Professional Documents
Culture Documents
Prepared by:
Scott Mills, President
William Mills Agency
scott@williammills.com
678-781-7201
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Bankers As Buyers
300 West Wieuca Road, Building One, Suite 300 Atlanta, GA 30342 www.williammills.com 678-781-7200 FAX 678-781-7239
Bringing the best minds together to help you plan for 2003
For many years, a major financial publications company provided an invaluable tool to help
vendors and others with their marketing planning by compiling a comprehensive collection of
research and data. For a variety of reasons, this annual study was discontinued and it left a void
for those who used it as an integral part of their marketing planning.
Because the mission of the William Mills Agency is to help companies market to
financial institutions, we were acutely aware of this void, and in 2002 we decided to publish
Bankers As Buyers as a service to our clients and others who might be interested. In 2002, we
leaned heavily on statistical data and research. This years Bankers As Buyers offers both
research statistics and the conclusions and predictions of some of the most knowledgeable
consultants and professionals currently involved in the financial industry.
Etched above the doorway of the former library of a major Southern university is the
saying, The half of knowledge is knowing where to find it. This years survey has been greatly
enhanced by contributions from:
Bankers Systems, Inc.
Celent Communications
Charles Potts
Dove Consulting
Financial Insights
Gartner, Inc.
Javelin Strategy and Research
The Tower Group, Inc.
On behalf of everyone who gains value from Bankers As Buyers, I would like to express our
sincere appreciation for their sharing of valuable information and knowledge. It is our pleasure
to provide you with this 2003 edition of Bankers As Buyers.
Sincerely,
Scott Mills
President
William Mills Agency
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Bankers As Buyers
Table of Contents
Observations
Industry Statistics
FDIC Data No. of Banks and Savings Institutions
Callahan & Associates Credit Union Market
Grant Thornton Community Bank Competition Survey Table
ICHA Infinet Community Banking Technology Survey
Findings
Celent Communications
Top Strategic Technology Issues in 2003
Virginia Heyburn Garcia, Senior Analyst, TowerGroup
Roundtable Discussion
Featuring:
James Van Dyke, Principal and Founder, Javelin Strategy and Research
Richard Crone, Vice President, Financial Services, Dove Consulting
Bill Bradway, Group Vice President, Retail Financial Services, Financial Insights
Feature Articles
Cash Management Forecast for 2003
Christine Barry, Analyst, Celent Communications
Online Bill Payment Will Be Top Bank Priority in 2003
Avivah Litan, Vice President & Research Director, Gartner, Inc.
Customer Identification Program Will Be An Important Part of Business
Plans for 2003
By Michael Maher, Senior Director of Legal and Compliance Services,
Bankers Systems, Inc.
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Observations
Looking back on 2002, it appears the banking industry was riding the coattails of
previous investments in technology. Cutting IT budgets and identifying cost savings
seemed to drive bankers.
What will banks spend in 2003 on technology, and what will drive those decisions?
Three themes seem to be emerging: adherence to and changes in regulatory demands;
technology obsolescence; and reducing losses due to fraud.
1. Adherence to and changes in regulatory demands this includes compliance with
the USA Patriot Act, which interrupts and obstructs terrorism. The act will become part
of the normal enterprise due diligence according to Richard De Lotto and Annemarie
Earley of Gartner.
A Jan. 22nd article in American Banker suggests a strong year for ATM vendors
because, this is the year all ATMs must be compliant with the encryption known as
Triple DES or data encryption standard. It is also possible that legislation giving check
images the same legal weight as the originals will pass; many banks are anticipating
this by equipping their ATMs with image technology.
The Gramm-Leach-Bliley Act may finally impact the systems and processes at the retail
level for institutions leading the way on insurance services.
Further, the Office of Foreign Assets Control (OFAC) has certainly added another layer
of discovery and reporting for banks.
Looking ahead, the Check Clearing for the 21st Century Act (HR 5414) or Check 21
will likely be reintroduced in the 108th Congress. If passed, Check 21 would promote
efficiency in the industry by increasing electronic check presentment and lessening
reliance on physical transportation and presentment of checks.
2. Technology Obsolescence All too often, experts say, financial institutions are
simply ill prepared, technologically, to respond to customer demands, especially in the
face of new regulatory requirements and market changes (Bank Director, 4th Quarter
2002).
Large banks are realizing that outdated mainframe legacy systems are, no longer
flexible enough to handle the growing number of new applications deployed, said
Alenka Grealish, Celent Communications.
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3. Reducing Losses Due to Fraud Credit card, check fraud and identity theft are the
leading concerns for bankers.
