Internet Changes Everything

Looks Like an Old-Fashioned Consumer Credit Crunch

Looks Like an Old-Fashioned Consumer Credit Crunch

by Dennis Jacobe

GALLUP NEWS SERVICE

PRINCETON, NJ – Once upon a time, a housing- and autos-led recession was a basic feature of the U.S. economic cycle. In those days, there were interest rate ceilings – a legacy of the Great Depression of the 1930s -- on the interest rates financial institutions could pay for deposits. As a result, as the Fed raised interest rates above those deposit-rate ceilings, money flowed out of local financial institutions, creating a "consumer credit crunch" that severely limited the availability of housing and auto loans. In turn, the economy slowed, often going into recession until inflation and interest rates came back down to levels that encouraged money to flow back into the nation's depository institutions.

Of course, all of those artificial regulatory limits on money flows are long gone and with them the experience of a consumer credit crunch. Today's financial markets allow the free flow of money worldwide, making liquidity readily available to consumers, businesses, and investors by way of numerous forms of securitization -- the packaging of loans for sale to investors. In fact, one of the factors extending the economic expansion of recent years and the boom on Wall Street that sent the Dow Jones average to a record 14,000 on July 19 may have been a worldwide glut of liquidity.

Over the past couple of weeks, however, financial market conditions have changed dramatically. As substantiated by the UBS/Gallup Index of Investor Optimism for July, the nation's residential real estate markets continue to get worse, not better. At the same time, the subprime mortgage debacle has many investors concerned about a consumer credit crunch and has sent the Dow Jones average plunging more than 800 points since its July peak. In this regard, the average investor may have been somewhat prescient in UBS and Gallup's most recent poll, because the Index of Investor Optimism declined in July for the second month in a row. In addition, the issues of a significant tightening of global liquidity, a U.S. consumer credit crunch, and the possibility that the current economic slowdown might turn into a full-fledged recession are likely to be major discussion topics as the Federal Open Market Committee (FOMC) meets this week.

Residential Real Estate Continues to Deteriorate

The old quip that the light at the end of the tunnel is really a train coming through may well apply in most residential real estate markets as the summer comes to a close. During the first half of July, 71% of investors said they perceived that residential real estate conditions nationwide were getting worse. This maintains a pattern of pessimism concerning the national outlook for the housing market that has persisted in Gallup's surveys for many months. Further, 78% of investors said the potential for a housing or real estate crash in some local markets was hurting the investment climate a lot (41%) or a little (37%) during July.

It is likely that this national perception has been affected somewhat by the well-publicized problems of various housing markets that once were super hot, not to mention the subprime mortgage mess. As a result, the finding that 60% of investors believe conditions in their local real estate markets are getting worse is of even greater concern. Presumably, most of the nation's investors are much more knowledgeable about their local housing market conditions than they are about those nationwide.

Potential "Consumer Credit Crunch"

A consumer credit crunch takes place as lenders refuse to make money available to many if not most borrowers. During the first half of July, 76% of investors said the consumer credit crunch was hurting the investment climate a lot (40%) or a little (36%). This is not as high as some other investor concerns, such as the worry over energy prices, with 92% of investors saying those high prices are hurting the investment climate a lot (70%) or a little (22%). Still, its comparative newness as a significant investor concern, the general public's lack of recent experience with a real consumer credit crunch, and the fact that the UBS-Gallup poll was taken during the first half of July -- before the equity markets began their recent plunge -- all suggest that the danger of a consumer credit crunch was surprisingly high on investors' worry lists early last month.

Potential for Recession

Over the past couple of years, fears of a potential recession have tended to center on the willingness of the U.S. consumer to continue spending. In this regard, some have seen the bursting of the housing bubble as a reason for the consumer to pull back on spending as the "wealth effect" benefits of past homeowner equity gains dissipated. Similarly, soaring gas prices have been seen as another drag on consumer spending, particularly for low- and moderate-income consumers.

Still, many observers have argued that consumers will continue spending as long as they have jobs and can continue to borrow money. This is where the real danger of an old-fashioned consumer credit crunch comes to bear. A consumer credit crunch, as noted, takes place as lenders refuse to make money available to many if not most borrowers. In fact, even borrowers with top-notch credit scores can see their cost of borrowing surge higher as liquidity is reduced.

What causes a credit crunch? In today's financial markets, many lenders make loans but do not hold them in their portfolios. Instead, they sell them to investors in the form of securitized investments. What appears to be happening in recent weeks is that the huge losses associated with some subprime mortgage investments are not only creating significant new risk premiums but also causing potential investors to shun all mortgage investments not guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. For example, on Friday various mortgage lenders announced that they could no longer sell various types of jumbo mortgage loans and special feature mortgage loans to the investment markets. As a result, some lenders decided to stop making various types of mortgage loans and sharply increase the pricing of the loans they would make.

Will this kind of consumer credit crunch be contained to selected areas in the mortgage market or will it spread to home equity loans/lines and maybe even to small business loans? The reality is no one really knows -- no one has any experience with this kind of potential liquidity problem. It depends on how much exposure holders of various kinds of securitized debt have and what happens to the value of that debt, particularly some of Wall Street's more exotic creations. What is known is that fears about the potential fallout in the mortgage securities market, not to mention a global tightening of liquidity, are already creating a consumer credit crunch. In this regard as well, the investors in our July poll may have been truly prescient.

Will There Be a Fed Bailout?

When the FOMC meets at the Federal Reserve Board on Tuesday, the discussions may include a number of topics not discussed in those hallowed halls for many years. Inflation, interest rates, economic slowdown, and even potential recession are fairly common topics for monetary authorities. However, "liquidity" is a totally different kind of issue. A lack of liquidity can lead not only to financial failures but also to the failure of the capital markets to function properly. Of all the responsibilities of the Fed, maintaining orderly financial markets heads the list.

At the conclusion of the FOMC meeting next week, monetary authorities may well come out with some reassuring words about the stability of the financial markets and their willingness to stand ready to provide liquidity to the system if necessary. On the other hand, they may say nothing about the liquidity issue, fearing that any statement will only make things worse, not better. Either way, the hope will be that the fears of the past couple of weeks will blow over and the credit crunch can be contained to the mortgage securities market. However, if following the FOMC meeting, the Fed states that it will provide liquidity to various investment banking firms and/or hedge funds, then a much more serious scenario may be underway.

Regardless, the return of a real consumer credit crunch would leave no doubt that the recovery of the housing markets will take a lot longer than previously anticipated and that consumers will have to pull back on their spending significantly. If that happens, then the probability of a recession late this year and into early 2008 would increase significantly.

Survey Methods

Investor results are based on telephone interviews with 800 investors, aged 18 and older, conducted July 1-12, 2007. For results based on the total sample of investors, one can say with 95% confidence that the maximum margin of sampling error is ±4 percentage points. In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.

August 6, 2007 at 05:02 PM in Consumer trends, Financial Services | Permalink | Top of page | Blog Home

Traditional vs. online banking: Which one is for you?

Richard Burnett | Sentinel Staff Writer
Posted May 27, 2007
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It was a no-brainer for Jim Gilkeson when he found an Internet bank offering a money-market account paying five times the average interest rate offered by conventional banks. He moved $10,000 into the online account two years ago and has earned at least twice as much on his money to date than if he had gone with the best conventional rates available, he says.

"The yields they offer are so much better," said Gilkeson, a finance professor at the University of Central Florida. "And the regular, brick-and-mortar branches haven't been very generous at all with their rates."

Gilkeson is among millions of people who in recent years have surfed onto the Internet in search of a bank account. Known as "direct" banks, the Web-only outlets have used high savings rates and aggressive marketing to capture more than $120 billion in deposits so far this decade, according to Celent LLC, a Boston-based financial-research firm.

They include giant players such as INGDirect and E*Trade Bank; growing ones such as Jacksonville-based Everbank and Palm Beach-based VirtualBank; and little-known ones such as giantbank.com of Fort Lauderdale. Because they don't have the overhead expenses of a brick-and-mortar branch, direct banks can offer higher yields than their conventional counterparts.

Celent's most recent forecast projects total deposits of $380 billion within three years for direct banks, thanks in part to new online products such as Internet checking accounts.

Even though that would still constitute only a small share of the nation's more than $10 trillion in bank deposits, the trend has already drawn the attention of the nation's conventional banks, many of whom now offer Internet-only products to compete with "pure-play" online banks.

The First National Bank of Omaha, for example, recently formed an Internet subsidiary -- FNBODirect, which now offers the highest savings account rate in the nation. The bank said last week it would roll out test marketing campaigns in Orlando, Seattle, Boston and Phoenix.

Experts say conventional banks, like other mainstream businesses, must come to grips with the emergence of younger, Internet-savvy customers who incorporate new technologies into their lives much more readily than older customers do.

Online banking, in general, is expected to expand 55 percent, to 72 million U.S. households, by 2011, according to a forecast by Forrester Research. Among Generation Y customers -- those born starting in the late 1970s -- it's expected to grow a much faster 136 percent, the forecast projects.

"Certainly a majority of bank customers today still look at where a bank's branches are in deciding where they'll do their banking," said Dan Schatt, a senior analyst for Celent. "But when you look at the growing impact of Generation Y and other younger users, there's no doubt online and mobile bank services are having a much greater influence in the marketplace."

The business has not been free of trouble. Just last week, Atlanta-based Netbank Inc. -- one of the pioneers -- announced it would unload its Internet unit to Everbank. Netbank cited problems with subprime-mortgage defaults, which have triggered millions of dollars in losses.

And, despite their growing appeal, Internet banks still have their work cut out for them, even among some young, tech-savvy customers.

"Yes, I've heard of them, but I don't think I'd go for something that sounds kind of iffy," said Tonya Walker, a 21-year-old University of Central Florida student who says she pays many of her bills online. "If I'm doing something with my money, I'd just rather have a place to go where I can deposit it directly. It would make me feel uncomfortable, you know, not to have human contact."

That attitude still resonates with many people, experts say, regardless of their age. Some people want that personal touch with their banking -- a message even Internet banks have gotten. For example, INGDirect, the market leader, has begun opening Internet-cafe-style locations where its customers can get live assistance.

"You may never completely lose the need for some kind of relationship with a local bank branch," said Greg McBride, senior financial analyst for Bankrate.com, a financial-research firm based in North Palm Beach. "The Internet banks may not be for everyone. But for people who do less and less of their banking at a branch or ATM and increasingly via laptop computer, it will be really well-suited to their lifestyles."

The first step when exploring Internet banking is to clear the emotional or technical hurdles that may accompany conducting your personal financial business over the Internet, experts say.

Securing your computer is crucial before you start. Install the latest antivirus, antispam, anti-spyware and firewall software and keep it updated. Beware of e-mail "phishing" -- scams that use realistic-looking but bogus Web links to try fooling you into giving up personal financial information.

Next, check out the Internet banks' various offers. The simplest way to do that is go to www.bankrate.com, click on "Compare Rates," and select from among the savings, investments and other products offered. You can compare the rates available nationally or by state. Internet banks routinely lead the lists.

Bankrate says it verifies that all of the banks it lists are insured by the Federal Deposit Insurance Corp. To obtain more regulatory information about a bank, go to www.fdic.gov, click on "Deposit Insurance" then "Bank Find," which will lead you to the company's latest financials and other data.

Once you see what the Internet banks are offering, you should be aware that all savings offers are not created equal.

Gilkeson, the finance professor, said he found that out the hard way. He had felt so good about his first deal with an Internet bank that he decided to open another savings account with a different online bank. But after signing up, he discovered that the adjustable "teaser" rate had already fallen a few basis points by the time his account was approved. He later found out that, if he needed some of the cash, it took about a month to access the account. Gilkeson also began to receive telemarketing calls from the bank as it tried to "up sell" him on other products and services.

"All of that told me that there would be a variety of experiences with these types of accounts," he said of the online-banking world.

Although customers should expect convenience from an online account, they should be wary of an Internet bank that makes it too easy for someone to set one up, said Avivah Litan, a consumer-finance analyst for Gartner Group, a business-research firm in Stamford, Conn.

In this age of electronic identity theft, financial companies should make it as difficult as possible for an ID thief to obtain and misuse your personal information, she said. Internet banks should have multiple layers of security to verify that online customers requesting access to accounts are who they say they are, she said.

"It sounds counterintuitive," Litan said, "but you want to have some inconvenience when it comes to setting up these accounts."

Richard Burnett can be reached at rburnett@orlandosentinel.com or 407-420-5256.

May 29, 2007 at 03:39 PM in Financial Services | Permalink | Top of page | Blog Home

A Tale of Two Lenders

Two startups with similar goals travel very different paths In 2004, while backpacking through Northern California's Desolation Wilderness, Chris Larsen told his buddy John Witchel about the concept of a hoi. Larsen, whose wife is Vietnamese, described how entrepreneurs in that country join cooperatives called hoi, then pool their resources to give one another informal loans. Not long after, the topic came up again as Larsen and Witchel hashed out business ideas at Larsen's dining room table in San Francisco's tony Russian Hill. At the time Larsen, 45, was the founder and chairman of online lender E-Loan, but he was ready for a new challenge. The competitive Witchel, 39, was hungry for another go at the dream: He had watched the software company he had founded, Red Gorilla, disappear when it ran out of money in 2000. What if, they wondered, they started a company that let people bypass banks and get small loans from one another?

Source: A Tale of Two Lenders

Around the same time, across the city in a modest Noe Valley flat, Matthew Flannery, a 27-year-old product developer at TiVo, was receiving long e-mails from his new wife, Jessica. She was a consultant in Kenya and Uganda with Village Enterprise Fund, a San Carlos (Calif.) microfinance organization. The 26-year-old described how she drove from village to village, evaluating the living conditions of business owners who had received $100 loans from the fund. "A little bit of money does so much,'' she wrote. What if, Matthew thought, he started a company that would let Americans lend money to struggling entrepreneurs in Uganda, enabling those entrepeneurs to bypass banks and loan sharks?

In March, 2005, Flannery mocked up a Web site, Kiva.org, which, loosely translated from Swahili, means "agreement.'' A month earlier, Larsen and Witchel had launched Prosper.com, a site that helps individuals loan each other small amounts. Both businesses are pioneers in microlending, a field born in the 1970s that is gaining prominence. Muhammad Yunus, who founded microlender Grameen Bank in 1976, won the 2006 Nobel peace prize for developing the idea of making small loans to entrepreneurs who otherwise might not be able to raise money. Entrepreneurs and philanthropists including Bill Gates and eBay founder Pierre Omidyar increasingly consider microlending an important strategy for lifting people out of poverty.

Kiva and Prosper share more than the goal of increasing access to capital. Both strive to keep operations lean, and both wrestle with a complicated regulatory environment. But Prosper is a dot-com, and Kiva is a dot-org. Prosper is a classic Silicon Valley baby, nourished by $20 million in venture capital and heavy-hitting backers including Accel Partners, Benchmark Capital, Fidelity Ventures, and the Omidyar Network. As a nonprofit, Kiva relies on donations and grants, which so far total $250,000.

The different models affect not only the superficial -- guess which company has slicker offices -- but also the fundamental. One key question: How will the benefits and challenges of each model affect its results? The issue is increasingly relevant for entrepreneurs whose businesses have an explicit social mission, be it protecting the environment or helping the disadvantaged. "Choosing between for-profit and nonprofit is becoming more of a common dilemma for entrepreneurs,'' says Alan Abramson, director of the nonprofit sector and philanthropy program at the Aspen Institute. "This is becoming an uncomfortable choice to make because they're trying to do both.''

Soon after their dining table epiphany, Prosper's Larsen and Witchel each kicked in $10,000 and hired a lawyer to see if their idea would fly with the U.S. Securities & Exchange Commission. In early 2005, they started offering programmers contract work and the promise of equity, and soon they had six employees. "They weren't doing it for charity,'' says the sandy-haired, soft-spoken Larsen. "There was no question we were going to get funded because of our track record.'' In April, Prosper raised $7.5 million from Benchmark and Accel. Prosper moved into a 2,500-square-foot office with furniture left over from a dot-com that went bust. Larsen brought his computer and office chair from home.

Larsen and his colleagues developed a site where those in need of cash can set up an account and list the amount they want to borrow and the maximum interest they will pay. Prosper's analytic tools assign each borrower a rating based on his or her credit record. Other Prosper users then offer a portion of the capital and bid on the interest rate. Those with the lowest bids become lenders. Last February, Fidelity and Omidyar Network invested $12.5 million in Prosper. "We didn't need the money,'' says Larsen, "but we wanted the brainpower.''

At Kiva, Flannery also worked his connections, albeit far less moneyed ones. He asked Moses Onyango, a pastor Jessica had met in Uganda, to gather $3,100 in loan requests from seven businesses, including a vegetable stand and a fishmonger. "The idea was that we would divide the loans into shares and sell them to the friends and family from our wedding invitation list,'' says Flannery. The loans wouldn't collect interest, but the shares sold in three days. Flannery collected the money through PayPal and wired it to Onyango, who then distributed the money to the entrepreneurs. Each succeeded in repaying the loan within the year.

Encouraged, the Flannerys organized a second round; this time, they invited the public to make loans. "I had this idea about sponsoring a business,'' he remembers. "That word was running through my head because I grew up sponsoring children.'' (His family donated to World Vision in the 1980s.) Jessica worked with Onyango to collect loan requests from 50 Ugandan entrepreneurs. Matt built a tool to create MySpace.com-like profiles for each one and sent out a press release. In November, 2005, two high-traffic blogs, Daily Kos and Boing Boing, featured the site. Within three days, 50 loans had been made for a total of $25,000. After talking with his mentor, Bob King at Peninsula Capital, and his brother-in-law, venture capitalist Peter Cochran, with Vulcan Capital, Flannery decided to take the nonprofit route. "What we were doing was highly experimental,'' he says. "I thought that as a nonprofit I could get early support I probably couldn't get from a VC.''

Unlike Prosper, Kiva works only with entrepreneurs, which it finds with the help of microfinance institutions in developing countries. Those partners bring their clients to Kiva instead of to a local bank. Kiva posts pictures of the borrowers on its site and shows how each would use a loan. When a loan is made, Kiva transfers the funds to its partners. Lenders, who are usually repaid within a year, can read blog updates from entrepreneurs they've sponsored.

Last July, Kiva's six employees moved into an airy, 1,300-square-foot office in a Mission District warehouse with exposed brick and an assortment of secondhand furniture. Kiva also inherited its best talent from other places. Chief Operating Officer Olana Hirsch Khan came to Kiva in May after six years in sales at Google, and Premal Shah, who made his fortune as one of eBay's first employees, became Kiva's president last year. Shah and Flannery now earn about $3,300 a month, and Jessica volunteers while she finishes at Stanford Graduate School of Business. Says Flannery: "In the future, we'd like to scale this to the point where people are paid the salaries that will give them incentive to do the work.''

Since July, Prosper's 25 employees have inhabited 111 Sutter, a 9,000-square-foot space with a majestic wood-paneled conference room and a showstopping view of San Francisco Bay. The rent is more than seven times Kiva's. Prosper's employees could do quite a bit better as well: As part of competitive pay packages, they receive options that vest in four years.

In all but four states, Prosper has secured a lending license by meeting the terms of the Fair Credit Reporting Act. So far, Larsen says, default rates roughly mirror those at major lending institutions. Prosper receives 1% of the loan amount; lenders pay an annual servicing fee of 0.5% of the amount they lend. That money leaves Larsen, who is CEO, and Witchel, who is chief technology officer, free to concentrate on building the business and to add new features to the site.

That's freedom Flannery would like to have. He spends three-quarters of his time raising funds. He can't replicate Prosper's model in the U.S. because the legal expenses would be too much. Instead, Kiva plans to expand by introducing low interest rates to attract more lenders.

It is not surprising that Prosper's reach is so much broader than Kiva's. In its first seven months, Prosper's 100,000 registered users have made $22 million in loans, averaging about $5,000. Kiva's 15,000 lenders have made $1.2 million in loans, with an average loan size of $500. That translates into success for both companies, whose founders agree that there is room in the wide-open field for both models. Says Kiva's Shah: "Right now there are so few people doing this and it's so experimental, we need to help each other. If either model has a significant flaw, it could destroy the credibility for everyone."

January 27, 2007 at 05:21 PM in Financial Services | Permalink | Top of page | Blog Home

We can all be bankers now

Telegraph | Money | We can all be bankers now

Last Updated: 12:30am BST 23/08/2006

Zopa, the internet business that introduces borrowers to private lenders, is now 18 months old. Pamela Atherton tracks its progress

You might think that not too many people would be willing to lend money to strangers, but thousands of people are, according to Zopa, the internet company. Zopa is the financial equivalent of eBay, the auction website: it puts borrowers and lenders directly in touch with one another.

It was launched in March 2005 to offer competitive borrowing and lending rates to people by cutting out traditional lenders who make money on the deal. Zopa (which stands for Zone of Possible Agreement) attempts to match small lenders with borrowers - finding the point at which what someone might pay for a loan matches the interest rate another person is willing to lend the money at. In a little over a year more than 88,000 people have become Zopa members.

Sixty-three per cent are borrowers and 37 per cent lenders, with about 50 per cent of active lenders having already added to their original lending outlay.

Zopa is coy about providing specific lending figures but insists that millions of pounds have been transacted since the launch, involving thousands of lenders and borrowers, and that more than 5,000 new members are being signed up each month.

The average gross return for lenders since launch has been 6.83 per cent (including Zopa's 0.5 per cent fee, but excluding tax). Lenders bear the risk of defaults directly, although bad debts to date have affected only 0.05 per cent of the loans made.

What is more, the risk of defaults is diluted by the spreading of any loan across a number of borrowers. In addition, Zopa carries out full credit checks on all borrowers. The appeal for lenders is not only the prospect of higher rates of return than those provided by banks and building societies but also the transparency of the costs and the control that direct lending gives them over their money.

The benefits for borrowers are that interest rates can be lower than those charged by traditional lenders and that there are no early repayment penalties. This has made Zopa particularly attractive to the self-employed and others who, because they have fluctuating earnings, may find it difficult to borrow from the banks and may also wish to repay loans early. Both lenders and borrowers pay Zopa a fee of 0.5 per cent of the loan. For example, if a deal is struck for £5,000 Zopa receives a total of £500.

It also receives commission (which it refuses to disclose) on the sale of optional payment protection insurance. It seems to work. Zopa is currently topping the best-buy tables on websites such as www.uswitch.com and www.moneysupermarket.com and estimates that its loans are about 30 per cent cheaper on average than those that a bank would offer to a prime borrower. The average gross interest rate paid by borrowers to date (on an average loan term of 2.5 years) has been 6.8 per cent (7.1 per cent APR including fees).

A good option for the creditworthy borrower
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Lenders who visit the website are asked how much they are willing to lend, to whom and over what period.

They are then asked to choose the price at which they are willing to lend. Borrowers trawl the Zopa website to see the terms on which lenders are willing to lend and apply accordingly.

Borrowers - who undergo a stringent vetting process - are rated "A''' or "B'' according to their creditworthiness. For example, on Tuesday last week an "A''-rated borrower could obtain a loan of £5,000 over 36 months at 5.34 per cent, whereas a "B''-rated borrower would have to pay 7.1 per cent for the same loan.

These rates include the 0.5 per cent Zopa fee, but not the cost of optional payment protection insurance. When a borrower finds an acceptable rate of interest he or she can apply for the loan. Once the application is accepted, Zopa arranges for the interest to be paid directly to the lender's bank account.

Lenders can make loans of between £10 and £25,000, while borrowers can apply for loans of between £1,000 and £15,000. Zopa boasts a bad-debt record of only 0.05 per cent in the first 18 months of its existence. It attributes its low default rate to its credit-scoring methods for assessing borrowers. These are carried out in addition to the normal checks via the electoral roll and credit reference agencies such as Experian, Equifax and CallCredit.

But it is still early days and whether its credit check system is more effective than that implemented by the banks will not be known for a couple of years.

Martin Lewis, editor of moneysavingexpert.com, says: "Zopa has a low default rate because it only lends to people with very good credit histories and who earn at least £25,000. You can't compare Zopa's default rate with the banks' because they have to lend to a far wider customer base.''

One senior official at a high street bank says: "Typically, we tend to see defaults halfway through the term of a loan, so with a five-year loan they start to emerge after two-and-a-half years. Depending on what Zopa's average loan term is, it seems a little early to be boasting of a low default rate.''

All lenders and borrowers enter into a legally binding contract with their respective borrowers and lenders, while Zopa manages the collection of monthly repayments via direct debit. Borrowers' non-payments are chased in the same way they would be by a bank: they are referred to a debt collection agency and any money collected is returned to lenders.

After 120 days of default, the agency sells the debt on to another financial institution, at which point the lender is offered a final payment and the outstanding debt is written off. Zopa is not a bank, so loans are not protected in the same way as bank and building society deposits. Instead, it holds consumer credit licences from the Office of Fair Trading and is authorised and regulated by the Financial Services Authority, but only for the sale of payment protection insurance.

Lewis says: "Zopa is a reasonable option for someone with a very good credit record to check out what someone on Zopa is willing to lend them. But for anyone with a poor credit history, I would never recommend that they apply to Zopa as it will simply leave an unwanted footprint on their credit reference files that they have applied for credit and been rejected.''

January 1, 2007 at 05:53 PM in Financial Services | Permalink | Top of page | Blog Home

In the future, everyone will be a loan officer

In the future, everyone will be a loan officer | Straight.com Vancouver

Truly brilliant and unique Internet business ideas are rare. Most, like Amazon, are merely a translation or expansion of real-world stores into the on-line realm. Really smart concepts like eBay could only exist in cyberspace and are peer-to-peer based, which means they offer an environment in which individuals can participate in business in a way that was never possible before on such a large scale.

The latest of these great ideas is so far only available to citizens of the U.S. and the U.K., where Prosper (www.prosper.com/) and Zopa (www.zopa.co.uk/), respectively, operate the first peer-to-peer money-lending networks. There are some differences between the two companies, but basically a prospective borrower asks for the loan of a sum of money, and people interested in lending money supply it. Naturally, all the standard rules of credit are in effect, from loan qualification to penalties for defaulting, but the process sidesteps the traditional banking hierarchy. The companies collect a small amount of the loan value as their piece of the pie.

In the October 2006 issue of Esquire, financial columnist Ken Kurson explains that Prosper was started by E-Loan cofounder (with Janina Pawlowski) Chris Larsen. E-Loan, which Kurson extolled as an investment opportunity a couple of years earlier, operates like a mortgage broker service (although for a wider variety of loans). It shops your application around to established lending houses, which either pass on it or make an offer of X dollars at Y-percent interest. What Prosper and Zopa do is more akin to the concept of microlending pioneered in developing countries. (That model just netted innovator Muhammad Yunus a Nobel Peace Prize.) People are graded for their credit scores and interest rates, and post applications. At Zopa, they are further grouped by the proposed length of the loan (one to five years), while Prosper operates with a fixed three-year term. With both companies, however, there are no penalties for early repayment.

On the funding side are people who wish to accept a little risk in order to make more money than a bank deposit provides, just folks with a few bucks to loan out—few being the operative word. Potential bankers with sums in the low two digits are not turned away. Furthermore, you aren't required to lend to a single individual. At Zopa, if you kick in £500 or more, it will automatically be split among at least 50 borrowers. In effect, Zopa is a quasi-traditional lending institution funded by individuals who've contributed at least £10.

Over at Prosper, things are considerably more free-market. People post requests for sums between US$1,000 and US$25,000 and the interest rate they desire, and lenders can browse the requests. Lenders can thus specialize in certain areas (such as helping aspiring audiophiles who “just want to buy some really bitchin' speakers”) or devote their funds to specific user groups like firefighters or teachers. They can agree to take on all of a person's loan request or just throw in a couple of hundred at a specific interest rate. Or you micromanage a little less and just select your desired risk level and/or user group and have the loans made automatically.

Another interesting feature of Prosper is that if a loan becomes fully subscribed and lending offers start coming in at lower rates (i.e., there's competition among lenders or somebody new joins the pool who has a soft spot for firefighters who are aspiring audiophiles) the original people who offered, say, US$500 at 14 percent are sent e-mails telling them they'll have to cut their rate to 13.75 percent if they want to stay in.

Unlike eBay, where the on-line meeting ground serves as an introduction service for a transaction that's completed via personal e-mails and the postal system, with Prosper and Zopa both parties' identities remain confidential. You're not putting up the money for Bob Smith; you're financing a loan request based on credit risk, interest rate, and—maybe—a personal fondness for a specific type of request (car loans for single mothers, golf clubs for retirees). Similarly, Bob Smith will never know if his loan came from one generous benefactor who liked his proposal or 200 smaller ones who liked his credit grade.

It seems to me that there are probably a few bucks to be made underwriting loans—the banks seem to believe it's possible. Kurson says that he favours making high-risk loans (higher interest rates, but with a certain percentage of defaults expected), and has kicked in some cash on 230 requests, pulling in almost a 20-percent return, with 10 loans going more than 30 days overdue and being referred to a collection agency.

I must admit that when I read Kurson's Esquire article, the first thing I did was rush to Prosper's Web site to see how I could become a lender. Unfortunately, you have to be a U.S. resident with a Social Security card. Still, maybe this concept will migrate to Canada in the near future—it's so gleamingly brilliant that it could go viral pretty quickly. (Both of these companies are less than two years old.) Of course, I'd expect the chartered banks to fight against it pretty strenuously, but there might not be much they could do in the present regulatory environment, where even grocery-store chains can spawn financial institutions. So all you bored venture capitalists, here's a great idea just lying there waiting to be picked up. Ladies and gentlemen, start your lawyers.

January 1, 2007 at 05:52 PM in Financial Services | Permalink | Top of page | Blog Home

A new world: Get your mass collaboration road map set

globeandmail.com: A new world: Get your mass collaboration road map set

Traditional business is no longer the sole engine of wealth creation in the economy, DON TAPSCOTT and ANTHONY D. WILLIAMS find

DON TAPSCOTT AND ANTHONY D. WILLIAMS

Throughout most of human history, hierarchies of one form or another have served as the primary engines of wealth creation and provided a model for institutions such as the church, the military and government. So pervasive and enduring has the hierarchical mode of organization been that most people assume that there are no viable alternatives. That is, until a new generation of user-friendly collaboration tools unleashed a new force on the world.

It's like someone uncorked the bottle of human ingenuity. Empowered by the growing accessibility of information technologies, millions of people already join forces in self-organized collaborations that produce dynamic new goods and services that rival those of the world's largest and best-financed enterprises. Though it is unlikely that hierarchies will disappear in the foreseeable future, it's clear that the traditional business enterprise is no longer the sole engine of wealth creation in the economy.

The quintessential example of mass collaboration is Wikipedia -- a collaboratively created encyclopedia, owned by no one and authored by tens of thousands of enthusiasts. With five full-time employees, it is ten times bigger than Encyclopedia Britannica and roughly the same in accuracy. It runs on a wiki -- software that enables multiple users to edit the content of Web pages. Despite the risks inherent in an open encyclopedia in which everyone can add their views, and constant battles with detractors and saboteurs, Wikipedia continues to grow rapidly in scope, quality and traffic. The English-language version has more than a million entries and there are ninety-two sister sites in languages ranging from Polish and Japanese to Hebrew and Catalan.

While Wikipedia's mission is to make the sum of human knowledge accessible, not all examples of mass collaboration are guided by altruism. Take Linux, an open source operating system that emerged from the hacker-fringes of the Internet in 1991. At first, many doubted the efficacy of an operating system developed by a Web-enabled community of anarchist programmers. Oh how the critics were wrong.

Today, more than a hundred million users of set-top cable boxes, TiVos, Motorola Razrs, and other home appliances use Linux, and more than a billion people use it indirectly whenever they access Google, Yahoo, or myriad other websites. If you drive a BMW, chances are its running Linux. All considered, Linux-related hardware and services produce billions of dollars of revenue annually and now IBM, HP, Motorola, Nokia, Philips, Sony, and dozens of other companies are dedicating serious resources to its development.

What should today's business manager make of this? First, if you can make an operating system and encyclopedia through mass collaboration, consider what might come next? How about a mutual fund (http://www.marketocracy.com), a peer-to-peer lending system (http://www.zopa.com), designer t-shirts (http://www.threadless.com), or just about any physical good one can imagine (http://www.cambrianhouse.com)?

Second, don't assume that the new collective action represents only a threat to established businesses. While some fear mass collaboration will reduce the proportion of our economy that is available for profitable activity, smart firms are proving otherwise. Networked models of innovation and value creation can bring the prepared manager rich new possibilities to unlock innovative potential in a wide range of resources that thrive inside and outside the firm. For example, IBM estimates that working with the open source community saves it nearly a billion dollars per year over what it would cost to develop a Linux-like operating system on its own.

Finally, get your mass collaboration road map ready. Barriers to entry are vanishing and the trade-offs that individuals make when deciding to contribute voluntarily to projects and organizations are changing, creating opportunities to dramatically reconfigure the way we produce and exchange information, knowledge, and culture. Companies that recognize, address, and learn to tap mass collaboration will benefit, while those that ignore and resist will miss important opportunities for innovation and cost reduction, and may even go out of business. Now that the genie's been unleashed, there's no putting it back in the bottle.

Don Tapscott is CEO of New Paradigm, a technology and business think tank, and the author of 10 books about information technology in business and society, including Paradigm Shift, Growing Up Digita.

Anthony D. Williams is an author and researcher with experience in the impact of new technologies on social and economic life.He is vice- president and executive editor at New Paradigm.

Wikinomics

Forget everything you know about the way we do business. Mass collaboration is revolutionizing the corporation, the economy, and nearly every aspect of management. In this seven-part series, Don Tapscott and Anthony D. Williams, co-authors of Wikinomics: How Mass Collaboration Changes Everything, due out Jan. 2, explain new business models that will empower the prepared firm and destroy those that fail to adjust.

December 26, 2006 at 10:07 PM in Financial Services | Permalink | Top of page | Blog Home

Social lending over internet cutting out the banks

Social lending over internet cutting out the banks | 24dash.com - Bill Payments

New study shows that Brits are looking for an alternative to high interest rates – Social Lending over the internet

Big banks watch your backs - the British public is looking for an alternative, with 74 per cent of Britons stating they would consider either getting a loan or lending money through a social lending community, rather than their high street bank, according to a new study.

While the study found that people who used high street banks thought they were necessary for general everyday banking, 49 per cent stated that they feel that banks do not have their customers' best interests at heart, 81 per cent agreed that the banks are self interested and 76 per cent strongly agreed that the banks are greedy.

'Internet-based Social Lending', an in-depth study by the Social Futures Observatory, looked at the growing phenomenon of Social Lending.

Borrowing and lending money person-to-person, rather than through a bank is an age-old concept, but in the past has normally taken place in private – through friends, family or other close-knit social groups. Social Lending, now facilitated by the Internet, is emerging as a new financial category of genuine importance. Social Lending is when people lend and borrow money, side-stepping the banks in order to get better loan rates and better returns than their savings account, and a fairer deal for everyone.

The study found that Social Lending is growing in popularity, much like other social networking sites that have seen huge growth with the likes of LinkedIn, YouTube and MySpace.

The reasons for this are due to the increased transparency and connectedness with others that comes from lending to and agreeing loans amongst like-minded people. Just as importantly, it offers people strong financial benefits – higher rates of return on investment for lenders, and a lower rate of interest than is offered by banks for borrowers.

The study looked at a number of Social Lending players, and used Zopa, the online marketplace where people meet to lend and borrow money, as a case study. Zopa, which was set up by many of the team that launched Egg, currently has 105,000 members in the UK.

According to Professor Michael Hulme, who authored the study, "Traditional Banking emerges from this report as almost some form of necessary evil. For most people banking does not provide any form of rewarding or valued experience it is simply a necessity. In contrast to this the Community Sites we looked at appeared to offer a much deeper appreciation of the individual that went far beyond the actual transaction."

James Alexander, co-founder and CEO of Zopa, believes that not only are people looking for a better financial deal, but also for a way to make their money human again.

"We've seen a strong return to ethical values in recent times, with many of us concerned about the impact we, and the organisations we deal with, are making on the community we live in. Lending and borrowing money from real people online, through marketplaces such as Zopa, allows people to get a much better financial deal than what's on offer on the high-street.

"People are already seeing the benefits – for example, those lending at Zopa have since launch received about a 50% better rate of return on money they've lent out than if they'd left their money in the best savings accounts such as ING Direct or Egg."

According to the survey, 64 per cent of people who use high street banks felt it was important that their banks provide a service that enables social interaction and community participation, yet only 13 per cent felt their bank significantly enabled either of these things.

Additionally, 56 per cent said that the more social and interactive features of Social Lending would be a significant factor in their decision to use a Social Lending scheme and 18 per cent stated that investing in people rather than institutions would motivate them to use Social Lending marketplaces such as Zopa.

December 26, 2006 at 09:57 PM in Financial Services | Permalink | Top of page | Blog Home

Prosper.com rounds up a community of dollars and sense

CSIndy: The loan rangers (December 7, 2006)

Prosper.com rounds up a community of dollars and sense
by Josh Johnson

Like many Americans, I’m in debt. Serious debt. I owe more money than I make in a year.

With the federal government operating at $8.6 trillion in debt, and with American consumers owing nearly $2 trillion — more than the gross national product of many industrialized nations — to credit card companies and other creditors, some might say that debt is the American way.

My debt is so scary that I’ve largely ignored it, unable to deal. I’ve contended with multiple daily messages about “an important business matter,” but otherwise, not facing it has been a fairly easy way of managing it. I can’t get a mortgage with an interest rate short of robbery, and even credit card companies have shunned me, so I get by paycheck-to-paycheck, trying not to increase my debt.

“Ignore it and it’ll go away,” however, is not a long-term operating principle. I was unemployed for much of 2006 and discovered that many employers now run credit checks on potential employees, as do landlords. My credit report can affect my housing and employment, and I had no idea what the report even said. It frustrated me that my secret past of fiscal irresponsibility was used to judge me, ultimately keeping me back.

So I set out to face the monster. I went to TrueCredit.com and bought my credit reports for $29. Beer in hand, I saw myself as the credit world sees me.

As a student, I took out the largest loan allowed each semester, for tuition and living expenses, sure, but also for stereos and other items not directly related to my education. My student loan account is now horribly delinquent, weeks away from defaulting. The credit cards are already in default. Library fines and parking tickets have been sold to collectors. I also have bounced checks from now-closed accounts and am years removed from a host of other small financial missteps.

After figuring out which accounts need to be paid now and making deals with others, I arrived at the amount needed to bring me current and on the road to better credit: $1,700. Not bad! Problem is, I’ve dug a hole so deep no one will risk helping me out, and I have no savings to halt that number from doubling. No credit card will give me a $1,700 line of credit, and when I applied for a loan through my local bank, I was told, “It’ll be difficult for you to do anything.”

I could go to predatory lenders, like a payday-loan agency or high-risk lenders disguised as credit counselors, but with payday loans in Colorado at an average 345 annual percentage rate (APR), I could dig myself deeper. Simply put, I have no access to credit. All reasonable creditors see me as a number. They don’t look beyond and see the human desperately trying to make good and right the wrongs.

Enter Prosper.com.

‘Libertarian paternalism’

Some years back, Chris Larsen had a “sleazy” mortgage experience that left him feeling ripped off, with the impression that the credit system in America is corrupt and generally “mucked up.” He set out to change things by starting eLoan, an online mortgage, home equity and car-loan lender. eLoan was a success, doing more than $27 billion in business over the Internet. But Larsen dreamt of further democratizing lending.

“We started thinking with the eLoan experience, ‘Well, what would be the ultimate model here?’ and kept coming back to an eBay for money,” he says. “eBay has been so great at democratizing. They’re bringing capitalism to the masses.”

Last year, Larsen sold eLoan for $300 million, and he launched Prosper.com in February. Today, Prosper has more than 100,000 members with $23 million in loans.

Prosper’s framework combines the peer-to-peer marketplace of eBay with the social networking of MySpace. Borrowers seeking between $1,000 and $25,000 post profiles explaining their need for a loan, and lenders bid on the most attractive loans the same way eBay users bid for products — except the lowest interest rates, not the highest offers, win.

Most loans are funded by dozens of lenders who bid $50 each, the minimum allowed. Prosper keeps a 1 percent loan-originating fee (a one-time $25 charge for a $1,000 loan), and bills the lender a 0.5 percent annual loan-servicing charge. Borrowers have three years to pay off the debt, with no penalty for pre-payment. Basically, Prosper is a peer-to-peer lending auction with a human element.

One of Larsen’s missions at eLoan was to be “radically pro-consumer,” and he’s brought that ideal to Prosper. In most lending situations, the borrower approaches the lender, putting the lender in a position of power. Prosper turns that model on its head. Here, the lenders seek out the borrowers, who set the details of their loan, including a cap on the interest rate they’re willing or able to pay.

Larsen calls this “libertarian paternalism.” Anyone who can clear an identity check can post a listing. And any American with $50 can bid on that listing. Lenders can assess their risk using methods such as credit ratings based on a borrower’s actual credit score. And the borrower’s debt-to-income ratio — marked with a red warning label if the ratio is high — cautions lenders against those who may not be able to afford the loan. From that point, the market is open to do what it will. Prosper is merely the tool, the venue.

As a result, the diversity of borrowers on Prosper is impressive. There are the entrepreneurs seeking start-up capital; those seeking car loans at lower interest rates and more manageable payment schedules than offered by dealers; and the people with terrible credit history trying to get a fresh start.

A quick survey of the site reveals some compelling stories. One single mother, an Iraq war veteran, is trying to consolidate her debt in order to get back on her feet. She’s posted pictures with her children and lays out her monthly budget for all to see.

A professional woman recently diagnosed with cancer needs $25,000 to front her chemo treatment until the health-insurance paperwork is processed.

$ocial networks

Many of the borrowers are people who, for numerous reasons, are not able to get credit elsewhere, and many of these people find loans on Prosper. Tales of funding someone with such dire needs can warm the heart, but Larsen is quick to clarify that Prosper is not an altruistic endeavor.

“We’re a for-profit company,” he says. “If we’re ever really going to take on this trillion-dollar credit market, just for unsecured credit alone, there really needs to be a model that can sustain itself, not just through charitable contributions, but through good returns on investment.

“We believe, much like the eBay sort of mission, that most people are good, and if people are given open access to trade, good things will come. You could probably track all the evils of predatory lenders, payday lenders, all the bad stuff that happens in credit, back to lack of transparency, lack of access.”

Some have compared Larsen to Ralph Nader for his consumer-rights fervor. In California, where Prosper is based, Larsen put up $1 million for petitioning and acted as a mediator between legislators and financial institutions to pass a law that prevents the buying and selling of financial information without notifying the consumer, a practice Larsen says contributes to the proliferation of identity theft. He’s also worked to create greater consumer access to credit information, which was highly guarded by the industry until 2001.

“Consumers need to be on an equal playing field with lenders who have that information,” Larsen says. He uses the example of an auto dealer to illustrate his point.

“Just when you’re at your lowest low, he gives you a rate that’s probably five or six points higher than what you really should be getting. Then he’s turning around and selling it to Wall Street at the real price, and he’s making a killing. That can only happen when there’s lack of access. Can anybody else see that transaction in America? Does anybody else see what it actually sold for on the capital markets?”

As much as they run the risk of getting screwed by traditional loans, solo borrowers on Prosper, especially those viewed as higher-risk by lenders, have a harder time getting a loan. For them, there are Prosper groups. Apple User Group, Independent Filmmakers, Funding Your Wedding, Corporate Divas, Minorities in Need of Money, Christian Opportunities — there’s a group to suit every user.

Groups primarily act as social networks. Users apply to a group, and the group leader accepts or denies the application. Some group leaders require a meeting or phone call, a bank statement or full financial vetting. The best groups are the most difficult to join.

Good group leaders act as mentors, reviewing member listings before they’re posted and offering advice. Lenders will reference a group’s rating and its members’ repayment histories when considering a loan. Groups essentially vouch for their members, and a member’s poor repayment history affects the whole group. Prosper kicks back some cash to group leaders whose members pay on time, and the leader can choose to share it with the group or keep it as compensation. Many members make money as they repay their loans.

More importantly, groups introduce what Larsen calls the “shame factor.” Group members feel compelled to repay their loans to avoid the shame of letting their group down.

“How will you be looked at in your community if you do not repay your debt?” asks Larsen. “That’s something that America’s sort of lost.”

The hui way

Prosper, upon first glance, may seem like a new idea, but it’s not. Larsen references the classic holiday film It’s a Wonderful Life.

Back then, with small community banks, borrowed money was actually a neighbor’s money. Prosper simply cuts out the middleman. While the neighbor may be earning 3 percent interest on his $5,000 savings deposit, the borrower is paying 19 percent interest on her line of credit from the same bank, for the same amount. Meet in the middle at 11 percent on Prosper, and she pays eight points less while he makes eight points more — a win-win.

Inspired by eBay, Prosper.com founder Chris Larsen is relying on the goodness of everyday people to transform the loan industry.
Photo courtesy of Chris Larsen
If a lender were truly a neighbor, the borrower would feel more inclined to pay on time, to save embarrassing encounters at the curb while putting out the garbage. This “shame factor” is lost when dealing with a large, faceless institution. With Prosper groups, borrowers are accountable to real people. But this is not an innovative concept.

“Prosper was partially built on a Vietnamese system called hui,” Larsen says. “It’s a system of peer-to-peer lending, where a small village will get together; 12 people participate, six will be lenders and six will be borrowers. And it works very strongly on that sense of accountability for the community.”

What’s missing here is a lender’s ability to diversify. Rather than lending $5,000 to an individual at 20 percent, lend $50 to 100 people with the same interest rate. Should one of them default, the rest will cover the loss. In many cultures, community members lend and borrow among themselves. Rotating savings and credit associations (ROSCAs) are an example, and Prosper is a kind of American version.

What Larsen calls the “shame factor,” Muhammad Yunus calls “solidarity.” Yunus pioneered microcredit, a system of giving small loans to those who otherwise would not have access to credit. He, along with his Grameen Bank, won the Nobel Peace Prize this year for fighting poverty using the method. Yunus believes credit is a basic human right.

The United Nations declared 2005 the International Year of Microcredit. Microcredit generally works with philanthropists making guarantees, dollar amounts not donated but placed as collateral should loans default. The guarantee remains in an investment account while microfinance institutions (MFIs) use it to back small loans to the world’s poor and extreme poor, who have no access to credit or banking of any sort.

Conventional wisdom would say loaning money to the poor and extreme poor is not good for lender or borrower, but Yunus has proven differently. A small loan of less than $500 is often all that’s needed to lift the poor out of poverty. Of those who’ve remained in Yunus’ program for more than five years, more than 50 percent have pulled themselves out of poverty, he says.

Yunus’ work also shows that the poor tend to make natural entrepreneurs. Their fight for survival has taught them efficiency, frugality and creativity in getting the most out of their money. With a small loan, a person can buy a goat to breed and sell the offspring, or start another business. And, perhaps most surprisingly, the available numbers show that the poor are fiscally responsible.

“Well-run MFIs typically have a default rate of less than 2 percent,” says Kyle Sayler, senior vice president of portfolio management for MicroCredit Enterprises. And while industry-wide numbers are not available, he suspects the average repayment rate is somewhere around 96 percent. “Repayment rates are better than in traditional banking in the U.S.”

MicroCredit Enterprises is a relatively new organization whose employees work mostly pro bono to raise money for MFIs within communities. Like many MFIs, MicroCredit prefers to work with women. And 96 percent of Grameen Bank’s loans are awarded to groups of women.

“Some would say women tend to repay better. I don’t know if that’s the case or not,” Sayler says. “In our case, when women increase the income in their families, they’ll take a greater share and put it toward food or clothes or education for their children.”

Sayler spent two years running an MFI in Chiapas, Mexico, and says one factor that contributes to high repayment rates on microcredit loans is the willingness of group members to cover a payment for another member when she cannot.

“It worked because they came from the same community, and they self-selected their group,” he says. “We didn’t force anyone to work with anyone they didn’t want to.”

As MFIs prove that the world’s extreme poor are responsible borrowers, the giant, for-profit banks are eyeing a slice of the pie.

“I think there’s a big divide in the industry right now between fear of commercialization and pushing commercialization,” Sayler says. “There’s a little bit that makes me fear making money on the backs of the poor. But at the same time, I think [commercialization] causes MFIs to operate more efficiently. Increase in competition and efficiency pushes down interest rates to the poor.”

After all, those receiving microcredit through MFIs or Prosper all have the same goal: profit.

Live long and ...

Andy Mowery is a Fort Collins entrepreneur and leader of the Prosper group An Entrepreneur For Sure!

“We look for serious entrepreneurs,” he says of the group. “If they don’t have a written business plan, they have a concrete idea of what they want to do with the loan.”

Mowery began selling home, garden and pet supplies on eBay in 1999. Today, his company, Debnroo, has grown into a 2,500-square-foot warehouse in Fort Collins, and he expects to do about $1.1 million in retail sales this year. Revenue doesn’t always mean ready capital, however, and so when he needs cash in hand, he turns to Prosper.

“We most recently took out a $25,000 Prosper loan to buy a container of a product that we’ve been selling for over four years, and it was a single opportunity to get the item at a deep discount.”

A single opportunity, Mowery says, that needed to happen in 72 hours. He found an investor to float him the capital for two weeks while he waited for a Prosper loan.

“Fourteen days is not a lot of time. I’d challenge anybody to try and do that with a bank,” he says. “I think the process through traditional banks is antiquated.”

Mowery got the loan through Prosper, and he now uses his know-how to mentor others in getting loans.

James Carothers had maxed his credit and needed to clean it up before applying for a Small Business Association loan to purchase the Moose Creek Café in Walden. He joined the group Business Loans for Entrepreneurs!, and with no mentoring, Carothers received a $5,000 loan from 26 lenders, most of whom put up the $50 minimum.

Carothers had a middle-of-the-road credit rating at the time he got his loan, with a debt-to-income ratio of 17 percent — not low. His group’s track record and his personal listing — which noted a financially crippling car accident 13 years prior, his Christian faith and his post on the town council — brought skeptical lenders to his side.

“I had it funded in less than four hours,” he says. “I hope to leverage myself in the next six months into a position where, rather than a borrower, I’ll become a lender to help other people out.”

While Prosper lenders certainly look for attractive returns, those who post listings that appeal to emotions and present a human face get funded. Apparently, lenders like to think they are helping out.

“You’ve got to be able to communicate to people that there’s a human being behind the screen name and tie in emotional aspects,” Mowery says. “Emotion works. That’s part of what marketing and salesmanship is all about.”

Whose de-fault?

My first loan application on Prosper, for $1,000, was a terrible failure. My credit rating lists me as high-risk, though my debt-to-income ratio is the lowest possible at 1 percent. Colorado caps interest rates at 21 percent, and most lenders don’t see that as a high enough risk-to-return ratio.

Immediately after I posted my listing, I received multiple messages from well-intentioned users offering suggestions. I was told to detail my four current defaults, vet my personal finances and, please God, join a group already.

So I joined the first group I found, one with 910 members who I knew would accept my poor-credit self. Its obnoxious name — “More loans FUNDED @ LOWER % than ANY other group” — gave me hope.

So I posted for another loan, now backed by what I thought was a successful group.

I got messages from the same people who replied after I posted my first loan. I was scolded: “Have you learned nothing since your last listing?” Apparently, lenders shun my group. They say the group leader can’t hold 910 people accountable and offers no mentoring. And I never heard from the group leader.

I soon withdrew my second loan application.

Fort Collins’ Andy Mowery, a Prosper.com borrower, is looking to give back — literally — as a lender.
© 2006 Laura Katers
In order for Prosper to work for me, I must do more homework. I need to scour the message boards for comments about groups and join one that’s right for me. I need to post a transparent profile that explains in detail why I’m in this situation and how I plan to budget payments. I need to build lender confidence.

But in the back of my mind, I wonder, “If I get this loan, will I make payments on time, or will I fall back into old habits?” Prosper gives credit to those who can’t get it elsewhere, but if I fail to uphold my end of the deal, I’ll be sent to collection agencies. Yet if I make payments regularly, it’s positively reflected on my credit report.

“Sometimes credit is something that completely turns around somebody’s life; they could start a business,” says Larsen. “And sometimes credit for a person at the wrong time in their life can actually be detrimental.” I’m looking to the world’s poor for an example.

Josh Johnson is a former contributor to the Colorado Springs Independent and current associate publisher at the Rocky Mountain Chronicle, where this story originally appeared.

December 8, 2006 at 10:52 PM in Financial Services | Permalink | Top of page | Blog Home

Integrating the Channels

http://www.banktech.com/printableArticle.jhtml;jsessionid=XWF44MCHDKT04QSNDLRCKH0CJUNN2JVN?articleID=193402868

Nov 01, 2006
URL: http://www.banktech.com/showArticle.jhtml?articleID=193402868

Channel Management

The development of banks' overall channel strategies has been anything but deliberate. Delivery channels have grown from need and technological advances, and banks' channel strategies have evolved in response. But now that financial institutions are juggling numerous channels and the multitude of ways in which they touch customers, many banks are actively looking to integrate those delivery channels more strategically.

According to an August survey from the American Bankers Association (Washington, D.C.), usage of the major delivery channels is decidedly split. When 1,000 consumers were asked what banking method they used most often, 32 percent said the branch, 26 percent said online, 26 percent said ATMs, 5 percent said the telephone and 5 percent said traditional mail (6 percent said other/none). But statistics on channel usage -- by age, gender and wealth, for instance -- abound.

Generally, current research indicates that the branch and the Internet are the key buying channels for banking products. A recent survey from Framingham, Mass.-based Financial Insights reports that the branch remains the most utilized channel, with almost 75 percent of consumers visiting a branch at least once a month. However, according to the survey, customers who use the online channel tend to have more interactions per month with their financial institutions: 25 percent log on more than 10 times per month.

According to research from Cambridge, Mass.-based Forrester Research, 82 percent of consumers still prefer the branch for opening a new account. Yet there is a strong difference in channel preference by age. Younger generations overwhelmingly prefer the online channel and are more likely to adopt online banking activities, Forrester reports.

The bottom line is that no channel is an island unto itself, says Karen Massey, a senior research analyst with Financial Insights' consumer banking and credit practice. "All channels are important to consumers for the specific purpose each serves," she writes in a new report from the research firm. As a result, Massey urges banks to invest in a consistent customer experience across all channels, including integration of real-time cross-channel data.

Seamless Customer Experience

The current focus in banking is on customer-centric, rather than product-based, strategies. And customers have strong demands. Consumers want to bank on their own terms -- they want access to their money anywhere, and they want it now, said Bart Narter, senior analyst, banking, Celent (Boston), during a recent BS&T webcast, "SOA for Multichannel Integration." "That has been a challenge for the banks," he noted.

Customers are spoiled by general retailers, says Jerry Silva, TowerGroup (Needham, Mass.) research director for retail banking and delivery channels. Some large retailers allow customers to order products online and then pick them up at the nearest store location, for example. But because of the way bank channels have been set up, with different products maintained in different silos and with no real interface to unite the systems, many banks haven't been able to deliver this level of service to their customers, Silva says.

"It's important for customers to feel like a bank really knows them," says Alex Hart, president and CEO of online banking solutions provider Corillian (Hillsboro, Ore.). The customer should get the same information at the ATM, the branch and online, Hart stresses -- there has to be consistency across those channels. At too many banks, he contends, that is not the case. "[Channel integration] is really designed to create a better user experience; it creates preference and differentiation," Hart says.

SOA for Multichannel Architecture

"Firms need to build integrated channels that facilitate customer information and process flows," said Peter Tebbenhoff, product marketing director for Palo Alto, Calif.-based business integration and process-management software provider TIBCO Software, during the BS&T webcast. "Only then will banks be able to achieve the operational efficiencies they had hoped for," he added.

But most banks must overcome legacy architectures that have been built piecemeal as the result of the emergence of new channels and products, as well as M&A activity, Tebbenhoff said. Maintaining legacy systems is time-consuming, prone to error, expensive and inflexible, he noted.

The best approach to achieve multichannel integration, according to Tebbenhoff, is a service-oriented architecture (SOA). "Enabling channels to interact with core applications allows banks to pull out the detailed data embedded deep in core systems spread across the enterprise, translate it into comprehensive, meaningful information, and enable its consistent availability across all of the delivery channels to internal and external constituents," according to a TIBCO report, "Using SOA to Cash in on Multichannel Integration."

A trailblazer in this area is The Huntington National Bank in Columbus, Ohio ($36 billion in assets). According to TowerGroup's Silva, "Huntington is the poster child of multichannel integration."

Dan Vermeire, SVP and chief technology officer for the bank, says a determination to improve the customer experience motivated Huntington to integrate its sales and service channels. "Huntington is incredibly focused on customer service -- on making sure that the things we do end up in positive experiences for our customers," Vermeire says. "We want to see things done consistently and accurately [across channels]," he adds.

"Banks have an intense number of ways in which we touch our customers. ... As those technologies evolved, it was not easy to integrate [them]," Vermeire continues. "Delivery channels exploded and customer experiences were starting to become disjointed. They weren't always receiving the same information or the same approach in service and delivery from one channel to the other." To clear up any customer confusion and create a more seamless experience, Vermeire says, he wanted an integration architecture that was designed specifically to deliver consistent information and experiences across the bank's channels.

Forrester senior analyst Mary Pilecki echoes Vermeire's sentiments. "The consistent customer experience is more targeted toward getting the same answer to the same questions," she says. Customers all have a preference for a particular channel, but no customer base will be homogeneous in its preferences, Pilecki observes. Therefore, banks should aim to provide a common experience across channels. The common experience can be delivered through a business process management (BPM) suite, Pilecki says, and SOA can enhance the BPM.

Huntington partnered with Columbus, Ohio-based software provider Synoran for its SOA platform. The Synoran solution enables Huntington to see a real-time picture of all of its customers across all of its channels, leading to a total view of the customer, according to the bank's Vermeire.

After Huntington's initial investment in SOA, the bank first integrated its self-service channels and then began to focus on the platforms used by its associates for sales and service capabilities, Vermeire explains. "We look at it as an overall business strategy and journey," he says. "[It's] a road map that's focused on customer needs and business changes."

A multichannel integration platform provides three major benefits: customer responsiveness, operational efficiency and a huge degree of savings by reducing errors, according to John Knightly, VP, industry and partner marketing, for San Jose, Calif.-based enterprise infrastructure software provider BEA. The banks that want a "walk-before-you-run approach," he says, start with a specific channel and specific goals. They build modular components and then realize that they can use those in other channels. "A more visionary bank" wants to do it all at one time, Knightly says.

Preparing for Growth

Waterbury, Conn.-based Webster Bank is an example of such a visionary bank. In early 2004, Webster ($18 billion in assets) decided to replace all of its core banking systems to support future growth. "We wanted an IT infrastructure that would support a bank double or triple our size," explains John Kershner, the bank's CTO.

In conjunction with the decision to upgrade its core infrastructure, Webster decided to implement SOA, Kershner says. When the bank selected Jacksonville, Fla.-based Fidelity National Information Services for most of its core banking applications, it was with the agreement that the vendor expose its mainframe systems to Webster through SOA, he says. "We require all of our strategic partners ... to expose their systems to us through Web services for easier systems integration," Kershner explains.

The bank evaluated a number of vendors for its SOA platform, including IBM (Armonk, N.Y.), TIBCO, WebMethods (Fairfax, Va.) and BEA, and then constructed a proof of concept for which the vendors came into the bank to design and develop an application to the bank's specifications, according to Kershner. Webster eventually chose BEA. "What set BEA apart was ... the fact they could bring in a small, knowledgeable team [that] could develop the code within the two-week time frame we allotted," Kershner says.

The BEA WebLogic Enterprise Platform is an open platform that integrates all customer touch points to deliver a consistent customer experience, BEA's Knightly says. The benefits of the infrastructure, he asserts, include obtaining a single view of customers, more-successful channel updates, integrated contact centers, streamlined account creation and improved cross-sales rates.

Over a 15-month period beginning in early 2004, Webster replaced its core banking systems, put in a new ATM system, installed the SOA platform and then integrated all of the bank's front-end delivery channels -- including ATM, branch, call center, Internet banking and voice response unit platforms -- back to the core systems through the SOA. "It's provided us the foundation and infrastructure to easily integrate new applications, to add cross-application functionality, and to add products and services more rapidly," Kershner says. "It has improved IT's ability to turn around projects much quicker by utilizing services that may have been developed for one channel or system to another. It's reduced the complexity of managing hundreds of point-to-point interfaces and has made us more operationally efficient by just managing one integration layer."

But Webster's channel integration efforts aren't complete just yet. "Our vision for multichannel integration is to enable customers to begin a process like a loan or deposit application in one channel and complete the process in another," Kershner says. "Our next steps are to do more business process refinements that improve our customer interactions," he adds.

"SOA is something that you implement because you plan to grow and change," Kershner says. "It helps you quickly adapt to business changes and business demands." Customers experience the benefits of SOA, he adds, in Webster's abilities to provide new products to the market faster than before, to provide more customer information to service representatives and respond more quickly to service requests, and to offer consumers more and easier ways to interact with the bank.

Kershner acknowledges that the path Webster took to integrate its channels is not likely to be emulated by many institutions, as it's not often that a large bank replaces all of its core banking applications at one time. Still, he recommends that banks tie an SOA implementation to the purchase of one or more new business or channel applications. "It is much easier to demonstrate the business case for SOA when you package it with other business functionality that can be delivered directly to the business lines," Kershner explains. "Spending money to integrate new business applications into an old point-to-point architecture is a waste."

Seattle-based Boeing Employees Credit Union (BECU) had a slightly more modest goal for its SOA initiative and multichannel integration, according to Kyle Welsh, director of technology services for the credit union. "We wanted to get to a hub-and-spoke architecture just so we could be more efficient, so when we rolled out products and services we didn't have to do redo interfaces all over the place," he says.

BECU replaced its core system and integrated its channels in November 2002. As a result, Welsh says, the credit union is able to greatly speed up its time to market for new products.

Welsh offers some pointed advice for other banks. "Don't try to boil the ocean," he says. "When you are implementing SOA, don't try to do it all at once." Only integrate the systems that make sense and those that will deliver the most "bang for the buck," he says.

The Payoff

Ultimately, regardless of the path taken to get there, multichannel integration pays off in higher customer satisfaction, says Frank Florence, VP and chief marketing officer for Chordiant Software (Cupertino, Calif.). "Consumers ... are more than ever prone to switch banks," he says. Integrating delivery channels creates a more-seamless cross-sell atmosphere, he says, promoting growth.

By making delivery channels user-friendly and seamless, banks will encourage customers to do more business with them, Forrester's Pilecki says. But banks also will incent staff by streamlining the process, she adds, as it will be easier for them to open new accounts, for example.

Channel integration also creates cost savings, Pilecki points out. Rules change a lot, particularly from a regulatory perspective, and a big expense is tied to that, she relates. But those costs can be cut if you only have to make the change once and it then can be applied across all the delivery channels, Pilecki notes. "Just by enabling a common process and being able to change that in one place reduces IT costs tremendously," she explains.

Still, multichannel integration really is about creating a better user experience to drive growth, says Corillian's Hart. It creates preference and differentiation, two holy grails in the financial services industry, he asserts.

Organic growth is driven by selling more to existing customers, TowerGroup's Silva adds. If a bank gives its customers consistent service that other banks can't deliver, "that will be the wow factor that will differentiate [it]," he says. *

Multichannel Integration: The Next Steps

Imagine that an online banking customer has a question late one night when checking his or her accounts. If that customer had the option of instant messaging a contact center representative and getting an instant answer to the question, that would make for a contented customer. Integrated multichannel platforms enable banks to implement such next-frontier technologies -- when their customers are ready.

Dan Vermeire, SVP and chief technology officer for The Huntington National Bank in Columbus, Ohio, says his bank's IT infrastructure is well positioned to support collaborative technologies, such as instant messaging, voice chat and ad hoc customer video conferencing. "We've got some small-scale chat capabilities in use," Vermeire says. When Huntington's customers demand those features to improve their interactions with the bank, Huntington is prepared to deploy them. "Stay tuned," Vermeire says.

While Huntington is preparing for the future, a small bank in Arlington, Mass., may be ahead of the pack. This spring, Leader Bank ($197 million in assets) began providing its customers with their bankers' AOL Instant Messenger screen names, The Boston Globe reported in an Aug. 12 article. Customers "can ask about anything from certificate of deposit renewal rates to mortgage quotes to information about their accounts," the article said.

Video conferencing, which is in use internally at many banks, also will morph into another customer touch point, many experts say. According to a Financial Insights (Framingham, Mass.) white paper, international banks are beginning to implement video conferencing for specific business purposes. For example, Banco Comercial Portugues (Porto, Portugal; US$95.6 billion in assets) uses video conferencing to discuss complex products with its customers, Financial Insights notes. --N.F.

November 1, 2006 at 07:23 PM in Financial Services | Permalink | Top of page | Blog Home

Fixing the Requirements MESS

Courtesy of NH

CIO | Fixing the Requirements MESS

The requirements process - literally, deciding what should be included in software - is destroying projects in ways that aren't evident until it's too late. Some CIOs are stepping in to rewrite the rules.

READER ROI

* How a broken requirements process can sabotage software projects
* Ways to rewrite the process for success
* Software that can help monitor requirements for problems

Hugh Cumming had his work cut out for him. The gap between what his not-yet-implemented call centre management application at a large European company could do and the requirements list created by 40 eager business-side stakeholders now filled 3000 pages and threatened to delay an already overdue call centre consolidation effort another four to five years. "My first instinct was that the project had absolutely no chance of success," says Cumming, currently CIO for ADP Employer Services Canada.

Requirements, as every CIO knows, are a problem, but CIOs may not be aware of just how catastrophic the problem has become. Analysts report that as many as 71 percent of software projects that fail do so because of poor requirements management, making it the single biggest reason for project failure - bigger than bad technology, missed deadlines or change management fiascos. Though CIOs are rarely directly responsible for requirements management, they are accountable for poor outcomes, which, when requirements go bad, can include: project delays, software that doesn't do what it's supposed to and, worst of all, software that may not work correctly when rolled out, putting the business - and the CIO's job - at risk.

Mishandled requirements can torpedo a project at any time, from inception to delivery. Start down the wrong road and you arrive at the wrong destination. And even if you're heading in the right direction, making fumbling changes midstream can be almost as deadly. Not integrating requirements with your test process can have you racing back late in the game to correct problems that might have been solved early on (and more cheaply).

It's up to the CIO to establish an overall requirements process that works and to support it with the political skills necessary to get buy-in from both the business and development sides. The CIO must also have the organizational backbone necessary to shove wayward requirements processes back into line. None of this is easy. Business users often don't know exactly what they want, can't prioritize what they do want, request things IT simply can't deliver (because of complexity or cost), or can't describe their desires in terms that translate accurately into code. On the IT side, analysts, architects and coders regularly try too hard to please and don't set realistic expectations for projects; they don't use every means possible to guarantee that what they're building is what the user really needs, and sometimes they even fail to make sure that they're talking to all the right stakeholders.

In short, the traditional practice of requirements is broken. But some IT folks are doing everything they can to fix the situation. To a man, they say process is key. Exactly what process? They all have their own ideas. One executive decided to simply enforce rules that should have been enforced all along. Another rewrote the rules from the ground up. And a pair threw out the old rule books completely, one taking a business-process-focused approach and the other choosing to build applications with quick iterations rather than long requirements documents. But they all agree that you should choose a formal requirements-gathering process and stick to it.

Writing requirements is hard. It will always be hard. But with a handful of smart decisions you can create a requirements process that will produce positive results - and maybe keep your next project from becoming another statistic.

Forty's a Crowd

Cumming's solution to his requirements nightmare was radical surgery. First - with backing from ADP's chief executive - he stripped down the scope of the consolidation project, lopping off existing processes that worked as-is and didn't need to be rolled into the new application. He also pared the group of 40 stakeholders to five active participants. He allowed the others to stay involved, but only in the more passive role of reviewing the implementation plan and feature specifications, without actually adding feature requests of their own. He then repeatedly went back to the remaining five stakeholders and asked them if specific requirements were really must-haves or simply nice-to-haves. After less than two months of pressing the issue, his new requirements list was less than 10 percent of the original. And after the project went into production, it needed to accommodate only one major change before being rolled out to 12 global locations.

Cumming says the problem in this case - and in many cases - is that IT often does not take a leadership position in the requirements process, instead taking the attitude that "the business is requesting it, so it must be the best thing to do". But that kind of thinking can lead to requirements lists that are unmanageable and unforgiving. Instead, he says, IT people need to develop a valuable skill: saying no with a smile. "Really what you're saying is: 'Not yet'," Cumming says.

To paraphrase Daniele Vare, managing requirements - like diplomacy - is the art of letting everybody have your way.

When Cumming reduced his army of 40 stakeholders to five, he admits that there were some "interesting conversations" about who would stay in primary roles, noting that people were worried they were going to lose features they felt were important to their business units. To ease their fears, Cumming and the core stakeholders created a "high-level vision" (a summary of the most important functions) for the project and spent time demonstrating how the final project lined up with that vision. He also showed all the stakeholders how they would get at least some value from the project - even if they weren't going to get every single detail they wanted.

The more passive stakeholders were also encouraged to become more active as the call centre system began rolling out. When the system moved into their departments, these stakeholders became directly responsible for sponsoring any necessary application changes within those departments. This task was assisted by the intense interest that senior management had in getting the project into production. Cumming felt he needed to know who really wielded influence in the company (versus what appeared in the org chart), plus he wanted to identify stakeholders with sufficient technical expertise to add value to the requirements-gathering process.

"The list of people who would have the most to contribute to a requirement list always ends up being small in my experience," Cumming says.

The Rules of the Roles

Tired of his company's hodgepodge of requirements practices, Jesse Hanspal, director of development technology services at Bank of Montreal Financial Group, decided to create his own process by combining pieces of existing requirements techniques and adding a quality assurance process as well. Hanspal says that after five years of effort, the bank has defined the requirements process at a level of abstraction high enough that it can be applied to any project or problem. After much consideration, the bank decided that it needed a process built around responsibility and job roles in order to guarantee that all necessary stakeholders had a say.

"It's important to get all the stakeholders around the table and get the requirements from the horse's mouth," Hanspal says. And, he adds, by defining stakeholders according to their roles, you get a more accurate cross-section. For instance, he says, for a given project, you need representation of the end-user role, of course, but also of the application administrator role, not to mention roles related to security and regulatory compliance.

Hanspal notes that in the past IT spent 10 percent to 20 percent of its time and energy on defining requirements. "What we've learned is that once you have defined a process, then you go and get an ISO 9000 certification for that," he says. Having the certification lets people know what is required of them. It also gives the bank a chance to evaluate effectiveness and improve the process. And Hanspal says the new process has produced results. For instance, the number of software defects related to requirements has dropped by some 50 percent since implementing the new controls.

Bank of Montreal also wanted to make sure that its analysts had the skills necessary to execute the new process. Unfortunately, while it had been easy to find external certification for project management (the Project Management Institute) and functional testing (the Quality Assurance Institute), no similar body existed for business analysis. So the bank created its own. The International Institute of Business Analysis now boasts some 800 international members, Hanspal says, and any company can send analysts for training in the Bank of Montreal approach.

Going Agile

Given the trouble companies continue to have with requirements, some practitioners argue that the process needs to be more flexible.

Gregor Bailar, CIO at Capital One, is a convert to one of these antiestablishment philosophies: agile development. Agile development advocates argue that old-style requirements processes are too rigid, put walls between users and developers, and, given the ever-changing nature of software and business, are fated to fail. Instead, they say, developers and users should sit down together and start coding almost immediately, stopping frequently to evaluate progress and make necessary changes based on user input without feeling the need to follow a monolithic requirements document. (For more information on agile development, see "Code of Practice", CIO May 2004.)

"What we needed wasn't more process but to get to the value [in a project]," Bailar says.

After piloting the concept in early 2004, Bailar began forming the ultra-lean, connected teams that are the basis of the agile method. Agile teams at Capital One generally consist of three businesspeople, two operations people, and five to seven IT folks, including a business information officer (in effect, a translator who works between the business and IT sides), a project manager and at least one of the 80 developers that Bailar sent to formal agile training classes. Along the way, some architects and security experts will add their skills as necessary. Each team gets its own agile coach (one of 20 Bailar hired) to keep an eye on the proceedings and offer advice and support. Teams meet in dedicated, open rooms, and initial requirements are limited to a goal for the project, a handful of cards with specific needs, and some models or prototypes for reference. Teams work together in close quarters throughout the project, and development stops regularly - perhaps three or four times in a typical nine-week development cycle - to assess progress and determine if changes are needed. Larger projects are built by breaking projects down into small pieces and assigning each subsection to an agile team (the method is sometimes called "swarming" in agile circles), with the overall progress controlled by a project manager.

To test the results of the system, Bailar took several in-development projects and switched them midstream from older waterfall-style development to "scrum", an agile technique that prescribes small, flexible groups that include developers and users and divides development into a sequence of 30-day "sprints". These sprints begin with a planning meeting and end with the group reviewing test results before the start of the next sprint.

He then tracked their progress against the historically expected progress of the older method, and he was happy with what he saw. Agile reduced development time by an average of 30 percent to 40 percent (sometimes nearer to 50 percent) while simultaneously improving the quality of the deliverables. He's sold, though he acknowledges that agile has its limitations.

"There are lots of things we don't use agile for," Bailar says, noting that the method excels where requirements are ambiguous and priorities are unclear, or for situations where you have the triple constraint of "faster, cheaper, better" but can't afford to drop one of the three. For extremely large projects or those with very distinct and ordered requirements, Bailar says more traditional approaches are probably a better fit.

Every Line of Code Connected to a Business Process

Robert Sherman might not see it that way, however. Sherman, the strategic methods leader for IT at Procter & Gamble Pharmaceuticals, isn't a huge fan of traditional approaches to requirements. He considers requirements only one of the first threads in a tapestry that includes everything from business processes to a finished software application. And unless IT managers begin to realize the importance of this interconnectedness, he warns, countless projects will continue to crash and burn.

Like ADP's Cumming, Sherman had a requirements epiphany in the late 1990s. At the time, he was involved in an effort to standardize all of P&G's 150 factories on a single factory-floor information management system. He and nine other experts at the company compared a 70-page specification written by the supplier to a 200-page requirements document written by P&G. Experts and vendor alike agreed that the document contained everything necessary for a successful project. It was concise. It was complete. It also "went to hell in a handbasket", Sherman says.

Poking through the rubble, Sherman at first couldn't understand what had gone wrong. Why had the seemingly ideal specification failed to produce a suitable application? He hired a contractor who spent two months tracing every requirement to every relevant sentence in the specification. P&G found that 30 percent of the deliverables were not adequately addressed. And from what Sherman could tell, the misfires were a result of being too dependent on team members' recollection of document comparison. The supplier had looked for common patterns that it could duplicate in order to reduce coding complexity. To Sherman and the others reviewing the specification, it looked - on the surface - as if those patterns matched exactly to the requirements. But they hadn't. The problem, Sherman eventually decided, was that everyone involved had simply run up against the limits of their ability to comprehend extremely complex situations. The management tools they were using were also unable to make proper connections between deliverables and the actual business processes they would support - connections that would have highlighted the subtle distinctions that turned success into failure.

Frustrated with the inability of requirements management software vendors to address the overriding disconnectedness he felt was at the core of many development problems (not just this one), Sherman decided to build a system using his own schema and a collection of tools that now includes Visio and Telelogic's Doors. The premise, he says, was simple: granular traceability. His vision was to be able to take a piece of code and quickly trace it back through the development process, back to requirements and then - rather than stopping there - map it all the way back to every affected business process to better gauge the application's impact on the business and to find hidden stakeholders.

Getting to this point has taken five years and has required the IT team to gain an encyclopaedic understanding of business processes, but the results have been worthwhile. Using complex pharmaceutical project lifecycle management tools as a benchmark, Sherman says he produced the application at one-quarter the cost and with fewer than 10 percent of the expected defects compared with outside development estimates. Sherman also helped another group in P&G apply the technique to a teetering ERP implementation that seemed destined for failure thanks to a never-ending requirements process. By shifting midstream to the new schema, however, the project got back on track and now looks like it will be a success, he says.

The P&G schema has produced numerous side benefits as well, Sherman adds. For instance, an approach called "initiative scenarios" helps IT teams identify potential enterprise-level stakeholders, with the aim of converting them to sponsors before a project even gets under way. Since every requirement links back to a business process, business-side stakeholders, developers, architects and analysts can trace their way through the organization, identifying groups that feel an impact from the new application, even if they weren't the actual end users. As an example, Sherman points to an Electronic Lab Notebooking (ELN) application (a digital data collection tool for researchers) that P&G had been having trouble getting rolled out. Previous attempts at justifying and delivering the ELN limited the requirements analysis to the lab bench and the scientist who used the notebook. But Sherman was able to demonstrate a domino effect that showed how notebook data would affect acquisitions, divestitures, patent filing and more. As a result, the IT group was able to seek additional sponsors inside the organization, and the project is heading toward 4000 users.

"If you've done the appropriate joins [to these work processes] and you understand the linkages back to the roles, you can get the clearance ahead of time - or kill the project if you don't have the buy-in," Sherman says.

The schema also has a dramatic impact on compliance. A too-restrictive view of regulatory issues can cripple projects in the pharmaceutical industry. A too-loose interpretation, meanwhile, could open the company to legal action. But previous requirements methodologies at the company relied more on gut instinct to determine the proper balance. Now, Sherman says, compliance experts can trace their legal requirements all the way from business process to final code to determine if regulations come into play. And the schema's chart-like format and standardized sentence structure make it possible for just about anyone to trace a path, which helps users and developers prioritize requirements

based on which ones will have the greatest impact on a business process.

Even so, Sherman says, successfully using the schema requires a couple of rules. Projects must be broken down into pieces. More complex applications can be built by combining these pieces, but Sherman believes that going beyond a certain level of documentation leads only to more documentation - and greater complexity - instead of execution.

Required Thinking

As these cases show, requirements processes must change, and CIOs need to drive the charge. Fixing your broken process probably won't be easy or quick, so start now.

"Today, survival depends on game changing - certainly for IT it does," P&G's Sherman says. To change the development game, "IT is going to have to understand the intersections between requirements and business processes". Failure to achieve that understanding could have dire consequences, he warns.

"If you're not rewriting the rules of the game," Sherman says, "then you deserve to have your job offshored."

SIDEBAR: REQUIREMENTS TOOLS

Guardrails to a Good Process

Tools never fixed a software problem, says Richard Chennault, enterprise architect at Kaiser Permanente. But when it comes to managing the requirements process, tools can be a help - assuming good processes are already in place.

Whether you subscribe to the Rational Unified Process and own the complete suite of Rational applications or simply piece together your own toolset from smaller vendors such as Borland and iRise, tools can act as bearings and guardrails to help keep your requirements process moving and on track. Some examples:

• The Framework for Integrated Test (FIT), developed by Ward Cunningham (who also invented the community-edited online Wikipedia), is a platform where requirements are literally written as tests - for a requirement to be met, the test must pass. And FitNesse, which puts a wiki-like interface on the FIT methodology, allows business users (or more likely business analysts) to enter requirements into a spreadsheet interface that automatically produces test cases for later testing.

• Sofea's Prophesy (used by Bank of Montreal) lets customers and business analysts produce simulations and tests before any code gets written.

• SteelTrace Catalyze (used by ADP) is a requirements-management tool that breaks requirements into functional and non-functional (qualitative) buckets, creates graphical storyboards of requirements and generates test documentation.

• Telelogic's Doors (used by Bank of Montreal and Procter & Gamble) integrates with Mercury Interactive's TestDirector for automated testing.

• iRise's iRise Studio lets companies create rich prototypes of applications, allowing, if not functional tests, at least visual confirmation that requirements are being accurately modelled. Short of having a simulation, you will get to the testing phase and have misrequirements, says David Nix, vice president of online banking at Suntrust, an iRise user.

• Borland CaliberRM allows simplified requirements modelling.

But, while all these products can simplify the requirements in your life, you have to focus on process first, says Chennault. You can do all this stuff with a notepad and a pencil if you have a great process.

October 14, 2006 at 02:33 AM in Financial Services | Permalink | Top of page | Blog Home

As good as it gets? Banking in UAE

Banker Middle East - The business of banking

The United Arab Emirates is home to some of the region's most successful banks, but are there too many of them? Robin Wigglesworth examines where the opportunities lie for retail and commercial banks in the UAE, and whether consolidation is the panacea for an overbanked market

If anyone thought that the volatile stock market would put a damper on the record profits of banks in 2005, they were sorely mistaken. Though much of the profits of UAE banks can be attributed to the booming markets, their underlying performance seems to be stronger than many analysts fear, with many banks reporting excellent first quarter results in 2006.

According to a recent report by EFG-Hermes, an Egyptian investment bank, the massive oversubscription of two IPOs that closed in March "severely distorted" the first quarter balance sheets of UAE banks. However, the only bank that posted negative earnings growth compared to the same period in 2005 was National Bank of Dubai (NBD), and this was only because of the one-off sale of its investment securities in early 2005.

This is heartening for the UAE, which has often been accused of being bloated with banking institutions, with 21 locally-incorporated banks and 26 foreign banks servicing an estimated population of 4.3 million.

There are historical reasons for the current overbanked situation. For a long period, the UAE was not a single banking market, but rather a conjunction of many micro-markets. Each Emirate was keen on keeping a bank in its own jurisdiction, fearing that the larger institutions would not be keen on having branches in the peripheral areas that were economically weaker than the financial powerhouses Abu Dhabi and Dubai.

"THERE IS CERTAINLY A STRONG CASE TO BE MADE IN FAVOUR OF SOME MERGERS IN DUBAI AND ABU DHABI, THE TWO LARGEST SUB-MARKETS."

With a few scattered exceptions have been very few institutions that have focused on a pan-UAE reach, and concurrently, there has been a willingness by local governments to maintain a bank in each Emirate.

Furthermore, after the Lebanese civil war, Bahrain and Dubai both competed to become the regional banking centre, and opened up to many foreign banks. The largest foreign banks, such as HSBC and Standard Chartered, now even compete with the top five local banks.

The influx has now stopped, as the Central Bank of the UAE has correctly deemed that 47 banks serving such a small population is not sustainable. However, according to Anouar Hassoune, an analyst for Standard & Poor's, competition has remained very strong, because overall, the UAE is" a market that provides banks with tremendous opportunities in private banking, asset management and investment banking, not only because of Abu Dhabi's oil wealth, but also because of the Dubai experience".

Atif Bajwa, head of the retail banking group at Mashreqbank, admits that the UAE is "a small market", and given the number of banks involved in retail, a call for consolidation would be "justified". The population centres are few, and according to Atif, they are "well-branched and have a very high density of ATMs".

There is certainly a strong case to be made in favour of some mergers in Dubai and Abu Dhabi, the two largest sub-markets. In Dubai, the government directly and indirectly controls NBD, Emirates International Bank and Dubai Bank, just in the conventional space. In Abu Dhabi, the government and Abu Dhabi Investment Authority (ADIA) control both NBAD and Abu Dhabi Commercial Bank (ADCB).

Anouar says Standard & Poor's expects to see more consolidation of banks, particularly for those that it makes "no economic sense to have them as separate entities". It is certainly true that regional competition will increase and shareholders will eventually realise that size does matter. With a larger pool of assets and capital, banks would be able to finance larger projects, have a wider branch network, and establish new initiatives such as private banking or Islamic finance subsidiaries.

NBAD has recently noticed the cost of such ventures. Whilst it is the largest bank in the UAE, it is, as Michael Tomalin, CEO of NBAD admits, "relatively small" in global terms. "It costs a tremendous amount to set up all these ventures and subsidiaries," says Michael, "whether private banking, Islamic banking or even having an office in London or New York. All this has very high fixed costs, and you need a very strong base at home in order for the economies of scale to work for these new ventures."

And the bottom line is that mergers cut operating costs, and enable banks to compete on pricing to attract more customers.

The case for consolidation is seemingly rock solid, and has been so for some time, but there has been no true M&As since the 80s, when ADCB and Emirates Bank were formed from a merger of several banks. Michael has felt "quite strongly for some time that consolidation should come", but says it is"not very high on the agenda right now". Why?

The key driver for consolidation is a desire to increase the return on capital, and mergers generally shave costs and have revenue uplift possibilities. However, as long as profits remain as high as they have been recently, there is little pressure on the banks to cut costs by operating on a larger scale. "Return on capital is good right now, and is likely to stay that way for some time," says Atif.

As of today, even small banks such as Sharjah Islamic Bank and RAKBank are performing well, having found their niche market. Atif says competition from the "smaller, nimbler" banks has become "quite intense" over the past few years, and RAKBank, for example, has pursued an aggressive marketing campaign aimed at the middle income mass market, and come up with a series of interesting products, according to Atif.

Sharjah Islamic Bank (SIB) is another case in point. National Bank of Sharjah was said to be doomed either to be subsumed by a larger entity, or continue trooping on, with little possibility for growth or expansion. However, it identified a previously niche market, Islamic banking, teamed up with Kuwait Finance House (KFH), giving up 20% of the shareholding in return for a management contract with KFH, and converted completely into an Islamic bank. A good example of what effect the conversion has had is to look at the share price. Before the conversion, National Bank of Sharjah traded at AED 3, but SIB is now traded at around AED 13.

"YOU COULD END UP WITH A CROSS-BORDER CONSOLIDATION OF A UAE BANK, ENTERING A REGIONAL NETWORK."

It is by most measurements an outstanding success story, and one that is likely to be emulated by other banks. Dubai Bank, for example, has already announced that it will be converting to become completely Shari'ah compliant.

However, consolidation among UAE banks could happen as a result of two scenarios. Firstly, intense competition might force the hands of banks unwilling to be subsumed at this time. The UAE market cannot continue to grow indefinitely, and to expand their market share, banks will have to compete more aggressively on pricing than they do now. As in all markets, this will weaken the small institutions and strengthen the larger ones, and a small bank might be forced to seek a merger.

Secondly, consolidation might happen if banks realise how costly organic growth can be. The current boom and expansion of banks across the Gulf means that competition for human resources is fierce, and shareholders might be willing to trade some control for scale.

Morgan Stanley has more experience with mergers and acquisitions than most, and is likely to be at the thick of things should consolidation happen. Dr. Georges Makhoul, regional head of Morgan Stanley's Middle East and North Africa office, strongly believes consolidation among UAE banks will eventually happen, not because of a need for higher capitalisation, but "because the competition for places to invest is going to get harder and harder".

However, he stresses the need for thinking out of the box, rather than a simple consolidation of, for example, the Dubai government's shareholding in UAE banks. "You could end up with a cross-border consolidation of a UAE bank, entering a regional network".

Another possibility might be a Saudi bank entering the UAE market by buying RAKBank or other small to mid-size institution. They could then, thanks to abundant Saudi capital, grow organically across the UAE. Georges is "certain" that Saudi banks are interested in buying other GCC banks, and says that whilst the time is not right yet, "the structure is there, and they will do it". Anouar says it is "merely a question of speaking to each other", and with the continuous flow of financial conferences and official government meetings, it might be only a question of time.

Opportunities
So far, the primary focus of UAE banks has been on serving the affluent segment and the upper middle class, in particular the large civil service. However, there are still abundant opportunities in this and other customer segments. Whilst locals have been well-served, the large affluent expatriate population is, according to Anouar, still "underserved" by domestic banks.

Despite intense competition, there is still a huge pool of potential clients for private bankers, but local UAE banks have been slower in focusing on this segment than the large foreign banks, a fact that Michael is very aware of. "The percentage of the business with local banks is relatively small, and the overwhelming majority of it is with the international banks. This is something we would like to change." Private banking services at local banks tend to be priority deposit and loan service with a relationship manager, whilst the asset management and wealth advisory business has often been left with the international banks due to the lack of skill sets at local banks.

Atif feels that financing for small and medium sized enterprises (SMEs) and commercial banking has also been neglected by UAE banks, but maintains that this is now changing, and the market will soon see a series of initiatives and products from leading UAE banks.

The rush of banks such as NBAD, First Gulf Bank, Union Bank of Abu Dhabi and Mashreqbank to establish Islamic finance company subsidiaries after the Central Bank approved new regulation, and the success of Emirates Islamic Bank and SIB, indicates the strong potential of Islamic banking. However, whilst the potential of Islamic finance in the UAE is undeniable, the Islamic finance companies are limited to what they can do in the retail space.

"THE MORTGAGE MARKET, AND INDEED THE WIDER RETAIL CREDIT AREA, IS ALSO DEPENDENT ON THE ESTABLISHMENT OF AN EFFICIENT CREDIT AGENCY."

It is the mass retail market that has been ignored the most. According to Anouar, there are very few banks across the GCC that concentrate on the mass market, and "none in the UAE". Banks have understandably focused on the high earners, but astute banks should diversify their deposit base to include this mass segment. A large UAE bank should have the right tools to manage the risk on a portfolio basis, and consolidation would again allow a bank further to neutralise any risk involved with the mass market segment.

Mortgages are a staple banking product in almost any other market, but not among UAE banks. However, that trend is changing, with a flurry of banks entering the mortgage market, ready to take advantage of the opening of the property market and the vast amount of homes ready to hit the UAE market.

Anouar says that mortgages are the "next big thing" for banks, but adds one large caveat: The legal framework for property ownership in the UAE is inadequate. "It is not supportive of banks that want to foreclose on loans and seize collateral. Atif agrees, pointing out that whilst the mortgage market is "relatively new and immature", the implementation of a comprehensive legal and regulatory framework would be "a great boon" for the industry.

The range of mortgage products is still incomplete, and repossession, the basic concept underpinning mortgages, is still untested in the UAE. In many ways, this is due to the particular cultural characteristics of the Middle East. One of the most basic principles of Islam is that you cannot evict a family out of their home, so repossession by a bank is an anathema, not only to Islamic banks, but to the entire culture of the country.

Therefore, the mortgage practices of the west will probably not be directly copied in the Middle East, but as Anouar points out, Islam itself might offer the solution through the concept of Ijarah, where the bank owns the underlying asset itself and leases it to the customer. If the customer defaults, it becomes a question of how to settle losses and assets between the parties. It will need work, but the banks are on it, and don't put it past them to come up with a product that serves both the banks' need for collateral and the customers' need for a home.

The mortgage market, and indeed the wider retail credit area, is also dependent on the establishment of an efficient credit agency. According to Anouar, an agency is "necessary" for the further development of the mortgage market, but says it is difficult to establish if it is not managed by the Central Bank. Atif also calls for the active involvement of the Central Bank, which he says should "push the establishment of a central credit bureau to develop a robust and sound retail credit environment".

However, due to the federal structure of the country, the Central Bank of the UAE is weaker relative to other GCC regulators, so UAE banks now have to do it themselves. Government involvement is vital, as credit agencies are useful when everyone is part of them, but each individual bank has very low incentives to take part.

October 10, 2006 at 12:52 AM in Financial Services | Permalink | Top of page | Blog Home

Trades and grades

Taddingstone Consulting Group - Press Article

01-16-2000
By: Canadian Business Staff

The best and worst discount broker rated by criteria

When researching the discount brokers for this special issue, we didn't just walk up and kick the tires a couple of times. We stripped them right down and studied every nut and bolt. We took roughly $40,000 and opened accounts at 1 discounters. We made hundreds of phone calls, sent scores of e-mails and placed dozens of trades to help you learn which broker is right for you. We also received expert guidance from The Taddingstone Consulting Group Inc., a Toronto-based financial services consulting firm.

Cost We looked at how much each broker would charge in commission for the following three trades: (1) 100 shares of a $20 TSE-listed stock; (2) 500 shares of a $20 TSE-listed stock; and (3) 100 shares of a US$50 stock listed on the New York Stock Exchange. We then multiplied by eight, for a total of 24 trades, or two per month over a year. We assumed that 12 of the trades were placed over the Internet and the other 12 were placed in live conversation with a broker. Where a broker charges more for limit orders than market orders, we applied the higher fee to four of the trades.

Other costs We looked at: the purchase of one contract of $3 options, the purchase of a $2,500 front-end-load mutual fund, the annual administration fee for RRSP accounts and the fee for transferring your assets to another broker. Where a firm waives the front-end-load mutual fund fee only for customers with accounts of $15,000 or more, we took the average of two purchases: one by a customer with the necessary $15,000, one by a customer with less.

Online trading We looked at 13 criteria including ease of navigation, real-time updates, charting tools, news sources and whether 24/7 technical support was offered. We deducted points for persistent technical problems. Since most investors trade over the Internet, online service was given double the weight of the other five categories.

Telephone service This category has two parts. First, we asked the brokers if they offered automated touch-tone trading or voice-activated trading, or both, and tested how easy those services were to use. Then we graded them on the quality of service we received from their customer help lines. We called each broker several times and posed questions or problems, and compared their responses.

Mutual funds & products In preparing this year's ranking we focused on two product areas where discount brokers can add value for investors-mutual funds, and IPOs and new issues. For mutual funds, points were assigned based on fee structure, selection and availability of no-load funds. Brokers were graded on the quantity, quality and breadth of initial public offerings and new issues over the past eight months.

Response time Do the brokers quickly pick up the phone or leave you on hold listening to elevator music? We phoned each firm 11 times with a stopwatch in hand. We also sent four e-mails to each broker and timed how long it took them to respond. Finally, we phoned the brokers and asked them to mail an application package to us.

Research & extras In this category we looked for value-added services provided by discount brokers. Of particular importance was the availability of research, both online and offline. We considered how many physical branches each broker has (not including regular bank branches) and whether they have specialized customer support staff to deal with questions about mutual funds, options and fixed-income securities. Finally, we took into account the level of access to foreign markets each broker offers its clients.

A- TD Waterhouse
It was close this year, but TD Waterhouse came out on top, thanks to all the value-added extras-like branches from coast to coast, voice-activated trading and proprietary research. But it's on the expensive side, and that could haunt it in the future as other brokers improve their services. www.tdwaterhouse.ca 800/465-5463

B+ BMO InvestorLine
A lack of research kept InvestorLine from clinching first place this year. But in most other respects, it's as good as Waterhouse. BMO offers value: a Web site that's very easy to use and some of the cheapest online trades around. www.bmoinvestorline.com 800/387-7800

B+ Charles Schwab Canada
The haute couture of discount brokerages, it's got a straightforward, user-friendly Web site that Mr. Clean would approve of. But unless you've got $20,000 just sitting around, don't bother-that's what you need just to open an account. www.schwabcanada.com 888/597-9999

B E*Trade Canada
E*Trade's Web site is great, but even a little attention to other things, like answering the phone more quickly, would be nice. If you're looking for cheap mutual funds, though, come here. www.canada.etrade.com 888/872-3388

B Royal Bank Action Direct
Royal's discount broker is like a mule-it's dependable and hardworking, but nothing to get excited about. The Web site is simple to use and the reps know what they're talking about. Action Direct hovers at the high end when it comes to price. www.actiondirect.com 800/769-2583

C+ HSBC InvestDirect
A mediocre grade for a mediocre discount broker. HSBC's prices are good, and if you want to trade Hong Kong stocks online, this is the place to go. But its unimaginative Web site is falling behind the competition, and you have to pay for all but the most elementary research. www.hsbcinvestdirect.com 800/398-1180

C CIBC Investor's Edge
CIBC says it plans to change its Web offering. Good-because the current one is a mess. Investor's Edge did score well for its access to IPOs, and it gets bonus points for introducing voice-activated trading. www.investorsedge.cibc.com 800/567-3343

C- Scotia Discount Brokerage
Scotia has come a long way since its last-place finish in our 1999 ranking, but it still has to work on some things-like price. It may boast the cheapest minimum trade, but Scotia will ding you on everything else. www.sdbi.com 800/263-3430

C- National Bank Discount Brokerage
Trades are cheap, but National's online offering needs a complete overhaul. On the other hand, it's easy to get a knowledgeable rep on the phone. www.invesnet.com 800/363-3511

D- eNorthern
The baby on the block has a lot of growing up to do. ENorthern offers little in the way of research or extras. And though it calls itself an online broker, you can get an eNorthern rep on the phone faster than you can load the Web site. www.enorthern.com 888/829-7929

D- Sun Life Securities
Sun Life has an interesting business model: offer your customers nothing special and charge through the nose. We're not sure why anyone would want to trade with Sun Life. Maybe that's why its representatives pick up the phone so quickly. www.sunsecurities.com 800/835-0812

COST

A - BMO InvestorLine

A- HSBC InvestDirect

B E*Trade Canada

B eNorthern

B National Bank

B Discount Brokerage

C+ Scotia Discount Brokerage

C CIBC Investor+s Edge

C- TD Waterhouse

C Sun Life Securities

C Royal Bank Action Direct

D Charles Schwab Canada

When James Powell started looking for a discount broker two months ago, he had one thing in mind-price. His first choice was US-based Datek, with its ultracheap US$9.99 trades. But Powell, a retired teacher living in Markham, Ont., discovered that it's illegal to trade with Datek because it's not a registered securities dealer in Ontario. So he was stuck with the current lineup of Canadian discount brokers, many of which charge twice as much to execute a trade.

In the end, he settled on newcomer eNorthern and its $24 trades. With a modest five-figure portfolio, Powell is a no-frills kind of guy. And he finds that when he calls up eNorthern-which keeps costs down by having just six licensed stockbrokers-they answer the phone right away. "I think it's because right now they're very small," says Powell. "I hope it stays that way."

Many investors want to do more than just trade equities, however. So we created a hypothetical investor who makes two trades a month, has an RRSP account, tries her hand at options, and wants to buy a $2,500 front-end-load mutual fund. When she trades stocks, our fictitious investor doesn't limit herself to the Internet; she makes half her trades on the phone, through a representative.

The broker who gave our imaginary investor the best deal was Bank of Montreal InvestorLine. It charges about $1,069 annually for our collection of services and would have been even cheaper if it didn't charge extra for limit orders (which allow an investor to state the exact price at which she is willing to buy or sell a stock). InvestorLine's minimum commission for market orders over the Internet is $25.

The two discount brokers most Canadians associate with inexpensive trades, E*Trade Canada and eNorthern, came in third and fourth in this category. That's because their fees for broker-assisted trades are much higher than those charged for online trades. The broker with the cheapest minimum fees is actually Scotia Discount Brokerage, whose online commission schedule starts at $20. But its fees go up quickly as you trade larger numbers of shares.

At the other end of the cost spectrum sits Charles Schwab Canada, the Canadian arm of the world's largest discount brokerage. Schwab charges a whopping $261 more than BMO InvestorLine for our package of services. Then again, its customers must have $20,000 just to keep their accounts open, so they're less likely to squabble over commissions. Probably the worst value for the money is Sun Life Securities. It's almost as expensive as Schwab, but provides much less in the way of service.

Finally, we were curious whether anyone was listening to all the grumbling over high fees. Over the past year, some brokers-including TD Waterhouse, CIBC Investor's Edge and Sun Life-ditched their fees for buying front-end-load funds, and Waterhouse slashed the minimum fee it charges for orders placed through its voice-activated telephone trading service, TalkBroker, to $29.95 from $35. Schwab, on the other hand, actually hiked its minimum fees for electronic trades to $33 from $30. Our advice: if you're waiting for bargain-priced trades a la Datek in the US, don't hold your breath.

BY JASON KIRBY

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ONLINE TRADING

A TD Waterhouse

A- BMO InvestorLine, Charles Schwab Canada,

A- E*Trade Canada B Royal Bank Action Direct

C Scotia Discount Brokerage

D+ HSBC InvestDirec

D+ CIBC Investor's Edge

D eNorthern,

D Sun Life Securities

D- National Bank Discount Brokerage

Like medicine men pushing magical elixirs, discount brokers have touted the Internet as the cure for all your investing ills. No more heart-stopping shocks from your full-service broker when that monthly account statement arrives. Gone are the debilitating $200 commissions. Simply log on, trade, make money, then log off-and repeat as necessary. Some discounters live up to the hype and make buying stocks and mutual funds an absolute joy. The bad ones, on the other hand, should have a Health Canada warning slapped across their order screens.

Four discounters battled it out for top spot in the online trading category: E*Trade Canada, BMO InvestorLine, TD Waterhouse and Charles Schwab Canada. All four have revamped their sites since we ranked them last year, adding new features. E*Trade made its site much easier to navigate, and has added some research on small Canadian companies. The folks at Schwab put on their thinking caps and came up with an innovation we feel was too long in coming-real-time updates to account holdings. When you make a trade with Schwab, it shows up in your account information right away. (Other brokers update customer accounts overnight.) In fact, with a site so clean it's almost sterile, Schwab would have ranked higher if it offered 24/7 access to technical support.

BMO InvestorLine, meanwhile, became the first to offer fixed-income products on its site, with a handy "quick picks" option that finds bonds, T-bills and the like, depending on how much you're looking to spend. BMO also stands out because it automatically lists the purchase price of shares and how much you've made-or lost-right in the account holdings section. There's also an area to track the monthly and quarterly performance of your portfolio. And we really liked InvestorLine's charting tool, which (among other things) allows you to compare the progress of one stock to another going back to when Reagan was president.

TD Waterhouse made the first tier, mostly because of the ease of navigating the site-we could get just about anywhere with just two clicks of a mouse. We especially liked Waterhouse's new eServices feature, which stores and sends electronic copies of trade confirmations and statements to customers. Waterhouse has also come a long way since last year in providing online research, especially for mutual funds (for more on research, see page 55). And there's no skimping on real-time quotes-Waterhouse has links scattered throughout the site. We don't like that there's no apparent way to change the start-up screen, which is a list of "important messages" that won't seem all that important when the market is tanking.

Scotia Discount Brokerage gets extra marks (but not an A) for effort. Their online offering last year was abysmal. You had to download special software before you could trade, which was a hassle. And Macintosh users found it plain didn't work. Now Scotia Discount customers can trade on the Web like everyone else. Its new-and-improved Web site is comparable to those of other mid-ranked brokers we looked at. Scotia's drop-down menus make it easy to get around, but there's nothing in the way of research.

Other discounters must have figured that catching up to the leaders is the same as trying to out-drive Tiger Woods, because it sure looks like they've given up and gone home. We were surprised how many discounters did little to improve their online services over the past year. "They've been trying to solve problems, rather than enhance their offerings," suggests Keith Sjögren of The Taddingstone Consulting Group.

CIBC Investor's Edge offers a couple of new features, such as online access to IPOs. But its research selection is still limited, and the site remains gawky and cheesy. And they still haven't fixed a problem we complained about last year: if you accidentally get kicked out of the site, you can't log in again for 15 minutes. As for National Bank Discount Brokerage, well, its Web site was already outdated a year ago, and it's not much better now. Preserve it for posterity-maybe someday it will find a home in a museum. We had a hard time even getting real-time quotes, and error messages were often transmitted in French. Zut alors!

The newest offering is from the people at eNorthern, who made a point of telling Canadian Business that they're not a "discount broker" but an "online broker." Guys, semantics should be the last of your worries. Sure, they're just getting started, but it looks like eNorthern designers went wild splashing useless diversions, like a streaming quote ticker, on the start-up page. All the fluff cramps an already sluggish download. A word of warning to potential eNorthern customers planning to trade using a Macintosh computer-don't. When one of our orders failed because the confirmation page took so long to load, an eNorthern customer service rep offered some stunning advice: "Try shutting down and booting up again." Don't bother, it doesn't work.

BY JASON KIRBY

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TELEPHONE SERVICE

A- TD Waterhouse

B BMO InvestorLine,

B National Bank Discount Brokerage

B- Charles Schwab Canada

B- CIBC Investor's Edge

B- Royal Bank Action Direct

C+ HSBC InvestDirect

C Scotia Discount Brokerage

C E*Trade Canada

C- Sun Life Securities

D eNorthern

You've been stuck in traffic for an hour, and you can still see your house in the rearview mirror. Then you hear on the radio that your star company has issued a surprise profit warning. Internet trading doesn't do you much good now, does it? In the scramble to offer online services, many brokers have given their automated phone service the bum's rush. Well, guess what, folks: punching sell orders into your dashboard computer isn't going to happen anytime soon. And we don't feel you should have to pay through the nose, or wait on hold forever, to place a telephone order just because your PC isn't handy.

TD Waterhouse is tops in this category, thanks to its voice-activated TalkBroker service. Getting quotes or portfolio updates and placing orders is as easy as saying, "Buy WestJet Airlines." Most of the time, the computer understands what you're saying.

Other brokers offer automated phone trading, but they vary in user-friendliness. We liked E*Trade Canada's touch-tone trading line for its simplicity. CIBC Investor's Edge allows you to punch a few keys and get company news faxed to you within minutes. CIBC has brought in a voice-activated system, too, though they're still testing the trading function. On the other hand, we found using the touch-tone services at BMO InvestorLine and Scotia Discount Brokerage cumbersome. But as it turns out, the most expensive broker also offers the worst in automated phone service, which is nothing at all. This summer, Charles Schwab Canada did away with touch-tone trading. "We literally had a handful of clients that were wanting to use that," says Schwab president and CEO Paul Bates. (Schwab will be rolling out voice-activated trading sometime in 2001, he adds.)

Schwab also lost marks for not offering 24-hour customer support, but the broker redeemed itself in this category with its knowledgeable staff. Through dozens of calls, we tested customer-service representatives on their understanding of the market. For example, we played dumb and insisted on buying shares in Hutchison Whampoa Ltd., a huge Hong Kong-based conglomerate that, in the US, trades over-the-counter as an American Depositary Receipt (ADR). We also quizzed them with questions about bonds, which are complicated enough to make anyone's head spin.

Schwab did very well, answering the phone and giving us the information we wanted quickly and painlessly. So did BMO InvestorLine, whose fixed income specialist found the price of the bond we wanted faster than anyone else. Not surprisingly, HSBC aced the question about Hutchison, and even explained how to trade on the Hong Kong stock market. Most reps fumbled that question, especially one guy at TD Waterhouse. When we asked if the company trades on US markets as an ADR, he asked: "Is that the company symbol?" E*Trade's rep simply gave up: "I can't explain it." In the end, we were given three different symbols for Hutchison shares, but everyone said they could get them for us. If we had gone through with the trade, who knows what stock we would have ended up with.

BY JASON KIRBY

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MUTUAL FUNDS AND PRODUCTS

B+ TD Waterhouse,

B+ Charles Schwab Canada

B E*Trade Canada

B Royal Bank Action Direct

B CIBC Investor's Edge

B- BMO InvestorLine

B- HSBC InvestDirect

C- National Bank Discount Brokerage

C- eNorthern

C- Sun Life Securities

D+ Scotia Discount Brokerage

Which share offering would you like a piece of: Celestica Inc., the much-loved IT component maker, or Stroud Resources Ltd., a tiny mining outfit and suffering penny stock? Obviously, it's no contest. Trouble is, you need connections to get your hands on the sweetest deals. Like finding a great job or snagging a princely federal government grant, getting in on sought-after IPOs and secondary offerings often comes down to who you know.

Not surprisingly, Canada's 11 discount brokers offer widely different access to new shares. Bank-owned discount brokers, such as TD Waterhouse, CIBC Investor's Edge and Royal Bank Action Direct, still have the inside track. For instance, Royal, which offered those tantalizing Celestica shares in March, tendered 89 share offerings in the first eight months of 2000, compared with eNorthern's eight IPOs (which included that unappetizing Stroud deal early this year).

Why? The banks own full-service investment dealers, which underwrite the IPOs. The full-service dealers decide who gets a piece of the action, and sometimes they will give their affiliated discount brokerages dibs on the leftovers. TD Waterhouse sold 49 new issues, while E*Trade Canada, an independent discount brokerage, offered approximately 20, including many small technology plays. Worse yet, Sun Life Securities offered none. If Sun Life customers want access to an IPO, they must explicitly ask for a piece of the action; only then will Sun Life try to scrounge up a few shares. Sun Life says it intends to improve its access to IPOs, but don't hold your breath.

Signing up with a bank-owned brokerage won't guarantee surefire access to IPOs, however. Full-service operations would much rather reserve lucrative deals for their own clients, not discount customers. Case in point: only two discount brokers got allotments of the coveted 360networks inc. IPO in the spring, even though three Canadian bank dealers helped underwrite the offering. This awkward relationship between the full-service and discount operations might explain why BMO InvestorLine offered just 19 new issues.

While access to IPOs and new issues varies, the gap between discounters narrows when it comes to mutual funds. Every discount broker has beefed up its selection. (All offer at least 1,000 funds.) Royal Bank Action Direct leads the pack with more than 100 fund families to choose from. But selection isn't the only consideration. For the second year in a row, E*Trade deserves top marks for selection, mutual fund research and low minimum-purchase restrictions. Best of all, it doesn't charge any fees or commissions when buying or selling funds. The same goes for eNorthern-as long as you don't redeem funds for six months after purchase. TD Waterhouse has seen the light and dropped commissions on the purchase and sale of 1,215 funds.

Royal and CIBC will ding you with a $40 redemption charge, as will National and BMO on funds other than their own. At Sun Life, you'll pay $45 to redeem front-end-load funds. The worst offender is still Scotia. Not only does it require a minimum purchase of $2,500 (the minimum is $1,000 at many other discounters), but in some cases it charges when you buy a fund and when you sell it. It's a minimum of $50 to purchase funds from a live agent, $20 to buy funds over the Internet and $15 to redeem them (unless they're Scotia products). The bottom line: don't be wooed by selection, and watch out for hefty commissions-which could quickly empty your wallet.

BY KEITH KALAWSKY

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RESPONSE TIME

A Sun Life Securities

B+ Charles Schwab Canada

B TD Waterhouse,

B BMO InvestorLine

B Royal Bank Action Direct

B HSBC InvestDirect

B CIBC Investor's Edge

B- eNorthern

C+ Scotia Discount Brokerage

C+ National Bank Discount Brokerage

C- E*Trade Canada

When Alan Richter called up Royal Bank Action Direct last week to place an options order, a rep answered so fast that Richter figures the staff must be sitting around with nothing to do. "I had a mental image of brokerage reps covered in spider webs, with tumbleweeds blowing through their offices." About the only thing missing was the howling coyote. How far things have come. Back in February, it was normal for Richter to be on hold for an hour or more with Royal. For investors at any brokerage, getting a rep on the phone required Zen-like patience, and the ability to withstand an extended pan flute version of "You Light Up My Life."

Ask any discount broker now and they'll tell you they learned their lesson. Some brokers, such as TD Waterhouse, have gone wild hiring people to handle calls. Waterhouse has doubled its staff since February, to 1,200 trading reps, opened a new call centre in Markham, Ont., and is building two more in Edmonton and Ottawa. "Given what happened, we're planning to handle everything RRSP season throws at us," says senior vice-president Bruce Shewfelt. We'll see. Come next February, customer rage will be the true measure of whether discount brokers have improved their service. But what we can do in the non-RRSP season-which, let's face it, makes up the bulk of your trading year-is help you avoid the worst time-wasters.

And boy, did E*Trade Canada ever waste our time. They were bad last year, and by our stopwatch they're even worse this year. On average, E*Trade took more than two minutes to answer our phone calls-almost twice as long as their last-place performance in 1999. While other brokers hired new call centre staff, E*Trade's big improvement seems to be a grating recorded voice that blithely spits out the time while you wait on hold. (It's a good thing 90% of transactions by E*Trade clients are done over the Web.) The next worst times were National Bank Discount Brokerage with an average wait of 44 seconds and BMO InvestorLine at 25 seconds. Most of the discounters picked up the phone within about 10 seconds, but three brokers really won our hearts. Sun Life, Schwab and HSBC InvestDirect were taking our calls faster than we could push the start button on our stopwatch.

No wonder Richter is happy with Royal Bank Action Direct these days; the broker fared well in this category, in part because the reps were quick to respond to our e-mail queries. Royal was one of only four brokers who wrote back to us in less than an hour. Once again, E*Trade kept us waiting. More often than not, their responses came trickling in hours, if not days, after everyone else's. If they're not answering the phones or typing out e-mails, what the heck are they doing?

One of the first things we did was also the simplest: we called the brokers and asked them to mail us an application to open an account. It must be a rare request at TD Waterhouse, because the representative had to ask someone if it was possible: "I've never done this before." He learned fast, though, because the package arrived in three days-the same time clocked by BMO InvestorLine, Charles Schwab and Sun Life Securities. The rest trickled in over the next few days, except for the package from Scotia Discount Brokerage, which took a full two weeks. eNorthern warned us right up front that vultures would be picking at our bones before we'd get any mail from them-they only take online applications.

BY JASON KIRBY

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Honestly, if investing were only about making trades online, you could get by with any of the discount brokers in Canada. But the vast majority of do-it-yourself investors want more than just a Web site where they can swap stocks. That's why we looked for value-added perks that put some discount brokers way ahead of the pack.

The most important item in this category is research. It's a word discounters obviously interpret in different ways. Sun Life Securities, National Bank Discount Brokerage, Scotia Discount Brokerage and BMO InvestorLine seem to think research means letting customers throw darts at the stock pages. None of them offers much analysis to help their clients make informed decisions. In fact, Tom Flanagan, chief operating officer of BMO InvestorLine, isn't convinced that people are looking for extensive help from their brokers. "I think a lot of customers who come to us are fairly sophisticated anyway and do a lot of research on their own," says Flanagan.

That's not what the folks at Schwab believe. They offer a mother lode of free research, including Zacks, Pershing Investment Research and Analyst Centre. All three are useful sources of information on large-cap companies. The only problem is, they're primarily focused on US stocks, so it's hard to find information on small to midsize Canadian companies. Schwab and Royal Bank Action Direct get around that problem by also offering research from the Financial Post Data Group. And Schwab actually keeps two analysts on staff who write proprietary reports.

There's also some pretty good mutual fund research to choose from. Royal Bank Action Direct, E*Trade and TD Waterhouse have solid tools to help you cut through the mass of available funds. But Waterhouse goes further, offering analyst picks along with reports on their choices of the best funds by category.

On top of the free research, several brokers offer premium reports for sale through their sites. We bought a few to see how useful they are. The best stuff comes from TD Waterhouse, which actually sells TD's own analyst reports, complete with buy-sell recommendations. (For $21 a month, you get 10 analyst reports, plus a morning market newsletter.) From HSBC InvestDirect we bought a report on Nortel Networks Corp. for $10.50 that had everything you could ask for. We were less impressed with E*Trade's Inside Edge service. For $15 a month you get research from Yorkton Securities. But the latest report on Nortel is a year old.

Having research is great, but sometimes you just need to talk to an expert. No one makes it easier to do that face-to-face than TD Waterhouse, which has 40 branches across Canada. And when you've got those really obscure questions about bonds, options or mutual funds, only BMO InvestorLine, CIBC Investor's Edge, Royal Bank Action Direct and TD Waterhouse have representatives who specialize in all three areas.

It might seem like we're asking the brokers to give us the world, but we'd settle for access to international markets. Only five brokers (BMO InvestorLine, CIBC Investor's Edge, TD Waterhouse, National Bank Discount and HSBC InvestDirect) let clients trade stocks that are not listed on North American exchanges. In almost every case, you still have to phone a rep. The only exception is HSBC, which lets you play the Hong Kong stock market on the Web.

Finally, we think you should feel safe trading with your broker. The good news is, we didn't have to shell out big bucks to hire a pimply-faced hacker to break into the brokers' sites; the bad news is, we found gaping security holes by poking around on our own. Take E*Trade Canada. One morning we logged in, made a trade, then closed our Web browser window. Five hours later, we visited the Web site again-and found that we didn't even have to re-enter our password. Anyone using the same computer in the interim could have looked at all our stock holdings, balances and personal information. We got an even bigger shock when we placed a telephone trade through a broker at eNorthern. Usually, brokers will ask for some personal information (address, social insurance number, mother's maiden name-that sort of thing) to ensure callers are who they say they are. But eNorthern just asked for a name and account number before putting the trade through. Surprisingly, the same thing happened with TD Waterhouse when, according to a rep, the computer system crashed. He scribbled down our name and account number along with our trade instructions and said he would hand it to a trader. That was it. The trade went through-three hours later.

July 16, 2006 at 02:12 AM in Financial Services | Permalink | Top of page | Blog Home

Expect more consolidation among on-line brokers

Expect more consolidation among on-line brokers

By ROB CARRICK
Saturday, February 16, 2002

Goodbye, Charlie.

Charles Schwab Canada is about to exit the on-line brokerage business in this country and other brokers are sure to follow in the year ahead.

There are now 15 on-line brokers providing the same basic service to Canadians -- trading of stocks, mutual funds, bonds and sometimes options over the Internet and by telephone.

For sure, all the big banks are going to hang onto their on-line brokerage operations. The banks want to dominate the wealth management business and you can't do this without offering an option for clients who prefer to make their own investing decisions.

As for everyone else, you have to wonder whether they've got the money and commitment to survive the killer slump that has weighed down the sector for almost two years now.

Schwab Canada is owned by San Francisco-based Charles Schwab Corp., which pioneered the discount brokerage business, and is still regarded as the premium name in the sector. Schwab arrived in Canada in 1999 and now it's leaving via a proposed sale of its assets, including $1.5-billion held in 28,000 client accounts, to Bank of Nova Scotia.

It's a deal that perfectly captures the new on-line brokerage reality. Schwab, a small and struggling player in Canada, sells out to a bank that is building its presence in on-line investing by making an acquisition.

Expect more small fish to be swallowed just as Schwab was.

"It's a natural evolution because, quite frankly, there were probably far too many companies getting into the discount brokerage than there should have been," says Douglas Hart, president of research firm Hart & Associates.

"We haven't seen much [attrition] so far, but it's just a matter of time," adds Tom Flanagan, president of BMO InvestorLine. InvestorLine is owned by Bank of Montreal,which is another example of a bank that is firmly devoted to on-line investing. Last year, it paid $830-million to buy CSFBdirect, a large U.S. outfit owned by Credit Suisse of Zurich.

Aside from Scotiabank's purchase of Schwab Canada, the only recent sign of consolidation in the on-line sector was the purchase last year of tiny Canada Invest Direct by eNorthern, itself a marginal player.

Mr. Flanagan said dismal conditions in the investing industry right now may hasten the departure of some on-line brokers.

"This RRSP season is one of the worst I've seen," he said. "Trading volumes are not coming up the way we had hoped."

Most prominent among the independent, non-bank on-line brokers is E*Trade Canada, a subsidiary of the big U.S. on-line broker E*Trade Group. E*Trade Canada has long been dismissed as a minor player by its bigger competitors, but president Colleen Moorehead says the company is committed to the Canadian market.

In fact, E*Trade is making a play for Schwab Canada clients by offering them free trades and other deals that could be worth as much as $1,800 in total.

Ms. Moorehead said E*Trade's strategy is to portray itself as an alternative to the bank-owned brokers for active, savvy investors. As evidence of how the strategy is working, she points to an increase in the number of customer accounts to 85,000 from just over 50,000 a year ago.

Some might point to Schwab's exit from Canada as a sign that on-line investing is a fad in decline, but Ms. Moorehead disagrees.

"Has the market been as buoyant as it was in 1999 and 2000, when we were in the middle of a raging bull market? The answer is No," she said.

"But on the other hand, you also have to look at the question of whether the consumer is actually turning around and saying, 'I don't want to invest on-line, I'd rather go back to doing it with the abacus.' The answer, again, is No."

For investors, consolidation means less choice and the annoyance of having your account switched to a broker that may not be as good as the one you're with now.

For example, look at Schwab Canada and Scotiabank's on-line brokerage, which is changing its name to ScotiaMcLeod Direct Investing from Scotia Discount Brokerage.

Schwab won The Globe and Mail's 2000 ranking of on-line brokers and placed fourth in 2001. Scotia Discount has improved a lot lately, but it was well back in both rankings.

If you're concerned about a lack of competition in the on-line brokerage world going forward, you can take some encouragement from the fact that U.S. broker Datek Online continues to work on opening up a Canadian operation.

While Canadian brokers charge anywhere from $25 to $29 for trades of up to 1,000 shares, Datek charges $9.99 (U.S.) for all trades of up to 5,000 shares. Now, that's competitive.
rcarrick@globeandmail.ca

July 16, 2006 at 02:08 AM in Financial Services | Permalink | Top of page | Blog Home

E*Trade slashes its fees in bid to shake up market

E*Trade slashes its fees in bid to shake up market

ROB CARRICK

Those low stock-trading commissions that American on-line investors have enjoyed for years are coming to Canada.

Discount broker E*Trade Canada is to announce today that its minimum commission for trading stocks on the Internet will fall 26 per cent effective Jan. 10. The new rates are to be $19.99 for mainstream investors and $9.99 for active traders, down from E*Trade's current top fee of $26.99 and as much as $29.95 at other firms.

Discount brokers are basically order takers for investors who call their own shots, and that's why they charge about one-third the commissions of full-service investment dealers. You can trade on the phone with a discount broker, but the lowest commissions are always reserved for on-line trading.

E*Trade is cutting commissions to build its presence in the Canadian market, where it has never made much headway against dominant bank-owned brokers, such as BMO InvestorLine, CIBC Investor's Edge, RBC Action Direct, ScotiaMcLeod Direct Investing and TD Waterhouse, the industry leader.

"Separating ourselves by a dollar or two from the pack isn't really separating yourself," said R. Jarrett Lilien, president and CEO of New York-based E*Trade Financial Corp., parent of E*Trade Canada. "We have to make a clear statement."

When it comes to price, the only clear statement from Canada's bank-owned discount brokers is that stock-trading commissions are an area where they choose not to compete these days with anything more than perfunctory effort.

A grand total of $4.95 separates the most expensive of the bank-owned brokers, Action Direct at $29.95, from the cheapest, which is Investor's Edge at $25. A $24 commission is available at the tiny independent firm, eNorthern.

"The market is less competitive in Canada," Mr. Lilien said. "That's one reason why we haven't had to become more competitive earlier with our commissions."

E*Trade's commission cuts will bring its Canadian fees in line with those charged in the U.S. market. The firm says it polled some of its Canadian clients and found that 80 per cent of them believed there was an unacceptable difference between Canadian and U.S. commissions. More than 50 per cent said they would bring additional assets to the firm if commissions were cut to U.S. levels.

Canadian discount brokers have certainly lowered prices from the early days of on-line stock trading in mid-1990s, when E*Trade Canada charged $38.88. But most now have pretty much the same pricing scheme they had in place five years ago or more.

Brokers in Canada have a few stock reasons why they're so much more expensive than their U.S. counterparts. There's the larger U.S. market and the economies of scale that entails, and there have been claims that Canadian investors don't trade as much as Americans and thus don't generate as much revenue.

Whatever the reasons, the competition that hit the U.S. market hasn't arrived north of the border until now. Ironically, Mr. Lilien says, price is hardly an issue for U.S. discounters any more. "People aren't competing on price any more," he said. "They're competing on functionality and service."

E*Trade Canada compares well with other brokers in terms of functionality, but its service has generated many complaints to this column over the years. Mr. Lilien said that in addition to cutting commissions, the firm will also try to improve its services levels.

The bigger problem for E*Trade, one of the largest discount brokers in the U.S. market, is that it's an independent going up against bank-owned competitors who have a built-in pool of potential customers.

At $26.99 for stock trades, E*Trade Canada doesn't have enough leverage to pry investors away from the comfort of dealing with a familiar name.

E*Trade also hurt itself in Canada with fuzzy marketing that seemed to target aggressive stock traders as opposed to mainstream investors, even while the firm provided the mutual funds and bonds that the mainstream requires. E*Trade offered steep commission discounts for active traders, but the pricing scheme was laughably complex.

"Our pricing hasn't been awful, but it has been confusing and it hasn't been the most competitive," Mr. Lilien said. "Our overriding idea now is to take control, to go after it a little bit."

Active clients will qualify for the $9.99 rate if they trade more than 30 trades a quarter. As is standard practice in the discount brokerage business, this commission will be applied in Canadian dollars for trades on domestic exchanges and in U.S. dollars for trades on U.S. markets.

The changes at E*Trade Canada include a new head of operations, Duncan Hannay, who replaces Bruce Seago, a 10-year veteran at the firm. In a sign of further change in the discount world, BMO InvestorLine recently parted ways with president Tom Flanagan.

rcarrick@globeandmail.ca

The cost of trading stocks

E*Trade Canada will be cutting its minimum stock trading commission to $19.99 from $26.99, effective Jan. 10. Here's how E*Trade compares with other discount brokers for trades of up to 1,000 shares.
MARKET ORDERS LIMIT ORDERS
E*Trade Canada $19.99 (from $26.99 Jan. 10)
eNorthern $24
BMO InvestorLine $25 $29
CIBC Investor's Edge $25
Credential Direct $25 $29
ScotiaMcLeod Direct Investing $25.95 $28.95
Qtrade Investor $27
National Bank Discount Brokerage $27.95
Disnat $29
HSBC InvestDirect $29
TD Waterhouse $29
RBC Action Direct $29.95

Market orders are where the investor accepts or pays the going market rate for a stock, while limit orders specify a maximum the investor is willing to pay or a minimum he or she will accept.

July 16, 2006 at 02:06 AM in Financial Services | Permalink | Top of page | Blog Home

Is Online Banking at a Crossroads or Traffic Jam?

eMarketer.com - Is Online Banking at a Crossroads or Traffic Jam?

NOVEMBER 10, 2004

eMarketer estimates that 31.5 million households are currently banking online, and that figure will rise to 45.0 million by the end of 2007.

According to the new eMarketer Interactive Banking report, the success of online banking is creating a crisis at many banking institutions.

Customers have unquestionably adapted to online banking services — they use them, like them, even demand them — but far too many banks are still struggling with how to integrate interactive banking into their other customer service channels.

"Until banks stop treating the Internet as a new, separate channel, run by a separate division within the company," says David Hallerman, Senior Analyst at eMarketer and author of the report, "not only will they continue to lose money on the service, they will fail to take advantage of the cost-savings, customer-retention, cross-marketing and revenue-building opportunities the Internet offers."

No one agrees on exactly how many online banking customers there are, but everyone agrees that there are a lot.

"Counting how many customers bank online is an inexact art," says Mr. Hallerman. "First off, while a few banks that have strong Internet bases are willing to reveal their numbers, most other institutions are extremely close-mouthed about the topic. Secondly, what's an online banking customer? Is it a customer who has ever banked online, or is it a customer who has banked online recently? And does it matter what the customer does online? If it's only checking balances, but no transactions, is that an online banking customer?"

For eMarketer's count of US households banking online, the definitions include only those who've banked online recently, within the past 60 days. However, any online banking action counts, even if it's not transactional (such as moving funds from one account to another).

On that basis, eMarketer estimates that 31.5 million households are banking online this year, a figure which should rise to 45.0 million by the end of 2007.

"While this year's growth rate for online banking is still considerable, at 17.5%," says Mr. Hallerman, "we're projecting a smaller rate of growth over the next three years, as more and more consumers add the channel to their banking experience."

Figures from eight researchers for 2004 range from IDC's older projection of 24.0 million at the low end to NFO's 36.0 million, and Financial Insite's 37.0 million at the high end.

While the absolute numbers may be difficult to gauge, the growth rates for online banking are more in line. For 2004, all estimates call for double-digit gains, and six of the eight researchers project growth rates between 11.5% (Celent) to 20% (NFO).

The figures bear out the comment Chris Musto gave to Newsday earlier this year, "Online banking has gone mainstream."

To put all these customer counts into perspective, eMarketer has calculated the percentage of online banking households as a share of all US households (based on Census Bureau data) and as a share of online households (based on eMarketer estimates). eMarketer projects that by 2006, more than one-third of all US households will be doing at least some portion of their banking on the Internet.

There is no question that online banking is now a mainstream activity. The question is — can banks make it a strong revenue stream?

To find out, read eMarketer's Interactive Banking report.

July 2, 2006 at 02:49 AM in Financial Services | Permalink | Top of page | Blog Home

Barclays steps up fraud war

Barclays steps up fraud war

A range of tools is key to bank’s plans to offer greater protection for online customers
Daniel Thomas, Computing 01 Jun 2006

Barclays has unveiled plans for a range of anti-fraud measures over the next 12 months to protect online banking customers.

The bank told Computing it will introduce a variety of methods to authenticate internet users, including card readers and mobile phone verification.

The aim is to offer different devices depending on customer needs, says Barclays director of electronic banking Barnaby Davis.

‘Everyone is trying to find a one-solution-fits-all method, but I don’t think that is how the internet will move,’ he said.

‘We are looking at a split service. There might be a one-time passcode for smaller payments, but if you move large amounts of money around you may want to use a card-based solution.’

The plans build on last week’s announcement that Barclays has become the first UK bank to offer free anti-virus software, supplied by F-Secure, to all 1.6 million active online customers, as well as a text messaging service to alert customers to suspicious transactions.

The text service, already used by Barclays’ ABSA bank in South Africa, will notify customers when a third-party payment is set up using their online account.

The bank plans to extend this service and use it as an anti-phishing technology, to issue an extra one-time password and notify customers if someone tries to log in to their internet account.

‘They will know as soon as someone tries to make a payment and can stop them. We also see the SMS notification service developing to include an element of authentication,’ said Davis.

Barclays also expects to start issuing a payment card-reading device to high-use internet customers next year, to authenticate transactions made via the internet or telephone.

The interoperable card reader developed by banking industry body Apacs aims to cut card-not-present fraud, which grew by 21 per cent last year, costing UK banks £183.2m.

‘Early alert systems of any type that notify banking customers are a good idea,’ said Sandra Quinn, director of corporate communications for Apacs.

‘Over the next 18 months to two years we will see banks offering a variety of things to further cut fraud.’

What do you think? Email us at: feedback@computing.co.uk

June 4, 2006 at 08:19 PM in Financial Services | Permalink | Top of page | Blog Home

Banks Give a Shout-Out to Gen Y: Young Adults Have Own Expectations, and Banks Are Rushing to Meet Them

RedOrbit - Technology - Banks Give a Shout-Out to Gen Y: Young Adults Have Own Expectations, and Banks Are Rushing to Meet Them

By Ieva M. Augstums, The Dallas Morning News

Jun. 4--Graphic

Steven Rose represents banking's future profits.

Yet, like other members of the highly mobile Generation Y, he isn't easy to capture or to please. The 22-year-old went shopping for alternatives when his Arlington bank was acquired last fall.

"My parents wanted me to stay at the same place," said Mr. Rose, a senior biology major at the University of North Texas in Denton. "But I didn't really want to. They were busy all the time and didn't have what I needed."

After talking to some of his fraternity brothers, Mr. Rose took his money to Washington Mutual. "It seemed like a steal -- like they were paying me to bank with them," he said.

Although Gen Yers may not have much money now, banks and credit unions know that these 18- to 28-year-olds could one day be profitable for them if the financial institutions can persuade them to become loyal customers.

But members of this generation want free, fast and easy services outside of branch locations, and financial institutions are having to find new ways to entice them.

"They are a different breed. This is a group that has different expectations," said Steve Williams, a principal with Cornerstone Advisors Inc., a bank consulting firm in Scottsdale, Ariz.

"We look at Gen Y as probably the demographic group that is going to put the requirements over the top in bank services and delivery."

Members of Gen Y are among the heaviest Internet users, and many bank online.

When they visit a branch location -- traditionally where banks sell more lucrative products and advisory services -- it's usually for simple transactions.

So many banks are rolling out a wider assortment of online banking options to appeal to young customers.

"They shop online, they do their research online, they're on the Internet," said Lisa Phillips, a senior analyst with eMarketer Inc., a market research firm. "Once they start banking online, they get to feel more secure and then they are more open to do other services online."

Eighty-two percent of 18- to 24-year-olds in the U.S. use the Internet, according to a recent Pew Internet & American Life Project study that looked at online usage by teens and adults in 2004 and 2005.

That figure increases to 85 percent with 25- to 29-year-olds.

Though Gen Yers are active online, they're cautious about banking online. Their Internet experience has exposed them to such dangers as identity theft, fraud and phishing scams, Ms. Phillips said.

As a result, banks go out of their way to assure these customers that their sites are safe and secure.

"Bank Web sites will have to have the right information on there in the right place in order to get this generation," said David Grove, Texas marketing director for North Carolina-based Wachovia Corp.

"Because the younger generation is more comfortable with technology, it's an easier sell."

Do it their way

To appeal to Gen Yers, banks also have to fit their lifestyles and make it easy to do business.

"They want to conduct business in their way, on their time," Mr. Grove said.

That means enhanced online services, text alerts and free stuff, not to mention the availability of a customer service phone line staffed 24 hours a day, seven days a week.

"Our focus has been around online bill pay and other ways to cater to their technology know-how," said Bridget Cooney, Dallas-area retail market manager for New York-based J.P. Morgan Chase & Co.

Chase customers can receive up to 17 kinds of alerts -- "overdrawn account" or "deposit posted" messages, for example -- that are transmitted via e-mail or text message on a cellphone.

Wachovia and several other banks and credit unions offer similar services locally. They sell their online capabilities as "state of the art" and "new and advanced."

Mr. Rose, the UNT student, said he goes to an ATM or online to bank and rarely visits a branch unless he has to make a deposit or cash a check.

"I just normally use my debit card," he said, adding that the closest branch to him in Denton is actually in Corinth -- about a 15-minute drive. "Normally, my dad and I check my balance online all the time -- that way I always know what I have."

In person or online

Young customers still visit branches to open accounts and use more complex services.

"Generation Y will likely still have some attraction to personal relationships," said Mr. Williams of Cornerstone Advisors. "Some of them may not be comfortable taking out a loan or getting a mortgage online."

But even that's changing.

About a month ago, Washington Mutual started a service to instantly open accounts online.

The process, which uses verification technology similar to that used by online credit rating sites, lets consumers open accounts anytime.

"Coupled with online banking and bill pay and free withdrawals at any ATM worldwide, customers who wish not to visit a bricks-and-mortar branch don't have to," said Brad Russell, spokesman for Seattle-based Washington Mutual Inc. "Convenience and cost savings, we believe, appeal to the 18- to 28-year-old consumer."

The key is to hook young people early, particularly in college, so that they will grow with the bank or credit union.

"It's a very important segment to us," said J.P. Morgan Chase spokesman Chris Spencer. "You never know what college student will be the next doctor or lawyer."

Financial institutions know that young people tend to stay with the same bank over the long term -- and ultimately can be sold profitable services such as mortgages and family financial planning.

A recent survey of college students and graduates by Synergistics Research Corp. showed that 69 percent of graduates kept their checking account with the same institution they used while in school.

When current students were asked whether their relationship with their bank was "only temporary," 60 percent disagreed and just 15 percent said they planned to switch.

That's why financial institutions are learning how to connect with Gen Y and pouring on the incentives.

Credit Union of Texas found that getting its message out to young people required a new approach, so it hired a local advertising agency this year to help.

"Like with any industry, it becomes competitive. This generation is mobile, on the go," said Karen Coffey, Credit Union of Texas' vice president of marketing. "We still do some print advertising, but we're doing more radio and online communications."

One bank is giving away a year's worth of 12 packs -- that's one 12-pack of a soft drink each month -- and another is linking college ID cards to bank debit cards.

San Francisco-based Wells Fargo & Co. provides campus ID/debit cards to students at 18 universities throughout the U.S., including several in Dallas-Fort Worth and elsewhere in Texas.

Students are able to use their cards not only on campus, but also with local merchants in many instances.

"It's a means to capture what we feel is a lifelong customer early in their decision process of who is going to be their financial institution and adviser through their life," said John Gavin, regional president for Wells Fargo.

Hire power

"Having the right people in our branches is also a plus," he said.

Banks are hiring students right out of college to step up the youth appeal, but industry experts say they could do more.

"I think it's a wake-up call in the sense that most of these tools that this generation wants to use aren't used by the bank employees," said Mr. Williams of Cornerstone, the consulting firm.

"The key is to hire -- and listen to -- young people."

E-mail iaugstums@dallasnews.com

-----

Copyright (c) 2006, The Dallas Morning News

Distributed by Knight Ridder/Tribune Business News.

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June 4, 2006 at 05:50 PM in Financial Services | Permalink | Top of page | Blog Home

E-Commerce in Crisis: When SSL Isn't Safe

E-Commerce in Crisis: When SSL Isn't Safe - -

May 25, 2006 11:31AM

"It's not a problem of authentication but one of transactional authorization," says Bruce Schneier, leading security expert and CTO of Counterpane Internet Security. "No matter how hard you make the initial authentication for the end-user or hacker, the malware can just wait until the authentication is done and then manipulate the transaction."

The Great Train Robbery of 1963 netted $69 million in today's dollars. The largest bank heists have scored more than $80 million. But "stick-'em-up" bank robberies offer high risks and low rewards: According to the FBI, the average U.S. bank heist yields just $4,200 -- and between 50 and 75 percent of perpetrators get caught.

Robbing a brick-and-mortar bank seems like petty theft compared with a new breed of cybercrime that, according to a growing number of security experts, is siphoning untold millions of dollars from banks and their customers using SSL-evading Trojans and ever more refined phishing techniques.

Every antivirus and antimalware vendor can report thousands of bank and e-commerce-specific Trojans designed to steal money and identities, often collectively referred to as Bancos/Banker variants. Yet given the vast investment in quelling consumers' fears about conducting business online, it's no surprise that few sources are anxious to provide information that highlights the severity of the problem.

Although the banking officials and security officers contacted for this article refused to be quoted on the record, all of them agreed that online bank fraud is an increasing problem. One banking regulatory security auditor told InfoWorld that in some instances, online bank fraud drains as much as 2 to 5 percent from a bank's overall revenue.

Mark Sunner, CTO of e-mail security provider MessageLabs, thinks it will take "a single, high-value tipping-point event" to wake up the general public, which would then pressure public officials. "I think the world's largest bank heist will soon be committed using malware," he says.

Phishing with a Hook

Phishing remains the weapon of choice for online bank theft -- and the sleight of hand that tricks users into visiting a phishing Web site continues to get more sophisticated. Phishing e-mails now show up with the user's address, ZIP code, or account information already filled in, indicating that professional criminals are using other, previously compromised resources to gain the trust of consumers.

Yet as phishing gets slicker, users are getting smarter. As the average Joe becomes less likely to type in authentication information in response to an e-mail, more and more cybercriminals are turning to SSL-evading Trojans.

These Trojans install themselves on unsuspecting users' PCs and either capture user log-on credentials or manipulate transactions after a successful log-on. In both cases, the SSL connection between PC and bank remains intact. The user may think the confidential online transaction is protected against mischief -- but it is not.

That shift has enormous implications. Ever since Netscape released SSL in 1996, consumers have been told that a confirmed SSL-connection icon indicates that it's safe to conduct online business.

"The problem is," according to one bank regulatory security auditor, "SSL isn't broken. SSL states that the connection between your PC's network card and the bank's network card isn't compromised. This is still true. Nobody is sniffing the transaction off the wire. Instead, this is a 'man-in-the-end-point' attack." In other words, the Trojan is sniffing or manipulating the transaction before it is ever sent across the Internet to the bank.

According to Mitchell Ashley, CTO of network security provider StillSecure, "Traditional phishing attacks have duped end-users into clicking on a link, but in the newest evolution, even the most security-savvy can fall victim to attack. Once you're infected, the game is up."

Although the theft of credentials remains the biggest threat to online e-commerce, SSL-evading Trojans are quickly becoming the criminal hacker's favorite tool, mainly because SSL-evading Trojans can bypass any authentication scheme.

Fighting the Last War

Most banks and e-commerce sites fall one step behind, responding to Trojans that steal log-on credentials by creating more complex authentication schemes and implementing two-factor authentication solutions. Today, banks frequently require that users click on-screen, randomized keyboards; type in the random letters of a "magic word"; or enter information from a hardware-based cryptographic key fob. None of these solutions works against the new breed of SSL-evading Trojans.

"It's not a problem of authentication but one of transactional authorization," says Bruce Schneier, leading security expert and CTO of Counterpane Internet Security. "No matter how hard you make the initial authentication for the end-user or hacker, the malware can just wait until the authentication is done and then manipulate the transaction."

For example, you think you're checking your bank balance or writing an online check to pay a bill, but the Trojan is transferring your bank balance to a bank account in the Cayman Islands.

"The real problem is that we are allowing computers to make transactional decisions for us on our behalf, and the computer really doesn't know what is right or wrong," Schneier explains. "The consumer may not be able to see the real transaction to put a stop to the automated authorization approval, and the bank really has no way of knowing that a Trojan is making the decision, and not the customer."

Even more disturbing is that most banks and regulatory officials don't understand the new threat, and when presented with it, hesitate to offer anything but the same old advice.

Every bank and regulatory official contacted for this article said they have already recommended banks implement a two-factor or multifactor log-on authentication screen. In general, they expressed frustration at the amount of effort it has taken to get banks to follow that advice. And all complained about the trouble these schemes are causing legitimate customers.

When told how SSL-evading Trojans can bypass any authentication mechanism, most offered up additional ineffective authentication as a solution. When convinced by additional discussion that the problem could be solved only by fixing transactional authorization, most shrugged their shoulders and said they would remain under pressure to continue implementing authentication-only solutions.

They were also hesitant to broach the subject with senior management. It had taken so long to get banks to agree to two-factor authentication, they said, it would be almost impossible to change recommendations midstream. That puts the banking industry on a collision course with escalating attacks.

Verifying Real Transactions

Workable answers to the SSL-evading Trojan problem aren't necessarily more inconvenient than two-factor authentication solutions. They just have a different focus: transactional authorization. Solution providers need to realize that any authentication mechanism can be bypassed, and instead focus more on the right long-term answer.

Some banks now send consumers an "out-of-band" authorization code -- that is, not through the PC, but via voice message or text message through another device -- to type in and confirm a particular transaction. Unfortunately, the bank is confirming the transaction as the bank sees it, whereas an SSL-evading Trojan could be manipulating what the customer thinks the bank is getting ready to do.

The customer may think he or she is making a small transaction, whereas the bank, because of the Trojan, is closing an account out and a transfer of funds to another bank.

In this case, sending an authorization code to the customer by itself doesn't work because the consumer is confirming a transaction he or she can't really see.

A better solution would be to send the consumer the relevant details -- such as the date, from, to, amount, and so on -- along with the authorization code, thus allowing the consumer to confirm the transaction. Some banks and e-commerce sites do this already using in-band e-mail confirmations.

Schneier has his doubts about the out-of-band approach. "These types of authorization schemes would work, but it sounds a little extreme as a solution. Unfortunately, we live in an economic reality where users will not accept extremes. They want convenience."

Bank officials concur. One regulator said, "Most banks, because of their customers, would probably not accept such an extreme form of authentication. How often would the out-of-band device fail or not be available? Requiring users to confirm every banking transaction out-of-band would not be accepted by today's consumers."

The regulator speculated that a better solution might be for the bank to offer out-of-band confirmations as an option and allow the consumer to pick the dollar amount at which the transaction would require additional confirmation measures.

Other bank security officers thought implementing added intelligence on the back end would provide more value. "How about not allowing online transfers to banks and countries with strong ties to crime?" offered one officer. "We could deny any transaction that the bank deemed highly suspicious, like your credit card company does now, and require a second confirmation."

Close observation of consumer behavior can also help. In one case, nearly 100 customers of one large bank were infected with an SSL-evading Trojan. As usual, the phishing e-mail used mostly legitimate links to the real bank's Web site. After noticing outside requests to links, most of which were normally referenced from other internal links, the bank's I.T. staff realized a Trojan was to blame.

The solution was to rename one of the requested links. If any user went to the real bank's Web site, the renamed link was now referenced by the legitimate Web site. Only the phishing customers would request the link's old name, enabling the bank to tell how many of its customers were compromised.

Yunus Emre Alpözen, a consultant for one of the world's largest banks, says, "Every customer requesting the old Web page link was redirected to a new page that notified them that they were the victims of a phish attack, and how to proceed. We used the phisher's e-mail against them."

Self-Defense for Consumers

Sadly, infection can't be stopped merely by convincing users not to execute untrusted software. No consumer knowingly installs malicious software, and SSL-evading Trojans can easily go unnoticed by the most careful user.

One of the best defenses is simply to convince consumers to check their online balances frequently. Beyond this, consumers need to lobby financial institutions and move their accounts from institutions that keep their head in the sand.

Banks that require stronger authentication and transactional authorization should be rewarded. Those institutions should also encourage customers to report phishing attacks to the site's security reporting e-mail address so they can take down fake Web sites or otherwise minimize risk.

Currently, log-on-stealing Trojans are still the No. 1 threat to the banking industry, but SSL-evading Trojans that can bypass any authentication scheme are emerging as a particularly frightening challenge. They need to be dealt with now before consumer confidence in e-commerce goes into serious decline.

May 25, 2006 at 10:31 PM in Financial Services | Permalink | Top of page | Blog Home

HP has spent a lot of money in this area - its CTO Jason Roualt tells us why.

Turning up the heat on identity management
http://www.techworld.com/features/index.cfm?featureID=2453&printerfriendly=1

Bryan Betts, Techworld April 24, 06

"Over 80 percent of authentication is still username and password - but there has to be change, because regulatory bodies are mandating it," says Jason Roualt, the chief technology officer (CTO) for HP's identity management group.

And that change is coming, as banks all over the world bring in two-factor authentication for their online customers, and as the US Federal Deposit Insurance Corporation mandates strong authentication for online banking by the end of this year: "If the banks implement that, it will touch a large proportion of the population," Roualt says.

"Strong authentication will be where things move to, but the act of authenticating involves user action, and people don't like change," he adds. "What form it will take is still up for debate - I think it will be something ubiquitous, such as a mobile phone."

HP's identity management group is one of its more recent creations. Selling its products under the OpenView Select brand, it's the result of several acquisitions that the company has made in recent years, according to Roualt.

"We identified identity management as a key technology to get into," he says. "We acquired access management from Baltimore, also TruLogica for identity provisioning, that became our Select Identity product. We OEM'd Trustgenix for federated identity and have now acquired them too, as Select Federation."

Automation and compliance
Roualt says that the business drivers behind identity management are the same across all industries, for example cost reduction via automating processes such as creating new accounts, deleting old ones, and password resets - plus a new one, namely regulatory compliance.

"A major driver for business is risk mitigation, and proving who had access to what at a particular time. You need to have process controls in place to satisfy the auditors. Without automation it takes IT managers an inordinate time to generate lists of who has access to what.

"The technology drivers are the ability to provide ease of use and effective change management, as organisational changes occur and the IT infrastructure changes, for example," he adds. "Identity needs to adapt to those changes in a way that doesn't require administrative intervention, so a line of business person could use them."

HP's interest is a result of the synergy between it sees etween identity management and its existing network and systems management framework, OpenView.

"We bring a lot of automation," says Roualt. "You might want a physical approval process, but there's still a lot you can automate, such as accounts for a new hire. We're connected into all the back-end systems, we know where the new user is and who they report to, and we know the business policies, so we can arrange access and accounts from day one.

"You can also compare your actions with business policy and remediate them if they're wrong. And when provisioning new servers, it's important to specify access control policy at the same time."

Enter the Federation
Roualt says that two of the most important developments in this whole area will be federated identity - HP is a member of the Liberty Alliance - and service-oriented architectures, or SOA.

"From an SOA point of view, identity will be exposed as services that can be consumed or requested. You are going to see identity management pushed down from the application level into the infrastructure - we think we can effect that change," he explains.

"It will be used and managed through network access control devices and also down to the servers and storage. It could go down to the chips on the motherboard. Mainly we're talking about user identity now, but it can be the identity of other services and so on.

"From a federation standpoint, the whole idea is that your identity is owned by a number of vested interests, such as your employer, your health company, and the organisation you're dealing with needs bits of those for the transaction. Using Liberty they can discover where that information resides and pull it in as needed, dependent on your privacy settings.

"It uses a discovery mechanism, it goes back to the identity provider and asks 'where can I get this information?' and the provider issues tokens which provide the reference and also the authentication to get that information."

That means you don't need to give all your personal or business information to every organisation you deal with. Instead, it goes to trusted third parties who can then say yes, you are who you say you are, and you indeed licenced to drive, set up direct debits, or whatever.

At liberty to choose
"Liberty wanted the consumer to be able to choose their identity provider, not only be offered one," Roualt says. "Right now, federated identity is more of a mesh, but I think it will work out to be fewer identity providers, such as financial services, credit unions, government bodies."

And if you thought federated identity was just a buzzword, think again: the protocols, such as the XML-based security assertion markup language SAML from OASIS, the Liberty identity federation framework (ID-FF), and the IBM and Microsoft-led web services federation language are already in place, with identity tools such as HP's Select Federation agnostically bridging between them as needed.

Roualt estimates that there will be two billion federated identities issued this year - not least because Liberty and OASIS member Nokia is shipping phones that support SAML and ID-FF.

"The technology is the easy part, it's the business processes that are the challenge - issues of trust, liability and so on," he continues. "Those issues have traditionally been dealt with by lawyers and contracts, but that's a process that doesn't scale well. People have been doing EDI for years though, so many of them are just going in and adapting those existing relationships."
This article was printed from Techworld : www.techworld.com The UK's infrastructure & network knowledge centre © 2006 : All rights reserved

April 23, 2006 at 10:39 PM in Financial Services | Permalink | Top of page | Blog Home

How Europe's banks can profit from loyal customers

The McKinsey Quarterly: How Europe's banks can profit from loyal customers

A new approach to identifying these individuals is the key.

Marc Beaujean, Vincent Cremers, and Francisco Pedro Goncalves Pereira

Web exclusive, November 2005

Europe's retail banks are missing out on what amounts to a sizable "loyalty bonus," according to McKinsey research. We examined the banking markets in Belgium, Germany, and Italy and found that loyal customers typically generate, over the life of their relationship with an institution, 30 to 70 percent more value than run-of-the-mill clients do. Loyal customers not only buy more products than their counterparts but also tolerate higher banking charges.

In our experience, most of the region's banks fail to identify and nurture these important customers, relying instead on segmentation models that are ineffective and even counterproductive. In fact, we believe that such miscues may be contributing to a growing sense of disenchantment among banking customers across the region.

Our research emphasizes what marketers in other retail industries already know: loyal customers—those who will recommend a bank to friends and family, feel that their expectations have been exceeded, and will without hesitation select the same bank to make a fresh transaction1—are more profitable. In practice, the mind-set of loyal customers is such that they will stick with a bank that treats them well and provides good value over the long term—even if it doesn't offer the best deal for every transaction. One bank we studied is able to charge its most loyal customers a premium of 20 to 30 basis points on mortgages, for example.

Exhibit 1, based on an analysis of the profiles and saving patterns of about 1,000 people in each country, demonstrates how greater loyalty leads to higher wallet share and reduced churn. High-potential customers,2 acquired at age 30 and remaining loyal throughout their active lifetimes, are worth 30 to 70 percent more than the high-potential but nonloyal ones, whose value to the bank gradually erodes or who eventually leave the bank altogether. These loyal individuals buy, on average, 40 percent more products than their less enthusiastic counterparts do (2.8 to 1.7), although in some countries the difference is far greater. By age 55, they make a direct contribution to the bank's bottom line of €548 a year, on average, compared with €183 a year for customers from the lukewarm majority.

ex 1

Few European banks currently segment their customers by loyalty; most institutions rely only on factors such as age, stage in the life cycle (for instance, student, married, or retired), and other socioeconomic variables. This failure to track loyalty is, in fact, doubly damaging. Our experience suggests that in addition to missing the opportunity to target the most profitable customers, banks selling new products to less loyal ones (say, as part of an indiscriminate marketing campaign) risk alienating them, since they automatically assume that what's being offered is not in their best interest. Such efforts could ultimately drive customers away.

Banks might supplement existing customer data by establishing an index, or matrix, that specifically tracks loyalty. Every customer can then be placed in a zone by loyalty (anger, distrust, passive loyalty, active loyalty, and advocacy, for example) and by share of wallet (Exhibit 2).

ex 2

An analysis of the answers to four or five simple questions, posed through the bank's existing channels, can determine an individual's position in the matrix.3 Once a bank segments its customers by the nature of their relationship, it can tailor actions to specific clusters, take steps to move individuals up the loyalty curve, and aggressively market new products to them.

The success of a major Benelux institution using this type of relationship matrix as well as our preliminary work with other banks suggest the benefits of such an approach. To exploit this opportunity, however, a bank must take three factors into account.

* For new sales, a bank's frontline staff should target only those customers with whom it has established an intimate and trusting relationship.
* A bank must be proactive in developing such intimacy, in particular by focusing on high-potential customers who have not approached the bank in the past 6 to 12 months. Sales efforts tend to be more efficient when the sales representative knows the customer.
* A strong effort should be made by frontline staff to handle "moments of truth"—highly emotional interactions (positive and negative) that endure in the customer's memory over time and affect loyalty (Exhibit 3).4 The optimal management of such events means ensuring that salespeople recognize positive events as opportunities to cross-sell and respond appropriately in times of crisis (when a card gets swallowed by an ATM, for instance). Our experience suggests that banks can significantly improve their handling of moments of truth.

ex 3

Segmenting customers according to loyalty means going beyond the traditional approaches that most European banks use to devise effective commercial strategies. The process takes time—12 to 18 months to transform a full branch network, we estimate—as well as new frontline skills, but early findings suggest that these techniques are effective in extracting more value from existing customers.
About the Authors

Marc Beaujean is a principal and Vincent Cremers is an associate principal in McKinsey's Brussels office, and Francisco Goncalves Pereira is an associate principal in the Lisbon office.
Notes

1 Such a definition, while simple, goes well beyond customer satisfaction, the traditional proxy for loyalty used by many banks.

2 Those who are expected to become affluent by the age of 55.

3 Questions should be linked to customer behavior ("If the bank makes a mistake, would you leave the bank?") and not their perspectives ("Are you happy with the bank?"). Likewise, questions requiring either a "yes" or "no" answer are preferable to open- ended ones.

4 Marukel Nunez and Corey M. Yulinsky, "Better customer service in banks," The McKinsey Quarterly, 2005 Number 1, p. 30.

April 23, 2006 at 11:17 AM in Financial Services | Permalink | Top of page | Blog Home

Financial services is top target for cyber-crooks

Finextra: Financial services is top target for cyber-crooks

Financial services firms are to remain the top targets for cyber-attacks in 2006, according to research from Counterpane and MessageLabs, which warns that hackers are starting to deploy more sophisticated tactics to bypass stronger authentication schemes

The study, which analysed key cyber-attacks across 15 industry sectors, found that nearly 30 per cent of total targetted scam attacks worldwide in 2005 were directed at the financial services sector.

This trend is set to continue in 2006, says the report's authors, who warn that hackers are engineering Trojan attacks and targeted scans to exploit weaknesses in the security posture of financial institutions.

Alex Shipp, senior anti-virus technologist, MessageLabs, says: "We have seen a Trojan program that did not have to trick victims out of revealing their password, but instead waited for the victim to check their bank balance and the Trojan then silently siphoned money out of the account. We expect this kind of activity to become more prevalent as banks move to stronger forms of authentication, as tactics typically change only when they need to."

In the past twelve months, cyber-criminals have moved away from deploying large-scale generalised attacks, like Blaster and Slammer, towards carefully engineered attacks calculated for precise outcomes, says Bruce Schneier, founder and chief technology officer of Counterpane.

"Today's attackers are smarter and stealthier," he contends. "They're much more likely to install spyware; they're more interested in making money."

March 13, 2006 at 07:48 PM in Financial Services | Permalink | TrackBack (45) | Top of page | Blog Home

Check out deals on supermarket savings

Guardian Unlimited Money | News_ | Check out deals on supermarket savings

Financial services have become a major factor in the big stores' product lines, writes Lisa Bachelor. But do they offer value as good as their groceries?

Sunday March 5, 2006
The Observer

Sainsbury's and Tesco have been pushing more than Jamie Oliver's kitchen brainwaves and Clubcard points in recent weeks - both supermarket giants have been spending their substantial TV advertising budgets to sell motor insurance.

Insurance policies and credit cards are important parts of the Sainsbury's armoury, while Tesco offers 17 financial products and services. Profits from Tesco's personal finance arm rose from £160m in 2003 to £202m in 2004 and it is Britain's biggest online car insurer. Last week Tesco announced an extension of its partnership with National Savings and Investments (NS&I) to offer Premium Bonds and Index-linked Savings Certificates in more than 700 of its stores.

Asda, Marks and Spencer and, more recently, Debenhams also sell their shoppers financial products, as well as groceries and clothes at the checkout. But do the supermarket giants offer value for money?

Motor insurance

The battle for customers boils down to a contest between Tesco, whose cover is provided by the Royal Bank of Scotland; and Sainsbury's, which uses HBOS.

'Both of them tend to go for very safe insurance risks, such as families driving saloon cars in low-risk postcode areas,' says Richard Mason, director of insuresupermarket.com. 'They don't tend to be very competitive for young drivers or those with previous convictions. We never see any supermarket at the top of the best-buy tables. They tend to settle at fourth or fifth at best.'

However, Tesco, whose underwriters do not allow its premium quote to be collected by comparison websites, came out well when we applied directly to its website. Sainsbury's, M&S and Asda are, as the online brokers suggest, generally uncompetitive. Sainsbury's, for example, would not cover our higher-risk driver at all.

'Occasionally, what you do find is that where a provider like Tesco is keen to increase their market share in a particular area, they can put their prices down to attract that business. That's obviously what we're seeing here,' says Mason. 'But this is usually not a sign that they are cheap continuously, nor that they are consistently competitive in that market segment, and it is important to shop around regularly to ensure they offer the best value for money.'

Travel insurance

Hundreds of institutions offer travel insurance these days, many of them small internet players offering incredibly cheap prices. This makes it hard for the supermarkets to compete - the premiums we found were nowhere near as competitive as the best on the net. For a woman under 65 seeking cover for a single, week-long trip to Europe, the supermarkets quoted between £14.99 (Tesco) and £18.69 (Sainsbury's). However, Sainsbury's, Asda's and Marks and Spencer's cover was more comprehensive than Tesco's, with up to £10m in medical expenses from Sainsbury's and M&S, compared with £2m from Tesco. Baggage cover varied from £1,250 with Tesco to £2,500 with M&S.

All were beaten, though, by internet firm FlexiCover Direct which, for a similar policy but without baggage cover, cost £5.72 - or £8.17 with £2,000 of baggage cover.

Credit cards

Supermarkets generally fare better when it comes to best buys. Sainsbury's Visa card has an introductory rate of 0 per cent for purchases in the first 10 months, which reverts to 15.9 per cent thereafter. It also has a balance transfer rate of 5.9 per cent for the life of the balance.

'Sainsbury's in particular stands out amongst the supermarkets when it comes to credit cards,' says Andy Britchford of moneyfacts.co.uk. 'It has the longest introductory purchase rate on the market. The only downside is that its standard purchase rate is a bit above average.'

The Tesco card is not so good. Its 0 per cent introductory rate for purchases lasts until September but, says Britchford, Nationwide, Abbey and Intelligent Finance are all offering longer deals. Its standard rate is also high, at 16.9 per cent. Asda and M&S have no introductory rate, although both have a balance transfer deal at 0 per cent for six months.

The Asda card is particularly unattractive given that its standard rate is a typical 19.7 per cent, which can rise to 24.8 per cent for customers with a poor credit history. The supermarket cut the interest rates on all its cards late last year, and says it will continue to do so.

'When we launched the Asda credit card and store card in 2004, we promised to give customers the opportunity to move to lower APRs over time, helping those who may have been refused credit in the past,' said Gev Lynott, director of financial services.

Loans

None of the supermarkets ever tops the best-buy tables, says Britchford. For several months the top slots have been fought over by Northern Rock and the Moneyback bank, part of Alliance and Leicester, which offers loan rates from as little as 5.5 per cent.

Tesco is fourth in the Moneyfacts best-buy table for a £5,000 loan taken over five years, with the controversial and usually expensive payment protection insurance (PPI). It has a rate of 6.3 per cent, which equates to monthly repayments of £168.73. Sainsbury's doesn't always appear in all Moneyfacts' best buys because, unlike Tesco, its quoted rates vary according to your credit rating.

'Sainsbury's do shine for higher amounts taken out without PPI, however,' says Britchford. 'For example, for £5,000 taken over three years without insurance, they have a typical interest rate of 6.5 per cent, with payments working out at £152.93 a month.' M&S's rates, he says, tend to be similar, but the cost of the PPI is much higher.

Savings

Supermarkets seem to be happier to lend you money than to look after it for you. Sainsbury's and Tesco are the only two that offer savings accounts, with Sainsbury's offering the bigger range and the more competitive rates. Its internet account pays 4.75 per cent, while its Direct Saver account, which can be operated by post or telephone, pays from 3.75 to 4.5 per cent, depending on the amount deposited. Sainsbury's internet account offers the best rate on the market for anyone depositing £1 or more. Bradford and Bingley beats it, at 4.85 per cent, but it can only by opened with £1,000 or more.

Tesco offers a less attractive 3.35 per cent interest on balances of up to £2,500 through its postal and phone account.

The verdict

Sainsbury's and Tesco are leagues ahead of Asda and M&S on financial services. Despite the brokers' disparaging comments, Tesco surprised by offering good motor insurance rates for the scenarios we tested.

Sainsbury's did best overall, offering a best-buy credit card for introductory purchase rates and a best-buy internet savings account. It also offered a relatively competitive loan rate, with a product likely to be best suited to those borrowing large amounts who want to avoid paying onerous premiums for payment protection insurance.

All the supermarkets fared badly on travel insurance; this is a product where it is worth hitting the internet comparison sites.

March 5, 2006 at 01:46 PM in Financial Services | Permalink | TrackBack (45) | Top of page | Blog Home

Bankless banking

Economist.com | Articles by Subject | Person-to-person finance

THE internet age was supposed to herald hard times for the middleman. Customers, so it was said, would flock to the web to buy products and services faster, cheaper and more transparently than in shops or through intermediaries. Disintermediation has indeed come about, as any out-of-work travel agent or bookseller will tell you. Yet retail bankers—the middlemen between savers and borrowers—have been surprisingly untouched.

Enter Prosper Marketplace, a Californian company that matches people who need small loans with others who have extra cash to lend. Prosper launched its website on February 6th. This week, the number of active bids for loans was running at around 200. Lenders have put up some $750,000.

Such “person-to-person” lending is not entirely new. Zopa, a British venture that also matches borrowers with willing lenders, opened for business last March. It now boasts 50,000 members, of whom 15% are actively trying to borrow or lend money at any given time. The company does not publish the volume of loans.

On both Zopa's and Prosper's sites, borrowers, who first undergo identity and credit checks, post bids specifying how much they wish to borrow and the highest interest rate they are willing to pay. Lenders bid the lowest rate they will accept for a given credit profile (based on credit scores, debt-to-income ratios and other metrics) and period. To diversify risk, most loans are made on a “one-to-many” basis, meaning a lender's loan of, say, $5,000 would be spread across lots of borrowers. Zopa's lenders' money is strewn among at least 50 borrowers; Prosper's members can take on entire loans if they like.

The companies manage repayments and hire debt collectors should a borrower default. They make their money by charging borrowers 1% of the amount of the loan. Prosper also charges delinquency fees and levies a servicing charge on lenders. Zopa takes commissions on repayment insurance.

Zopa and Prosper say that lenders can earn a higher rate than they would from a savings account and borrowers pay less than on a credit card. According to Richard Duvall, Zopa's chief executive, interest rates on Zopa have averaged 7% before bad debts (of which there have so far been none). That compares with the 4.5% paid on a good British savings account and the 15% typically charged on credit-card debts.

There is a psychic pay-off, too. Users on Zopa have said that they like lending and borrowing within a community of “real” people, rather than through a faceless bank. Mr Duvall notes that affinity credit cards (ie, those linked to an activity or membership) tend to have lower default rates than traditional credit cards. “The sense of community matters,” he says.

Prosper takes this idea a step further, by allowing customers to form groups of borrowers with similar interests or backgrounds—similar to social networking sites such as MySpace.com or Friendster. Groups include one made up of Harvard Business School alumni, and others for atheists and agnostics. Groups with reputations for repaying loans on time can expect to get cheaper interest rates.

Chris Larsen, Prosper's founder, believes that these groups will help his company cut the two biggest costs encountered by credit-card companies: customer acquisition (often requiring pricey direct-mail or advertising campaigns) and defaults. Because group leaders earn money as their members repay loans, they have an incentive to recruit new members—in theory, doing Prosper's marketing for it. And the hope is that group members will be less prone to default because doing so would lower the credit rating of their group as a whole. Moreover, while borrowers can remain anonymous to the larger community, group leaders will know who has defaulted, so there is a “shame” factor. “It only takes lowering default rates by a fraction of a percentage point to make a difference,” says Mr Larsen.

Catherine Graeber of Forrester Research, a consultancy, is intrigued by the idea, particularly because it might attract 18- to 28-year-olds who need credit and spend hours logged on to social networking sites. These people, says Forrester, are much less likely than their parents to care about brands when choosing a bank. They are also routinely ignored by banks.

Still, potential pitfalls remain. One is that Prospect's group concept suffers from an inherent conflict: bigger groups mean more borrowers, but less cohesion, weakening the shame factor. But perhaps person-to-person finance's biggest difficulty will be to attract enough lenders—particularly once customers start to default, as they surely will. Ms Graeber points out that there is a reason why banks and credit-card companies charge the rates they do. “Unsecured lending has a high default rate,” she says. “What do these companies know that banks don't?”

March 4, 2006 at 05:22 PM in Financial Services | Permalink | TrackBack (12) | Top of page | Blog Home

Scotiabank writes a new chapter in data capture

IT Business

The bank is testing digital pens that can scan information as they write. Also: Smart cards and IP networks take on lingerie and beer
3/3/2006 5:00:00 PM
by Vawn Himmelsbach

TORONTO – Scotiabank is using familiar technology in a new way to streamline data capture using digital pens, digital paper and BlackBerry wireless handheld devices.

Seeing familiar technology from a new perspective and exploring emerging technologies and business concepts were the main themes at this year’s MindShift 2006 conference hosted by Allstream.

Scotiabank, for example, was looking for efficiencies in the highly competitive residential mortgage business by improving the application process used by salespeople. While it wanted to increase revenues for the bank, it didn’t want to push new technology down to users.

“Their comfort zone is pen and paper,” said Nando De Francesco, manager of business innovations with Scotiabank.

The bank embarked on a proof of concept with Allstream to pilot digital technology. Its salespeople use digital pens that scan as they write; they can be Bluetooth-enabled for wireless connectivity or used in conjunction with a docking station. Digital paper uses small black dots in mathematical patterns to map handwriting. Ink recognition software converts handwriting to text, while IP connectivity transmits data to the back-end.

Scotiabank chose to use BlackBerry devices over a wireless network. Using the thINK mobile wireless solution, handwritten information is forwarded to the server over a secure communications link using BlackBerry devices.

“The business process doesn’t change,” said De Francesco. “All we’re doing is digitizing the capture of data.” While it’s still too early in the process to determine ROI, the real benefit will come from salespeople processing more deals than they would have in the past.

Other benefits include cost savings, since it eliminates redundant data entry and scanning, as well as streamlined workflow and automatic backup. Another benefit is that the business process remains unchanged. “Technology adoption is virtually non-existent,” he said, since it’s just like using a pen and paper.

Other potential applications for the technology include account opening, security log book, signature capture and privacy compliance.

Another technology that is actually changing business processes is virtual payment, including chip-based technology in credit cards and using debit cards to pay online. Online debit payments are already a reality with retailers such as La Senza and The Source, but the concept doesn’t have a lot of publicity yet.

“Retailers are realizing their existing POS systems must be upgraded to accommodate new technology,” said Amer Matar, vice-president of product development with Moneris Solutions. Retailers want to move customers faster through checkout lines and provide more payment options but their systems are, on average, eight years old.

Data packet networks are becoming obsolete as IP penetrates the market, said Matar. The company’s network, based on Allstream, provides an always-on connection for merchants to connect with Moneris.

“You can see how fast it works at the Beer Store,” he said, where it takes about two seconds to approve a transaction. Merchants can connect directly to the Moneris host via a private IP network or the public Internet – or even dial-up. About 50 per cent of retailers are still using dial-up but, down the road, he expects dial-up will remain flat or decrease as legacy networks are phased out.

“IP allows us to penetrate new solutions taking a foothold (in the market),” he said. Within the last three years, Moneris has gained customers in new market segments, including insurance and education, by introducing capabilities such as batch processing and recurring payments.

Another technology that’s changing business processes is RFID. But data synchronization is a necessary first step to radio-frequency identification, which can then provide a foundation for collaboration with business partners.

RFID doesn’t need 100 per cent accuracy to gain substantial benefits, said Pierre Deschamps, executive vice-president of Cactus Commerce and chair of the marketing sub-committee for EPCglobal Canada. Its true value, he said, lies in sharing information with others.

That can’t happen, though, until you have your data in order. Without data synchronization, your information is not complete and you can’t base business decisions on it. “Otherwise you’re just pushing around bad data,” he said.

MindShift 2006 wrapped up on Thursdays

March 3, 2006 at 06:07 PM in Financial Services | Permalink | TrackBack (16) | Top of page | Blog Home

Nearly two-thirds of Brits bank online

Nearly two-thirds of Brits bank online - Financial Services - Breaking Business and Technology News at silicon.com

Almost 60 per cent of Britons rely on the internet to do their banking, research commissioned by Alliance and Leicester suggests.
One-third (29 per cent) of the 2,395 people surveyed use internet banking between once and twice per week, and one in 10 (12 per cent) uses it everyday.

The YouGov survey found a 63 per cent rise in people managing their current accounts online since 2003. Balance checks are the most popular (96 per cent) online activity, followed by money transfers for payments (76 per cent).

But some respondents said they would still visit a branch for more complex banking activities. Those who avoid online banking (21 per cent) said they prefer dealing with people face-to-face and 13 per cent said they have concerns about security.

The rise of internet and phone banking has led to more branches being closed, a study from the Economic and Social Research Council found last week.

The report said that half of a bank's customers will visit the branch at least once per month.

A report from analyst house Forrester last year said banks are currently restructuring their approach to customer service. It said while banks are investing heavily in IT to support new banking methods - set to hit €100bn by 2010 - they should put more effort into customer service.

March 2, 2006 at 12:43 PM in Financial Services | Permalink | TrackBack (26) | Top of page | Blog Home

Bank loyalty

Banking Strategies Blog : Why Can't Some People Commit?

BY JEFF TAYLOR AND GINA PINGITORE, PH.D. J.D. POWER AND ASSOCIATES

Face it. Runaway customers are just not that into your bank. What more can be done to nurture customers who will stay in good times and in bad? This exclusive report on the just-released J.D. Power and Associates Retail Banking Satisfaction StudySM ranks 33 of the largest banks' success in maximizing customer commitment.

| SYNOPSIS | The inaugural J.D. Power and Associates Retail Banking Satisfaction StudySM ranks 33 of the country's largest banks on the basis of customer satisfaction and customer commitment. Banks vary within a narrow band on customer satisfaction; the survey found more bank-to-bank variance in customer commitment although banking enjoys a much higher level of committed customers than JDPA finds in other industries. Satisfaction and commitment insights are offered as a means of driving bottom-line results, by employing customer service, product development and operations strategies aimed at retaining and attracting highly committed customers.

Recent customer relationship management strategies have focused on driving customer loyalty and building customer satisfaction. But - and this will be borne out by any bride or bridegroom - the state of "being loyal" or "being satisfied" falls short of the state of "being committed."

A business cannot depend upon fickle customers, and executives for years have intuited the emotional attachment of their "best customers." But now consumer research by J.D. Power and Associates (JDPA), announced in late February and available in this form exclusively in Banking Strategies, links a banking customer's commitment to a bottom-line impact for the provider.

A financial institution's success in gaining commitment, JDPA found, is a function of how customers feel as much as it is about how satisfied they are with services received. Banks vary within a rather narrow band in terms of customer satisfaction; it's in customer commitment (incorporating the customer experience, image of the institution and propensity of customers to be loyal) where the variance is. Why can't some people commit? The financial institution that addresses the reasons that keep customers from emotionally attaching may gain a competitive advantage in what is increasingly a commoditized business.

There are few firms better positioned to perform this analysis than JDPA. Each year, we survey millions of consumers around the world to gather their opinions and expectations about the products and services they purchase. This information is used to compile rankings based on product quality and customer satisfaction that gauge company performance. Companies that rank highest in the firm's studies are recognized for their achievements. Through the firm's research and publicity of research results, JDPA has served as a catalyst for positive change across many industries.

While JDPA is best known for its work in the automotive industry, the firm has expanded to serve a number of other industries including financial services. Financial services includes insurance, mortgage, brokerage, automotive lending, and most recently, retail banking.

The inaugural J.D. Power and Associates Retail Banking Satisfaction StudySM, published in February 2006, assessed 12,904 households regarding their opinions and experiences with their primary banking provider. The study focuses on 33 of the largest banks, which collectively represent nearly half of all FDIC-insured deposits. In the discussion that follows, we compare those banks based on the satisfaction level reported by their customers. We also describe how these satisfaction ratings were derived.

While measuring customer satisfaction remains our core focus, the firm recognizes that relying on satisfaction alone to gauge financial provider performance may not adequately explain customers' feelings about their banks. Customers have a composite view of their primary financial institution. In addition to encompassing their experiences at the bank, this view includes perceptions of the institution's image and the customers' own propensity to be loyal. This composite picture generates a measure we call "customer commitment," which is the most complete way to view a customer's relationship with his or her bank.

Transactional Satisfaction

When compared to our findings in other service-related industries, retail banking ranks in the middle of the pack in terms of customer satisfaction, similar to hotels and rental cars. This suggests the industry has some room for improvement overall. However, the differences between individual banks are fairly slight. Although each industry offers a unique set of experiences, our research has revealed that in industries or services where products are viewed as commodities (as in banking), there tends to be less differentiation in satisfaction ratings. Believing that most banks provide similar products and services, consumers tend to rate banks as basically the same.

But there are differences. JDPA's study finds that customers of smaller institutions, such as credit unions and community banks, tend to be more satisfied with their bank than are customers of the largest banks. A few larger banks, however, have been able to outperform not only the industry average but also the average smaller bank. Cherry Hill, N.J.-based Commerce Bancorp and Downey Savings and Loan, Newport Beach, Calif., are examples of banks with a strong customer focus that also rank high on convenience.

Branch convenience is just a piece of the story. To measure customer satisfaction, we have developed an index of 52 core questions to measure various factors critical to the customer experience: product, process, people, presentation and price - what we call "the five Ps."

For the banking industry, "transactional" satisfaction dominates the performance ratings because banking is a business built on transactions, such as deposits, withdrawals, lending, etc. The transaction factor is further subdivided into measures that gauge satisfaction where the transaction is conducted - whether in-person at the branch or via remote channels such as the call center, ATM or online. Interactions at the branch, ATM and online tend to have the greatest impact on customer satisfaction.

Along with transactions conducted via a customer service representative, online banking is the transaction channel with the highest average satisfaction level. With a higher percentage of customers who use the online channel, Commerce Bancorp and Wachovia Corp., Charlotte, N.C., both earn above-average ratings. This contributes to their customers' higher overall satisfaction.

Customers who visit the branch less often have a slight propensity to be less satisfied and less committed. Banks with the lowest in-person transaction usage include Citicorp Inc., New York; Wells Fargo & Co., San Francisco; Bank of America Corp., Charlotte, N.C.; JPMorgan Chase & Co., New York; and the former Bank One Corp., now owned by Morgan Chase. All five have in-person transaction rates below 77%, as compared to the industry average of 83%. Each bank also has low overall customer satisfaction, at least 20 index points below the industry average.

The relationship between branch types and satisfaction is difficult to ascertain. Downey Savings, with more than half of its branches located in supermarkets, earns well above average overall satisfaction. Yet Wayzata, Minn.-based TCF Financial Corp., another firm that relies on supermarket branches, ranks far below-average in overall satisfaction. TCF has much higher than normal wait times for all transaction channels: branch, online or call center.

The ATM channel can help boost satisfaction and commitment scores in some cases. Wells Fargo customers use ATMs more frequently for transactions (80% versus an industry average of 65%), and view this transaction method more positively than the industry average. In fact, ATM activity represents the only transaction method that Wells Fargo customers rate higher than the industry average.

By contrast, more than eight out of 10 customers of Union Bank of California (owned by San Francisco-based UnionBanCal Corp.) and Columbus, Ohio-based Huntington Bancshares Inc. use ATMs but don't rate the experience as positively. These lower ratings occur despite the fact that fewer Union Bank and Huntington Bank customers report an out-of-service ATM or one that's missing supplies; that's nearly one-and-a-half times better than the industry average.

Other Satisfaction Drivers

While customer transactional experience dominates the overall satisfaction ratings, perceptions of convenience, competitive product offerings and fees, financial statements and problem resolution are also important. By understanding the relative importance of each factor to satisfaction, a financial services provider can easily prioritize improvement efforts and direct resources to boost customer satisfaction. A poor problem resolution rating, for example, may flag training issues to be addressed or a negative effect of a bank policy.

Overall, problem resolution accounts for a small percentage of the customer's experience. But for those customers who actually experience a problem (one-fourth of those surveyed did), problem resolution becomes the most important element influencing their banking satisfaction.

The survey identified Seattle-based Washington Mutual Inc. as one bank doing a good job of addressing service problems. Wamu's customers are more satisfied with problem resolution, despite the fact that more of them experience problems. This is an exception. Most of the high-satisfaction banks minimize problems that customers experience, and nearly all of the survey leaders garner fewer than the average number of problems.

Convenience accounts for much of the high satisfaction rankings earned by Commerce Bancorp and Downey Savings. Commerce branches are open seven days a week and over half of Downey branches are located in supermarkets, which also have convenient hours and locations.

Satisfaction with product offerings doesn't vary much between banks, but Commerce and a few others earn high ratings. Institutions such as ING U.S. Financial Services, Atlanta, and World Savings Bank (subsidiary of Oakland, Calif.-based Golden West Financial Corp.) earn above-average satisfaction ratings on their fees.

Customer Commitment

We believe that more meaningful insights can be attained when overall satisfaction results are combined with an additional measure of customer sentiment - commitment. This approach yields a more complete measure of customers' attachment to their banks. By combining satisfaction, brand image ratings and customers' own propensity to be loyal, a more comprehensive picture emerges. This provides a greater degree of banking performance differentiation.

Much has been written about customer loyalty. No one in business would deny that loyal customers are preferable to indifferent ones. But analysis of the loyalty factor is often superficial. Typically, loyalty is measured as the intent to repeat a purchase or recommend a product or service to a friend or colleague. These measures, while important, describe only the outcome of loyalty, not the reasons for being loyal.

The JDPA Customer Commitment Model aims to help companies better understand what influences loyal behavior. It complements our Customer Satisfaction Index in that the customer experience is a major dimension affecting commitment. However, it differs by considering additional factors that drive loyal behavior, such as the image of a particular brand and the propensity of an individual customer to be loyal. These factors describe the "emotional" factors that affect the way a customer feels about a provider.

Customer Experience The customer experience in retail banking is defined by the convenience of branch locations, product offerings, transaction channels, accuracy, fees and problem resolution. As previously discussed, the ability to perform consistently in these areas is a major driver of satisfaction and directly contributes to a customer's level of commitment to a brand.

Across all of the industries where we have measured Customer Commitment, we consistently find that the customers' experience is the best determinant of commitment. In fact, in most industries, experience accounts for more than half of the level of commitment. In the business wireless industry, for example, customer experience accounts for 65%; in the restaurant industry, it's 64%. The corresponding percentage in retail banking is 56%.

Image While experience is important, it does not entirely predict whether a customer will stay with a brand. The automobile industry has some good examples of this phenomenon. For many years, Jaguar suffered from poor quality but still enjoyed strong customer loyalty. Conversely, the Ford Taurus earned relatively good scores for product quality but lost sales and market share.

Image may account for these disparities. Driving a Jaguar connoted a certain elevated status in spite of the brand's poor reliability; driving a Taurus lacked similar status, despite being reliable. Through effective marketing, public relations and other communication initiatives, customers can be coaxed to accept an image of a brand even if they have no direct experience with that brand.

A brand's image can best be understood by determining the characteristics or attributions that people assign to that brand. Image is the second most important factor in customer commitment. The higher the brand image score, the more positive the brand attributes, which include being viewed as innovative, fun, customer-oriented, reliable, etc.

Loyalty Propensity People vary widely in the degree to which they form attachments and commitments. Some people are prone to be loyal while others are "wanderers" (or runaways) and don't want to be tied down. Therefore, it is important to understand the influence of loyalty when developing models of commitment.

While there is little difference between brands when it comes to the number of loyal customers, these consumers play an important role in explaining or modeling consumer commitment and loyalty. For example, there will always be people who want to try competitors' products, despite having a strong positive perception of their primary company. Including an "individual difference factor" in the model helps to determine which elements companies can change, versus elements that are impossible to alter or impact because they reflect personality traits of customers that are resistant to change. This factor helps provide a more accurate predictor of true loyalty to a company.

Bottom-Line Impact

This discussion about customer commitment is not an esoteric exercise; it also has a bottom-line impact. A strong positive relationship exists between the level of customer commitment and a number of revenue-generating and cost-saving behaviors. JDPA has found this relationship not only in banking and other financial services but also in hospitality, airlines and telecommunications.

In these industries, a customer's level of commitment correlates with spending and other factors that drive revenue. For example, business wireless customers who are committed to their provider spend more each year, stay longer and advocate the provider six times more frequently than do customers who have low levels of commitment. In retail banking, highly committed customers use more bank services and place a greater share of their financial "wallet" at their primary bank. They also serve as a bank's best source of referral business and recommendations.

The banking industry, in fact, enjoys a much higher level of committed customers than we typically observe: 28% for retail banking, compared to 13% on average in other industries.

Why do some banks enjoy higher levels of customer commitment than others? For illustration, let's look at the institutions with the highest and lowest levels of customer commitment respectively - Commerce Bancorp and Birmingham, Ala.-based Regions Financial Corp.

With branches open seven days a week, Commerce Bancorp is highly rated for convenience and performs well in other measures, such as product offerings and fees, which contribute to its high customer satisfaction and commitment levels. Commerce Bancorp is also perceived as being customer-focused, providing personal service and for being an innovative company.

Regions Bank, with the lowest commitment scores, garnered reasonable satisfaction scores in our Retail Banking Study. Regions customers indicated that they receive speedy service and have few reported problems with their ATMs, both critical aspects of satisfaction. However, the bank suffers poor perceptions on innovation and reputation, both important image items.

ING is an example of an institution with a high level of customer commitment despite the disadvantages inherent in a direct channel strategy. Precisely because it offers its services nearly exclusively online, ING loses marks for providing very impersonal service. But despite these image liabilities, ING performs very well on the experience factor by providing a superior online banking experience combined with good product offerings and fee satisfaction. It also has earned an image as an innovator.

Customer commitment is an important measure, both in terms of its influence on revenue and the insights to be gained in understanding what drives it. While satisfaction remains the main factor influencing customer commitment, measuring both satisfaction and commitment offers the opportunity to understand the effect of one upon the other and the opportunity to know what motivates highly committed customers. This in turn can help banks develop strategies in customer service, product development and operations aimed at retaining and attracting highly committed customers.

As bankers prioritize initiatives within their institutions to improve performance, they need to consider that image ratings for a bank will be very slow to change. However, if a bank is clearly known for a particular image and begins to promote this image more prominently in its advertising, commitment levels could show rapid growth.

For most banks, however, improving the customer experience (ease of transaction and offering better products, etc.) will produce a more immediate impact on satisfaction and further drive customer commitment.

Mr. Taylor is director, banking practice, and Dr. Pingitore is chief research officer at J.D. Power and Associates, a global marketing information firm based in Westlake Village, California. Mr. Taylor can be reached at jeff.taylor@jdpa.com.

More Information

J.D. Power and Associates and BAI are planning a Webinar to further discuss the results of this survey with some of the included banks (which were not notified about the results prior to presstime). Please watch the Web site (www.bai.org) for the time and date of this follow-up event.

March 1, 2006 at 05:34 PM in Financial Services | Permalink | TrackBack (183) | Top of page | Blog Home

SOA and Grid

SOA and Grid

The emergence of service-oriented architecture and grid computing offers banks the promise of a flexible, scalable IT infrastructure. But creating an open architecture doesn't come without challenges, such as upgrading legacy systems and changing established behaviors.
By Peggy Bresnick Kendler
February 27, 2006

Q: What is driving the adoption of service-oriented architecture (SOA) by banks?

Alan Goldstein, Bank of New York: The way we measure the business value of an application is changing as IT gets more aligned with and accountable to business drivers. As a result, the tolerance once exhibited by business sponsors in accepting solutions that cannot be broadly leveraged is waning. This has created a greater impetus within the technology world to attempt to answer some of the challenges that inhibit broad reuse. The current industry iteration of SOA is perhaps the first genuine attempt to solve some of the perennial challenges (legacy reuse, interoperability, better ROI) in a united way. SOA is one of the first steps in addressing the necessity to modernize business capability using technology as opposed to making the capability fit within the constraints of technology.

Manuel Barbero, BearingPoint: SOA enables faster, cheaper application integration. It exists thanks to the adoption of Web-related technologies and constructs that make applications talk to one another in a standardized manner. Moreover, SOA makes the creation of enterprisewide, reusable services possible, and accelerates the creation of new applications as well as their integration with the plethora of disparate applications performing overlapping functions and storing redundant data.

Jim Gahagan, webMethods: The main driver for SOA adoption is the desire by banks to overcome the limitations of their legacy systems as well as their need to eliminate the operational silos separating various business units. By employing an SOA, banks are realizing greater reuse of existing IT assets while also reducing the cost to develop and implement new systems. SOA also allows banks to readily create and implement dynamic business processes that span disparate business units and more closely mirror actual customer requirements.

Q: What challenges and risks do banks face when pursuing SOA?

Goldstein, Bank of New York: Some of the initial challenges are getting familiar with the concept of a service, understanding the boundary conditions around what constitutes a service, implementing the processes to manage this orientation and associated service levels, and working through the underlying technology issues. Many of the obstacles are not technology related. Providing a suite of network-available services that comprehensively represent our business capabilities requires a holistic view of business services and how they translate to technical services. This requires a level of technical and business architectural maturity that is often difficult to achieve.

Our strategy to manage the risk around SOA is to try to understand the fundamental strengths and the value-add of this model as it relates to our business services. Clearly, not all business capabilities in their current forms can be objectively justified for SOA enablement. We go through a due-diligence process of assessing the current capabilities, identifying the needs and benefits to see what services fit into this model, augment the services if necessary and then finally orchestrate them using an SOA paradigm.

This also requires a mind-set change among the providers of the technology services. Once you start delivering capabilities broadly across many business lines, you encounter issues in which there is no obvious ownership. Long-term strategic planning requires business and technology unit managers to think as service owners, and offer a comprehensive service-level agreement for their services including enhancements, support and planning. Critical success factors include establishing a strong operational service infrastructure (service bus), and establishing a culture of ownership, service engineering, responsiveness and collaboration among the service owners.

Gahagan, webMethods: Many banks maintain a number of disparate and redundant systems. Culturally, banks often are unable or unwilling to share data, objectives or processes across siloed organizations. As banks move forward with SOA, they risk creating multiple "islands of SOA," effectively creating new silos within the IT infrastructure that require another layer of complex middleware to overcome. To minimize these risks, banks should employ a pragmatic, targeted SOA strategy and road map, with clear benchmarks for return-on-investment as the strategy unfolds.

Jamie Bernardin, DataSynapse: The primary risk to any application that is constructed by assembling these discrete services is that those services won't be available when the application must execute them. Web services tell us how to manage the interaction between client request and service response. However, if the services aren't there or don't respond in an appropriate amount of time, the application is at risk. Given this, organizations that are exposing services must take care to ensure that their services are always available and able to scale with demand.

Q: In what processes/applications have banks had the most success in deploying grid computing?

Goldstein, Bank of New York: Banks have had the greatest success in deploying grids in capital markets, fixed-income and currency derivatives applications. These high-performance computing applications use mathematically intensive calculations that require massive processor compute resources. Grid is the right solution for these because it's much cheaper to scale capacity horizontally using many low-cost small servers than to scale vertically using a single high-cost large server.

Bernardin, DataSynapse: The initial successes of grid computing were in the area of computationally intense applications. For instance, Monte Carlo simulations are easily parallelized and distributed to every compute node participating in the grid. The advantage should be clear—instead of executing these simulations on one server and grinding away for, in some instances, days, they now can be broken apart and distributed across hundreds or even thousands of compute nodes, resulting in dramatic reductions in the amount of time taken to complete. The result is that organizations using this technology are gaining a competitive edge. In the area of SOAs, the grid is the ideal platform on which to execute services because of its ability to virtualize the actual execution of the service away from the physical host on which the service is to be executed.

Q: How will SOA and/or grid change banks' computing environments, and what impacts will they have on IT organizations and end users?

Barbero, BearingPoint: Imagine being a credit risk analyst not having to log into six applications to get a single view of your client exposure. You run a risk model on your entire portfolio and get results within seconds, not minutes. As an end user, you just leveraged SOA, and grid computing helped you quickly marshal enormous computing resources. The IT group developed the application at a fraction of the cost and time it would otherwise need—that's what SOA and grid make possible.

Bernardin, DataSynapse: SOA and grid computing are natural partners. SOAs give organizations the ability to respond rapidly to evolving business requirements by leveraging existing value-add processes as discrete services; grid computing provides the virtual service infrastructure that will guarantee the availability of these services regardless of the demand placed upon them.

The impact that grid computing has on the IT organization cannot be overstated. Services executing on the grid are not tied to any particular host, so removing any one node (for hardware upgrades, for instance) has no impact on service execution. Adding new hardware to the grid is just as easy because it is the responsibility of the grid itself to ensure that nodes are appropriately provisioned with all of the services that are being managed on the grid. As for the end users, they benefit from increased response times and a wider array of available application services. --Peggy Bresnick Kendler

February 27, 2006 at 10:52 PM in Financial Services | Permalink | TrackBack (27) | Top of page | Blog Home

Corillian and StrikeForce team for Web banking authentication service

Finextra: Corillian and StrikeForce team for Web banking authentication service

Corillian Corp. (NASDAQ: CORI), the top provider of online banking, online payments and anti-fraud solutions to the financial services industry, and StrikeForce Technologies, (OTCBB: SKFT), experts in identity assurance, today announced a joint offering to help financial institutions proactively prevent identity theft and fraud, strengthen online banking authentication and comply with FFIEC guidance.

Corillian and StrikeForce will protect financial institutions' online users with a comprehensive authentication service combining Corillian's Intelligent Authentication with StrikeForce's "Out-of-Band" authentication platform, ProtectID. The joint offering helps to proactively detect fraudulent online activity and prevent illegitimate users from accessing accounts.

Benefits include:

* Easy implementation - no software downloads
* Easy-to-use, uninterrupted online banking experience
* Strong authentication with multiple layers and multi factors
* Device flexibility for financial institutions and their customers

"Online banking is undergoing a permanent shift that requires secure and user-friendly technology, affordable prices, and rapid deployment," said Mark L. Kay, CEO of StrikeForce Technologies. "The FFIEC guidelines present a marked adjustment for the online user and the financial institutions that offer very flexible and streamlined solutions will attract and retain these online customers."

"Financial institutions are looking for strong online authentication methods that don't disrupt the online banking experience that customers are used to," said Alex Hart, president and CEO of Corillian. "The multiple layers of Intelligent Authentication were designed with the online banking user in mind - to provide ultimate protection of online accounts without compromising the convenience of online banking. StrikeForce's "Out-of-Band" authentication process complements Intelligent Authentication and provides financial institutions with additional layers of multi-factor protection for their online customers."

StrikeForce's patent-pending ProtectID is the first and only "Out-of-Band" identity authentication solution that creates a separate pathway for users to enter a PIN over the telephone that takes seconds to authenticate the identity of the online customer. Biometric devices, such as fingerprint and iris scanners, as well as one-time passwords (OTPs) can be added or substituted for additional versatility and layers of security. The different multiple methods of authentication eliminate the need to carry or purchase new technology, making two-factor authentication affordable and quickly deployable.

Intelligent Authentication employs a behavioral approach to authentication by building a history of "access signatures" for individual users. This is accomplished by collecting and validating information about each user's computer and method of Web site access without collecting personally identifiable information or requiring participation of the end user in the data collection process. An electronic access signature is created by combining a number of key identification points, such as IP address, Internet service provider, PC and browser settings, time of day and geographic location. It is a zero footprint authentication solution that does not require client hardware or software, is not dependent on the existence of any special marker or cookie on the user's PC, and does not require interrogation of the user's PC via downloaded software.

February 23, 2006 at 05:12 PM in Financial Services | Permalink | TrackBack (52) | Top of page | Blog Home

Microsoft plans virtual information wallet: Gates

Microsoft plans virtual information wallet: Gates - Yahoo! News

Tue Feb 14, 6:39 PM ET

SAN JOSE (Reuters) - Microsoft Corp. (Nasdaq:MSFT - news) Chairman
Bill Gates on Tuesday showed off a new software tool aimed at giving consumers a virtual wallet to securely store their personal information for Internet transactions.

As part of that effort, Gates said the virtual personal information wallet, code-named "InfoCard," would allow consumers to safely manage their identities online. It seeks to provide better security by reducing reliance on usernames and passwords which are often the target of computer criminals.

This time around, however, Microsoft puts the power in the hands of the user, Gates said. In a demonstration, Microsoft showed how easily a consumer logged onto a car rental site to quickly reserve and pay for an automobile using a card from the virtual wallet.

Speaking at the annual RSA computer security conference, Gates provided a broad overview of how the industry needs to meet what he said were growing cyber threats and that consumers would not embrace technology which is not simple to use.

Microsoft first offered identification and authentication with its Passport service, but that technology failed to win wide acceptance because consumers did not embrace the idea of having the software maker manage their information.

Microsoft also said because InfoCard runs isolated from other programs on the desktop it makes it harder for hackers to install malicious software on the system.

The company plans to release the technology later this year, which will support the upcoming Internet Explore 7 on Windows Vista
Windows XP with Service Pack 2 and Windows server 2003.

February 15, 2006 at 01:24 PM in Financial Services | Permalink | TrackBack (17) | Top of page | Blog Home

Westpac bids to thwart keyloggers with onscreen keypad

Finextra: Westpac bids to thwart keyloggers with onscreen keypad

Westpac has introduced a mouse-activated keypad for users logging on to its Internet banking service. The move comes just months after Australian police busted an online crime syndicate suspected of stealing funds from Web banking customers through the use of keylogging malware.

Westpac says the onscreen keypad scrambles customers IDs and passwords and renders keylogging Trojans ineffective.

The bank says it is the first to introduce the technology in Australia, although similar programmes have been implemented by other banks worldwide, including Citibank, Standard Bank of South Africa and ING in Holland.

Westpac's move comes just months after police in Perth smashed a crime ring that had allegedly used keylogging software to steal "significant" sums of money from victim's bank accounts. Multiple banks had been targeted but names of specific financial institutions were not disclosed.

The security and effectiveness of graphical keypads has been questioned recently following revelations that fraudsters are increasingly using sophisticated "screenscraper" software to neutralise these programmes. Rather than tracking keystrokes, the screenscraper takes takes a snapshot of the user screen each time the mouse is clicked and sends it to the phishers' server for inspection.

Dan Hubbard, senior director of security for Websense and an analyst with the Anti Phishing Working Group, says crimeware continues to evolve and advanced techniques are now being used to steal information: "These Trojan horses are moving beyond keylogging to now capture screenshots to obtain end-user credentials."

February 13, 2006 at 08:57 AM in Financial Services | Permalink | TrackBack (27) | Top of page | Blog Home

Banks' silence is golden for booming internet fraud

Scotsman.com News - Banks' silence is golden for booming internet fraud

MURDO MacLEOD mmacleod@scotlandonsunday.com

FRANK Duns believed he was being ultra-cautious. He used his credit card only when he had to, including to pay a restaurant bill while on holiday in the Isle of Man.

Just weeks later, the businessman from Penicuik, Midlothian, discovered to his horror that his card had been used to buy a £4,000 motorcycle. The card had been cloned and the details handed to an Ireland-based fraudster.

"I am still absolutely stunned how anyone could have made a transaction for so much money just like that," Duns said. "No security checks or anything. I got a full refund from the card company, but never an explanation of how this happened."

Duns is just one of the rapidly growing number of Scots falling victim every year to scams and thefts involving credit cards and bank accounts, most of which take place in cyberspace. A new branch of the English language has emerged to describe the shady practice, with phishing, pharming, keylogging and spyware among the recently coined words.

Banks acknowledge about £500m of such fraud a year in the UK - up from £213m in 2000 and £62m in 1995. But banking insiders have told Scotland on Sunday that as much as another £500m was discovered by the industry but never reported to police, under a controversial policy of dealing in-house with any theft of £2,000 or less.

It's the bigger cases that do come to light, such as the £280,000 stolen by fraudsters from comedian Harry Hill, as reported last week. Politicians and police fear that by "hushing up" such large numbers of crimes, the banks could be inadvertently encouraging more theft.

Pauline McNeill, the convener of the Scottish Parliament's Justice 1 Committee, said: "This needs to be investigated. It's important to get an accurate picture of what is happening in order to fight crime. I am concerned that by only focusing on the larger frauds we might be missing the opportunity to link crimes together and so solve more of them."

A police insider said: "From one point of view we might quite like it if the figures seem lower than they really are, because that gives us less crime to chase up. But ultimately the most effective way to stamp this out starts by knowing the full picture of what is going on."

Detectives say criminal gangs have turned to internet and card fraud as an easy alternative to "traditional" crimes such as armed robbery. Criminals calculate that even if they are caught, there is less risk of receiving the hefty sentences they would get for using guns or knives.

As a result, banks and detectives are now locked in a technological arms race against fraudsters, culminating in Chip and Pin, which will come fully into force this week. The new system will mean that customers who do not know their numbers might have their cards refused. But the system risks descending into chaos, as millions have still not received their code numbers.

And Scotland on Sunday can reveal that the latest gadget in the thieves' technological armoury "tunes in" on the new portable Chip and Pin readers as they are used - typically in restaurants.

Detective Inspector Duncan Hamilton, of the Strathclyde Police fraud squad, said: "Chip and Pin has been very effective at stopping fraud at the point of sale. But there is evidence that criminals have been using special receivers which can pick up information from a portable chip card reader."

The crime has been uncovered in continental Europe and police believe if it is not here already, it is only a matter of time.

Hamilton says the biggest cybercrime threat in his force area is gangs targeting bank and call centre workers in order to bribe or force them to reveal confidential bank information.

He said: "The gangs approach the staff in the pub or somewhere and typically offer about £200 for each set of details. If the person refuses, the promises turn to threats. But let's face it, call centre workers are not brilliantly paid and there's a high turnover and not much loyalty."

Meanwhile, the potential financial perils of using a home PC become ever more pressing. Fraudsters are firing out bogus e-mails, purportedly from banks, in an effort to get consumers to enter their account details - a practice known as "phishing".

A variation is "pharming". Software is installed on a computer which diverts the user from common retail internet sites to fake web pages which look like shopping sites. The unwitting user keys in vital details in the belief that he is buying something online, but is actually sending credit details to criminals.

Conmen also hide "spyware" programs in innocent-looking files downloaded from the internet, such as free software.

Peter Craig, of the security software company Trend Micro, said: "About 60% of UK computers are infected with spyware, and it's tremendously difficult to avoid. I visited a website with a clean PC, turned off all anti-virus protection, downloaded a free program, scanned the PC again and found 418 items of spyware."

So who is behind the new crimewave? Detective Chief Superintendent Stephen Ward, crime coordinator for the Scottish Drug Enforcement Agency, said: "We are seeing a number of organised criminal gangs from Eastern Europe moving into Scotland.

"They seem to believe that there is a lot of potential here to make money. It's not all from outside - there are the gangs from here in Scotland at it too."

Andrew Goodwill, the managing director of Early Warning, a company which develops anti-fraud databases, said: "Gangs target graduation lists and universities in the former Soviet Union for the best maths and IT graduates. They face the choice of not much money in honest work or quite a lot of money working for criminals."

A police insider in the former Soviet Union said: "The gangs here think you in the West have too much money and that you are not careful with it. We were told for decades that you were decadent capitalists and that you were weak. That message had its effect even on our criminals."

Meanwhile, the banking industry generally prefers to compensate customers - to the tune of around £1bn a year - rather than tell the police of every case and suffer a public crisis of confidence.

A banking industry source confirmed: "We don't report the smaller ones because of the impact on the image of the bank. Customers' confidence would be affected.

"Banks also hate having their staff on the witness stand. You don't know what a defence lawyer might ask, and you might be forced to reveal information about procedures which you wouldn't want people outside the company to know about."

Paul Leckie, a partner in Unisys global financial services, which provides security analysis to the industry, added: "If it's under £2,000 then they don't bother reporting it."

But while they may be reluctant to involve the police, the banks cannot be accused of doing nothing. Based in Northampton, Barclaycard's anti-fraud centre has a rogues' gallery of wanted fraudsters and figures charting the team's progress in the never-ending battle with the conmen.

Rebecca Mckee, the anti-fraud team leader, said: "When you speak to a customer, having detected a fraud, it's quite a shock to them and they need reassurance."

Sometimes the work involves talking to the people who will ultimately be snared by the team's investigations. "It's exciting. You get a buzz," Mckee said.

But Duns remains surprised at what he sees as the lack of control over card use. He said: "I recently bought a car with my debit card and no security checks were done.

"I find it worrying that considerable sums can go through electronic machines with no questions asked."

HOW THE CARD CHEATS CAN TARGET YOUR IDENTITY

ID THEFT - Criminals steal personal details, for example through discarded bills and use the information to divert credit cards and cheque books to an alternative address and even get loans in the victim's name.

CLONING - A card is swiped through an electronic reader to retain the details. A copy of the card is then produced which can be used by a fraudster.

PHISHING - A rogue email, usually purportedly from a bank and requesting financial details.

PHARMING - An email invites users onto a computer link to divert a computer from shopping websites to fake retail pages set up by criminals for bank details.

SPYWARE - Computer programmes keep a log of what a user does at their computer and which internet sites they visit. Commonly used by marketing companies.

How to stop the cheats from grabbing your cash

The top tips to keeping your money safe include:

• Never let your cards out of your sight - their details could be written out by hand and swiped through a reader in a matter of seconds, leaving you potentially vulnerable.

• Narrow down your pack of cards so you keep tabs of each one. It will also make it simpler if you have to remember fewer numbers.

• Do not write down your personal identification numbers. Banks allow you to change them to something a bit more memorable.

• Never use a cash dispenser which looks in any way unusual. Some have sniffing devices on the front and some are actually 100% fake.

• Join a card protection scheme, such as Sentinel, which insures you against all losses, keeps a track of your plastic and does all the work cancelling the cards if you become a victim.

• Shop in outlets set up for chip and pin rather than card and signature - there is less chance that you and your card can be parted.

• Shred all your documents, or rip them up into very small pieces if a shredder seems melodramatic. If you have a home fire you could even consider burning them.

• Make sure no one is looking over your shoulder when you use your card. Gangs operate in teams - one checking the number and others angling to steal or clone the card, maybe much later.

• If someone phones up purporting to be from your bank, offer to call back. No bank staff will ever have a reason to ask you for your PIN number. Most banks do not e-mail customers, and those that do will address you by name.

• Install spyware protection on your computer in addition to anti-virus and firewall software. And keep it up to date. Unlike anti-virus programs you can operate more than one spyware killer. Use it regularly.

• Ignore spam e-mails with offers that are too good to be true. You have not won the Canadian Lottery - there is no Canadian Lottery to win. And no one is offering you the latest iPod for nothing.

• If your children use your computer for instant messaging teach them not to click on strange links or to tell you if they have.

• Police recommend checking out www.getsafeonline.com for the latest advice. A tip for connoisseurs of junk e-mail: the word 'the' appearing in odd places means it is likely to be from eastern Europe. Most Slavic languages have no definite article and placing 'the' wrongly is a common mistake.

TERESA HUNTER
PERSONAL FINANCE EDITOR

February 12, 2006 at 01:28 PM in Financial Services | Permalink | TrackBack (10) | Top of page | Blog Home

Banks hide true level of card crime

Scotsman.com News - Banks hide true level of card crime

MURDO MACLEOD POLITICAL CORRESPONDENT

HALF a billion pounds stolen from bank and credit card accounts each year is not being reported to the police by financial institutions, a Scotland on Sunday investigation has found.

Banking industry sources have confirmed that any cyber-theft of less than £2,000 is not reported to outside authorities as a matter of policy. This means that at least half of the estimated £1bn pilfered from bank customers annually is being written off, fuelling fears that criminal gangs are being emboldened to steal even more.

MSPs and MPs have called for an inquiry into how widespread bank and credit card crime really is, amid concern that by not flagging up all incidents, the battle against fraud is being harmed.

Senior police officers have warned that Scotland has become the target of a new wave of organised crime gangs from eastern Europe, who believe that unwary Scots offer rich pickings and who target bank call-centre workers.

Officers also warn that thieves are acquiring new radio devices which can snoop on the signals from chip and pin card readers in restaurants and log them.

An informed insider in the banking industry said: "The figure for losses due to credit card and ID theft fraud is in the region of £1bn. That is about twice the amount which is typically reported, so about half is never flagged up to police."

The typical amount below which individual losses are not reported is £2,000, a figure cited by banking security analyst Paul Leckie, a partner in Unisys Global Financial Services, which provides security analysis to the industry.

An insider explained: "We would only report something under £2,000 if it were clear that it was a part of a much larger fraud. It may seem a lot to you, but for the bank it costs more in the time taken up by speaking to police and lawyers."

Police officially deny that they believe banks are failing to pass on information to them and praised the co-operation of financial institutions. But a number of police sources said that the lack of information prevented them getting a true picture of the scale of fraud.

Margaret Mitchell, the Scottish Tory justice spokeswoman, said: "Obviously the banks do work closely with the police on major cases and get results. But I think that if more smaller cases were flagged up then we would be able to fight against bigger fraudsters more effectively."

Nationalist MSP Stewart Stevenson, the deputy convener of Holyrood's Justice I Committee, said: "There should be an investigation into this. The question is whether we have the time to carry it out because we have so many bills to deal with. But this is a serious issue which needs to be looked into."

Scottish police say that gangs are increasingly targeting bank and call-centre staff to get confidential bank details from them, and "planting" moles within branches and centres.

In order to foil criminals such as these, who use bribery or threats to get workers to divulge information, banks are developing new software which can analyse suspicious transactions and also alert them to the activities of dishonest staff.

They are also developing sophisticated background checks, and some are even pondering scrapping staff uniforms to avoid targeting of employees after work.

February 12, 2006 at 01:27 PM in Financial Services | Permalink | TrackBack (26) | Top of page | Blog Home

HSBC rolls out Vasco authentication tokens across Apacs

Finextra: HSBC rolls out Vasco authentication tokens across Apacs

VASCO Data Security International, Inc. (Nasdaq: VDSI), the global number one vendor of strong user authentication products to the financial sector, today announced that HSBC will use VASCO's Digipass across the entire Asia Pacific Region for secure Internet Banking.

HSBC Hong Kong started using Digipass during Q2 of 2005, and has currently rolled out an impressive 900,000 Digipass GO3 authenticators. HSBC has initiated Digipass use in mainland China, Singapore, Indonesia, South Korea, Malaysia, Sri Lanka, Brunei, Thailand, New Zealand and Australia.

HSBC is using Digipass for retail, commercial, corporate and private banking applications. The World's Local Bank has placed its trust on two Digipass models: the Digipass GO3, and the Digipass 260. The Digipass GO3 is a lightweight, low cost strong user authentication token, especially designed for the large volume banking market. GO3 is extremely easy to use - with a simple touch of a button, the customer generates a unique one-time password. The Digipass 260 is a very portable, PIN protected device offering One-Time Password and e-signature functionalities.

"We want to congratulate HSBC for their security awareness, their visionary approach of using Digipass across the Asia Pacific region, and the impressive speed of their implementation and roll-out," said Jan Valcke, VASCO's President and COO. "The battle against Internet fraud has become a priority for banks worldwide. HSBC proves that end users in the e-banking sphere can be protected in a cost-effective and easy to use way."

February 2, 2006 at 09:56 PM in Financial Services | Permalink | TrackBack (30) | Top of page | Blog Home

Smart IT spending: Insights from European banks

The McKinsey Quarterly: The Online Journal of McKinsey & Co.

Those that get the most value from information technology might be the ones that spend the least on it.

Kanika Bahadur, Driek Desmet, and Edwin van Bommel

Web exclusive, January 2006

A small number of European banks get more business value from information technology—including faster, more flexible support of business objectives—than do their peers, and at a far lower cost. How? Our research found that this select group combines superior IT management with a tight focus on using IT to help improve business performance.

We surveyed 37 retail and wholesale banks to understand how they manage technology and to identify the IT-management practices of the top performers. In the course of the effort, more than 70 variables of management practice—ranging from the management of data centers and application portfolios to IT governance models and outsourcing contract provisions—were examined. We collected quantitative and qualitative data on the banks' IT spending and on their staffing levels for internal personnel and contractors.

The survey found that IT spending varied widely—from 10 to 30 percent of operating costs, or 4 to 18 percent of operating income. Higher levels of IT spending didn't increase the effectiveness or efficiency of the business. Indeed, the banks that appear to get the most business value from IT spend up to 40 percent less than the weakest performers.

We discovered that the best performers were separated from the rest by fewer than 20 statistically meaningful variables associated with two factors: the quality of a bank's IT management and the ways the bank uses IT to support the needs of the business. There was no correlation between the performance of a bank and either its size (as measured by revenues or head counts) or its mix of retail and wholesale business. Taken together, these results strongly suggest that the way banks use and manage IT will continue to be a crucial factor in their performance.

Four kinds of banks

Each bank was assigned to one of four categories (Exhibit 1). The top performers, which we dubbed "effective business enablers," achieve the greatest business efficiency and effectiveness, from a relatively low level of IT spending (8 percent of operating income, compared with an average of 12 percent for all other respondents). Of the 37 banks, 14—including all of the Spanish institutions surveyed (see sidebar, "The IT operating edge of Spanish banks")—fell into this category.
Chart: How do you use IT?

At the other end of the scale were the "high IT spenders," which pay out almost 13 percent of their operating income on IT but are not yet seeing the desired impact on business efficiency and effectiveness. Thirteen banks were in this group.

The banks in the third category, "heavy IT transformers," spend almost 15 percent of their operating income on IT, largely for specific business transformation projects. These tend to be one-time but multiyear efforts, such as a major IT consolidation, standardization and postmerger integration efforts, or support for business expansion into new product lines, markets, or channels. Only three banks fell into this category.

Finally, seven banks spend just 10 percent of their operating income on IT but haven't achieved a high level of operating efficiency. We dubbed these banks "efficient IT executors."

IT management makes the difference

The effective business enablers, we found, have a distinctive way of managing IT operations. Most striking was the way these banks handled applications, infrastructure, outsourcing, and vendor management (Exhibit 2, part 1).
Chart: Managing IT better

Typically, the effective business enabler has a more centralized and consolidated application portfolio than the typical high IT spender—380 applications, on average, compared with 500 for high IT spenders and as many as 1,200 at some other banks. Effective business enablers also spend €75,000 less per application than do high IT spenders. Moreover, the applications associated with complicated business transactions are less fragmented at the top-performing banks than at others. Take a typical mortgage transaction that consists of various stages, from submitting the application and prequalifying the borrower to underwriting and financing the loan. To complete such processes, banks lower down on the performance scale use numerous applications that draw on data from many different systems. Since these applications often require manual data transfers from system to system, they generate more errors and slow down processing. The best banks, by contrast, use fewer, more integrated applications.

Effective business enablers also manage their IT infrastructure tightly. They have half as many data centers (one or two, on average) as the high IT spenders do, for example. They also spend less on each one—some €22 million a year, compared with €29 million for the highest spenders.1 The difference partly reflects the fact that many high IT spenders haven't yet rationalized the data centers they accumulated through acquisitions. Most top banks have done so but still seek to reduce costs further by setting up data centers in regions with lower real-estate costs and by automating operations so that fewer employees are needed to run them. Top banks also keep a close grip on procurement contracts for hardware and services.

As for desktops and help desks, effective business enablers have standardized these assets to reduce their cost and increase their scalability and to make it possible to manage them remotely. As a result, such banks spend only €1,600 a year per employee on desktop and help desk services, compared with €2,500 for high IT spenders.

Another way this group of banks differs from the rest is its approach to outsourcing IT and managing vendors. Only 30 percent outsource at all, compared with 45 percent of the high IT spenders. Moreover, effective business enablers do so sparingly—outsourcing represents only 7 percent of their IT spending, compared with 25 percent for high spenders. In our experience, the reason for the difference is that the top banks have stronger in-house IT skills and can thus outsource more selectively than the others, carefully choosing those areas where third-party providers would add value rather than outsourcing to "fix" IT-management problems.

Finally, top banks negotiate flexible vendor contracts and monitor them continually to allow for timely renegotiation when opportunities arise. Other banks tend to be constrained by inflexible contract terms and conditions, which make renegotiation more difficult and less rewarding.

More support for business

In addition, effective business enablers excel in the way they use IT to support the business. They make applications flexible, centralize important customer data, and use IT to support core banking processes and business productivity.

Because these banks use applications that are more standardized and fairly easily modified, they are better able to respond to changing business needs (Exhibit 2, part 2). By contrast, high IT spenders report that 40 to 60 percent of their applications have customized features that are difficult to change or enhance, as compared with less than 40 percent of those at the top banks. Moreover, the top performers tend to keep customer profiles in a centralized, integrated data file. As a result, back-office processes are more efficient and contact information about existing customers need not be reentered each time one of them applies for a new loan or opens an account.

Another key difference is that the effective business enablers spend more of their application budgets on primary processes such as executing payments, processing mortgages, or handling securities—applications that deliver direct value to the business. They spend only 13 percent on support processes such as HR, risk, and finance. By contrast, the high IT spenders dedicate an average of 21 percent of their spending on applications to such support processes rather than to customer-facing or core-banking processes.

Effective business enablers also enhance their business productivity by spending more on work-flow-management systems that automate a wider range of processes and ensure that the most appropriate people perform the right process steps in a timely fashion. In addition, these companies provide customers with easier access by making all services available through all channels: branch offices, ATMs, the Web, and the telephone. Other banks offer only limited services on certain channels—for instance, by narrowing the customers' telephone-banking options to checking account balances.

Strategies for improving performance

Taking the top performers' practices as a starting point, any bank can improve its efficiency and effectiveness. Each, however, faces specific challenges. High IT spenders need to invest more selectively and to align their spending more closely with business aims. As Exhibit 3 shows, these banks lag well behind the effective business enablers on overall operating efficiency. Business as usual is not an option: the high IT spenders must fundamentally rethink how they manage and integrate IT into the business.
Chart: The learning curve

Efficient IT executors might need to increase their investment and use more of it to enable their business processes. The IT transformers should closely monitor multiyear investments to ensure that they stay aligned with changing business needs and, at the same time, run day-to-day IT operations efficiently. The challenge for these banks will be to cut back on IT spending as their transformation projects draw to a close and to redirect those funds toward further innovation and efficiency.

The top performers can make advances too. They have an opportunity to extend their advantage by further automating their already lean back-office processes. And when integrating a merger or acquisition, they can use their own tried and tested applications, data centers, and capabilities as a starting point for the new IT organization.
The IT operating edge of Spanish banks

Why were all four Spanish banks in our survey among the top performers? The answer is competition and leadership. Spain's banking market was for many years more fragmented than that of other European countries, sparking fierce competition. In this climate, bankers maintained extraordinary discipline over IT costs and at the same time looked for IT solutions that could provide a competitive edge. As a result, the country's banks were early adopters of many IT-management best practices identified in our research.

We found the use of technology to be especially effective in three areas:

* Servicing. Spanish banks were quicker than other European institutions to adopt ATMs and to establish call centers and Internet channels. Being ahead of the curve, they reaped the cost savings from each of these moves early on—and garnered a reputation among customers for being innovative and technologically savvy.
* Transactional products. Spanish banks quickly embraced paperless transactions in the payments arena through the use of ATM networks, wire transfers, and direct debits (a direct, automated charge to an open account for a service provided by a company). Moreover, the country's regulatory bodies drove efficiency within the industry by fostering the development of centralized, consolidated, and well-run exchanges for processing payments, bonds, and equities. By eliminating paper-based transactions, the banking sector lowered its processing costs and increased its efficiency.
* Back-office operations. IT and operations are closely linked and managed at most Spanish banks and are frequently run by the same person—often the chief operating officer. The result: more consolidated and automated back-office functions, which in turn lowers costs.

Return to reference
About the Authors

Silviano Andreu is a principal who leads McKinsey's IT practice in Spain and Portugal. He specializes in IT strategy and is based in Madrid.
About the Authors

Kanika Bahadur, a consultant in McKinsey's global IT practice, specializes in banking technology and operations. She is based in London. Driek Desmet, a principal who leads McKinsey's IT practice in the Benelux countries, specializes in banking and insurance technology and operations. He is based in Amsterdam. Edwin van Bommel, an associate principal in McKinsey's global IT practice, specializes in banking and insurance technology and operations. He is based in Amsterdam.

This article was first published in the Winter 2005 issue of McKinsey IT.
Notes

1 These figures include all server costs.

February 1, 2006 at 04:10 PM in Financial Services | Permalink | TrackBack (2012) | Top of page | Blog Home

Demographic Trends

How are bank customers changing, and what must financial institutions do to meet these evolving requirements? Establishing flexible infrastructures and adapting systems to provide appropriate customer support and product development are critical steps.
By
Bank Systems & Technology
January 31, 2006
http://www.banktech.com/printableArticle.jhtml?articleID=177103796

Jan 31, 2006
URL: http://www.banktech.com/showArticle.jhtml?articleID=177103796

Q: How are retail banking customer demographics changing? What is the significance of these trends?

John Eilering, Mount Prospect National Bank: Although our customer base is quite mature, customers have become computer savvy. Ten years ago, all the large banks insisted that the banking industry could not afford brick and mortar and should be driving customers toward online banking. In light of that, community banks opened branches and touched their customers. Now, large banks have responded with numerous branches, while community banks are looking at improving their online banking systems.

Aaron Fine, Mercer Oliver Wyman: The most significant demographic trend that retail banks need to be tracking is age—and the shift of wealth into younger generations. It's possible that the traditional retail bank customer is going to become more of a borrower than a saver over time. Why? Because, on one hand, segments of the population that have money to invest are becoming more informed about their options—options that also are more readily and cheaply available. On the other hand, a lot of the rest of the population is spending and borrowing more and saving less.

Kathleen Khirallah, TowerGroup: Demographic data on banking customers provides tremendous value to those banks that wish to be customer-centric. Thus, age, income, ethnicity, gender, level of education, etc., are all valuable pieces of information for a bank to consider when developing new products, creating marketing campaigns or deciding where to place branches and in what configuration. But demographics are only one piece of the analysis; other factors such as life stage and psychographic attitudes also play a role.

Andy Holley, Capgemini: The biggest impact will result from the so-called "mature market" (customers older than 55). Driven by aging baby boomers, this fast-growing market already totals 60 million people in the U.S. (about equal to the entire population of the U.K.). Other trends that likely will have significant long-term effects are the rapid growth of the Hispanic and Asian communities, and the increase in Islamic banks. Banks also are realizing that female customers differ from their male counterparts in some of their financial needs and attitudes.

Q: What are the preferences of these evolving customer segments? How will the changing demographics impact product development, distribution and operations?

Eilering, Mount Prospect National Bank: We need to work diligently on making it easier and safer for customers to use financial technology while at the same time maintaining close personal relationships with their bankers. Customers want the best in technology, but also want a relationship with their bankers.

Fine, Mercer Oliver Wyman: Why is generational shift important? According to one survey, 40 percent of total deposits—the lifeblood of retail banks—is held by people over the age of 65. Even small changes in the behaviors of younger generations—either because they more actively push wealth into higher-return investments or because they have a tendency to save less than their parents did—could have big impacts on future bank earnings. If this played out, you could see banks polarizing toward transactional and lending products on the one side, and more-sophisticated and trusted investment management capability on the other.

Khirallah, TowerGroup: The goal of the bank is to meet the product and service needs of its customers. If a market area should experience changes in demographics, the bank will be caught without a viable strategy unless it has been tracking demographic, life stage and psychographic information. It's particularly important in markets that are experiencing rapid migration. If neighborhoods sustain changes in ethnicity, banks must ensure their staff is bilingual and familiar with the new customs/culture. Similarly, if older customers leave an area and an influx of young families occurs, the bank should rethink the products and services that it advertises in that area.

Holley, Capgemini: Today's seniors live almost 20 years longer than they did a century ago, and they have much more cash. This market demands a great deal in terms of proximity, easy access and service levels. On the other hand, many modern women struggle to find a balance between career and family, and face financial challenges that banks could help them solve long before starting a family. By providing segment-specific solutions with targeted value propositions, there is tremendous revenue and relationship potential for retail banks.

Q: What channels will be most important to these evolving market segments? How will this impact retail banking strategies?

Eilering, Mount Prospect National Bank: A myriad of retail and commercial customers use our online banking technology. But people in those groups also prefer to come into our branch and receive service in the traditional manner. While that is working successfully, there will be a time when we need to focus on either simply providing high-tech online services or focus on high-touch service in the branch.

Fine, Mercer Oliver Wyman: Younger generations are going to both demand and allow more remote service than their parents. But the branch will transform long before it disappears. Here, it's critical to think about small businesses, a segment that generates up to one-third of deposit profit and that demands a lot of the "fat" that some of the evolving branch models seek to trim away. Banks can't afford to let efficiency drive this segment elsewhere.

Khirallah, TowerGroup: Banks should ask their customers what their preferences are for interactions. Banks will find that their customers will use all channels; the trick is to know how each customer wants to interact with the bank and then honor that preference.

Q: How must technology support and product development evolve to meet changing customer preferences?

Fine, Mercer Oliver Wyman: Banks' technology and product innovation centers need to focus on four key capabilities: (1) Invest in data quality and the ability to aggregate information across products and customers to drive customer and profitability insights; (2) make sure the bank's application environment is agile enough to handle new products and services for target segments quickly, capitalizing on those insights; (3) mitigate operational glitches around data privacy, security and infrastructure that erode customer loyalty; and (4) empower the front line by taking IT decisions closer to the customer, and investing in front-end tools and analytics that promote sales and service, rather than back-office administration.

Khirallah, TowerGroup: A one-size-fits-all approach to serving customers simply will not be successful. Because customers are different and manifest many diverse behaviors and financial needs, banks are forced to be flexible. The technology infrastructure required to serve so many varied customers is expensive to maintain; however, the infrastructure is considered "table stakes"—a cost of being in the banking business. The real challenge for many banks is the ability to adapt the technology infrastructure so that disparate customer groups are served appropriately and consistently.

Holley, Capgemini: Channel integration, mobility and event-triggered marketing based on integrated customer information will be the main themes governing the front end, while industrialization will predominate "backstage" to ensure scale and profitability. Mass customization and packaging of products will be accompanied by rigorous product portfolio/product life cycle management, which integrates not only different lines of business, but also external partners and is supported by appropriate technology. For most banks, this means investment in fundamental infrastructure renewal—investing in flexible core-banking systems, and building sustainable and flexible service-oriented architectures and IT organizations. --Peggy Bresnick Kendler

February 1, 2006 at 01:07 PM in Financial Services | Permalink | TrackBack (60) | Top of page | Blog Home

RBC adds bandwidth to remote bank machines

IT Business

A nationwide upgrade will provide Canada's largest financial institution with a foundation for future applications. Plus: Why 56K is fast enough
1/30/2006 5:00:00 PM
by Neil Sutton

The Royal Bank of Canada Monday said it has reached an agreement with Allstream to upgrade its standalone bank machines nationwide.

The deal, which will affect the 1,900 automated banking machines (ABMs) that are not connected to an RBC branch, will provide the bank with more bandwidth which could be used to add more applications. Financial terms of the agreement were not disclosed.

Currently, the standalone or “remote” ABMs use a Bell Canada multi-drop line with 2,400 bits per second. RBC recently issued a request for proposals to upgrade the network to all Canadian service providers and Allstream came back with the best offer, said Bob Matthews, RBC’s senior manager for telecom.

The Allstream upgrade will increase network speeds to 56K via a multiprotocol label switching (MPLS) IP platform. The ABMs themselves will be also be replaced with NCR machines. Spokespeople from NCR were unavailable for comment at press time.

A small pilot project was introduced in December with half a dozen ABMs and the upgrade will begin in earnest next month. The rollout will take approximately 18 months, said Matthews.

While 56K may not sound very fast compared to broadband Internet connectivity, it is sufficient for most ABM applications, he added. “The application that uses these lines doesn’t need a lot of bandwidth at this point in time. Down the road (broadband) could be in the future for us, but right now, dial-up satisfies the business requirements.”

Matthews said he couldn’t elaborate on the types of ABM services RBC customers may see in the future, but noted that MPLS is becoming the connectivity standard of choice for the Canadian banking industry.

Chris Long, sales vice-president, central region for Allstream said that most Canadian banks are taking a wait-and-see attitude towards more advanced ABM applications. The ground is being broken in Europe, he said, where financial institutions are moving ahead more rapidly with application upgrades.

“You don’t see a lot in Canada, but if you look globally, you do see a lot of progressive banks or finance institutions have chosen to have a direct link-up with an actual live video feed,” said Long.

“They’d be able to connect up to a branch. A lot of the banks in Canada have the capability and strategy in place, but they often like to see other, more progressive markets roll things out and see how they go before they make a huge investment.”

Just over a year ago, Allstream signed a deal with Scotiabank to migrate its 1,050 branch locations to an MPLS IP network. ABMs in branches tend to enjoy slightly higher bandwidth than remote machines, said Long, because they can take advantage of on-site connectivity.

But, he said, the new remote RBC ABMs will have “sufficient bandwidth to roll out a variety of applications, if they choose to do so.”

January 30, 2006 at 10:08 PM in Financial Services | Permalink | TrackBack (50) | Top of page | Blog Home

Fraud puts online banking at risk of collapse

Fraud puts online banking at risk of collapse - vnunet.com

Consumer confidence 'fragile', reports FSA
Iain Thomson, vnunet.com 23 Jan 2006
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Over three-quarters of UK surfers currently using internet banking could abandon the services because of fraud, according figures to be released on Wednesday by the Financial Services Authority (FSA).

The watchdog's Financial Risk Outlook 2006 warns that 77 per cent of UK users would close their accounts if banks started refusing to reimburse customers for internet fraud.

The FSA went on to describe consumer confidence in the internet banking system as "fragile".

"If consumers were asked to foot the bill for internet banking fraud losses, our research shows that they would stop using the tool," said Philip Robinson, financial crime sector leader at the FSA.

"Most consumers recognise that they have some responsibility for security but they are not necessarily following this obligation through.

"To tackle the losses associated with fraud, banks should continue to drive security and this must include educating consumers on the importance of protecting themselves."

The report quoted figures from the Association for Payment Clearing Services suggesting that fraud losses through internet banking reached £14.5m in the six months to June 2005.

Although this is relatively low, losses have more than trebled since the same period in 2004 when the total was £4m.

Nearly all users (95 per cent) surveyed believe that at least some security responsibility should lie with the bank, and 45 per cent believe that banks should take sole responsibility. One in 20 respondents had no security software on their PC.
Research by Forrester last year estimated that 600,000 UK internet users had stopped using online banking because of security fears.

"We recognise that many banks are already taking steps to engage consumers. Initiatives like the Get Safe Online campaign by the government and the private sector show that consumer education is beginning to happen," said Robinson.

"But banks need to look carefully at consumer attitudes and whether their initiatives are effective in maintaining confidence."

January 25, 2006 at 09:12 AM in Financial Services | Permalink | TrackBack (19) | Top of page | Blog Home

Yorkshire introduces virtual agent to chat with mortgage customers

Finextra: Yorkshire introduces virtual agent to chat with mortgage customers

he UK's Yorkshire Building Society (YBS) has introduced a virtual assistant to its Web site to answer online queries from mortgage customers.

Web site visitors are able to ask the virtual assistant - which is known as Helen - questions in natural language, instead of having to choose the right combination of key words to retrieve the correct answer from the search engine.

YBS says the virtual assistant creates an emotional and entertaining experience, increasing customer loyalty and Web site "stickiness", and initial results show that a significant number of people enjoy having a "chat" with her.

Typically Helen is asked about best rates and types of mortgages on offer.

Since Helen was introduced, the virtual assistant has had over 3000 users and answered over 7000 questions.

January 24, 2006 at 08:09 PM in Financial Services | Permalink | TrackBack (7) | Top of page | Blog Home

Consumer confidence in online banking 'fragile' - FSA

Finextra: Consumer confidence in online banking 'fragile' - FSA

The majority of consumers (77%) would stop using Web banking services altogether if they were forced to foot the bill for online fraud, according to research commissioned by The Financial Services Authority (FSA), which is calling on banks to do more to educate customers about Internet security in order to stem losses.

Figures from Apacs show that bank losses from Internet fraud more than trebled to £14.5m last year. But a survey of 1500 Internet users conducted for the FSA's Financial Risk Outlook report found that if banks decided to shift liability of the losses towards the consumer, the vast majority would stop using the services.

The FSA says nearly all users (95%) surveyed believe that at least some security responsibility should lie with the bank, while just under half (45%) say banks should take sole responsibility for fraud.

But while many Internet users are protecting themselves by installing security applications on their PCs, the research shows that over a quarter did not know when they last updated their software or updated it infrequently. Around five per cent of online bankers have no security software installed on their PC at all.

Philip Robinson, financial crime sector leader at the FSA, says most consumers recognise they have some responsibility for security but are not necessarily following this obligation through.

"To tackle the losses associated with fraud, banks should continue to drive security and this must include educating consumers on the importance of protecting themselves," says Robinson.

The FSA is warning banks that fear of fraud is already causing customers to limit use of Web banking services and consumer confidence in online banking is "fragile".

The regulator is calling on banks to do more to educate customers about security, and says that even those who use the Web regularly regularly are either "extremely" or "very" concerned about the risk of fraud when making an online transaction.

In an effort to stem online fraud losses, more banks are actively promoting the use of security technology among their online banking customers.

Earlier this month Barlcays Bank said it was teaming with security software vendor F-Secure to provide discounted anti-virus and spyware technology to its online banking users. While in September rival high street bank Lloyds TSB partnered with Internet security firm Zone Labs to provide its customers with a free PC security scan and discounted anti-virus software.

Last year Lloyds TSB also began trials of a Vasco security device that generates single-use passwords in a bid to protect its Web banking customers from phishing and spyware scams. The key-ring sized devices are being rolled out to 30,000 Internet banking customers.

January 23, 2006 at 10:32 AM in Financial Services | Permalink | TrackBack (16) | Top of page | Blog Home

Online Banking: How Safe Is Your Money?

Online Banking: How Safe Is Your Money? - Yahoo! News

Robin Arnfield, newsfactor.com Fri Jan 20, 5:45 PM ET

Online banking is suffering through a withdrawal phase. A study last fall by I.T. security firm Entrust found that 18 percent of Americans who bank online plan to do so less often because of security concerns. A third of the respondents said they were worried about their bank's Web site being spoofed by a fraudulent facsimile that would trick them into divulging their logon information.

"Consumer confidence in online banking security has been damaged," said Chris Voice, vice president of technology at Entrust. "This is bad news for banks. If consumers start defecting from online banking to call centers or branches, this will put banks' costs up."

According to Voice, a call-center transaction costs a bank 10 times as much to process as an online transaction. And if people start beating a path back to the branches, where a transaction is even more expensive than at the call center, banks will have to hire more staff, he said.

Banks are reluctant to share hard data on the scale of online fraud. But in response to the growing threat, financial institutions around the world are stepping up their user-authentication systems and strengthening their risk-monitoring technology.

In the U.S., the federal government has given banks until the end of the year to install better online-security measures. Some companies, such as Bank of America and E*Trade, have gotten a head start by introducing two-factor authentication technologies to complement the traditional user name and password required for accessing online services.

A SiteKey for Sore Eyes

Two-factor authentication combines something you have, such as a hardware device or a software application, with something you know, such as a password.

Bank of America's new authentication system, called SiteKey, is now mandatory in all markets across the U.S. in which the bank offers online-account services, with the exception of Washington and Idaho. The bank said it will roll out SiteKey to its online customers in those two states by April.

SiteKey, developed by PassMark Security in Menlo Park, California, is designed to prevent account holders from falling prey to bogus Web sites that troll for sensitive information. It does this by asking you to select an image and a phrase that only you know. If this image and phrase are not displayed on the Bank of America Web site when you log in, then you know the site is fraudulent.

SiteKey uses cookies -- packets of information commonly used as tracking devices -- to check whether or not customers are accessing the bank's Web site from their usual computers. If, for example, they are using a computer at an Internet caf�, then they are given some challenge-and-response questions that only they will be able to answer.

"SiteKey allows our customers to know that they are accessing our Web site and not a fraudulent site, and it enables us to know that we are dealing with genuine customers," said Betty Riess, a spokesperson for Bank of America.

E*Trade chose a hardware-based route to stronger authentication. Since April 2005, it has been offering its customers devices known as SecurID tokens, which are made by RSA Security in Bedford, Massachusetts. For customers who are frequent traders on the site or who hold over $50,000 in assets with E*Trade, the SecurID tokens are free, and a one-time $25 charge for everyone else.

These tokens calculate a one-time "passnumber" to enter when logging on. The number has to correspond to an identical one-time passcode that is simultaneously generated at E*Trade's back-end server.

"We have been very pleased with the adoption rates for the tokens," said Greg Framke, E*Trade's CIO. While he would not disclose how many tokens have been issued, Framke said adoption numbers have been doubling regularly since the program started. "There is a pretty reasonable proportion of users who log on every week to E*Trade with the tokens," he said.

The company has enough confidence in SecurID to offer its customers a guarantee that they will be reimbursed if they suffer online fraud, whether or not they are token users. "We expect other financial institutions to follow our lead in issuing tokens to their customers," Framke said.

Methods of Deceit

Avivah Litan, a financial-services security analyst at Gartner Group, said that a rise in online banking fraud attempts has followed banks' efforts to step up their security systems for debit and credit card payments. "It's too early to tell how the criminals will respond to the new security systems that banks are installing for their Web sites," Litan said.

Two scams commonly used today are phishing and pharming. In a phishing attack, a victim is tricked into divulging a password, user name, or other confidential data by an e-mail that purports to originate from a bank or credit card company. The message typically steers people to fake Web sites under the pretense of having them update security information. Once the sensitive data is obtained, the victim's money is there for the taking.

Phishing e-mails might also ask customers to reconfirm their ATM card number, expiration date, and personal identification number (PIN). These details are then used to manufacture a bank card, which the fraudster then uses to drain the victim's account.

"No legitimate bank or e-commerce company is going to send its customers e-mails requesting security information," said Amanda Pires, a spokesperson for PayPal. "Nor is a bank going to send out an e-mail warning that a user's account will be suspended if they do not immediately provide their
Social Security Number."

Pharming works much in the same way as phishing, except that e-mail is now out of the picture. In a pharming attack, your Web browser is hijacked so that you are diverted to a false site when you attempt to visit your bank. Unaware of anything out of the ordinary, you divulge your password and user name to criminals.

A variant of the two above scams is known as a "man in the middle" attack. Here, once a person is fooled into visiting a bogus bank site, a real-live hacker watches as the victim types in logon information. Criminals also have employed Trojan programs -- hidden applications that disguise themselves in order to avoid detection by antispyware software -- that wait for people to go to their banking sites and then capture passwords.

Keeping a Close Watch

Amir Orad, executive vice president of marketing at New York security firm Cyota, said that it is not enough for banks to step up their authentication procedures. "Just as a home owner has a gate, a lock on the door, an alarm and a safe, so banks need to have multiple layers of security," he said. In addition to stronger authentication, banks need to be monitoring their customers' transactions for abnormal events, according to Orad.

"If I log on and simply pay my monthly car insurance bill, then that is a normal event which does not need any verification," Orad said. "But if an online payment is made out of my bank account to someone that I have never made a payment to before, then maybe the bank needs to ask for some additional security information before authorizing the transaction."

A challenge-and-response mechanism is a good idea for high-risk transactions such as an online payment or a change-of-address notification, said Jonathan Penn, an analyst at Forrester Research. "If I ask my bank to change my address on its files and then ask for my card to be canceled and a replacement issued, then the bank's Web site should ask me a security question," he said. "It should not ask for something that is likely to be in the public domain like my Social Security Number, but for something that I have pre-agreed with it, such as my favorite football team."

Cyota has developed a real-time monitoring system that looks globally for fraudulent attempts to access online bank accounts. Its E-Fraud Network has 50 major banks as its members, including Barclays Bank of the UK and ING Direct of the Netherlands. "As soon as a suspect Internet Protocol address tries to access an account at one bank, this IP address is blocked, and its details are relayed to the other members of the network," Orad said.

Cyota was acquired in December by RSA, the security vendor that makes E*Trade's SecurID tokens.

Smart Hardware

Hardware devices represent an additional layer of security on top of software-based authentication and risk-monitoring systems. In the UK, banks are investigating the use of smart cards for accessing online banking services. Since the beginning of 2005, every UK bank customer has been issued a debit card that contains a chip as well as the standard magnetic stripe. The chip, which is designed to prevent the card from being cloned by crooks, can be used to authenticate the cardholder when logging on to a bank's Web site.

How the card manages that feat is the one drawback to the technology. Banks have to issue smart-card readers to the cardholders. When the smart card is inserted in the reader, and the person types in the PIN, a passcode is generated. The person then enters that passcode when logging on to the bank's Web site.

According to Colin Whittaker, head of security at UK banking association APACS (Association of Payments and Clearing Services), it would cost banks in Great Britain the equivalent of $5.40 to issue a smart-card reader to each of their Internet-banking customers. "The banks have agreed to pay the cost of issuing these readers," he said. "What is not known yet is whether the banks will use the readers to authenticate cardholders when making online debit or credit card payments on the Web, or also for online banking security."

One company has developed an alternative hardware-based authentication system to using smart cards or one-time passcode-calculating tokens. Meridea, in Helsinki, Finland, has developed software that allows cell-phone users to use their handset as an authentication device.

"An online banking user registers their cell-phone number with their bank and the bank then sends them a text message," said Justin McAuley, vice president of financial products at Meridea. "Once the customer has downloaded this message, they click on a link in it to download an application."

After downloading the application, the customer has to enter an activation code provided by the bank, and create his or her own secret PIN. "The cell phone has now become an authentication device," McAuley said. "There is no need for banks to issue their customers with online authentication tokens or smart cards."

When performing a transaction, the user is presented with a one-time challenge code on the bank's Web page, and is asked to provide a response code. "The user types the challenge code into the mobile phone, which validates that the challenge code is genuine," McAuley said. "After the user has entered their PIN into the phone, it generates a response code. The user types the response code into the Web bank screen, and the transaction is confirmed."

Knowledge Is Its Own Reward

Recent efforts to fight fraud have stressed the importance of consumer education. Too many people, it seems, neglect to take the elementary step of running security software on their computers.

But some companies are encouraged by what they see as increased vigilance on the part of consumers. Amanda Pires, a spokesperson for eBay and its PayPal payments service, said that the online auction company has seen a rise in the number of phishing e-mails forwarded to it by users.

"We think greater user awareness about phishing is the reason for this," Pires said. "EBay and PayPal work with Internet service providers and law enforcement to shut down spoof Web sites. We have a very good success rate in the U.S., but it takes longer to shut down spoof Web sites when they are located abroad."

Still, people who bank online should not be lulled into a false sense of security.

Frost & Sullivan analyst Rob Ayoub said that many Internet users are more careful about their personal information in the physical world than they are on the Web. "No one would hand over their credit card information to a shady-looking guy hanging around outside their bank," he said.

"People should be even more careful on the Web."

January 22, 2006 at 12:07 PM in Financial Services | Permalink | TrackBack (27) | Top of page | Blog Home

Model Governance

FDIC: Supervisory Insights - Compliance Examinations

Financial modeling is increasingly important to the banking industry, with almost every institution now using models for some purpose. Although the use of models as a management tool is a significant advance for the industry, the models themselves represent a new source of risk — the potential for model output to incorrectly inform management decisions.

Although modeling necessarily involves the opportunity for error, strong governance procedures can help minimize model risk by

* Providing reasonable assurance the model is operating as intended;
* Contributing to ongoing model improvement to maintain effectiveness; and
* Promoting better management understanding of the limitations and potential weaknesses of a model.

This article briefly discusses the use of models in banking and describes a conceptual framework for model governance. In addition, the article suggests possible areas of examiner review when evaluating the adequacy of an institution's model oversight, controls and validation practices.

Use of Models in the Banking Industry

Fundamentally, financial models describe business activity, predicting future or otherwise unknown aspects of that activity. Models can serve many purposes for insured financial institutions, such as informing decision making, measuring risk, and estimating asset values. Some examples:

* Credit scoring models inform decision making, providing predictive information on the potential for default or delinquency used in the loan approval process and risk pricing
* Interest rate risk models measure risk, monitoring earnings exposure to a range of potential changes in rates and market conditions
* Derivatives pricing models estimate asset value, providing a methodology for determining the value of new or complex products for which market observations are not readily available

In addition, models play a direct role in determining regulatory capital requirements at many of the nation's largest and most complex banking organizations. Some of these institutions already use value-at-risk models to determine regulatory capital held for market risk exposure.1 At institutions adopting the Basel II capital standards when finalized, financial models will have a much expanded role in establishing regulatory capital held for all risk types.

Not all models involve complex mathematical techniques or require detailed computer programming code. This does not, however, diminish their potential importance to the organization. For example, many banks use spreadsheets that capture historical performance, current portfolio composition, and external factors to calculate an appropriate range for the allowance for loan and lease losses. Although at first glance this may not appear to be a "model," the output from such spreadsheets directly contributes to preparation of the institution's reported financial statements, and some controls are necessary, given the seriousness of any potential errors.

Model Governance

Institutions design and implement procedures to help ensure models achieve their intended purpose. The necessary rigor of procedures is specific to each model. An institution's use of and reliance on a model determines its importance and, in turn, establishes the level of controls and validation needed for that model. For some simple spreadsheet models, controls and validation may consist of a brief operational procedures document; password protection on the electronic file; and periodic review by internal audit for accuracy of the data feeds, formulas, and output reporting. While procedures will vary, certain core model governance principles typically will apply at all institutions (see Figure 1):

* The board establishes policies providing oversight throughout the organization commensurate with overall reliance on models.
* Business line management2 provides adequate controls over each model's use, based on the criticality and complexity of the model.
* Bank staff or external parties with appropriate independence and expertise periodically validate that the model is working as intended.
* Internal audit tests model control practices and model validation procedures to ensure compliance with established policies and procedures.

Figure 1
dmodel risk governance framework

Supervisory Review of Models

With the industry's growing reliance on financial modeling, regulators are devoting additional attention to model governance.3 Examiners do not typically review controls and validation for all models, but instead select specific models in connection with the supervisory review of business activities where model use is vital or increasing.

The evaluation of model use and governance often becomes critical to the regulatory assessment of risk in the reviewed activities. For example, many banks have completely integrated the use of credit scoring models into their retail and small business lending. Model results play a significant role in underwriting, contributing to the decisions to make loans and price loans for credit risk. Model results also typically are used to assign credit risk grades to loans, providing vital information used in risk management and the determination of the allowance for loan and lease losses. Therefore, examiner assessment of credit risk and credit risk management at banks that use integrated credit scoring models requires a thorough evaluation of the use and reliability of the scoring models.

Although the supervisory review of model use and governance may sometimes require quantitative or information technology specialists for some complex models, examiners can perform most model reviews. Even when specialists are used, model review does not occur in isolation; the specialist's evaluation of mathematical theories or program coding is integrated into the examiner's assessment of model use. Regulatory review typically focuses on the core components of the bank's governance practices by evaluating model oversight, examining model controls, and reviewing model validation (see Figure 2). Such reviews also would consider findings of the bank's internal audit staff relative to these areas.

Figure 2
dsuggested framework for the supervisory review of models

Model Oversight

When evaluating board and senior management oversight, examiners typically

* Review model governance policies to determine (1) if the policies are adequate for the bank's level of model use and control, and (2) if validation procedures used for individual models comply with established policies; and
* Review the bank's model inventory for accuracy and completeness.

Model policies: A single board-approved policy governing models may suffice for many banks, although those with greater reliance on financial modeling may supplement the board-approved policy with more detailed policies for each line of business. Such policies typically

* Define a model, identifying what components of management information systems are considered subject to model governance procedures;
* Establish standards for controls and validation, either enterprise-wide minimum standards or, alternatively, varying levels of expected controls and validation based on model criticality and complexity;
* Normally require verification of control procedures and independent validation of model effectiveness before a model is implemented;4 and
* Generally define the roles of management, business line staff, internal audit, information technology staff, and other personnel relative to model development and acquisition, use, controls, and validation responsibilities.

Model inventories: Banks of any size or complexity benefit from maintaining an inventory of all models used. The inventory should catalogue each model and describe the model's purpose, identify the business line responsible for the model, indicate the criticality and complexity of the model and the status of the model's validation, and summarize major concerns identified by validation procedures or internal audit review. Periodic management attestation to the accuracy and completeness of the model inventory is a strong practice to help ensure that the inventory is appropriately maintained.

Model Control Practices

When examining controls around individual models, regulators

* Review model documentation for (1) discussion of model theory, with particular attention to model limitations and potential weaknesses, and (2) operating procedures;
* Review data reconciliation procedures and business line analysis of model results; and
* Evaluate security and change control procedures.

By conducting their own review of model documentation and controls, examiners gain a stronger understanding of the model's process flow. This understanding enables examiners to test the findings of the bank's validation and internal audit review against their own observations.

Model documentation: Documentation provides a thorough understanding of how the model works (model theory) and allows a new user to assume responsibility for the model's use (operational procedures). Each model should have appropriate documentation to accomplish these two objectives, with the level of documentation determined by the model's use and complexity. Generally, elements of documentation include:

* A description of model purpose and design.
* Model theory, including the logic behind the model and sensitivity to key drivers and assumptions.
* Data needs.
* Detailed operating procedures.
* Security and change control procedures.
* Validation plans and findings of validations performed.

Data integrity: Maintaining data integrity is vital to model performance. Much of the information used in a model is electronically extracted or manually input from source systems; either approach provides opportunity for error. Business line management is responsible for the regular reconciliation of source system information with model data to ensure accuracy and completeness.5

Data inputs need to be sufficient to provide the level of data consistency and granularity necessary for the model to function as designed. Data lacking sufficient granularity, such as product- or portfolio-level information, may be inadequate for models that use drivers and assumptions associated with transaction-level data. For example, the robustness of an interest rate risk model designed to use individual security-level prepayment estimates could be compromised by the use of an average prepayment speed for aggregate mortgage-backed securities held in the investment portfolio.

Security and change control: Key financial models should be subject to the same controls as those used for other vital bank software. Security controls help protect software from unauthorized use or alteration and from technological disruptions. Change control helps maintain model functionality and reliability as ongoing enhancements occur.

Some level of security control is generally appropriate for all financial models. Security controls limit access to the program to authorized users and appropriate information technology personnel. Control can be maintained by limiting physical or electronic access to the computer or server where the program resides and by password protection. The institution should have backup procedures to recover important modeling programs in the event of technological disruption.

