IBM / BBA report on future of banking

[Amethyst]

2nd Feb http://www.bba.org.uk/content/1/c6/0.../IBM192_06.pdf

Restoring loyalty, trust and industry profitability
The role of smarter banking

Intelligent
The final aspect of smarter banking to consider is that of
‘intelligence’ – how can we embed greater intelligence into
everyday banking transactions?
The current difficulties the banking industry is facing on
overdraft fees provide a unique opportunity to substitute
a controversial source of income (unauthorised overdraft
charges) with more transparent charges for a proactive cash
management service, which could be provided for a small
monthly fee.

The cash management service – perhaps offered as an
alternative to a standard current account – would check
whether customers could avoid being overdrawn on their
current accounts by meeting a payment request from either a
credit card or a savings account. If these sources of funds were
not available, the bank could text the customer (using SMS)
warning them that their account was about to be overdrawn
and what the charges would be.


Smarter pricing?
One of the issues that arose in several of our interviews and discussions with the banking industry and consumer groups was that of charging. Specifically this revolved around whether the arrival of new competitors, the legal and regulatory challenges on overdraft charges, and the debate on personal protection insurance would lead to a more rational and transparent pricing structure for retail banking products. In practice, this would mean the end of ‘free in-credit’ banking and the unbundling of charges in other areas. For example, the cost of mortgages might increase to more realistic levels while the cost of protection insurance might fall. In practice, climbing out of the current pricing swamp will prove difficult. Any individual bank seeking to ‘rebalance’ its charges would face adverse publicity from consumer groups and its competitors, as Halifax’s recent experience has demonstrated. A more likely outcome is that banks will seek to restore profitability by developing a service offering for their target customer groups and pricing it on a bundled basis. Banks could, in parallel, use product or channel pricing to discourage uneconomic behaviour in customer segments they could afford to lose – for example, imposing a monthly charge on ‘low activity’ accounts. “The strategic question facing banks is whether the crosssubsidisation model of pricing, that lies at the heart of the retail banking proposition, is sustainable in the long run, in the light of the customer and public relations resistance
that it provokes.” —Thomas Huertas, Vice Chairman, Committee of European Banking Supervisors7

[Tools]

Re: IBM / BBA report on future of banking

The cash management service – perhaps offered as an
alternative to a standard current account – would check
whether customers could avoid being overdrawn on their
current accounts by meeting a payment request from either a
credit card or a savings account. If these sources of funds were
not available, the bank could text the customer (using SMS)
warning them that their account was about to be overdrawn
and what the charges would be.
This is only one example of the opportunities provided by
embedding business rule engines which capture and automate
human decision-making on top of existing core systems.
Marketing is another. Rather than the current monthly mail
drop of loan and credit card offers, many customers may
prefer an intelligent system which mines their transaction
records across the different products they hold and their
past touch-points with the bank to recommend further
products and services.
Who could offer smarter banking models?
If smarter banking models offer a way of not only addressing
the challenges of customer trust and regulatory concern, but
also of helping rebuild industry profitability, who can we
expect to take the lead in implementing them?
The model might well be attractive to challengers of the
established banks – one of Tesco’s core values, for example, is
‘no-one tries harder for the customer’ – but it would be wrong
to assume that only new entrants can offer smarter banking
services. Over the course of several decades, the established
players have shown a remarkable resilience in adjusting their
business models to changes in society and technology. They
have now achieved a near universal reach (prodded on by
government intervention) in terms of offering banking services
to all. In a new smarter banking world, they effectively have
two options: offering smarter banking models themselves
(potentially to particular customer niches) or supplying some
of the core banking processing which the challengers will need
(the O2 Money offering is, for example, powered by NatWest).
This mirrors the transformation we have already seen in
insurance, where the major players have had to consider
whether they should be manufacturers, distributors or both.

Cash Manager - O2 Money Cash Manager helps you to manage your money wherever you are
Our Cash Manager card helps you budget your spending on the fun things in life, like shopping, or buying tickets for exciting times out. And it's also handy for everyday spending costs like your household shopping.

• Transfer spending money from any bank account on to your card
• Spend it on the things you like the most - almost anywhere that takes Visa
• Keep track of your spending with free real time balance alerts sent to your mobile Find out more
• You can never spend more than what's on your card.
• Exclusively for O2 customers

• Is free to get and use for payment in the UK
• Use our budgeting calculator to work out what you can afford to spend
• Manage your card online
• An annual limit of up to £10,000 as long as we can verify your details
• Use it as another way to top up your Pay & Go mobile

This is exactly what I put to the OFT yesterday and argued that the banks do have the technology in place to only allow you to spend what you have and not go into an overdraft situation. As above, it mentions it is free to get and use, no cross subsidy involved whatsoever, so why cant the banks just do this.......why not? because they generate so much profit from allowing you to go into unauthorised overdraft.

[Amethyst]

Re: IBM / BBA report on future of banking

Instrumented
Many of the ‘instruments’ that we use in transaction banking
today (cash, cheques and cards, for example), while innovative
in their day, are now starting to look both dated and expensive
to service. A number of commentators have argued that ‘digital
money’ should be relatively straightforward to implement,
requiring only an electronic record of a debit and credit.
In reality, the greatest returns will probably come from
instruments that remove our reliance upon cash and cheques.
In fact, new instruments are here already. The UK’s near
realtime money transmission system, Faster Payments (FP),
will speed up electronic payments, while developments in
prepaid and contactless cards – forecast to grow globally at
rates of 20 to 30% per annum – will also offer customers the
opportunity to carry less cash. Both of these developments
have the potential to both enhance the customer experience
(by providing more convenient ways to pay) and to raise
banking industry profitability by lessening the need for
expensive cash and cheque transactions.
The problems lie in rollout and adoption. Contactless cards
will require significant merchant investment, and customer
awareness of FP’s capabilities needs to be improved.15 Pricing
could help. If there were incentives for customers to use more
cost-effective channels, the demise of the cheque (now set for
2018) might be welcomed rather than condemned.