According the American Bankers Associations Deposit Account Fraud Survey Report,
39.3 percent of survey participants cited identity fraud as the number one threat against
the industry. Debit card fraud was a distant second at 15.2 percent.
John Askew, a consultant with Fraud Control Strategies, said, Large banks are looking
to implement the next generation of check fraud detection which prevents check fraud
by stopping it at the source. Check fraud is a growing concern to small and mid-sized
financial institutions.
Despite attempts to diminish credit card fraud, it remains a leading threat to the financial
services industry in the U.S. and losses are expected to continue an upward trend
according to Celent Communications. The methods are becoming more sophisticated
as usage rates for credit cards continue to grow, personal information becomes more
readily available and Internet applications thrive.
In closing
According to the Aberdeen Group, financial services firms are among the fastest to
adopt new technologies and typically lead the way in implementing innovative
applications and business practices, including CRM and outsourcing, enabling them to
extend benefits achieved by automation to their customers and increase revenue
significantly.
Technology vendors must be able to show faster return-on-investment projections and
must clearly communicate how they can reduce costs, increase revenue or help better
automate operational processes that support the banks mission.
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Industry Statistics
FDIC Quarterly Banking Profile
There were 9,415 FDIC-insured banking institutions at the end of September 2002. Of
these, 7,933 were commercial banks; 1,482 were savings institutions.
FDIC-insured institutions employ approximately two million people full time.
The pace of consolidation and mergers has slowed. During the Q1 of 2002, 86
institutions were absorbed by mergers. In 2001, 422 banks and savings institutions
were absorbed by mergers. This contrasts with 2000, when 499 institutions merged. In
1999, there where 513 mergers and in 1998, there were 680 mergers. It's worth noting
that in Q1 2002, 17 new banks and/or savings institutions had been chartered, while
146 new banks and savings institutions were chartered in 2001.
Callahan & Associates
Third-quarter results indicate that credit unions, banks and thrifts all posted solid results
but with different strengths. Credit unions led all three groups with asset growth of 12.7
percent over the past 12 months, which is more than twice the bank growth rate and
three times that of thrifts. Credit unions also maintain the only double-digit capital ratio
among the three institutions at 11.4 percent. All three sectors posted strong profitability
as measured by return on assets (ROA). Despite their tax-exempt status, credit unions
recorded the lowest ROA at 1.09 percent. The year-end numbers should be interesting
due to a higher provision for loan losses at many banks.
As of September 30, 2002
Institution Type
Credit Unions
No. of
Institutions
9,964
Assets (Millions)
$557,251
12-Month
Annualized Loans / Charge Off
Asset
Capital Ratio
ROA
Deposits
Ratio
Growth
12.7%
11.4%
1.09%
71.3%
0.49%
Grant Thornton
Some current industry statistics from the FDIC and Grant Thornton:
Commercial Banks as of Sept. 30, 2002:
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1,482 institutions
$1.3 trillion in assets
524 institutions have less than $100 million in assets
1,334 institutions have less than $1 billion in assets
12 mergers in (last) quarter
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Findings
By Celent Communications
The reduction in the number of banks in the U.S. witnessed over the course of the past
10 years has done nothing to reduce the level of IT investments. On the contrary, large
banks tend to spend more than small banks on IT not just in absolute terms, but also as
a percentage of their total expenses. At many of the largest banks, IT spending
accounts for over 20 percent of non-interest expense. At medium-sized institutions, the
range is 12-15 percent.
Increased competition from non-banks, an increased emphasis on self-service and an
erosion in the importance of interest income and a corresponding increase in fee
income are some of the drivers behind banks IT spending plans. Over the course of the
next year, Celent expects to see banks invest considerable amounts of new funds in
branches, the much maligned delivery channel whose demise has been long
forecasted.
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Given the recent trends in the economy, the specific challenges to the banking industry,
and longer-term trends we observe across various business lines in which commercial
banks participate, a number of overall conclusions suggest themselves:
Risk management and enterprise-wide monitoring will be focus areas for banks over
the coming one to two years, given the downturn that has occurred in the U.S. economy
and the reversal in fortunes experienced by some of the major banking institutions.
The branch will receive renewed attention as a delivery channel after years of relative
neglect.
Many new technology initiatives will be deferred or implemented more slowly in the
coming period, as a result of an economic slowdown that is hurting bank profitability and
therefore the ability of banks to make new technology investments. While there will be
exceptions, IT departments will be under pressure to control spending and minimize
resource deployment on endeavors that are not mission-critical. Despite these
pressures, IT spending at banks in the U.S. will continue to grow modestly.