Change control may be necessary only for complex models. Such procedures are used to ensure all changes are justified, properly approved, documented, and verified6 for accuracy. Events covered by such procedures include the addition of new data inputs, changes in the method of data extraction from source systems, modifications to formulas or assumptions, and changes in the use of the model output. Typically, proposed changes are submitted for approval by business line management before any alterations to the model are initiated. To maintain up-to-date documentation, staff may log all changes made to the model, including the date of the change, a description of the change, initiating personnel, approving personnel, and verification.

When model importance and complexity are high, management may choose to run parallel models — prechange and postchange. Doing so will assist in determining the model's sensitivity to the changes. Changes significantly affecting model output, as measured by such sensitivity analysis, may trigger the need for accelerated validation.

Model Validation

Validation should not be thought of as a purely mathematical exercise performed by quantitative specialists. It encompasses any activity that assesses how effectively a model is operating. Validation procedures focus not only on confirming the appropriateness of model theory and accuracy of program code, but also test the integrity of model inputs, outputs, and reporting.

Validation is typically completed before a model is put into use and also on an ongoing basis to ensure the model continues to perform as intended. The frequency of planned validation will depend on the use of the model and its importance to the organization. The need for updated validation could be triggered earlier than planned by substantive changes to the model, to the data, or to the theory supporting model logic.

Examiners do not validate bank models; validation is the responsibility of the bank. However, examiners do test the effectiveness of the bank's validation function by selectively reviewing various aspects of validation work performed on individual models.7 When reviewing validation, examiners

* Evaluate the scope of validation work performed;
* Review the report summarizing validation findings and any additional work papers needed to understand findings;
* Evaluate management's response to the report summarizing the findings, including remediation plans and time frames; and
* Assess the qualifications of staff or vendors performing the validation.

This process is analogous to regulatory review of bank lending. When looking at loan files, examiners do not usually rely exclusively on the review work performed by loan officers and loan review staff, but also look at original financial statements and other documents to verify the loan was properly underwritten and risk graded. Similarly, examiners review developmental evidence, verify processes, and analyze model output not to validate the model, but to assess the adequacy of the bank's ongoing validation (see Figure 3).

Components of Validation:

* Developmental evidence: The review of developmental evidence focuses on the reasonableness of the conceptual approach and quantification techniques of the model itself. This review typically considers the following:
o Documentation and support for the appropriateness of the logic and specific risk quantification techniques used in the model.
o Testing of model sensitivity to key assumptions and data inputs used.
o Support for the reasonableness and validity of model results.
o Support for the robustness of scenarios used for stress testing, when stress testing is performed.
* Process verification: Process verification considers data inputs, the workings of the model itself, and model output reporting. It includes an evaluation of controls, the reconciliation of source data systems with model inputs, accuracy of program coding, and the usefulness and accuracy of model outputs and reporting. Such verification also may include benchmarking of model processes against industry practices for similar models.
* Outcome analysis: Outcome analysis focuses on model output and reporting to assess the predictiveness of the model. It may include both qualitative and quantitative techniques:
o Qualitative reasonableness checks consider whether the model is generally producing expected results.
o Back-testing is a direct comparison of predicted results to observed actual results.
o Benchmarking of model output compares predicted results generated by the model being validated with predicted results from other models or sources.

Figure 3
dongoing validation

Expertise and independence of model staff: The criticality and complexity of a model determine the level of expertise and independence necessary for validation staff, as well as the scope and frequency of validations. The more vital or complex the model, the greater the need for frequent and detailed validations performed by independent, expert staff.

The complexity of some models may require validation staff to have specialized quantitative skills and knowledge. The extent of computer programming in the model design may require specialized technological knowledge and skills as well.

Optimally, validation work is performed by parties completely independent from the model's design and use. They may be an independent model validation group within the bank, internal audit, staff with model expertise from other areas of the bank, or an external vendor. However, for some models with limited importance, achieving complete independence while maintaining adequate expertise may not always be practical or necessary. In such cases, however, management and internal audit should pay particular attention to the appropriateness of scope and procedures.

Validation work can incorporate combinations of model expertise and skill levels. For example, management may rely on the bank's own internal audit staff to verify the integrity of data inputs, adequacy of model controls, and appropriateness of model output reporting, while using an outside vendor with model expertise to validate a model's theory and code.

Third-party validation: Vendors are sometimes used to meet the need for a high level of independence and expertise. They can bring a broad perspective from their work at other financial institutions, providing a useful source for theory and process benchmarking. When using external sources to validate models, appropriate bank personnel should determine that vendor review procedures meet policy standards and are appropriate to the specific model.

Banks sometimes use third parties for validation when they purchase vendor models. The validation of the model theory, mathematics, assumptions, and code for purchased models can be complicated, as vendors sometimes are unwilling to share key model formulas and assumptions or program code with clients. In such cases, vendors typically supply clients with validation reports performed by independent parties. Such work can be relied on if management has adequate information to determine the scope is adequate and findings are appropriately conveyed to and acted on by the model vendor. Management may also increase its comfort with vendor-supplied models through a greater emphasis on regular outcome analysis. However, management cannot rely exclusively on a vendor's widespread industry acceptance as evidence of reliability.

Supervisory Evaluation of Model Use and Governance

Bank management is responsible for establishing an effective model governance program to recognize, understand, and limit the risks involved in the use of these important management tools. The examiner's role is to evaluate model use and governance practices relative to the institution's complexity and the overall importance of models to its business activities. Examiners incorporate their findings into their assignment of supervisory ratings to the bank.

For example, regulatory guidelines for rating the sensitivity to market risk component under the Uniform Financial Institutions Rating System include an assessment of management's ability to identify, measure, monitor, and control exposure to changes in interest rates or market conditions.8 Any significant examiner concerns with the effectiveness of a model used to measure and monitor this risk, such as the failure to validate the model or a lack of understanding of model output, would have some negative effect on the rating. Conversely, if the model improves interest rate risk management, this would be positively reflected in the rating.

Other component ratings also can be influenced by model use, such as the evaluation of credit scoring models' effects on loan underwriting procedures and credit risk management in assigning an asset quality rating. The management component rating also may be influenced if governance procedures over critical models are weak.

The use of financial modeling in the banking industry will continue to expand. By necessity, supervisory attention to the adequacy of governance practices designed to assess and limit associated model risk also will increase.

Robert L. Burns, CFA, CPA
Senior Examiner

Potential bank governance practices and supervisory activities described in this article are consistent with existing regulatory guidance, but represent the thoughts of the author and should not be considered regulatory policy or formal examination guidance.

1 Institutions with $1 billion or more in trading assets are subject to the 1996 Market Risk Amendment to risk-based capital regulations.

2 Providing for appropriate controls may be the responsibility of senior management at smaller organizations.

3 OCC Bulletin 2000-16, "Risk Modeling," (May 30, 2000) is the primary source for formal regulatory guidance on model governance available at www.occ.treas.gov/ftp/bulletin/2000-16.doc.

4 Banks may sometimes face compelling business reasons to use models prior to completion of these tasks. For example, trading of certain complex derivative products often relies on rapidly evolving valuation models. Management may, in some instances, decide the potential return from such activities justifies the additional risk accepted through the use of a model that has not been validated. In such cases, management should

* Specifically approve the temporary use of an unvalidated model for the product.
* Formalize plans for a thorough validation of the model, including a specific time frame for completion.
* Establish limits on risk exposures, such as limiting the volume of trades that are permitted before validation is completed.

5 For example, the regular verification of data integrity for a value-at-risk model likely would include the following:

* Reconciliation of trading account exposures in source information systems with model inputs to ensure that all trading positions are being captured and accurately incorporated into the model.
* Reconciliation of model outputs with model inputs to ensure all data inputs are being appropriately used, with particular attention to handling missing, incomplete, or erroneous data fields that serve as risk drivers in the computation of value-at-risk for each trading position.

6 Optimally, all changes to models should be verified by another party to ensure the changes were made accurately and within the guidelines of the approval. This does not constitute validation, but merely verification that approved changes were made correctly.

7 This review may require the use of quantitative specialists, depending on the complexity of the model.

8 Relative to the evaluation of a bank's sensitivity to market risk, the FDIC Manual of Examination Policies states, "While taking into consideration the institution's size and the nature and complexity of its activities, the assessment should focus on the risk management process, especially management's ability to measure, monitor, and control market risk" available at www.fdic.gov/regulations/safety/manual/section7-1.html#rating.

January 17, 2006 at 12:43 PM in Financial Services | Permalink | TrackBack (16) | Top of page | Blog Home

DIFC papers

Dubai Financial Services Authority

Set out below are drafts of legislation and other information which has been superseded by fresh material, and if applicable, for which the consultation period has closed. This list is provided for historical information purposes only, and identifies those topics which have been open to consultation more than once.

January 11, 2006 at 11:48 AM in Financial Services | Permalink | TrackBack (18) | Top of page | Blog Home

Regional debt mart likely to get a boost with the arrival of a new Rating Agency, ICRA

Emirates Bank Group

Anis Al Jallaf-MD/CEO of EB and Chairman of Dubai International Financial Center seen with D.N. Ghosh(left), Chairman of rating agency ICRA, and Suresh Kumar-General Manager of Emirates Financial Services in Dubai

The domestic and regional commercial paper and corporate loans market is expected to get a boost with the arrival of rating agency ICRA, brought here by Dubai-based Emirates Bank Group.

ICRA was born in India in 1991. It claims to be the leading provider of credit ratings, investment information and advisory services - which it aims to extend here through a technical services agreement with recently formed Tricolour Initiatives FZ LLC (TIE) based in the Dubai Media City.

TIE is a wholly-owned subsidiary of Tricolour Investments Ltd, promoted and now owned 40 per cent by EBG. Tricolour recently declared a maiden dividend of 8 per cent after a year of operations.

ICRA's arrival comes against the backdrop of the recently announced Dubai International Financial Centre which has heightened activity in Dubai's financial sector.

"This region requires a rating agency," declared Anis Al Jallaf, managing director and chief executive of Emirates Bank. However, as chairman of DIFC, Al Jallaf declined to commit that there would be a requirement for rating if companies wanted to come to the debt market.

He, however, acknowledged that major international financial centres have such a requirement. ICRA chairman D.N. Ghosh, pointed out that rating agencies help foster the growth of the corporate debt market.

Al Jallaf added that until now banks or any other investors had to do due diligence on each corporate seeking a loan. The effort would be multiplied, if several banks were extending funds to the same corporate.

It would be easier, less time consuming and more cost effective if a corporate is rated by an independent rating agency. Banks would not need to look into the company, and the company would get funds faster. Also, if the rating is good, it allows corporates to get the benefit of better rates.

A regional rating agency is specialised in the region and costs less than an international agency. Therefore, it is of great use even for international investors who wish to place funds into this region, added Suresh Kumar, general manager of Emirates Financial Services on behalf of Tricolour.

Al Jallaf pointed out that majors like Standard and Poor's and Moody's are not very keen on small to medium enterprises that characterise this region. Incidentally, Moody's holds a majority shareholding in ICRA.

"We would love to have more rating companies as it deepens the market," added Al Jallaf. The rating operations are expected to start by the third quarter.

Reported on: Emirates Bank Group
Reported on: 13.03.2002

January 11, 2006 at 11:44 AM in Financial Services | Permalink | TrackBack (121) | Top of page | Blog Home

Washington Mutual beefs up Web banking security

Finextra: Washington Mutual beefs up Web banking security

Washington Mutual, Inc. (NYSE:WM), one of the nation's leading banks for consumers and small businesses, announced today that it will be adding a risk-based multi-factor authentication solution to provide enhanced security for its online banking users.

As a result, Washington Mutual will continue to provide an online banking tool that is not only easy to use but also provides best-in-class authentication, fraud detection and prevention to its customers.

"Washington Mutual is once again taking a proactive approach to protecting our customers by securing their accounts and personal information with superior, flexible, cutting-edge technology. By doing so, Washington Mutual customers will continue to benefit from the convenience and ease of online banking with the utmost confidence," said Dave Cullinane, chief information security officer at Washington Mutual and International President of the Information Systems Security Association.

Washington Mutual's enhanced security will analyze every online login and transaction behind the scenes and score the potential risk based on a broad range of criteria, including the user's IP address, geographic location, prior transaction behaviors and much more. When a potential risky situation is detected, it can invoke additional authentication methods in real-time. In addition, because online fraud crosses international boundaries, WaMu is further protecting its customers by joining a real-time world-wide fraud detection network.

Of the many multi-factor authentication solutions analyzed, it was determined that Cyota's eSphinx offered one of the strongest authentication measures available with minimal impact to the comfortable and easy online experience that customers have come to expect from Washington Mutual.

"By proactively helping to protect their online channel against fraudulent activity, Cyota is helping Washington Mutual stay one step ahead of today's and tomorrow's online threats," said Naftali Bennett, Cyota's chief executive officer.

December 23, 2005 at 10:28 PM in Financial Services | Permalink | TrackBack (15) | Top of page | Blog Home

LaSalle says mortgage information is missing

Chicago Tribune | LaSalle says mortgage information is missing

By Becky Yerak
Tribune staff reporter
Published December 16, 2005, 9:11 PM CST

In the latest incident to fuel concerns about identity theft, Chicago-based LaSalle Bank Corp. said a computer tape containing the names, addresses and Social Security numbers of 2 million residential mortgage customers, including more than 100,000 in the Chicago area, was lost en route to a credit reporting bureau.

A LaSalle division, ABN Amro Mortgage Group Inc., said shipping company DHL picked up the computer tape from its Chicago data processing center on Nov. 18.

But the tape never arrived at its destination, an Experian credit bureau in Allen, Texas, and is "missing and presumed lost," Thomas Goldstein, chairman and chief executive of ABN Amro Mortgage, said in a conference call Friday.

Besides names and Social Security numbers, the data include mortgage payment histories of the 2 million consumers, which is all of the unit's residential mortgage holders. Of those 2 million, nearly 200,000 are in Illinois and about 320,000 are in Michigan.

ABN, based in Ann Arbor, Mich., said there have been no reports of the data being misused.

The November security lapse came just weeks before ABN was to begin transmitting the tape's data electronically.

"As you can imagine, I personally am just sick that we missed this thing by one month," Goldstein said.

ABN shipped the tape on Nov. 18, a Friday. The following Monday, as is customary, ABN tried to confirm that the tape arrived safely in Texas.

"We discovered the tape missing," Goldstein said.

ABN investigated, but ended its search a few days ago.

"You look for something until the point where you determine it's absolutely gone and missing," Goldstein said. "We worked with DHL and Experian until we concluded there was no further point in searching and declared the package lost."

For its part, DHL said its shipping practices exceed industry standards, but "regrets that, despite diligent search efforts, it has been unable to locate the shipment," the company stated.

"DHL security and operations teams have conducted a thorough investigation and search of our network and facilities," it said. "Although we've not yet closed our investigation, at this time we have uncovered no error in protocol, indications that this package was stolen, or evidence that the contents of the shipment have been disclosed or used for any improper purpose."

The accident comes about six months after United Parcel Service Inc. lost the financial data of nearly 4 million Citigroup Inc. customers.

In an interview earlier this month with trade publication FleetOwner, a UPS official said the packages broke open in transit and the contents were inadvertently thrown away.

According to a Dec. 15 report by FleetOwner, Citigroup said it still hasn't received any reports of unauthorized activity related to the lost tapes. In July, he added, Citigroup began sending that data electronically in encrypted form.

Indeed, since ABN's tape went missing, the lender has stopped physically shipping mortgage tapes to credit bureaus, instead choosing to transmit the data electronically from its Chicago data processing center "by secure and encrypted means," Goldstein said.

ABN has begun sending first-class letters--enough to fill six trucks--to its residential mortgage customers and is offering them free credit monitoring for 90 days.

"The letters just started going out in the last day or so. Up until today, we still see no signs of misuse of the data," Goldstein said. "Had we discovered earlier that the data was being misused, we would have come out with an announcement much faster."

The bank also has established a special Web site, info.mortgage.com, to provide information about the incident.

One consumer advocate said an increasing number of companies are reporting security breaches that put millions of Americans at risk for identity theft, but that rise is partly due to tougher reporting requirements.

"The reason we're starting to learn about these gaps is laws on the books that force companies to tell consumers when information has been compromised," said Beth McConnell, director of the Pennsylvania Public Interest Research Group.

Illinois, for example, passed an identity theft law in June that requires customer notification, a spokeswoman for the state said Friday.

The tape contained no data on any LaSalle personal or business accounts. ABN has alerted law enforcement and regulatory agencies.

---

byerak@tribune.com

December 17, 2005 at 12:32 PM in Financial Services | Permalink | TrackBack (17) | Top of page | Blog Home

Sainsbury's Bank grows online financial sales

Finextra: Sainsbury's Bank grows online financial sales

UK supermarket bank Sainsbury's says the percentage of financial products sold via its Web site has more than doubled over the last two years to 40%.

Fewer than one in five (18%) purchases were made via the Sainsbury's Bank Web site two years ago. This rose to 30% in January this year and has since increased again to around 40%.

The bank is also reporting a 73% increase in vistors to its Web site over the past 12 months. The site receives more more than 23,000 visits each day.

The most popular financial products purchased online are life insurance, car insurance and pet insurance.

Sainsbury's says it expects the upward trend for purchasing financial services online to continue and cites research from GfK Financial, which predicts that during the 12 months to June 2006, 4.8 million people will have completed a financial application online, compared to 3.9 million during the same period 2004-2005, signifying a 23% increase of almost one million.

Kevin Barrett, director of e-commerce, Sainsbury's Bank, says: "The general acceptance of buying goods or services online means that the Web is now a mainstream and vital channel for businesses to interact with and sell to customers. Web sites act as a 'shop front' and are increasingly the customers' primary contact with a brand."

Barrett says broadband technology is a possible driver behind the growth of online financial services, along with greater customer awareness of Internet payment security systems.

"We believe that consumers' confidence is on an upwards curve and once an individual makes one successful transaction, they are more willing to repeat the experience," he adds.

December 14, 2005 at 01:56 PM in Financial Services | Permalink | TrackBack (13) | Top of page | Blog Home

Come to the Edge and Fly...How to create a brief that sets creativity free

Ogilvy.com

f the Pope had simply asked Michelangelo to paint the ceiling, it is unlikely he would have gotten this.

Pope Julius II directed Michelangelo in his paining of the Sistine Chapel ceiling by explaining that he wanted a creation that would sanctify and celebrate the glory of the Lord. The Pope did not tell him to simply paint the ceiling.

Likewise, the best creative comes from a clear, focused brief. A strong brief states a clear objective, and defines a target audience and its needs in attitudinal rather than demographic terms.

For example, the Tiger Woods Green Card work addresses the 'driven' attitude of AmEx customers rather than their merely focusing on age-income grouping.

A brief should also define the role of the brand in meeting those needs, leading to a clear, relevant, and well-supported proposition that suits the customer.

A brief can give creatives inspiration, as it appeals to the strategic impulses all good creatives share. Involve them from the start. Furthermore, a full, face-to-face briefing can make the written brief more vivid and actionable. Finally, it's the tight, focused brief that gives the courage and the time to think beyond the ordinary.

The agony and the ecstasy.
A lot has been written about the creative brief, but the debate drags on. How important is it? What is its role? What should it contain? Who is it for? Is anyone going to pay any attention anyway?
The reality is that the debate is largely semantic. Whereas fine art is about unfettered self-expression, commercial art always has to start with an objective and a strategy. What do we need to achieve? How are we going to do it? And at some point, this challenge needs to be brought to life for the benefit of the people who have the not inconsiderable task of turning a sound strategic idea into a captivating creative one.

When Pope Julius II commissioned Michelangelo to paint the Sistine Chapel, he didn't just ask him to paint whatever he fancied. If he had, he might have ended up with a nice landscape or a handsome still life, but that wouldn't have delivered against his objective of wowing the blase Roman churchgoer. Instead he asked Michelangelo to create something that would sanctify and celebrate the glory of God. Which led to an image that has awed millions, believers and heretics alike, for generations.

Whatever we call it, whether written or verbal, a meeting or an ongoing dialog, every creative journey has to start with an understanding of where we are and where we want to get to. In other words, it has to start with a creative brief. The example of the Sistine Chapel makes several other important points.
Firstly, great creative ideas are media-agnostic. The Church was an early and effective proponent of 360 Degree Branding. Get the brief right and it should act as a springboard to creative ideas that can be executed across every medium and, indeed, every touchpoint between the consumer and the brand.
Secondly, everyone remembers the ceiling but no one remembers the brief. No one ever built a great brand by writing great briefs. The truth is that there is no such thing as a great brief -- only a brief which leads to a great creative idea.

There are no rules that guarantee a brief can do this. But there are some principles that, if followed, maximize the chances of getting to an outstanding creative solution. Before we look at these principles, let's review the ingredients of a good creative brief.

The essential elements of a good brief.
There are many different styles and formats, but most briefs ask the same essential questions:
-- What is the objective and role of communications? What do we want people to do differently and why? How do we expect communications to impact attitudes and behavior? What are people doing now instead? What are the category conventions we can challenge? What do competitive communications look like and how can we avoid imitating them?
-- Who precisely is the target audience and what is the shared emotional need or desire the brand can best address? Get this right and the rest of the brief should fall into place around it. Demographics are important, particularly when it comes to media, but the key is to define the audience by shared attitudinal characteristics rather than demographic similarities. For example, when developing a new campaign for American Express, qualitative research suggested that many Card members have the same restless and driven attitude towards life as golf star Tiger Woods, an insight that led directly to a powerful new campaign for the Green Card.
-- What is the role of the brand? Once we understand the emotional need, we can define the role the brand plays in addressing it. We can then use this "brand promise" as the lens through which to define the whole of the brand experience, including but not limited to communications. In the case of Procrit, a drug for the treatment of anemia in chemotherapy patients, behavioral research conducted by the OgilvyDiscovery/New York revealed that many patients were in denial about the effects of anemia, which led to a reluctance to treat it and defined a role for the brand in helping sufferers to come to terms with their condition.
-- What is the proposition -- the single-minded thought that the communications will bring to life in a provocative and compelling way? It should build on our insights into the target audience and the role of the brand and crystallize them into a focused idea that captures the essence of what we want to say.
-- What is the support or reason to believe this? We need to give consumers "permission to believe" -- something that allows them to rationalize, whether to themselves or others, what is in reality an emotionally-driven brand decision. Avoid laundry lists. The support should be as focused as the insight or proposition, the truths that make the brand benefit indisputable.
-- What is the unique personality of the brand? People use products, but they have relationships with brands. As David Ogilvy said, "The manufacturer who dedicates his advertising to building the most sharply defined personality is the one who will get the largest share of the market at the highest profit." When defining personality, be provocative and avoid meaningless generalizations such as "confident." The mood and tone of the communications should reflect the unique personality of the brand. The brief that led to British Airways' classic Manhattan commercial described it simply as "big, warm, goose pimples." Try using photographic images or collages, tapes of research groups, video, music or other stimuli to bring the brand to life.
One final observation. When preparing a brief bear in mind that different creative people may find inspiration in different parts of it. In Truth, Lies and Advertising, Jon Steel observes that legendary copywriter John Webster used to describe one inspiring minute in a two-hour conversation as a "good briefing."

How to maximize the chances of the brief leading to a great creative idea.
Treat every brief as an opportunity to do great work.
There is a tendency in some agencies to divide assignments into those with creative potential and those without. The reality is that the health of an agency depends in large measure on the quality of its creative output, so no agency can afford to miss an opportunity to do truly outstanding work. Given the critical importance of the brief to the resulting work, it is imperative that every brief is treated as an opportunity to help build the brand, the business, and the agency's reputation.
As David Ogilvy said, "Raise your sights! Blaze new trails! Compete with the immortals!"
Moreover, creative people, like all of us, do their best work when they believe that there is a determination and passion to do something truly great. Make them believe that "this is the one" and they are much more likely to give it their all.

Understand your audience.
The audience for the brief is not the marketing department, CEO or even the apocryphal housewife in Peoria. It is the creative team faced with a blank sheet of paper and a deadline. If you want great work, start by understanding the needs and motivations of the people responsible for creating it.
What motivates creative people is not sales charts or share points. It is the opportunity to create something that tugs at the heart as well as the wallet.
If you want advertising that inspires consumers, start by inspiring the creatives.
Involve the creative team before you brief them.
A planner or account person may lead the strategy development process, but the creative team should be their partner from the very beginning. Not only will it ensure that they agree with the strategic direction, the best creative people are by nature intuitive strategists, with a natural feel for consumers' attitudes and needs.
Don't confuse the brief and the briefing.
A written creative brief is a useful way of marshalling thoughts, but it can never replace a face-to-face briefing and the ongoing dialog that surrounds it. Its role is as an aide memoir, to ensure the key points from the briefing stay fresh in creatives' minds.
A creative briefing should try and bring the key message or theme alive in a way that will both inform and inspire. Get out of the office. Go to where the brand lives. Brief a beer campaign in a bar, an athletic shoe campaign in a playground. In one case, a swimwear brief was laminated and thrown into a swimming pool for the creative team to recover (presumably they were advised to bring a change of clothes.) In another example, the team was blindfolded to help them understand what it's like to be blind, before being briefed on a fund-raising campaign.
Be maniacally focused.
Try this test. Throw someone five or six tennis balls at the same time. Chances are they'll drop all of them. Throw them one and they'll probably catch it.
The best briefs always focus on one key message. Creatives usually perform best when given free rein to push the execution in one clearly defined strategic direction. As David Ogilvy said, "Give me the freedom of a tight briefing." Don't fudge the brief and expect the creative process to clarify unresolved strategic decisions. It won't.
Ensure that the focus runs through the whole brief. Does the main message address the insight? Does the reason to believe support the main message? Will this deliver against the desired objective?

Even market research company Millward Brown supports the need for focus. In an analysis of Link results, they found that executions which focus on one message consistently outperform those that are more ambiguous.
Be brief.
It's not called "brief" for nothing. A quick poll round the creative department suggested that brevity is valued above all else. Creatives should have access to as much information as they need, but the essence of the argument should be expressed in the fewest words precision allows.
There is a story of an examination candidate who answered the question "What is courage?" (for which 40 minutes had been allowed) with the one-word answer: "This." We too should aim to be this succinct and this meaningful.
Use the language of the living room, not the boardroom.
There's no substitute for original thinking, but too often corporate jargon is used to disguise a lack of it. Briefs should use language of the living room, not the boardroom (unless of course you are targeting CEOs).
When Karl Marx said, "from each according to his abilities, to each according to his needs," people understood what he meant. When Einstein said "E=MC2," they didn't have a clue.
Write the first ad.
A simple test of a brief is to try and write the first ad. Don't craft detailed words and images, but try and come up with a creative idea that demonstrates its executability.
John Hegarty takes it a step further. He describes the brief as being the first ad. Does the argument captivate you and make you want to buy? He suggests taking the proposition, visualizing it and pinning it next to your desk. If it makes a good billboard, then the brief has potential.
Start with an interesting strategic idea.
The last principle is in many ways the most important. If you want your creative work to be fresh and interesting, then you are best off starting with something fresh and interesting to say.
As David Ogilvy said, "Unless your advertising has a big idea it will pass like a ship in the night."
The best strategies and briefs take a radically new perspective on a familiar problem, reframing it in the minds of consumers and prompting them to reappraise their own needs and the role of the brand in addressing it.
A classic example is Ogilvy London's repositioning of Lucozade, a long established glucose drink. Lucozade had been positioned for years as an aid to recovery for sick children, but sales had been declinIng for some time, a situation not helped by a dowdy image. Ogilvy's solution was to create a sports energy drink category in the UK and then dominate it with Lucozade.
Another example is the recent "mLife" campaign for AT&T Wireless from Ogilvy New York. Rather than compete on generic benefits in an increasingly commoditized category, the team recognized that technological developments would have a fundamental impact on people's lives and the way they connect to others and set out to own this. The creative idea, "mLife" (or "mobile life"), sprung directly from this vision.

As Brian Collins, Executive Creative Director of the Brand Integration Group at Ogilvy New York says, "Define every opportunity as big as possible." Or as Steve Henry puts it in Excellence in Advertising, "Write every brief with the intention of changing the world."
A final piece of advice: Be open-minded and courageous.

The best creative teams don't work to a brief. They work from it. Working to a brief implies limits and constraints. The reality is that the brief is a starting point, a springboard to something new and greater. It should be directional but never prescriptive.

We need to be open-minded to the fact that creativity will take us to a place we maybe never knew existed. Indeed, we need to embrace and encourage this rather than fear it, because it is the source of competitive advantage both for Ogilvy and also for our clients.
Ultimately the role of the brief is to give us the courage to take a step into the unknown, knowing that what we find there can make the difference between the success and failure of our client's brand.
The English poet, Christopher Logue, described the process of creativity thus:
"Come to the edge,
We might fall.
Come to the edge.
It's too high!
COME TO THE EDGE
And they came
and he pushed
and they flew. . . "

It is the creative brief that can give us the confidence to take that step over the edge.

December 13, 2005 at 12:12 PM in Financial Services | Permalink | TrackBack (29) | Top of page | Blog Home

Retailers Take Multi-Faceted Approaches to Multi-Channel Success

A Resurgence is In Store for Retailing

Macy’s, Sears and REI adopt distinct strategies that consider how the goals of each channel fit together

By Susan Reda, Executive Editor

It’s a standard topic of conversation with children: “What do you want to be when you grow up?” If they’re under 10 years old, just about anything from astronaut to zookeeper receives an adult’s optimistic nod. But as their late teens approach, expectations change. Teenagers are expected to have an idea about where they’re heading and a game plan to get there.

Multi-channel retailers have reached those pivotal years. Even though a majority of retailers have had an on-line presence for a mere five to seven years, rapid growth and consumer acceptance have compressed the timeline.

Industry experts say that multi-channel success is contingent upon figuring out how the e-commerce piece fits into the total organization, how to leverage e-commerce assets across the enterprise and what organizational and technological tools are needed to reach the goal.

Dale Achabal, director of the Retail Management Institute at Santa Clara University, and Kirthi Kalyanam, director of e-business initiatives at SCU, are engaged in ongoing research on the factors that drive multi-channel strategies. Their aim is to provide on-line companies with tools to help determine which strategy is right for their unique businesses.

“We’re looking at multi-channel retailing from a strategic point of view,” says Achabal. “Everybody seems to have a multi-channel presence today, but not everyone has really thought out how the e-commerce channel links to their traditional stores, their direct mail business or both. “If you ask some on-line retail companies whether the decision to have the same assortment across all channels is part of a measured approach or just the way they’ve been doing it since the company first launched its e-commerce initiative, you’re likely to find that, in many cases, it’s the latter,” he says.

BLENDING ASSETS Achabal’s research calls for executives to examine four key factors that shape a multi-channel strategy: customer expectations, assortment characteristics, company structure and competitive environment.

A comprehensive evaluation of these factors provides a framework for determining, for example, whether it’s better to focus on key items vs. a full assortment, or whether it’s more advantageous to deliver a uniform brand experience across every channel vs. differentiating the website based on customers’ expectations.

"True multi-channel advantages are realized when an organization engages in the strategic blending of key assets across value chains,” explains Achabal. “There are no hard-and-fast rules to apply here. The approach will be different for each company, based on what’s right for its unique business and customer. But the attitude some senior executives have, that the e-commerce channel doesn’t command their attention because they have bigger fish to fry, is one that can negatively impact their entire business.”

While many e-retailers continue to sort out which multi-channel strategy is most relevant to their overall business scheme, a handful of players are ahead of the curve, including Macys.com, Sears.com, LandsEnd.com and REI.com. Each has adopted a distinct multi-channel strategy that takes into consideration the role of e-commerce vs. the other channels in which the company operates.

The strategy at Macys.com has evolved considerably since its 1996 debut as a view-only site focused on bridal registry. At one point, company executives considered recreating the full-line department store in the virtual world, but they quickly discovered that the channels attract different shoppers and require distinct strategies.

“We’ve grown this business by focusing on the customer who is shopping on-line and by managing the shopper’s expectations,” says Gene Domecus, senior vice president of e-commerce at Macys.com, a division of Cincinnati-based Federated Department Stores. “Over the years, we’ve actually reduced the size of the assortment and grown the business.”

CATER TO CUSTOMERS In 1998, plans called for offering e-shoppers the best of Macy’s East and Macy’s West, featuring top brands from every category. That strategy went through several iterations over the next two years before executives decided to eliminate certain categories, such as career apparel, and place more emphasis on others, including juniors and home-related merchandise.

“Juniors is now 40 percent of our women’s apparel on-line. It’s nowhere near that large in the store,” Domecus notes. “The same can be said of the home business. As a percentage of total sales, it’s much higher on-line than in the traditional store setting.

“The on-line shopper comes to Macys.com with a mission, a gift to buy or something she needs,” he adds. “It would be neither practical nor profitable to have the same four million sku’s on-line as we have in the stores. We have to cater to the needs of the on-line customer if we intend to grow this business.”

Today, Macys.com is operated separately from the traditional stores, including separate buyers and inventory. Still, items featured on-line must be available in at least one Macy’s division. While the product assortment is smaller, items are available in greater depth than in the traditional stores, and anything purchased on-line can be returned to the stores.

Domecus de-scribes the e-commerce channel as being in lock-step with the company’s corporate direction. “Federated is focused on growing its business while catering to customer needs,” he explains. “Our mission is the same, but that doesn’t imply that everything that works in one channel will work in another.”

Case in point: Macy’s executives tried extending the brand into direct mail in 1998 with a catalog targeted to customers outside the retailer’s major markets. The catalog was short-lived as executives realized that the product offering was not in sync with the other channels. To stay true to the brand, the decision was made to exit the catalog business.

“Just because you can do business in every channel of retailing doesn’t mean you should,” says Domecus. “Our decision to exit direct mail is a perfect example of that. Each company has to understand the role of multi-channel retailing within its overall business, then manage growth in that context. For example, the on-line channel plays a huge role in delivering new customers to Federated by means of the on-line bridal registry. The Internet generates 30 percent of all the new registry customers at Federated.”

BRAND POWER While Macy’s runs its Internet channel separately from the store operation, Seattle-based REI. com makes every effort to deliver a consistent customer experience, operating its on-line channel as an extension of the store and direct mail businesses.

“Ultimately, it’s about the power of the brand and the desire to communicate to the customer with one voice,” says Joan Broughton, vice president of multi-channel programs at REI. “Executives were of one mind from the outset in terms of how the e-commerce piece would fit into the total business. We are still engaged in integrating the systems used across the various channels, but we always wanted the customer to feel that the on-line shopping experience met his expectations of the REI brand.”

Broughton points out that the on-line assortment is a superset of the store product. If a customer can’t find what he wants in the store, he can order it on-line via the in-store kiosk. The next phase for REI is to enable shoppers to buy on-line and pick up in the store, a service that’s set to debut this summer.

Each business channel contributes to the retailer’s overall growth. Most retailers’ e-commerce operations generate 4 percent to 5 percent of the total business, according to Broughton. At REI, the on-line channel contributes more than 11 percent of total company sales.

“The value of REI.com goes beyond its on-line sales generation. It is viewed within the company as an asset that goes across all sales channels. We know its value as a driver of business, based on our knowledge of the customer, how she shops and what she buys. Our strategy is to deliver a consistent experience, regardless of which door the customer comes through.”

LEVERAGE STRENGTHS Bill Bass, who wears two hats – vice president and general manager of Sears Customer Direct and senior vice president of e-commerce at Lands’ End – is quick to note the similarities and differences in the two ulti-channel businesses.

“Lands’ End started a catalog business, slowly expanded into the e-commerce channel and recently entered the traditional store channel,” explains Bass. “Sears’ roots are in bricks-and-mortar retailing and direct mail, but they got out of the direct mail business and methodically built the on-line channel with careful emphasis on exclusive brands. But when you look closely at the two, each has leveraged its strengths and adopted a gradual approach to growing the on-line channel.

“Different companies will pull different levers,” Bass continues. “The important thing is not which strategy a company chooses, but how the strategy that it picks fits with the rest of the business goals.

”Executives at Lands’ End began dabbling in e-commerce because of their fascination with technology. The Dodgeville, Wis.-based retailer, the first direct marketer to launch an 800 telephone number, is considered an Internet pioneer because of early experiments at selling via CD-ROM on Prodigy and AOL. As the company’s on-line presence grew, the goal was to be a channel agnostic, making certain that the product and experience on-line was consistent with the catalog.

Today, Lands’ End continues to leverage new technologies to drive e-commerce growth, hence the launch of technologies such as the virtual model and customized apparel. Still, to make the shopping experience easier for the consumer, the brand is now available in Sears stores.

At Hoffman Estates, Ill.-based Sears, the venture into e-retailing has been methodical, but one that acknowledges customers’ changing expectations of shopping and service and plays to the company’s strengths. “Sears executives leveraged the strength of the store channel, in this case its vast network of more than 800 stores, to drive sales on-line,” recounts Bass.

“By giving shoppers the option to buy an item on-line and pick it up at a local store, they manage to grow business in both channels. Today about 30 percent to 40 percent of on-line sales are picked up in the store,” he adds. “That’s the beauty of multi-channel retailing. It’s understanding how the goals of each channel fit together to drive the total business.”

©2003, NRF Enterprises, Inc.

December 10, 2005 at 04:13 PM in Financial Services | Permalink | TrackBack (22) | Top of page | Blog Home

The Evolution of Customer Service for Financial Services:

The Evolution of Customer Service for Financial Services: Speech-enabling Multi-channel Customer Care

Overview

Innovation and adaptation are critical to industry leadership. As the world economy gains momentum in its long-delayed recovery, retail banks are reinventing themselves as flexible, dynamic sales organizations at the front end, and efficient, low-cost processors at the back end. Driving this reinvention is intense local and global competition. The key to staying ahead lies in leveraging all available customer relationship management mechanisms — in order to ensure that retail banking customers can get what they need when they need it, while ensuring that banking operations have real-time, relevant access to information about customers and critical operations across the enterprise.

What can today's converged, web-voice solutions do to help your financial services organization realize the aforementioned goals and objectives? Just ask yourself the following questions: When customers dial in to your call center, use your ATM network, log on to your online banking system, or visit a branch office, are you able to serve them consistently regardless of method of interaction? Is all pertinent and appropriate information available at the precise moment of customer interaction? Can you spot the ideal moment to offer your customer the equity line or debit card that would make them a more profitable customer? In short, are you optimizing every interaction with every customer? Most likely, the information and processes required for this type of service and highly effective selling already exist in your retail banking enterprise; however, they may not be working optimally. By identifying, integrating, and leveraging these processes in real time at the point of customer interaction, you can convert them into a profit engine. You can also differentiate your customer interaction from the competition by offering state of the art speech interfaces that are not only easy to use for your customers, but also easy to maintain, and that leverage many of the web-based assets that you have invested in today.

This is precisely the power that today's open-standards based voice systems bring to retail banking. As banks look for ways to achieve higher profits through customer service and sales, they need to integrate customer service systems, tie them to a variety of back-office systems, and supply them with consistent information. A state-of-the-art voice system based upon the Microsoft .NET Framework makes this possible by enhancing payment and financial data with real-time, comprehensive, cross-channel information to enable personalized service to each customer as a "market of one." In fact, this solution delivers critical customer and business information to all parts of the enterprise — immediately and consistently. The solution integrates core systems, data warehouses and delivery channels in real time, driving unprecedented levels of integration, performance, and manageability. It complements and adds value to your existing IT investment. And because this solution is built to scale up and out, you can be assured that solution will be able to grow with you and your customers.
Business challenges and opportunities

Every year, retail banking customers engage in more than 200 billion interactions with their financial institutions. Each interaction has the potential to either create value and strengthen the customer relationship or leave customers feeling frustrated and dissatisfied. The annual American Customer Satisfaction Index suggests that the latter scenario too often prevails: At the end of 2004, customer satisfaction for the top four U.S. banks was rated at a score of 71 (out of a possible 100), lower than the scores achieved by department stores, supermarkets, and insurance companies. A major contributor to these low scores is the lack of an integrated customer view, resulting from an infrastructure that is incapable of delivering such a view. The problem of multiple core systems complicated by a growing number of disparate delivery channels makes finding a solution even that much more challenging. These systems were developed individually using state-of-the-art toolsets, specialized development skills, and proprietary data models. As a result, they have widely varying integration requirements, data structures and availability guidelines. And no single channel has complete access to an up-to-date, consolidated view of critical customer and business data. The "many-to-many" connections between back-office systems and front-office delivery channels create an enterprise infrastructure that is complex, expensive and incapable of delivering a single view of the customer from the bank's perspective or a single view of the bank from the customer's perspective. In fact, the existing technology within the average banking institution makes it virtually impossible to create this unified view. In an attempt to improve customer satisfaction, financial institutions have spent billions of dollars on customer-focused products and services, as well as on Customer Relationship Management (CRM) projects. These efforts were implemented as internally-facing, data-driven systems and have been hampered by a lack of consistency in delivering the information to the customer when it really counts: at the exact point and time of interaction. Leading banks seek to create an environment in which customers are treated consistently at every point of interaction, and in which the bank can leverage up-to-the-second information to capitalize on sales and marketing opportunities. Only with multiple customer access channels, and real-time access to customer data, can banks maintain and advance profitable relationships with their customers.
Industry trends

Across the financial services spectrum, whether in retail banking, wholesale banking, or the securities environment, enterprises are facing a growing list of challenges. Continued pressure on interest margins makes the need for efficiency greater. Customer service, retention and loyalty depend on the regular rollout of new products, services (including value-added advisory services) and payment mechanisms. And a single view of the customer, whether corporate or individual, is needed to achieve real-time decision-making capabilities and to deliver new service levels. A virtual avalanche of compliance, regulatory and industry mandates, such as anti-money laundering, the USA Patriot Act, SWIFTNet and Basel II, is descending on the industry. The "do more with less" paradigm that characterizes 21st century business requires an even stronger focus on operational efficiency, accompanied by greater emphasis on cost reduction and improved return on IT investment. Consolidation in the financial services industry will continue, fueled by the desire to move into new markets and products, integrate distribution channels and lower costs through greater economies of scale.
Technology trends

The TowerGroup, a leading research and advisory firm focused on technology in the global financial services industry, projects that worldwide IT spending will grow at the rate of 3.3 percent per year going forward. This projection is based on a broad agreement that technology is a primary enabler for the development of new, customer-centric features and services. Legacy systems lack the flexibility needed to integrate data across internal and external environments in real time and leverage it for informed business decisions. An increasing number of financial institutions are pursuing open platforms for more efficient standardization, greater modularity, faster application development and lower total cost of ownership.
Investment protection

Infrastructure replacement is not an option in today's retail banking environment — a result of the enormous investment in legacy core banking and delivery channel systems. Current technology solutions include some level of channel integration. However, banks must replace existing platforms to take advantage of their enhanced integration capabilities. For effective branch, call center, voice-response, kiosk, and online banking integration without a central hub, all three systems would need to be replaced with a single solution. And the provider of such a solution may not have the necessary experience in all of these areas to provide a scalable, reliable multi-channel delivery system. The way this can be done successfully is through the deployment of a reusable framework.

