Kristin Moyer

Some IT vendors and banks are starting to think of PayPal and other non-bank providers as a friend rather than a foe. This is a good idea, and one which we have proposed 2 years now in our research (Gartner client access only):

• PayPal and Google Checkout Show the Way for Banks’ Payment Operations

• Nonbank Payment Institutions: A Threat and an Opportunity for Banks

• Banks’ Retail Payment Operations at a Tipping Point

Banks need to stop looking at non-bank payment providers as foes. When consumers work with PayPal outside of a banking relationship, the bank completely looses visibility of the customer relationship – and the customer isn’t thinking of the bank either. True, PayPal and others have hijacked Internet payments revenue away from banks. But the real danger for banks is that they loose relevance in the customer relationship and the financial supply chain.

The industry would do well to partner with PayPal and other non-bank payment providers, both to meet the needs of their customers (who want to work with PayPal, too) and to maintain the relationship with their customers (rather than losing site of what happens with payments outside their walls).

One of the most dramatic social changes in history is brewing according (see entire article in The Economist: “Go Forth and Multiple a Lot Less”). At some point in the next several years, the fertility rate of half of the world will be 2.1 or below. This is replacement level fertility, where people only have enough children to replace the population.

Iran is an example of the social change that comes through replacement fertility. In 1984, fertility rates were 7, but by 2006 they fell to 1.9 (and just 1.5 in Tehran). That is a huge amount of change in just 22 years. The riots in Iran this year showed the social change that comes lower fertility rates. According to The Economist, about 1/3 of the population is 15-29 years old – they are better educated than previous generations (something that happens with falling fertility rates) and therefore had different expectations than previous generations with regard to elections. The result – a major clash against traditionalists.

What is the impact on banking? Fewer potential customers than if fertility were above replacement level. But that’s not a bad thing. A “bulge” of working adults (which The Economist refers to as a “Goldilocks” generation) fuels economic growth. In 2008, for example, household savings in China reached almost 25% of GDP. It also enables more rapid accumulation of capital per head.

Where should banks look for the Goldilocks generation? In places many banks in established markets have recently exited: Asia, Latin America.

The implications for the environment, unfortunately, are bleaker (because richer countries pollute more). But I’m a banking analyst, so that’s a discussion to have over a pint sometime rather than here.

Predicts 2010 is hot off the presses (for paying Gartner clients): “Predicts 2010: Operational Technologies Present Threats and Opportunities in Banking and Investment Services.” IT leaders at banks and investment service firms should use this analysis to support their business and IT planning in 2010 and beyond, and to avoid wasted investments.

This year’s predictions for operational technologies in banking include a focus on:

• The fate of tier 3 and tier 4 US banks in light of more intensive regulatory and risk management requirements
• How adoption of an emerging technology could slash pending credit losses
• The alarmingly low adoption rate of holistic, enterprise risk management
• How not to invest in bank service hub initiatives.

When I first saw the announcement that Avaya was getting into mortgage mods, my first thought was honestly, “Another provider to jump on the bandwagon.” Then I thought again.

Proactive Outreach for Financial Services is an outbound contact solution that uses voice automation to determine whether or not a borrower qualifies for modification (previously it was more focused on collections). It also does proactive closed loop communication, for example to communicate the status of an application to a borrower or notify them of missing documentation (a huge challenge in modifications right now).

On the one hand, I’m not sure I’d personally want a voice automation program calling me up if I was worried about losing my home. On the other hand, mortgage servicers are overwhelmed by default volumes, particularly in light of HAMP (which Avaya refers to as “HAM” in its white paper). Avaya quotes some scary call center statistics…call hold times in excess of 1 hour, call abandonment rates of 50% and others.

This solution, while not perfect (given the emotional stress distressed borrowers are under), could help reach more borrowers and potentially alleviate call center jams and servicer capacity.  What this solution made me think of though, as well as some conversations I’ve recently had with clients, is that there are better ways to work with distressed borrowers than what the industry is currently doing.  For example, mobile alerts.  More on that soon.

Contrasted to credit card issuers and consumer lenders, mortgage servicers are being less aggressive with the use of predictive analytics, optimization and behavior modeling.  For one thing, mortgage servicers have fewer levers to use and less data to leverage in reducing loss compared to issuers of revolving credit.  The cost of servicing has also gone up due to high levels of distress, making it difficult for servicers to invest in new technologies.  And consumer focus on credit obligations have changed as a result of negative home equity, making mortgage a lower priority payment for consumers (source:  Effectively Managing Risk in the New Economy,” Equifax, April 2009).