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Outsourcing, particularly that of back-office activities, has been significant for many
years in some of the core areas of banking, such as check processing. Banks will
continue to turn to ASPs and other forms of outsourcing as a means of timely
deployment of emerging technologies at a lower cost than they could most likely
accomplish internally. Some banks also continue to regard outsourcing a means of
maintaining strategic focus, as opposed to what many see as a gradual transformation
of banks into technology shops.
With pressure on profit margins likely to increase, the use of technology to encourage
self-servicing by the customer, particularly through the Internet channel, will accelerate.
Over the long-term, the general industry trend toward higher industry concentration will
inevitably mean a greater need for automation and more intense use of technology to
manage customer relationships and maximize customer profitability.
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IT Cost
Strategic
Decision
Cost of Transformation
Time
Source: TowerGroup
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119.5
External
Outsourcing
Internal
Software
45.3
27.8
150.6
e-Enterprise Strategies
After many years of hype and even gloom surrounding the Internet, a new wave of
effective innovation is poised to deliver improved business processes to the financial
services industry. Far more than a vehicle of delivery of financial services products and
services to the customer, Internet technology is pervasive throughout every network,
application, delivery channel, and communication medium across multiple business
segments, constituencies, and regions. Web-based solutions will address age-old
integration issues of significant economic burden, while fundamentally altering the way
software, hardware and services both internally and externally are deployed within
FSIs. Exhibit 3 illustrates total worldwide technology spending by financial services
institutions between 2001 and 2006. It is important to note that spending on new
technologies will increase by 18 percent, while maintenance spending for existing
technology will decline marginally as FSIs seek to build efficiency into their budgeting
process.
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$350
$300
$79
18%
$93
$250
New
Maintenance
$200
$150
$247
$100
-0.4%
$246
$50
$0
2002
2003
With total IT spending remaining flat in 2003 due to stringent budget pressures, investment in new
technology will be viewed as a means of achieving long-term cost advantage.
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Roundtable Discussion
Richard Crone
Vice President
Dove Consulting
Bill Bradway
Group Vice President
Financial Insights
1. Where will bankers spend their Information Technology (IT) budgets in 2003?
JVD: 2003 will be another year of pragmatic, controlled spending. Certainly some
bankers will increase their budgets, but unlike the more heady times of the late-90s
through 2001 there will be no spending without a plan for clear ROI in the near term.
Five years from now, observers will look back on our current period as one where we
returned to discipline, with the result being that more projects met expectations. Few
institutions will invest in such areas as wireless or personalization, which are viewed as
speculative or tarnished by many. In contrast, there is much to be gained in more
practical areas, such as integrating existing applications and systems together in order
to significantly improve the customers experience while minimizing manual, costly
processes behind the scenes.
RC: Supporting online account management and Internet based self-care functionality.
BB: Bankers will continue to spend their IT budgets to support their ongoing business
needs. Between 75 percent and 90 percent of an institutions budget is very well defined
before the year begins. The difference of between 10 percent and 25 percent will be
available for strategic initiatives. The Financial Insights Top 10 strategic initiatives for
Retail Financial Service, Corporate Banking and Capital Markets provide our
perspective on strategic spending opportunities.
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and sometimes even direct revenue benefits to banks. Other applications will eventually
become essential as well, but patience has never been more essential when planning
technology investments.
RC: Image technology for paper check displacement.
BB: As a broad category for U.S. banks, the mobile or wireless channel has diminished
levels of spending.
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Feature Articles
Cash Management Forecast for 2003
Analyst: Christine Barry of Celent Communications
One area where banks are projected to spend a great deal of money during 2003 is in
cash management initiatives. Spending in this area increased during 2002, and we
expect this trend to continue given improvements in vendor solutions. The corporate
side of the bank has had a tendency to lag the retail side from a technology standpoint,
therefore forcing banks to continue investing money in this area as they play catch-up.
While most large and mid-sized financial institutions are now offering some type of
browser-based solution, penetration rates are not quite as high as they are on the retail
side, where both segments have reached almost 100 percent penetration. Surprisingly,
most cash management transactions continue to be completed via Windows-based
solutions. This is due primarily to the fact that until recently most vendor product suites
offered only limited features and functionalities through their browser-based solutions.
Therefore, while browser solutions are more cost effective, many banks have been
forced to run both browser and Windows solutions simultaneously in order to meet all of
their business clients needs.
