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Bank Systems & Technology: The Blog

I recently had the opportunity to meet with Clark Abrahams, chief financial architect at SAS, on a trip he took to New York. He has helped me out with some articles in the past and it was nice to put a face to a name.

Clark, who actually wrote a column for BS&T, is working on creating a new framework for the financial services industry around scoring the risk of customers/potential customers in a manner that's a bit more three-dimensional than the tried and true credit score. His progress in convincing the industry to accept this new concept, called the Comprehensive Credit Assessment Framework (CCAF) was the subject of our conversation.

If history were to repeat itself, and it often does in the pattern of behavior regarding bank tech activities, there will be 409 conversions to new core systems in 2008. Not one of them will make the news, because small financial institutions (FIs) are not usually noticed by the news media. On the other hand, if one of the 137 large FIs in the U.S. (over $8 billion in assets) were to convert its entire core system, you'd hear about it even if you were on sabbatical at the island of Tristan da Cunha.

When Fannie Mae and Freddie Mac not just pioneered but mandated the use of automated underwriting in the mid-nineties, some feared the 'black box' making the decisions. Minority advocates, for instance, queried whether models would make middle-class existing homeowners the standard against which they would be found lacking.
No, the agencies insisted, pointing early to improved credit quality and less biased credit decision making from automated agencies.
Now we learn that the government-sponsored enterprises -- long deemed "too big to fail" are essentially getting a cash injection to ensure they don't (access to the Fed's Discount Window). It has to make one wonder how technology did so little to prevent Fannie and Freddie from massive mortgage losses.
We now know loan quality is bad. We know Hispanics, for example, are among the worst hit by foreclosures.
Yet, it's been known since 2003 that foreclosure rates were at then record highs. Though tiny compared with today, five years ago there were signs that subprime loans were witnessing their first test in economic down times and failing.
Where did automated underwriting go wrong? Did corrupt brokers or borrowers commonly falsify information, like claimed income, fed into these systems when everyone was too busy making loans to notice? Or, did the industry keep changing the rules of these rules-based systems so long as everyone was making money? In other words, did technology just served to rationalize a collective insanity?

This weekend, since our contract with Verizon expired, we switched our cell phone plan to AT&T (because my husband made me get an iPhone). Also on the plan are two other family members who just wanted simple phones (I swear, that’s all I wanted too!). So AT&T added them onto our “family plan” and said those two phones would be about $10 a piece after I mailed in the rebate information. Great. So that means I’ll be getting back about $50 or $60 from AT&T, right?

Whoever is writing the marketing announcements that tech vendors are using today, ought to get a makeover to remove the meaningless phrases that are just as bad as comb-overs, brilliant Chicklet-like teeth, and shiny stretched skin that makes the beholder's eyes pop out at you. You know who you are Donald, Kenny and Wayne. Is this what banking is all about today?

Seven days into my new job at BS&T and I have seven new password and log-on combos.
You can imagine how it struck me when security veteran RSA announced a new security token to authenticate customers for online banking that fits in your wallet like a credit card and, the release boasted, can bear the name of each bank issuing such a card. Great! It's not enough that I have two credit cards and one debit from JP Morgan Chase, alone, for example; I can look forward to having to carry additional cards to back up the original plastic online.

The story behind the story of the operational crisis and ongoing reorganization at Citi is one of technology.

In last week's blog, I attempted to alert the "suits" in banking that there are some downsides to the proliferation of the hottest new banking apps in the past two years. Security systems, fraud detection systems, risk management, regulatory compliance measures, dual authentication for online users and anything resembling protection are in vogue whenever bankers get squeezed by the unexpected. But when these systems do their job, they also create a huge workload for bank employees as they are now required to test all possible suspects. In other words, for every good technology there's a "gotcha" somewhere that no one anticipated. The CIO is claiming victory, but the head of operations is cursing.

By Mike Fenton, Parascript, LLC

Since the establishment of the first ATM networks in the early 1970s, ATMs have become an essential component of consumer banking technology that continues to evolve. Customers have come to rely on them for convenience and ease in accessing their financial institution and making transactions without the need for a human interface or bank teller. This type of service answers the demands of our fast-paced society and may seem unconditionally attractive. However, security is a big concern for both banks and consumers and is one of the reasons limiting ATM usage.

Bank of America announced last week it is cutting 7,500 employees. Unfortunately, it's not because of improved technology—it's because of Countrywide. The best employee-reducer in banking is acquisitions. I'm sorry to report the bad news, but today's technologies are going to make bankers at the top work harder and overworked bankers at the bottom will be welcoming additional coworkers. Before you take that double-shot of Jose Cuervo, hear me out.