Servicers are overwhelmed by volumes and often do not have the resources they need, both in terms of personnel and technology (due to the increasing costs of servicing).  For example, they lack technologies (such as loan portfolio management) to determine the best option for each loan in distress, whether that be loss mitigation, a short sale, a third party sale or foreclosure.  They have yet to adjust to their new role as “life coaches” (not just loan counselors focused on completing a task) in working with so many distressed borrowers.   Regulations, such as the Home Affordable Modification Plan (HAMP) in the US, have been challenging to implement and execute.

So why should the residential mortgage industry use loan portfolio management – now?

Loan portfolio management has been shown to reduce re-default and significantly improve average unpaid-principal-balance increase in net present value (NPV) from modifications using loan portfolio management (relative to nonoptimized loan modifications using general risk scores) from vendors such as Response Analytics (Distressed Portfolio Management and others).  Segmentation and clustering analysis supports optimal treatment strategies as well.  For example, First American CoreLogic (WillCap) provides cluster-driven treatment strategies that segments borrowers into more than 20 segments in order to reduce default rates, decrease losses and accomplish socio-political goals (for example, keeping borrowers in their homes and reducing foreclosures).

And preventing a customer from falling behind on payments may be the best course of all.  I spoke with someone in the industry today that said something like 20%-30% of borrowers who are current on their mortgage at the time of modification later end up defaulting.  If a borrower has fallen behind on payments, the rate is more like 70%-80%.  Pre-delinquency management is also a core capability of loan portfolio management.

Steve Leigh from the insurance team here –   I wanted to let everyone know that I along with two colleagues here at Gartner (Juergen Weiss and Stephen Forte), will be talking about social networking for insurance in our upcoming teleconference on November 6th.   It seems to me that there remain considerable questions about what social networking is, whether you can build a sound business case and the best strategies for creating a social network.  Insurers have not been able to successfully derive significant value from externally hosted social networks like Facebook and Linkedin other than to minimally participate in the conversation.  To really leverage social networking for employees, agents and customers, it is likely that they will need to invest in dedicated solutions which will help them to monitor usage, control content, and generate reports.

I would love to hear your thoughts on this topic, as well as invite you to the upcoming event.

In financial services, data has become the differentiator in payments.  Financial institutions struggle to differentiate with payment products, but they can differentiate by using data for value added purposes (for Gartner clients, please see Banks Must Invest in Payment Systems to Win Back Customer Trust, Payment Information Value-Added Services: The Cornerstone of Customer Loyalty and others).  Data is becoming more important in all areas of lending, both as a differentiator and as a tool of survival.  For example, loan level and property level data is needed to triage distressed loans and value asset-backed securities.

I saw a great example of a non-banking industry using data for value added purposes.  Rhode Island is tracking H1N1 through e-prescription data.

“Public health officials will receive de-identified prescription data along with ZIP codes and ages of patients to aid in the tracking and trending of flu outbreaks through the state (see the Information Week article here).”

Officials hope to achieve the following benefits by tracking e-prescription data:

• Tracking outbreaks by location (for example, schools hit particularly hard) and age
• Detect discrepancies in between doctor reports and drugs prescribed (which could trigger educational outreach on over-prescribing medications)
• Monitor availability of Tamiful and other antiviral medications to trigger the release of emergency stockpiles as needed.

Turning data into information – not easy, but more necessary than ever in financial services.

From Peter Redshaw.  I’m just back from the hugely successful Gartner Symposium in Orlando, USA, so now I have only the one week to help make final preparations for its sister event in Cannes, France! Orlando provided lots of evidence that confidence in the IT industry is starting to grow again and the banking and investment services team there was delighted that we got such a fantastic turnout for the banking workshops at the industries’ “Super Sunday” event.

If you are already booked for Cannes, then I wish you safe travels and look forward to seeing you there — if not, it’s an open event and not invitation only – see here to book your place. In the meantime, why not have a quick look at the very concise podcast and videocast we have prepared for Financial Services.

