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Emerging Trends in Retail Banking

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    Emerging Trends in Retail Banking Acknowledgement This project was prepared with the kind assistance and support of many individuals both internal and external to the Bank who have contributed directly and indirectly in many ways to the successful completion of this exercise. