Customers will therefore face an increasingly limited choice of providers due to new legislatively defined markets. This will limit the number of providers by determining the number, variety and specificity of banking licenses, as well as the types of businesses and risk profiles that firms can adopt.

A new service called Blippy let’s users share their credit card purchases on Twitter.  Each time a person makes a purchase with the cards they register with Blippy (a type of “social card”) and it tweets the cardholder name, purchase amount and merchant name.

One of my colleagues saw this and said, “I know I remain firmly rooted in the cynics camp, but…  I really do not need, want or care to know that my “friends”, “fans” or any other acquaintance have just bought.”

I have to agree that I’m not jumping up and down to be part of this beta test.  However, what if a future version or iteration of it includes personalization capabilities?

I live in a small town of about 50,000 people.  The merchants in town are trying to figure out how to get more locals to buy stuff from them rather than Amazon.com.  What if as a local, I could sign up for a “social card” (e.g., connect whichever of my cards to this account as I wanted to) called “Support Local Merchants.”  I could get rewards or special deals or something as I build up the amount I’ve spent with local merchants.  Other friends who are interested could also sign up, and this service would let each other see when we bought coffee from Higher Grounds rather than Starbucks (note:  I could chose not show the time I bought a Gingerbread latte at Starbucks, but show when I bought a cinnamon role at Higher Grounds).

Or…One of my friends runs a charity each year hto raise funds for meals on wheels for AIDS patients.  As many in our circle of friends as possible goes out to local merchants for dinner on that night, and something like 15% of your meal goes towards this charity.  My friend could set up a page that shows who went out for dinner that night, where they went, how much their bill was and how much money our circle of friends raised as a result.

I often don’t understand the fixation of society on the apparently inane activity of tracking every movement of acquaintances in real-time.  But in this case, personalization could make all the difference.