Vendors have come a long way over the last year and a half however, and now offer
more complete product suites. It is now up to the financial institutions to deploy the
features available to them, and we believe they will. Most businesses to date have
shown a great willingness to use browser-based solutions whenever possible. Celent
forecasts 2003 cash management IT spending to reach $459 million and increase an
additional 22 percent by 2005 to reach $560 million. The majority of 2003 spending will
be on add-on features which will enable institutions to phase out their Windows-based
solutions by the end of the year.
Breakdow n of IT Spend
700
US $ Millions
600
500
400
300
200
100
0
2001
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2003
Bankers As Buyers
2005
Avivah Litan
Vice President & Research Director
Gartner, Inc.
Online bill payment will be a top priority for U.S. banks in 2003. It continues to be
the fastest-growing financial application on the Web.
In the resource-constrained environment of 2003, U.S. banks will face tough decisions
about which consumer e-banking projects to fund. Projects that help banks retain and
acquire profitable customers will earn top priorities. Online bill payment is one of those
e-banking applications. It is the fastest-growing financial application on the Web, and
despite the economic slowdown, is continuing to thrive as consumers discover its timesaving benefits.
Prediction: Online bill payment will be one of the top three priorities for e-banking
projects in 2003.
Approximately 90 percent of all U.S. banks, and 100 percent of banks with deposits
greater than $50 billion, offer online bill payment to their retail customers, according to a
Gartner survey of 193 U.S. banks in September 2002. This application will continue to
be a high priority for U.S. banks, despite budget cuts that are forcing the elimination of
lower-value e-banking initiatives, such as wireless banking and alert services (see
Figure 1). Online bill payment helps banks retain their most-profitable customers, so
banks need to increase its adoption levels. Approximately 12 percent of all U.S. bank
customers bank online; among banks with deposits greater than $50 billion, 28 percent
bank online. On average, however, only 20 percent of customers who bank online also
pay their bills online at their banks' sites, leaving plenty of room for growth in bill
payment adoption.
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In 2003, an average of 30 percent of online banking customers will also pay their bills
online at their banks sites (0.7 probability).
Impact in 2003: Key vendors that offer online bill payment services (such as
CheckFree) will grow; most vendors that offer nonessential services, such as account
aggregation or wireless banking, will adapt their services for other markets or face
extinction in 2003, either through bankruptcy or acquisition.
According to Gartner research, CheckFree is the third most important vendor to the
overall consumer strategy of banks (S1 was first; Microsoft was second). Among banks
with deposits greater than $10 billion, CheckFree ranked second in strategic importance
to Corillian, an Internet banking vendor.
Reacting in 2003: Banks must automatically enroll online banking customers in online
bill payment, rather than make it a separate application for which customers must enroll.
If they can afford it, banks should offer bill payment for free. Bank of America observed
a 50 percent increase in consumer bill payment enrollment in nine months because it
eliminated bill payment fees. Banks must continue to fund online bill payment projects.
In 2002, the average bank spent about $265,000 on these projects; banks with deposits
greater than $50 billion spent more than $780,000. In 2003, banks must spend more
wisely by adding customized value that bill payment processors cannot provide.
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Bankers As Buyers
Prediction: Online bill payment will be the fastest growing online financial
application in 2003.
The number of U.S. consumers using online bill payment more than doubled during the
past year, and will reach approximately 25 million by YE02. This number will grow
nearly 35 percent to almost 33 million users in 2003 (0.7 probability).
Consumers are interested in online bill payment primarily to save time (see Figure 2).
Impact in 2003: In 2003, billers and banks will battle to lure consumers over to their
sites to view and pay bills; most of the growth in online bill payment will occur at the
same site where consumers view their bills. In a September 2002 Gartner survey of
more than 1,000 online U.S. adults, 79 percent said they viewed their bills online at a
billers Web site; 10 percent viewed their online bills through a bank consolidation
service. Consumers cited two main reasons for using the biller Web sites:
They could find the e-bill
The service was free
As this disparity continues, billers will begin capturing more of the online bill payment
traffic in 2003.
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Banks will lose revenue and cross-sales opportunities, unless they reverse consumer
traffic flows.
Reacting in 2003: Banks must provide more value in their online bill payment
applications. To attract new price-sensitive customers, banks should offer discounts or
free trial service periods. Nearly one-third of online consumers who do not view bills
online said they would do so if the service were free; nearly one-quarter said they would
start if billers offered a price discount, according to the Gartner online adult survey.
Banks should also allow users to sign up for bill presentment independently of enrolling
for online banking or bill payment. Some users prefer viewing bills before they start
paying them online. Banks should incorporate automated bill payment plans (via
preauthorized direct debits), which are used by almost a quarter of all U.S. adults and
are more than twice as popular as online bill payment at bank sites.