Open-standards for converged web/voice solutions have made the reusable framework concept a reality for financial services organizations. Based on more than a quarter century of financial industry experience in traditional voice-enabled customer relationship management systems and real-time transaction processing, Intervoice and Microsoft have created solutions for the financial services contact center. These solutions have their roots in core Intervoice and Microsoft service and technology components such as Microsoft Windows Server 2003, Microsoft SQL Server, Microsoft Speech Server, Microsoft Active Directory, Intervoice Telephony Interface Manager (SIP & TDM), and the Intervoice Computer Telephony Integration (CTI) Server. A typical solution framework depicting how voice-enabled technologies can be incorporated into today's financial services contact center is depicted in the Figure 1 below:

This architectural framework can enable a financial institution to enhance payments and financial data with real-time, comprehensive, cross-channel information to serve each customer as a "market of one." By integrating and not rebuilding best-in-class front-office solutions, today's voice solutions protect the bank's investment in individual delivery channels while giving your customers a competitively different customer service experience through speech-driven voice self service. What's more, this solution gives the bank the flexibility to leverage existing infrastructure investments — IT Human Resources, desktop and server licenses, legacy CRM systems like Oracle and SAP, online access methods, CTI software, existing switching fabric and more!
Capabilities and benefits

Intervoice Solutions for Microsoft Speech Server for retail banking deliver an up-to-the-second, consolidated view of all payment and customer related data — enabling financial institutions to optimize every customer interaction. The solution addresses major business challenges, including the need to reduce costs, increase revenue and profitability, improve customer service, respond quickly to changing market dynamics, and leverage existing investments.

Key benefits include:

* Reduced costs: The solution enables financial institutions to leverage actual cost analysis to drive profitability decisions. It's real-time view of enterprise-wide transactions makes it possible to intercept fraud before it happens, lowering financial risk. The solution framework significantly reduces the number of individual point-to-point interfaces (estimated at US$30,000 to US$50,000 per interface) needed to support application-to-application and channel-to-channel interconnects, resulting in immediate IT savings.
* Incremental ROI: The solution can be implemented in an incremental fashion, with short-term return on investment at every step.
* Improved customer service leading to increased revenue and profitability: The solution delivers the insight needed to serve each customer as a "market of one," dynamically personalizing and optimizing every customer interaction in real time — at the point of the transaction. It also makes it possible to identify, and appropriately target, the bank's most profitable customers with special programs and offers, improving customer retention and profitability.
* Agile response to changing business requirements: The solution combines real-time and historic information in a powerful decision-making tool. By synchronizing key business data, it provides "one version of the truth" to support all business processes. It enables faster time-to-market for new services — a key success factor in today's increasingly competitive financial services environment. It also facilitates prompt compliance with evolving regulatory requirements and legal mandates.
* Ease of expansion: The solution framework provides the flexibility to add new data sources and users, expanding the current environment with no disruption to existing systems or processes. The solution uses .NET technologies for ease of integration with a standard, reusable, and modular infrastructure that greatly facilitates the addition of new products, services, and channels.
* Investment protection: The solution adds real-time capabilities to current applications and data sources, so banking institutions can preserve their investment in legacy systems while enhancing the power of existing solutions. The solution adds new value propositions to the legacy infrastructure and minimizes the impact on core systems.

Summary

The growth of e-business of over the past several years has led to an explosion in the number of interactions a financial services organization has with its customers. A company must plan for interactions not only through a contact center, but also through multiple touch points including the Web, mobile phones, Pocket PCs, and e-mail. Financial services companies that have successfully deployed self-service options for customers continually look for ways to improve and integrate these services to reduce the total cost of ownership, increase profitability, increase customer satisfaction, retain customers, and uncover new revenue opportunities. Key contact center solutions that can help you further enhance self-service capabilities and realize these benefits can be achieved through Intervoice Solutions for Microsoft Speech Server.

Designed and certified for Microsoft Windows, Intervoice Solutions for Microsoft Speech Server facilitate a new age of integration and collaboration between the retail banking consumer and the financial enterprise. By leveraging the power of Microsoft Windows and .NET technologies, these solutions allow you to "close the loop" between your customer care strategies and the technology already in your customers' hands.

Intervoice Solutions for Microsoft Speech Server offer an efficient and effective path for any business that seeks to deploy speech-enabled technology as well as a centralized integration framework to take advantage of all other customer touch points in their organization. Our solutions deliver extraordinary ROI potential by providing highly integrated, efficient, speech-enabled, self-service capabilities for enterprise financial services organizations at an economical price. Future business needs are met by a flexible technology that provides multiple deployment options through a highly scalable and integrated architecture built on the .NET Framework. In fact, the ability to manage one .NET code base for both Web- and voice-enabled applications makes it possible to extend new and ubiquitous self-service capabilities to retail banking customers — ultimately enabling you to balance enterprise and customer goals through an optimized customer experience. Let Intervoice show your financial institution how to optimize its technology investments to succeed in today's challenging environment. For more information visit us at www.intervoice.com/solutions/microsoft-solutions.

Author Profile:
Michael Segura is responsible for strategy, product, and market development of Microsoft products for Intervoice. Segura has 15 years of experience managing business units within the telecommunications, energy and consulting industries. He holds a Bachelor of Business Administration from Texas A&M University and has completed Executive Marketing Management Program from Duke University and University of North Carolina. Segura also holds a CPA certification.

December 10, 2005 at 01:57 PM in Financial Services | Permalink | TrackBack (19) | Top of page | Blog Home

Embracing a Multichannel Strategy

destinationCRM.com: Embracing a Multichannel Strategy

The marketplace has spoken: pure-play is out, click-and-brick rules.

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by Brett Anderson

Friday, April 27, 2001
Thanks to recent and rather sobering setbacks in the U.S. economy, many U.S. executives not previously committed to a multichannel strategy have experienced a remarkable epiphany. Admitting that pure-play is powerless, they have submitted to a higher marketplace authority that says multiple touchpoints are critical for businesses that want to stay competitive and build profits.

In other words, the "click, click, click" of yesterday's economy has evolved into the more Darwinian mantra, "click, brick, paper, voice." Click here to learn more!

And understandably so. The "clicks and mortar" strategy combines the advantage of offering customers greater access to and awareness of your company's products and services with strong operations and inventory management.

"We think the most successful strategy is for existing brick-and-mortar companies to basically build the Internet into everything they do, because the asset of your customers needs to be leveraged throughout the organization--stores driving traffic to the Web, the Web driving to stores. That's the only way to do it," says John Sheldon, associate director, e-business architecture at Dialogos, a customer development consulting firm headquartered in Boston.

Customer demand is one of the strongest drivers of multichannel models. The quest for convenience has drawn many consumers to clicks-and-mortar retailers that give them a choice of making their purchases on the Internet, through a catalogue or from a store. Many of these companies will allow purchases made online to be returned to local outlets.

"Customers want to be able to return merchandise using the method that is most convenient to them, whether it's by mail or at a store location," says Dennis A. Veltre, founder of Clicks &
Mortar Consulting, a Bayside, New York-based firm specializing in the retail market.

The majority of traditional companies have long leveraged multiple channels in marketing to customers, selling and cross-selling products, and managing inventory and fulfillment. Their operational models offer such advantages as strong brand presence and relatively low customer acquisition costs. The newer Internet channel offers powerful personalization technologies and a customer-centric focus that is important in retaining customers in today's challenging marketplace. Combining these advantages creates the competitive edge and efficiencies companies need to survive.

Making the Multichannel Model Work
To leverage this multichannel model, companies must develop a strategy that makes sense for their particular business and product category. "It all depends on where you are in the food chain right now," says Miki Tsusaka, Boston Consulting Group's vice president director of the consumer practice. "What is your current level of sophistication and understanding of your customer base? And what is the objective? Is it to retain every single customer you've got? Is it to buy new customer names because you're nobody and you need to get to that scale? Is it to sell customers the next category?" Once you have identified that objective, she says, only then can you determine what level of investment--in
technologies and in partnerships or acquisitions--makes sense.

"After all, you do not want to buy a nuclear engine if you can
paper-and-muscle the job through at the outset."

The extent to which online and offline elements function together to better serve the customer will determine the organization's future success. The challenges involve not only the technology, but also the ways in which information from each division is leveraged across the organization to promote business goals. From a purely technological perspective, integrating legacy systems with newer e-commerce front-end and back-end systems is both time-consuming and painful. While common architecture should govern distribution, the methods of distribution themselves must remain distinct for online and offline channels. "You will run a real inefficient operation if you don't have different methods and techniques for [online and offline]," observes Veltre. "You cannot work with a common inventory very easily, because in an online environment, you have to be able to reserve the stock and be able to promise it to the customer at a moment's notice."

Challenges notwithstanding, most industry analysts agree that the clicks-and-mortar approach to retailing is a winning proposition. The dollars-and-cents value of the strategy is well illustrated by the success of Gap, whose gap.com has been selling online since 1997. Sales have increased dramatically at Gap during this period, not merely because of incremental online revenue, but
because the different channels, both offline and online, drive customers to buy--and to buy more. For example, the Gap's in-door campaign to collect shoppers' e-mail addresses has broadened its online marketing base, increasing online traffic. Overall, customers who shop online and in the stores spend 50 percent more than single-channel customers.

Cannibalization Concerns
The benefits of opening an Internet channel can be compromised when companies don't address their concerns over the cannibalization of established channels of business by the online breed. The concern is a legitimate one, particularly in cases where a retailer may have too many stores, says BCG's Tsusaka. "I think the Gap right now is over-stored. In an over-stored environment, it's interesting how these organizational tensions arise if your dot com is too competitive." This tension is mitigated, she notes, by the fact that many online Gap customers who return items to the chain's physical stores actually make additional purchases in the process. Even so, for many over-stored companies, the solution is not necessarily to minimize online activity, but to reduce the physical network--if that's what makes sense for the customer base.

Tsusaka stresses that the right strategy is the one that most benefits the customer. "The act of cannibalization, if it's to your own benefit and your customer's, I don't think is bad," she observes. "It's cheaper for a catalogue company to send me fewer catalogues each year. If I start shopping on the Net, you might be able to send me a smaller catalogue. The act of cannibalization is not a bad proposition to you at all, as long as there aren't huge negative repercussions to your physical store network. At the end of the day, the online business is not going to be 50 percent of your core."

The very fact that, to maintain and grow a healthy customer base, traditional companies are increasingly migrating online while Internet companies are exploring traditional channels suggests that the one channel's domination of the customer relationship to the detriment of the other is an unlikely threat for the majority of companies. And the risks of relying on a single-channel strategy are probably greater than not.

"In my opinion, nobody in the retail space is going to be content with one channel," says Veltre. "When you're one-channel, and the customer expectation is to have the convenience of choosing between a store, a Web site or a catalogue," he concludes, "you're going to lose that customer."

December 10, 2005 at 01:56 PM in Financial Services | Permalink | TrackBack (50) | Top of page | Blog Home

Bank branch transformation: The root of a multi-channel success strategy

IBM - Bank branch transformation: The root of a multi-channel success strategy

With the popularization of the Worldwide Web, the conventional wisdom was that banks would begin to lose branches like a willow in a windstorm, opting to build more cost-effective business models around the virtual advantages of the Internet. But customers made it clear they still wanted the human touch, and savvy banks now are transforming branches to play key roles in a more expansive, multi-channel strategy.

Every retail bank has a different idea about branch renewal, though, and the look of new branch blueprints can range all the way from radical to retro-chic. But the underlying business objectives are pretty much the same, and to that extent banks should be guided by some fundamental considerations – the first of which can be summarized by an old Oliver Cromwell quote: “Think it possible, you may be mistaken.”

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Or at least that you could be underestimating how customers may respond. That’s exactly what happened when retail banks saw the Internet as a potential way to offload the significant overhead costs of brick-and-mortar branch offices. There was a growing public fascination with the Web, to be sure. But at about the same time the financial services sector was going through a period of intense consolidation, which generally leads merged banks to conclude that they’re suddenly branch-heavy and in need of some paring. Add to that average high teller turnover rates and it’s not at all hard to imagine that the cost-effective virtues of virtual branches was exactly the story bank managers wanted to hear.

Read on...

It turns out, however, to have been only part of the plot line. The cost benefits of self-service Internet sites aside, customers made it clear there is a value to them in doing business with a live human being. They like being able to talk with somebody, both behind the counter and in the waiting line. Without that comforting personal interaction, there is a palpable loss of a sense of community.

It’s also likely that a four-dimensional interaction with a real live person adds to a customer’s confidence in the finality of the transaction. They actually hand that deposit to someone they can see and hear and feel, and watch as it moves directly into their account. No questions. No doubts. Just an honest-to-goodness paper receipt that will stand up in court. And with the latest focus on the dangers of identity theft, it’s likely as well that branch customers enjoy a sense of assurance in being recognized by name and face.

But equally important, customers have made it clear that they want access to a variety of channels – the Internet for on-the-fly transactions and balance updates, ATMs for a quick hit of cash, telephones for those times when a computer isn’t available, and walk-in branches when nothing but a live human being will do.

By the numbers

In fact, leading U. S. banks are looking to differentiate themselves from competitors by increasing their investments in distribution channels. One survey shows that, if bank executives had additional technology spending money available to them to improve retail bank profitability, they probably would spend 20 percent on new product development, 20 percent to offset product pricing, and a full 60 percent on development of delivery channel solutions. (Source: TowerGroup 2002 Primary Market Research; Datamonitor; IBM Institute for Business Value)

The upshot is that, even with more access to alternative channels, bank customers continue to demand in-person branch service. Market research has shown that 92 percent of U.S. retail banking customers use a physical branch at least once a month, and 50 percent actually prefer branch offices to automated channels. (Source: Business 2.0 magazine, Oct. 2004, “How to Get Tough With Bad Customers.”) That’s why branch transformation needs to be an integral part of an overall retail banking strategy that focuses on sustaining, maintaining and investing in multiple channels, especially for U.S. financial services institutions.

Generally speaking, most banks see branch transformation in terms of a move toward customer self-service, but there is no single model being followed by any one business organization. Washington Mutual, for instance, operates a few Ocasio sites, a relatively radical approach in which a branch office operates essentially like a store. Transaction areas are open and airy, and tellers wander the floor to assist customers with the specific business they want to conduct. Savings accounts? Aisle 6. Certificates of deposit? Aisle 3. Consumers even can buy hats and t-shirts and coffee mugs.

Can we take your order?

Commerce Bank branches set themselves apart by being open every day, including Sundays, and ING Direct CEO Arkadi Kuhlmann likens his retail bank to financial services fast food. “The difference between ING Direct and the rest of the financial industry is like the difference between take-out food and a sit-down restaurant. The business isn’t based on relationships; it’s based on a commodity product that’s high-volume and low-margin. We need to keep expenses down, which doesn’t work when customers want a lot of empathetic contact.”

ING Direct’s strategy is to target a specific retail banking niche – the 8 percent of customers who don’t stop by a branch office every 30 days or so. But for banks more interested in the 9 out of 10 customers who do, the essential objectives for branch transformation are these:

* Create competitive cost of operation by improving efficiency and effectiveness
* Update, replace and re-engineer processes and systems to more efficiently support staff and customers
* Leverage all retail channels to maximize value to customers and the bank
* Grow revenue by becoming the provider of choice
* Improve service delivery by deploying a more flexible, reliable IT infrastructure.

The idea is to make the most out of a customer while he or she is on the premises, and to accomplish that banks need to have a more complete picture of who that customer is, including their current financial requirements, where they are in their lives right now, and what kinds of services can be presented as sensible follow-up offers. There are no single solutions to the problem, but there are a series of incremental steps banks can and should be taking to develop their own particular models.

For instance, each bank needs to make up-front decisions about functional and operational issues. Are tellers going to major in transactions, or, as part of an effort to imbue a deeper sales and service culture, will they sell, too? Maybe the better approach is to have them do both, and refer services in the bargain. Either choice requires better training.

And what about technology? Is it flexible and resilient enough to support a multi-channel architecture and provide a common and comfortable customer experience? In answering that key question, banks need to consider not only back-office systems, but front-office equipment, cross-enterprise networking infrastructures and the cost and strategic benefits of leading-edge technology such as voice-over IP and customer relationship management software.

Some banks are beginning to move toward fingerprint stamping and retina scanning to enhance security, for example. Others are revamping to incorporate broadcast readers and smart cards that will instantly recognize customers as they walk through the front door, alerting managers and sales persons about not only their physical presence, but their financial and account histories. In the end, functionality, ease-of-use and customer interaction will be determined by the IT infrastructure on which a branch bank is built.

The bottom line in bank branches is this: They’re how a financial institution’s customers see it and talk to it, and to that extent are invaluable assets in terms of capitalizing on customer needs and market opportunities. Transforming them – taking them to the next level as a key part of an overarching, multi-channel business plan designed to differentiate services and raise customer satisfaction – can help banks to reduce operational costs, generate new revenue, reverse employee turnover and position the business for rapid market and customer response.

December 10, 2005 at 01:53 PM in Financial Services | Permalink | TrackBack (8) | Top of page | Blog Home

Broadband banking

Finextra: comment - Broadband banking

The finance sector needs to get wise to the demand for information on demand says Jim Sterne, producer of the Emetrics Summit

CBS recently announced the launch of a 24-hour digital news network as part of a major expansion of CBSNews.com. Welcome to Immedia - the shape of things to come.

People want their news right now. News organizations around the world published mobile phone photos from the London Tube after the bombings. Live video online is a forgone conclusion and news is where it makes sense to have it first. This is going to put serious pressure on the news agencies to verify their sources or to lable breaking reports as 'Unverified' just so they can publish immediately.

TV takes too long to do much more than, "We interrupt this programme to tell you that we have no details but reports are coming in that Michael Jackson has been launched and will collide with an asteroid soon. Now back to Coronation Street."

Radio has traditionally been the place for breaking news but they don't go deep. The Web can go fast and deep at the same time due to the lower cost of production. The CBS press release said the new CBSNews.com would include:

* an on-demand, 24-hour news network in the digital broadband space;
* a blog to be called "Public Eye" designed to provide greater openness and transparency into the news gathering process;
* a newly-configured homepage including The EyeBox, an on-page video player showcasing the free broadband video of CBSNews.com including over 25,000 clips - and video yet to be broadcast on the network;
* a commitment by CBS News fully to integrate its personnel and other global newsgathering resources to provide exclusive, original reporting and commentary around the clock.

Calling it a 'news blog' gives the impression that reporters can publish immediately. Interesting and inevitable, but not the end of the story. This isn't just about breaking news.

You can search the Internet for online video through Blinkx.tv, a UK site that is creating an index for keyword and conceptual searches.

This also isn't about just the news. Enid Burns recently reported for ClickZ on Nick at Night's exclusive video content and VH1's VSpot. It won't be long until new shows and old shows are available 24/7. And how about movies?

In a UK first, ISP Tiscali has teamed up with film production company Dogwoof Digital to launch the new film EMR simultaneously in cinemas, on the Internet and on DVD. Can you spell convergence?

I've avoided uttering the convergence word until now. Finally, it seems, the Internet Protocol Network of Networks is going to be the delivery medium of choice. How and where you consume it is up to you. Big screen for movies, medium screen for email and surfing, small screen for snap-shots and phone calls and calendars and no screens for music and audio.

Yes, audio - let's not forget podcasting. USA Today recently reported that, "Podcasts from ESPN, CNN, ABC News and the TV show Queer Eye are among the most popular this week on iTunes, Apple's download site." Podcasts are also working well for radio stations across the UK.

So now that broadband has finally hit the tipping point, we're going to see immediate news and permanent archived entertainment for anytime consumption. Immedia and Permedia.

What does this mean to the world of finance and financial institutions? Two things - both complex and resource intensive. First, your marketing had better become multi-media quickly. The consumer (be it the 'great unwashed' or business-to-business) is going to expect access to information in print, online and via video and there will be no difference between them. I want to see customer testimonials, product reviews, investment news, demonstrations, etc., in video that I can access from your Website.

Second, your marketing had better come with clear expiration dates. Information is no longer tossed out. Yesterday's news you say? Only good for chip paper? That's the paper. The news lives on in online archives. Your client testimonial video is still on a prospective customer's hard drive even though you and the client have had a falling out and they're moving their money.

I'll be addressing these issues at the London Emetrics Summit in May 2006. My point is, we will have to manage the public information about our products and services in a different way from now on. Instantly (Immedia) and for the long haul (Permedia). Once again, times have changed.

Jim Sterne is a consultant and speaker who focuses on measuring the value of the Web as a medium for creating and strengthening customer relationships. Sterne has written eight books on using the Internet for marketing, produces the Emetrics Summit (London 3-5 May 06) emetrics.org and is a founding director of the Web Analytics Association.

December 7, 2005 at 02:50 PM in Financial Services | Permalink | TrackBack (27) | Top of page | Blog Home

Wells Fargo ditches OneLook account aggregation service

Finextra: Wells Fargo ditches OneLook account aggregation service

US bank Wells Fargo is scrapping its free account aggregation service OneLook early next year due to poor customer uptake.
The bank launched OneLook in March 2001 to provide its online banking customers with single sign-on access to balances across multiple financial institutions.

Although uptake of the system was good in the first two years, only a small number of customers carried on using the service on a regular basis. As a result Well Fargo says the service will be discontinued in February next year.

Earlier this year Citigroup also abandoned its account aggregation service, called My Accounts, due to low customer enrollment. Citigroup spokesman Mark Rodgers told Reuters reporters that the bank had no current plans to reintroduce the service.

Increasing concerns over online fraud are thought to have led to customers abandoning some aggregation services, especially as to use the system customers have to provide user IDs and passwords for all accounts - including those from other institutions - to their bank.

The introduction of two-factor authentication in the US next year is also expected to impact negatively on the use of aggregation by online banking customers. A report released by Forrester Research in June this year predicted that the introduction of two-factor authnetication would be "the death knell" of account aggregation services as they are currently implemented.

December 3, 2005 at 03:35 PM in Financial Services | Permalink | TrackBack (13) | Top of page | Blog Home

Keep the Change Offers Consumers Opportunity to Save

A New Survey Shows Most American Adults Don't Save for the Holidays

CHARLOTTE, N.C., Nov. 29 /PRNewswire/ -- For millions of Americans, holiday shopping is top-of-mind, which brings about money concerns from saving to spending to saving again. This holiday, Americans will spend nearly $750 on average for holiday gifts this season. Despite the strong desire to save while holiday shopping, not many Americans will. According to a new survey commissioned by Bank of America and conducted by Harris Interactive(R), about three-quarters (76%) of U.S. adults agree they don't save as much money as they should.

So, how can consumers save for themselves while they spend on others this
holiday season? For the 48 percent of U.S. adults who say they plan to use
their debit cards to make purchases for the upcoming holidays, Bank of America
offers an automatic solution with its new savings feature, Keep the
Change(TM).
"The Keep the Change program is a great way for consumers to save money
while they spend this holiday season," said Diane Morais, Deposits and Debit
Products executive at Bank of America. "More than half of those surveyed said
they could use some help in learning about good ways to save money. We hope
that educating consumers about this program and other ways to automatically
save money will help them to begin turning this year's holiday purchases into
savings."
Keep the Change is a quick and easy way to start saving immediately. When
a customer signs up for this program, the amount of every purchase they make
with a Bank of America debit card is automatically rounded up to the nearest
whole dollar and transferred from the customer's checking account into their
savings account at the end of the day. For example, when purchasing a coffee
with a debit card, the difference between the $2.85 cost and $3.00 -- or 15
cents -- would be transferred electronically. In addition, Bank of America
will match 100 percent of the Keep the Change transfers for the first three
months a consumer participates in the program. After that, the bank will
contribute five percent a year. The maximum match is $250 annually.
"Nothing destroys a year of being smart with your money like over-shopping
during the holidays. My recommendation during the holidays is to start smart!
Consider keeping the credit cards at home and use a debit card, cash or
checks. You'll spend less and avoid going into debt," said financial expert
and best-selling author David Bach. "By participating in an automatic savings
program like Keep the Change during the holidays and all year round you can
see the savings really add up -- and make next year's holiday spending even
easier on your budget."
The survey of more than 2,000 U.S. adults also found:
- Close to nine in ten U.S. adults (89%) do not have a separate account
where they save money for holiday shopping.
- Nearly seven in ten (68%) put their spare change in a change jar or
piggy bank.
- Just over four in five U.S. adults (82 percent) have a savings account,
but less than two-thirds (64%) saved money in the past year.
- Nearly all U.S. adults (98%) regularly take measures to save money,
most commonly by making meals at home instead of eating out (76%),
conserving energy (73%), and waiting for items to go on sale before
purchasing (69%). More than nine in ten (92%) save spare change, yet
two-thirds (66%) do so specifically as a means of saving money.
- U.S. adults typically think they could save just over $100 (median =
$103) just by saving their spare change over one year.
- Only a third of U.S. adults (33%) regularly transfer funds from an
account into their savings account.

http://www.bankofamerica.com/ktc

Keep the Change matching funds are paid annually after the anniversary of
enrollment up to a maximum of $250 on accounts that remain open and enrolled.
Eligible savings accounts include regular savings, which requires a minimum
opening balance of $100 and pays a variable annual percentage yield that was
0.50% as of November 16, 2005. Fees could reduce earnings. Patent pending.

About Bank of America:
Bank of America is one of the world's largest financial institutions,
serving individual consumers, small and middle market businesses and large
corporations with a full range of banking, investing, asset management and
other financial and risk-management products and services. The company
provides unmatched convenience in the United States, serving more than 38
million consumer and small business relationships with more than 5,800 retail
banking offices, more than 16,700 ATMs and award-winning online banking with
more than 14 million active users. Bank of America is the No. 1 overall Small
Business Administration (SBA) lender in the United States and the No. 1 SBA
lender to minority-owned small businesses. The company serves clients in 150
countries and has relationships with 97 percent of the U.S. Fortune 500
companies and 79 percent of the Global Fortune 500. Bank of America
Corporation stock (NYSE: BAC) is listed on the New York Stock Exchange. Member
FDIC.

Survey Methodology
Harris Interactive(R) fielded the online survey on behalf of Bank of
America between October 5 and 7, 2005 among a nationwide sample of 2,180 U.S.
adults ages 18 and over. The data were weighted to be representative of the
total U.S. adult population on the basis of region, age within gender,
education, household income, race/ethnicity, and propensity to be online. In
theory, with probability samples of this size, one can say with 95 percent
certainty that the overall results have a sampling error of plus or minus 3
percentage points. This online sample is not a probability sample.

SOURCE Bank of America
Web Site: http://www.bankofamerica.com/ktc
http://www.bankofamerica.com
Photo Notes: NewsCom:
http://www.newscom.com/cgi-bin/prnh/20050720/CLW086LOGO-b AP
Archive: http://photoarchive.ap.org PRN Photo Desk,
photodesk@prnewswire.com

December 3, 2005 at 10:19 AM in Financial Services | Permalink | TrackBack (31) | Top of page | Blog Home

Branches Are for Errands, Not Sales

Live from BAI Retail Delivery : Branches Are for Errands, Not Sales

Banks may be eager to tout their comfy branches, with their free coffee, newspapers on hand and plasma TV screens. Yet all too often, they lose sight of what the customer really wants: service that’s simple, easy and fast, said James McCormick, president of New York City-based First Manhattan Consulting Group LINK TO (www.fmcg.com/).

In a Thursday afternoon session entitled "Keys to Gaining Share: Which Strategies Are Working; Which ‘Best Practices’ Are Problematic," McCormick said mystery shops conducted by FMCG found customers generally unimpressed by attempts to turn the bank branch into Starbucks. He said customer comments included remarks like: "I don’t come to my branch for the coffee and treats," and, "Why would I come to the branch to sit down and read the paper?"

The problem, McCormick said, is that many banks are trying to provide a sales environment when the typical customer is in an "errand mode." According to FMCG’s research, customers want to sit down and consider a new product in only one in 100 visits to a bank branch. "So if you build your system around the sales event, that approach is going to be sub-optimal for all but 1% of the time. It’s a nonstarter," McCormick said.

During mystery shops, the number one customer-suggested improvement, McCormick said, was faster service, meaning shorter wait times in the lobby and drive-through.

It doesn’t help that many banks are bewildering customers — and their own employees — by piling on increasingly sophisticated features to products. "It adds to the challenge of staying current," McCormick warned.

From conducting 1,400 mystery shops in opening new accounts since 2003, FMCG found that only 3% of these visits featured what McCormick calls a "good profile session," which means waiting less than 15 minutes to see a representative, having an effective needs-based discussion and getting a follow-up call after the account is opened.

Banks that are winning with customers have "a mindset of simple, easy and fast," McCormick said. "Their product lines are more basic, their policies and procedures are streamlined. And it doesn’t take a lot for the customer to understand how everything works."

One day last October, FMCG conducted mystery shops at 15 branches of one bank with the goal of opening an account. The bank was then pushing a new checking account that had identity theft protection features. Trouble was, none of the employees could satisfactorily explain those features.

"They just failed in front of the customer," McCormick said. "The customer is sitting there thinking, ‘Gee, I don’t know if I want to bank with a bank that is so complicated they don’t even know how their own features work.’"

For more on the complications of delivering good customer service on the frontlines, see "Give the Customers What They Want," in the Nov./Dec. 2005 issue of Banking Strategies.

November 23, 2005 at 10:56 AM in Financial Services | Permalink | TrackBack (12) | Top of page | Blog Home

Give The Customers What They Want (and in most cases, it's not a relationship)

BAI Online | Banking Strategies | November/December 2005 | RETAIL DELIVERY SPECIAL REPORT Part II

BY PAUL MCADAM

BAI's The Frontline Experience consumer research calls for a rethinking of the one-size-fits-all approach to relationship-building; some customer segments will be receptive, others won't. And all involved — consumers, management and employees — say the frontline needs help.

| SYNOPSIS | BAI's The Frontline Experience research reveals that 70% of consumers are not receptive to the notion of having a relationship with their primary banking institution. The fundamental strategic question exposed: How can a retail bank simultaneously align its resources to adequately serve customers who want a relationship versus the more utilitarian set of customers who simply want convenience, products and service? Five distinct customer segments are identified.

“Relationship banking” is the bedrock of most financial institutions’ retail strategy these days. The proposition that banks should strengthen their relationships with customers by selling them more products and services, thereby increasing the loyalty and profitability of those customers, seems obvious. Why wouldn’t an institution want to do that? What else would or should be done?

Consider, though, that only 31% of retail banking consumers say they are highly receptive to the idea of developing a relationship with their bank. This is a key finding of BAI ’s The Frontline Experience research project, which is based on a national consumer survey AboutThe Frontline Experience. The study further found that perceptions of inefficient, unfriendly and poorly trained branch staff are key drivers of dissatisfaction and even mistrust, in some cases, among the 69% of consumers that are either indifferent or highly skeptical of the notion of developing a relationship with a bank.

This research builds on the findings of BAI’ s 2004 research survey of 520 senior retail banking executives, which revealed that 90% of U.S. retail banking institutions emphasize relationship banking or service quality as their primary value proposition. The 2004 The Frontline Factor identified a gap between the expectations of senior management and the ability of their front-line employees to effectively deliver.

In representing the views of 3,748 consumers, our 2005 work provides added insight on the difficulty banks have had in implementing relationship banking strategies. The Frontline Experience reveals yet another gap between strategy and execution. The majority of the general public does not have a positive view of the customer frontline experience at banking institutions.

For their part, frontline employees also are frustrated. Our analysis of employee attitude surveys Frontline Employees Say They’re Not Prepared revealed that over 25% of frontline branch staff are dissatisfied with key components of their employers’ sales process, training, goal-setting, staffing and compensation programs — key programs that are intended to equip them to enhance customer relationships. When this finding is combined with the other facets of The Frontline Experience research project, the ramifications are troubling.

While this research doesn’t demonstrate that relationship banking itself is a flawed strategy, it does suggest that success will require the overcoming of execution deficiencies, which have to do with bank staff. From the perspectives of customers, the primary deficiencies with banks’ relationship-based approaches are not due to product- or convenience oriented factors, but rather to the quality of interactions with frontline staff. Customers raise issues about whether that staff is knowledgeable and well trained and whether it executes transactions and service requests quickly.

The one-size-fits-all approach to developing relationships will not work, the research makes clear. We recommend that industry executives approach relationship- building initiatives from a customer segment perspective. Alignment of resources being deployed into frontline products, staffing and training with the needs and preferences of at least five distinct customer segments is likely to yield more effective relationship-building results.

How do Customers Define Relationship?

Traditionally, the underpinnings of competition in retail banking have been convenience, product pricing, service quality and the overarching theme of establishing trusted relationships. But as banks have developed national or regional distribution networks, achieving sustained competitive advantage through pricing or convenience has become increasingly difficult.

Attaining long-term differentiation through a value proposition based on sustained price leadership is generally feasible only for banks that possess either massive scale advantages or superior operating efficiency. And given the omnipresent availability of banking services in most major markets, few institutions can rely on convenience as a competitive advantage.

Small wonder, then, that many banks are looking to the softer domains of service quality and relationship-building to differentiate. Once reserved for private banking or high net-worth individuals, relationship-building approaches have now migrated to the mass market, with the promise of delivering deeper customer loyalty and a greater share of the consumer wallet.

But what does the concept of having a “relationship” with a bank really mean to a customer? A dictionary
will typically use the following phrases to define the word “relationship:”

* Connected by common origin, such as marriage or kinship;
* The connections, dealings or associations bringing together persons or groups in personal or business affairs;
* A particular state of affairs among people related to or dealing with one another.

These definitions imply themes of affinity, family connections and of people working together to achieve common goals. Do customers and bankers really have mutually consistent definitions of what constitutes a relationship? Our research suggests not Bankers’ Relationship Expectations Out of Synch With Consumers’'.

Banking executives interviewed for the project tended to refer to customer relationships in terms of bank-oriented benefits, such as “having a multi-product relationship with a customer” or “gaining as much of a customer’s business as possible.” Only a few bankers defined relationship in terms of customer benefits, such as “relationships are all about what’s in the customers’ best interests.”

The research demonstrates that trust and confidence are the foundational elements of a relationship from customers’ perspectives. But these are not abstract concepts. Customers view the concepts of trust and confidence as part of a hierarchy that starts with the bedrock principles of safety, accuracy and professionalism and builds into more complex principles of fairness and authenticity. Ultimately, customers want to have confidence that the bank and its staff are acting in their best interests.

Relationships are built on experiences. Unless customers’ perceptions of trust and confidence are secured in the lower levels of the hierarchy — safety, accuracy and professional interactions during routine transactions — banks will not be granted permission to evolve the relationship into the advisory stage.

This does not suggest that convenience, product features and pricing are not important. Our research found that some major customer segments acknowledge the convenience and product performance provided by their bank. They’re just not interested in forming a relationship with their bank, which is ultimately a process determined by the customer. Bankers cannot make a customer relationship; they can only generate a consistent set of experiences that ultimately guide a portion of customers to this desired state.

The Frontline Experience demonstrates that customers’ perceptions of the quality of the interactions they have with branch staff have a tremendous impact on their overall receptivity to establishing a relationship with the institution. The importance of in-person interactions with branch staff to relationship-building is highly apparent, not only in frequent interactions with tellers for routine transactions, but also in the higher-value interactions that are involved in all of the major stages of a customer’s lifecycle with a bank — shopping prior to a new product purchase, account opening, new customer on boarding, the purchase of additional products and the closing of product relationships.

The ability of frontline staff to provide the five Ps of prompt, positive, polite, perceptive and personal service in routine as well as high-value interactions is essential. But meeting these basic customer expectations will not be sufficient to differentiate a bank from other providers. These interactions must also cultivate trust and confidence, and ultimately involve frontline staff that will take ownership of the customer need or problem.

It’s an enormous task to ask every frontline employee in every branch to not only handle but also to take ownership in every customer interaction in a manner that builds trust, confidence and relationship receptiveness. In fact, it’s impossible. Yet banks must necessarily focus on what is possible. There are steps that can be taken to meaningfully enhance customer service and nurture relationships that will grow.

First, realize that there is a major group of customers that define relationships differently than bankers. Many don’t want a relationship. Second, understand the building blocks of customers’ relationship hierarchies. And third, realize that the progression of customers through that hierarchy will vary. This speaks to the need to understand customer segments Meet the Relationship Segments.

The frontline experience's consumer survey and analysis of the population's attitudes and preferences regarding the establishment of a relationship with a bank found three basic strata of opinion. Thirty-one percent of customers are highly enthusiastic about the idea of developing a relationship with a bank, 29% of consumers are indifferent, and 40% of consumers are highly skeptical of the concept of having a relationship with a bank. Those three strata can be further refined into five distinct segments.

Relationship Enthusiasts

The 31% of customers enthusiastic about establishing a relationship with their bank can be characterized as people who long for the good old days of banking that revolved around branches, interactions with people and a strong bank presence in the local community.

These traditional customers strongly prefer interacting with their bank through people rather than through technology and view their banks as possessing financial expertise. They tend to have personal relationships with branch personnel and like to be recognized when they enter a branch. Overall, they are loyal, very happy with the service they receive from their bank and display a strong tendency to patronize community banks. More than 80% of these customers are extremely satisfied with the experience they have with their primary bank and more than 70% of them are extremely likely to recommend their bank to friends or family members.

Banks have an excellent opportunity to maintain their relevance with this group of customers as long as they allow them continued access to traditional channels in which they feel comfortable. They may need help navigating the new developments in both financial products and technology to identify what is most relevant to their situations.

This 31% of the population can be further subdivided into two segments. We’ve named the first segment, which comprises 22% of the population, Relationship Enthusiasts. These customers are not highly confident in their own ability to make financial decisions and are very receptive to receiving recommendations regarding financial services from their bank or from friends or family members that they trust. They are highly likely to take action based on these recommendations. For Relationship Enthusiasts, banks have fulfilled all five stages of the relationship hierarchy, leaving these customers very receptive to advisory overtures from their bank. In addition, they are willing to consolidate deposit and loan balances with their primary banking providers.

We’ve named the second segment of customers, comprising 9% of the population, Confident Relationship Enthusiasts. These customers possess high confidence in their own ability to make financial decisions. They will definitely listen to recommendations regarding financial services from their bank or from friends or family members, but they are strongly independent and like to make their own decisions on financial matters.

These customers do have strong affinities with their banks and value the interactions and recognition they receive from branch personnel. Banks have an excellent opportunity to expand wallet share with this segment of customers, who are highly likely to recommend their bank to friends or family members.

Relationship Indifference

Our research revealed that 29% of the population is indifferent to the concept of developing a relationship with their bank. We have named this segment of customers Service Seekers. As the name implies, this segment is highly receptive to service-based value propositions. In fact, of the five customer segments that emerged from our research, Service Seekers display the greatest willingness to trade off product pricing and product choice in order to receive higher service quality.

Branches are very important to Service Seekers. These customers want to be treated well when conducting business within branches and they enjoy personal interaction with branch staff. In particular, the interactions that Service Seekers have with tellers are critical to their perceptions of service quality. They also display the highest receptivity to weekend and evening branch operating hours.

But while Service Seekers are attracted to service-based value propositions, they believe that banks are not providing them with the level of service they deserve. As opposed to 80% -plus satisfaction ratings from the two relationship enthusiast segments, only 49% of Service Seekers are extremely satisfied with the banking experience they have with their primary bank and only 51% of them are extremely likely to recommend their bank to friends or family members.

Our research asked consumers to rate the quality of interactions with branch staff across dozens of attributes ranging from routine teller transactions to higher value sales-oriented situations, such as shopping for a new account, account opening and on boarding. As opposed to the relationship enthusiast segments that rated the capabilities of branch staff very highly across the board, the Service Seekers provided branch staff with only average satisfaction ratings. Thus, banks have not been able to transcend the third stage of Service Seekers’ relationship hierarchy and evolve to a point of gaining permission to establish a consultative and advisory-based relationship.

However, Service Seekers are an extremely important group of customers for banks due to their size ( 29% of the population) and financial potential. Service Seekers are the