For technology, the world of banking can be likened to a major movie production in which scores of actors clamor for only a few coveted spots. There are, however, scattered among the extras, a few stars waiting for someone with a careful eye to recognize their potential.
In the technology-heavy productions orchestrated by banks, these potential stars are overlooked change agents, often described as disruptive technologies. They are defined as new products, services or business models that initially target small, often unprofitable customer segments, but eventually evolve to take over the marketplace, according to Clayton Christiansen, founder of Boston-based consultancy Innosight.
For bankers, change is never easy. "Banks tend to be interested in new technologies early, but they tend to embrace new technologies too late," says Steve Wunker, a partner with Innosight. Yet banks should be commended for ushering in the future, he adds. "Historically, there have been a lot of disruptive technologies in banking -- from payment systems to ATMs to the Web," continues Wunker. "But in the present day, we haven't seen major new disruptive technologies pushedmore like disruptive business models."
So what will be some of these transformative technologies in 2006 and beyond? Experts in a variety of areas gave BS&T their take on what may be some of the most pivotal disruptions to the banking industry.
Swipeless/contactless payment cards operating with radio frequency identification (RFID) technology received much attention in 2005. The idea behind these cards is to wean consumers off cash for low-value transactions while giving them a convenient means to pay merchants. But will such a cash alternative take a bite out of banks' ATM networks?
"Contactless is about cash displacement and throughput," says Jim van Dyke, founder and principal analyst at Pleasanton, Calif.-based Javelin Strategy & Research. "Will [these cards] displace ATMs? Maybe you'll see some erosion, but [rather] the ATM model has to change."
"If you think of ATMs as cash dispensers," maybe contactless poses a threat, adds Nina Owens, global solutions leader, payments strategy, with MasterCard (Purchase, N.Y.). "But that's not the best way to look at ATMsyou should see them as a way to provide value-added services." Swipeless, Owens says, could in fact enhance the ATM, offering further convenience to consumers.
Paul Race, director of innovative marketing with Dayton, Ohio-based NCR, sees opportunity in contactless. "[Contactless] is one of these disruptive technologies that will change consumer behavior," he says. For example, "For ATMs, it can offer more simplistic technology" for accessing money, Race offers. Or banks can go a step further and eliminate cards, replacing their functionality with RFID-enabled mobile phones, he suggests.
Payroll cardsplastic substitutes for costly paycheckshave existed for a while, though banks have not exactly embraced them, according to Cynthia von Hollen, banking industry principal, SAP (West Chester, Pa.). In spite of any perceived danger of disintermediation, in which users find they no longer need to maintain bank relationships, insiders say payroll cards actually can provide banks with a terrific opportunity for growth.
Large banks have been in the payroll card space for years, explains Katy Jacob, senior analyst with Chicago-based Center for Financial Services Innovation. They know it is a good value-add for commercial customers, she asserts.
"[Banks'] corporate customers will eventually force banks to offer payroll card services," SAP's von Hollen says. "Any way banks can offer new products to their corporate customers is going to solidify those relationships, expanding the financial supply chain a bit further."
But a good payroll card program also looks beyond the employer, says the Center for Financial Services Innovation's Jacob. Since some employees do not maintain bank accounts, payroll cards open the door for banks that want to reach this unbanked market. "None of these cards can exist without financial institutions," Jacob relates. "Prepaid cards change the way banks look at customers. It's a way to get into new spaces and sell customers higher-margin products in the future."
Although phishing has been the target of banks' security efforts for some time, Brad Johnson, VP of consulting with Sudbury, Mass.-based security consultancy SystemExperts, says the increasing use of e-mail by consumers provides an almost endless pool of new victims for phishers. "It is a problem that reinvents itself because new users gain essentially no useful experience from previous exploits," he explains.
Javelin's van Dyke acknowledges that phishing is a problem, but he believes the industry's reaction is off the mark. "[Phishing] attempts are very common," he says. "But the actual number of losses from it are low$337 million annually in the U.S. [compared to the $52.6 billion overall cost of fraud]. We should take it seriously, but must understand that a high number of attempts doesn't mean they're successful."
Van Dyke stresses that other forms of fraud are more serious. "To fight traditional fraud, banks have to really partner with their account holders," van Dyke says. And that potentially can revolutionize the way banks and consumers relate to each other. "Half of all identity fraud is detected by the account holder first, and the bank's fraud experts have proprietary information that customers don't. They need each other. But banks aren't making this a high priority."
And new threats loom on the horizon. The trend toward implementing service-oriented architecture (SOA) presents CIOs with a particular dilemma. According to Richard Mackey Jr., principal, SystemExperts, the problem of internal network attacks will increase with the growth of SOAs. The open relationships between applications inherent in SOA "run counter to specifying exactly who interacts with whom and exactly to what extent," he states. "General purpose functionality will not support the security requirements of more-sensitive applications."
No discussion about security technologies would be complete without mentioning biometrics. But biometric solutions' effectiveness is debatable. Javelin's van Dyke, for one, is not too enthusiastic about the technology. "[Biometrics] have value for identification," he says. However, "They're not the silver bullet for authentication."
Jon Gossels, president of SystemExperts, asserts that the technology will not gain acceptance until "standardized readers are integrated into common office or home devices such as keyboards." He adds, "At that point, a different challenge comes to the fore: How does one securely store the biometric data?"