By Alan Tenenbaum, Cohen Pontani Lieberman & Pavane, LLP

Over the past few years, we've seen an enormous amount of patent litigation against companies in the financial industry. The patents at issue in these litigations primarily concern business methods, covering such things as financial email alerts, systems for trading treasuries and other securities, Check21 technology, pre-paid gift cards, and online credit applications, to name a few. The trend is continuing, with recent infringement suits brought by Edge Specialists LLC for patents that concern systems for automated options trading, and by Lincoln National Life Insurance Co. for patents that concern computerized methods for administering annuity products.

When vendors tell Wall Street not to expect much in 2008, you know we're in a leveling off period.

Here's my take on the subject.

Sometimes I like to post stories about my personal experiences with banking technology. I think what happened to me the other day with my debit card fits the bill.

It wasn't too long ago that I wrote a blog about a new mobile financial services standards working group that was being established by the Financial Services Technology Consortium (FSTC). The group hopes to address the interoperability issues facing the industry to help adoption rates. Now, over the Atlantic in Finland, the Mobey Forum, a nonprofit financial industry forum that helps facilitate mobile financial services for banks, issued a whitepaper which, it says, lays the groundwork for global mobile financial services (MFS).

By Randy Rodriguez, Bluewolf

One word summarizes today’s banking climate: volatile. Bank CEOs are focused on capital markets, fall-out from the subprime debacle, and the pace of merger and acquisition. FDIC’s last Quarterly Report for 2007 points out the realities facing today’s banking leaders. With banking quarterly income at the lowest levels in 16 years, eroding margins, earnings volatility, non-current loans rising and one in four banks losing money, IT managers will continue to face enormous challenges in 2008.

There's a bit of an uptick in the marketplace right now regarding core conversions among banks of all sizes, even the giants. But be aware that this is the kind of stuff that arrives at the Gillis Gossip Gateway. It's mostly hearsay, whereas I deal in proof as supported by numbers. In 2007, the churn rate for core conversions among the 16,881 financial institutions was only 2.7 percent. It's been dropping every year for at least the past six years. So the accurate realization will arrive this time next year when the numbers roll in for 2008.

I'm not complaining about the large number of daily news items I receive from Google, because I asked for them—intelligently I might add, according to a few key words. So when I read about a report last week of IT glitches that blocked New Zealanders from using their banks' services, I wondered if those banks were using FNIS, Fiserv or Metavante. Nah.

I've been pretty skeptical about the use of Web 2.0 tools in the financial services space. I just can't see how banks can broadly implement things like wikis, blogs and podcasts throughout their practice just to cater to a particular demographic—Gen Y. Nor can I see why they would want to embark on such a project beyond simple curiosity.

It looks like the mobile channel just found a standards champion—the Financial Services Technology Consortium (FSTC). The organization announced it is assembling a team of industry experts to help develop best practices and standards for mobile payments.

By Anand Swaminathan and Andrew Kappy, Accenture

Medium-sized banks find themselves in an increasingly desperate situation. They are losing significant market share to their larger competitors without the scale or funds to weather the weak economy, diversify their business or acquire others as a competitive strategy.

Throw vendor brochures into the recycle bin before you read them, and don't waste your time attending a vendor dog and pony show. If you want to know which vendor you should be entrusting the future of your bank with, go talk to them. Following is an excerpt of a chapter in my report.

My experience with EDS goes back to 1962, not because it was day one for EDS, but instead, to tell you how bad I am at predicting success stories. What I'm good at is predicting failures.

By John Cronin and Rachael Schwartz, ipCapital Group

Recent patent-related stories in the news suggest to the inexpert public a disturbing trend that some lucky inventor comes up with a simple concept, receives a valuable patent from a broken patent office and then easily earns hundreds of millions of dollars in licensing fees from industry leaders who cannot afford not to use the new technology themselves. From these stories, the public may start to recognize patents as a threat to industry, as they may force companies hoping to compete to license technologies at exorbitant costs. However, once one investigates the patents more deeply, it is clear that they do not threaten to shut down industries or disrupt the U.S. patent system.

On Monday at the NACHA Payments 2008 conference, I attended a session on decoupled debit aptly named "Decoupled Debit: Threat or Opportunity?" During the session, HSBC's Daniel Eckert, SVP, payments products, and Mike Grossman, CEO of Tempo, an alternative payments company, spoke to a packed room about what exactly decoupled debit is and what it means for banks.

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