The podcast looks at the wider FS agenda for the week at Cannes while the videocast focuses on the “Six Killers” presentation that will kick off the FS sessions on Monday morning. You can find them here:

Podcast

Videocast

There are presentations, forums, workshops, analyst-user roundtables and networking events throughout the week. Some of these are “by registration only” sessions, so it is worth having a look at the event website and using the Agenda Builder to add these sessions to your calendar, and where necessary register your attendance. A quick summary is:

1. Six Things That Could Kill Your Financial Services Firm in 24 Months

09:30-10:30, Monday, 02 November 2009 (Location: Palais des Festivals – Ambassadeurs 2)

2. Financial Services Workshop: ‘Cost Optimization Best Practices’ and ‘Banking on Recovery’

11:00-13:30, Monday, 02 November 2009 (Location: Palais des Festivals – Ambassadeurs 1)

3. Gartner Analyst/User Roundtable: BPO for Banking/Investment Services

15:45-16:45, Monday, 02 November 2009      Speaker: Peter Redshaw

4. Gartner Analyst/User Roundtable: Collaborating With Regulators in the ‘New’ Financial Services Industry

17:00-18:00, Monday, 02 November 2009      Speaker: Alistair Newton

5. Workshop: How Will You Survive the Six Killers of the Retail Banking Sector?

08:00-09:30, Tuesday, 03 November 2009    Speakers: Alistair Newton and Peter Redshaw

6. Gartner Analyst/User Roundtable: Offshoring for Banking/Investment Services

15:45-16:45, Tuesday, 03 November 2009    Speaker: Peter Redshaw

7. Gartner Analyst/User Roundtable: Development of End-Customer-Oriented IT in Financial Services

14:30-15:30, Tuesday, 03 November 2009    Speaker: Alistair Newton

8. Executive Roundtable: The Future of European Insurance

14:30-15:30, Wednesday, 04 November 2009               Speaker: Juergen Weiss

9. Gartner Analyst/User Roundtable: To Cloud or Not to Cloud — How Applicable is Cloud Computing and SaaS for the Insurance Industry?

16:00-17:00, Wednesday, 04 November 2009               Speaker: Juergen Weiss

10. Gartner Analyst/User Roundtable: Pan-European Insurance Platforms – Dream or Reality?

09:45-10:45, Thursday, 05 November 2009   Speaker: Juergen Weiss

11. Insurance Networking Lunch (please note that this lunch requires pre-registration and is limited to 80 attendees)

13:15-14:30, Tuesday, 03 November 2009    Speaker: Juergen Weiss

Mortgage servicers have been slow to adopt loan portfolio management (a technology that supports pattern-based strategy) and continue to suffer heavy losses.  Contrasted to this, credit card issuers have been aggressive with adopting loan portfolio management to seek, model and adapt.

For example, credit card issuers are reducing limits on consumers whose risk profile is changing, potentially due to unemployment or other factors.  They are monitoring individual consumer spending patterns and can tell when a consumer begins using their credit card in a way that signals distress – for example, if they start using their credit card to pay their mortgage.  In this case, the financial institution may shut down the card altogether.  Or in some cases, depending on the risk profile of the customer, they may increase the spending limit.

Case studies show that card issuers using loan portfolio management technology that supports pattern-based strategy and seek-model-adapt have reduced bad debt by 25% – 50% and increased revenues by 25% – 30% (by optimizing authorization rates, credit lines and marketing campaigns).

Credit card issuers are already moving this direction as in the examples above – other lenders would benefit from following.

As more consumers buy mobile devices, and more banks offer consumers mobile alerts and services, banks must decide how they will support their road maps for mobile retail banking services.  Stessa Cohen just published a Magic Quadrant on this – take a look (client access required):  Magic Quadrant for North American Mobile Retail Banking.

The current mobile retail banking hype in North America requires banks to understand and support not only the current customer demand for alert services, but also the evolution of these services into an anytime/any mobile device point of access to financial information and transactional services. This is a simple point, but one often forgotten by North American banks. Banks that deploy mobile retail banking simply because other banks have done so run the risk of achieving poor return on investment (ROI) and creating dissatisfied customers and mobile retail banking channel silos. As more banks support alert-based services, and the mobile device becomes “just another customer touchpoint,” a bank’s lack of a strategic approach to mobile retail banking will seriously damage its competitiveness in the long term.