ATM giants NCR and Canton, Ohio-based Diebold have been dabbling with biometrics for some time. Yet, despite successful installments of biometric-enabled ATMs in Latin America, neither company has seen a major international bank hop on board. It is a matter of social acceptance of the technology, according to NCR's Race. It is common for some developing countries to keep fingerprints of citizens on file, he explains, while privacy-conscious Americans and Western Europeans resist the notion.
"We're mostly seeing interest in biometrics in emerging markets," adds Mark Grossi, NCR's CTO. "Although U.S. and European banks are interested, they tend to have too much legacy in place; however, we are seeing some applications of biometrics internally for vault access."
All agree biometrics do have a good deal of value for security; however, not everyone agrees it will transform banking. "'Transform' might be too strong a word," says Jim Block, director of global advanced technology with Diebold. "It won't transform banks, but it will allow banks and their customers to step up to a higher level of comfort in transactions."
E-learningtraining delivered by electronic meanshas long been espoused as a way for companies to save money. Broadcasting a course over the Web is far cheaper than organizing a live class for dozens of employees; however, the methodology can yield benefits beyond cost savings. "E-learning is going to transform the way in which banks work with their employees, the way they think about product launches and the way they launch new technologies," says Tom Kraack, managing partner for learning and workforce practice in Accenture's financial services group.
Banks' uptake in e-learning has been spotty, according to Kraack. But adoption will pick up for several reasons, he says, including banks' highly dispersed workforces; better compliance, since e-learning enables the development of more-standardized training processes; and globalization. Furthermore, the results of e-learning now can be measured to a greater extent.
"Now, there's a melding of different technologies called agent performance optimization where you monitor agent performance to preset goals," explains George Tubin, a senior analyst with Needham, Mass.-based TowerGroup. "With these new tools you can measure the results afterward by following each person's progress to more easily gauge the effectiveness of your e-training."
But both Kraack and Tubin agree that e-learning should not supplant classroom training. Rather, they see it as a supplement to the classroom.
Many banks got burned during the initial CRM craze. But today, the technology is there to enable banks to achieve that long-sought 360-degree view of customersand the cultural focus has caught up with the tools.
Alex Berson, director of McClean, Va.-based BearingPoint and leader of the firm's customer identity management practice, says customer data integration (CDI) enables banks to understand patrons more than ever. "CDI is the next level of integrating all the information on your customersall their relationships," Berson says. This not only includes customer data from within the bank, but publicly available demographic data on individuals obtained from third parties. Banks are aware of the privacy implications of engaging in this practice, he explains, but, "This is the way financial institutions have to go."
Once these building blocks of customer data are in place, banks are ready to cross-sell. But is cross-selling enough? According to Mike Blum, president of the financial services division of Amdocs (Chesterfield, Mo.), the next logical step in the customer relationship-building process is in offering them bundles of products at a discounted price. This is the retail model for which banks should strive, and it will drastically change the face of banking, he contends. "Banks have finally figured out they are retail organizations and have to sell more products to customers," Blum relates. "They need to be able to do dynamic pricing and sell a bundle of products to customers, not individual products. You establish a long-term relationship with customers when you do thist's a stickiness strategy."
According to Blum, "Most CRM systems are focused more on customer interactions, not cross-selling. The banks with customized integrated products at the point of sale will increase customer retention and satisfaction."
According to Tony Kleckner, director and practice leader for financial services with New York-based communications technology provider Avaya, banking lags behind even the insurance industry when it comes to mobile technology. "Banking is relatively behind in this area," he relates. "Insurance is under pressure to cut costs and is more willing to try radical approaches to do this."
But banks definitely are interested in the technology, asserts Cisco's Jim Bright, U.S. financial services industry marketing manager. Unfortunately, "They're holding back because there are still some security concerns that aren't well-founded when it comes to the technology," he says.
Experts agree that the possibilities for enabling a flexible, mobile workforce will explode over the next year as connection speeds and signal penetration improve. Increased productivity and customer satisfaction are the payoffs of a good wireless strategy for the savvy bank.
"Mobility converts to increased productivity and customer service," explains Bright. "Branch employees can use mobile tablet PCs to assist customers while they're standing in line. There will be connectivity to self-service information kiosks. You can connect customers with a product specialist who is not even located at the same physical location."
According to Avaya's Kleckner, this customer advocacy is the ultimate in service. "Having a technology infrastructure where you can quickly pull in a representative in the organization who can fix a customer's problem even if he's not in the same room is where this is going," he explains.
As far-fetched as it might sound, the benefits of nanotechnologythe manipulation of atoms and molecules to make entirely new systemsshould not be overlooked by bankers, according to Jack Uldrich, president of Nanoveritas Group, a Minneapolis consultancy. One application in finance that is being examined is incorporating nanomaterial into currency to prevent counterfeiting and assist with authentication. "You can develop material that's really small that can identify physical currency and a host of other documents," Uldrich relates.
But the real promise for nanotech in banking is in the smaller, more powerful computing and storage devices it will enable. Nanoscale is the next logical step in computing, and computers will become so fast because of nanomaterials that banks will be able to mitigate risk and perform other functions at much greater speeds, Uldrich asserts.
Data storage is improving as well. When the technology is nano-enabled, it will allow banks to further squeeze efficiencies out of operations, Uldrich adds. "Much of what's on paper will be digitally stored at a fraction of the cost," he says.
Though nanotechnology is in its infancy, Diebold's Block agrees it holds much promise for banking, such as lighter, stronger materials for housing ATMs. "Carbon nanotubes have good electronic and insulating properties too, so they can be looked at as a power source within ATMs," he says.