By Lee Wetherington
Want to understand the biggest trend in technology today? Look no further than your cell phone. It’s that single, ultra-portable device that has converged in a mind-bending multitude of features and functions – digital photography, video capture, Internet access, e-mail, television, movies, music, shopping and GPS navigation … to name just a few.
Not so long ago, watching television required a TV, receiving e-mail a PC and listening to music a CD player. Now, of course, you need only a cell phone (“smart phone,” if you’re hip) thanks to technology and the convergence of everything.
And banking is not immune to the convergence trend. Perhaps more than any other industry this year, banking is undergoing radical transformation at the hands of convergence. Nowhere is this transformation more conspicuous than within, among and across banks’ payments franchises.
Remember when checks, ACH, credit cards and debit cards settled separately within their own networks? No more. Today, a check payment may mutate into an electronic ACH debit, an image file or, ironically, a duplicate paper substitute check. A card transaction may never travel across the Visa/MasterCard networks or even a local ATM switch, e.g. some merchant-issued debit cards produce ACH transactions only.
The point? In a race to develop the fastest, cheapest, safest and most reliable ways to move money, our payments franchises are combining and cross-breeding to create hybrids that are not only better for the payer and the payee but, by being better, are altering payments behavior and shifting the deposits at both ends of the transaction. Case in point: remote deposit (aka merchant capture).
Remote Deposit Revolution
Thanks to the convergence of checks, images and ACH, geography no longer dictates deposit relationships. Businesses no longer have to bring physical checks into the bank branch for deposit. Rather, they can scan and submit those check items electronically and remotely from anywhere.
What does “community banking” mean when the community’s geography no longer defines, limits or protects a bank’s market or, more specifically, the bank’s deposits within that market? According to Celent, remote deposit is the most quickly adopted service in the history of banking. Over 4,000 financial institutions have implemented it already and this number will double by the end of 2008. During that time, over $1 billion in commercial deposits will migrate from banks that do not offer the service to banks that do. In short, we are in the middle of a remote deposit revolution.
From a technology standpoint, remote deposit is not just about the convergence of checks and images. Remote deposit is still evolving and is far from being a commoditized service that all banks offer in much the same way. Consider the following:
Last September, a new ACH rule provided an automated way for check scanners to distinguish business from consumer checks based on the Magnetic Ink Character Recognition line, paving the way for a second generation of remote deposit services that offer “least-cost routing” of items via either Check 21 image or ACH eCheck.
In March, NACHA, the national ACH association, launched a new payment type called Back Office Conversion (BOC) that will allow businesses to convert consumer checks to ACH debits in the back office. NACHA projects BOC conversion of 3 billion consumer checks annually by 2010 and this payment type will figure prominently in second-generation remote deposit services.
The bottom line is this: Banks that leverage both Check 21 and ACH in their remote deposit services will be much better positioned (to capitalize on deposit migration over the next 12 months) than those banks that rely solely on one or the other or, by default, deploy whatever flavor of remote deposit their core vendors offer.
According to a recent Bank Administration Institute survey, more than half of business owners will switch banks for better payment services. Even more surprising, smaller businesses – not larger ones – are more likely to switch banks. Therefore, the stakes are high. Be sure your remote deposit service is a hybrid, one that offers the best of both your Check 21 and ACH franchises. Otherwise, your bank might find its remote deposit service at a significant cost or capability disadvantage. Don’t be a casualty of convergence.
Convergence isn’t only about functionality; it’s also about speed. Consider the following:
This year is the 41st anniversary of Moore’s Law. In short, the processing capacity of the average computer chip is still doubling every 18 months.
Access to raw processing power amplifies with every other PC or device to which you are connected – via local networks, wide areas networks or public networks like the Internet. This is called “grid computing” or “distributed computing.”
Today, you don’t have to have a physical connection with a device to share its resources. Your PC can connect with other PCs and devices wirelessly. The new 802.11n standard for wireless networking offers up to twice the range and five times the speed of its predecessor. Therefore, connections today are not only often wireless; they are, by and large, very fast.