Banks can also increase adoption using e-mail delivery of bills to their entire consumer
base, not just those who bank online. Although just 12 percent of U.S. bank customers
bank online, approximately 65 percent of U.S. adults are online and using e-mail. E-mail
can serve as a personal bill consolidation delivery channel for consumers; Gartner
consumer research indicates that consumers prefer e-mail delivery of e-bills more than
twice as much as they prefer e-bill consolidation at bank Web sites.
Bottom Line: Banks will continue to give high priority to online bill payment projects in
2003, even in the face of tight budgets and resource constraints. However, banks must
carefully craft their bill payment strategies so that they offer more than just a processor's
commodity service. They need to offer value-added features such as customer selfservice, automatic enrollment, bundling of automated payment plans, free trials for new
users and a user interface that does not impose bank preferences on their customers.
Failure to cultivate online bill payment applications in 2003 will cause banks to lose
revenue and customers to competing service providers.
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Bankers As Buyers
Michael Maher
Senior Director of Legal and Compliance Services
Bankers Systems, Inc.
Most financial institutions are keeping a watchful eye toward the U.S. Treasury
Department this year. Thats because the Treasury is expected to issue its final ruling
on Section 326 of the USA PATRIOT Act sometime in early 2003. Soon after, financial
institutions will need to have an effective Customer Identification Program (CIP) in place
to comply with the Acts requirements.
While many institutions are waiting to see the final regulations before implementing their
CIPs, almost all are researching the training, technology, and support solutions theyll
need in order to be in compliance. Some financial institutions have already
implemented or are implementing their CIP now. Many of these have fallen prey to
fraudsters already and know that an effective CIP is about more than simply complying
with a regulation. In fact, identity theft is considered to be the fastest growing crime in
the U.S., according to the Federal Trade Commission.
Developing and maintaining an effective CIP will be an important part of a financial
institutions business plans for 2003. It will be essential to complying with the new
regulations and protecting the institution and its customers from fraud losses. Building a
CIP requires careful examination of solutions to find those best suited to the needs and
workflow of the organization.
Technology Solutions
So what does a financial institution need to think about when choosing the best
technology solution? Perhaps the most important factor when considering and pricing
customer identification solutions is the cost of fraud. How much can the financial
institution reduce its risk by catching discrepancies and identity thieves before an
account is opened? There are a number of other important factors to consider including:
The financial institutions risk tolerance;
New account volume and channels (Internet, branch offices, mail, etc.);
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Stand-Alone Systems
Web-based Technologies and Remote Applications
Batch Delivery
Real-time, Direct Connect Delivery
Finally, a product is only as good as the people who back it. Therefore, the financial
institution will want to choose a technology provider that has strong, proven knowledge
of the institutions business, the compliance elements of the USA PATRIOT Act, as well
as a solid track record for quality, service and support.
Training Employees
In addition to choosing the right technology, a financial institution must assess its ability
to effectively train employees to comply with Section 326. Many organizations look to
outside experts for assistance, especially when dealing with multiple bank locations or
larger employee numbers. The primary criteria for selecting training programs is the
vendors knowledge about compliance, the format and ease-of-use of the training, and
most importantly, the training programs ability to effectively convey information
enabling employees to know and follow the proper job behaviors and procedures.
Telephone and Internet training can save time and money. CD-ROM training makes it
easy for employees to train when it is convenient for them.
Its a good idea for a financial institution to begin some general training before the final
regulations are released and ensure regular training after they are released. Because
Section 326 impacts all areas of a financial institution, training should be made available
to all employees and certainly be required for those with account opening
responsibilities.
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Planning Ahead
Savvy financial institutions are researching technology, training and support solutions
for their CIP right now. Some are already implementing actions required under the
proposed Section 326 regulations. By reviewing current practices and updating them
where needed, financial institutions should be well on their way to complying with the
Section 326 CIP requirements and thereby reducing the likelihood that they will become
victims of fraud.
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The William Mills Agency was founded in 1977 and specializes in representing firms
serving the financial industry. Agency services include media relations, brand building,
media communications training, event management, crisis management, investor
relations, creative services and marketing consulting.
The agency successfully works with more than 40 clients throughout North America.
The company has worked with a wide variety of products and services that are
marketed both nationally and internationally.
The William Mills Agency is a privately-held, family business located in Atlanta, Georgia
with twenty employees.
For more information about the agency, call 678-781-7200 or visit the companys Web
site at www.williammills.com.
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