Today, for the very first time, more than 80 percent of all online users in the United States enjoy broadband access to the Internet. This simple fact has made online banking the fastest-growing Internet activity. Why? Remember attempting to navigate SSL-encrypted Internet banking pages through your old dial-up connection? DSL has made the pain go away.
Broadband access has not only turbo-charged online banking generally; it has ushered in the first real significant growth in online billpay. This year, for the first time, Internet households are paying more of their bills electronically than with paper and over three-quarters of all households with annual incomes greater than $75,000 pay bills online. The old axiom still holds true. Online billpayers are generally your bank’s most profitable customers … and now, there are more of them!
Because of this, bank Web sites have never been more important. Some banks are now experiencing real recurring traffic on their Web sites. This is good for your bank, as long as your Web site is easy to find, use and navigate. If your Web site falls short on any of these counts, it will not only be a disappointment; it will actively drive customers away from your bank. If navigation isn’t standardized, refresh rates are too slow or transactions too sluggish, your Web site won’t satisfy the average online customer’s expectation of instant gratification. In today’s online world, we all have the need for speed!
And there’s one more reason to get your Web site right: If you offer online banking, you already offer mobile banking! That’s right. Any customer who carries an iPhone has full and fast access to your online banking functionality on that mobile device. The iPhone offers 2.5G (i.e. pretty fast) Internet access via AT&T’s Edge Network and almost 3G (i.e. DSL speed) access via local wireless network connections. Moreover, this is access to the full Internet in full color, with the ability to spread and pinch Web site copy with your fingers to make Web site text easy to read.
The bottom line? Right now, whether you officially offer “mobile banking” or not, your customers can check account balances, transfer funds, and pay bills on their iPhones and other PDA devices. In other words, if you don’t get your online banking right, you have also botched your mobile banking play.
Usability and Security
Technology and convergence go hand in hand, as technology is all about convenience and convenience is all about getting your stuff in one place for quick, easy, immediate access. The upside of convergence is obvious: anything, anywhere, anytime. The challenges, however, often aren’t as apparent, at least not until the novelty of your new gadget or technology begins to fade. The challenges of convergence generally fall into one of two categories: usability and security.
Back to your cell phone. You like having your entire life on one device that you can carry everywhere. But can you find precisely what you need or do exactly what you must quickly on that device without thumbing awkwardly through miniscule keyboards and endless submenus full of stuff not relevant to the task at hand?
Granted, the iPhone has improved mobile usability considerably, but it and other PDAs are far from perfect. Have you ever typed a long e-mail on your BlackBerry? Not pleasant, right? And the only thing worse than using your BlackBerry is losing your BlackBerry. Why? Because every conceivable piece of information vital to your day-to-day existence has converged upon it: your contacts, your e-mail, your music, your life! And hang on. Your cell phone will soon don a new feature: wave-n-go payments at the point of sale! Very cool … and very painful if you lose your cell phone!
If technology helps you put all of your eggs in one basket (for the sake of convenience), then that basket becomes more attractive to thieves of every ilk. Convergence raises the stakes and security must step up to protect what has been converged.
In banking, we’re experiencing unprecedented ID theft and other forms of fraud. Over the past two years, more than 100 million records of non-public personal consumer information have been lost, stolen or compromised. Hackers, well aware of banks’ efforts to strengthen authentication per FFIEC Guidance, are increasing the volume, sophistication and automation of their attacks.
The greater risk, however, is that banks become so narrowly focused on minimal compliance with the FFIEC Guidance that they don’t realize stronger authentication won’t fully protect their growing online franchises: online banking, online billpay, mobile banking and remote deposit.
Last July, one of the nation’s largest banks was the first target of a new form of phishing/pharming attack called man-in-the-middle. This type of attack bypassed the bank’s multi-factor authentication. The reality is that, going forward, all banks will have to maintain a layered approach to security, one that includes not only external protections like firewalls and access controls like strong authentication, but transaction-level monitoring for unusual behavior. This final layer will be banks’ last line of defense against new forms of attack, forms that we can’t possibly anticipate.
Speaking of which, you’re at the end of this article. Where’s your cell phone?
Lee Wetherington (firstname.lastname@example.org) is senior vice president with Goldleaf Financial Solutions, a leading provider of payments solutions and Web site design/hosting services for community financial institutions.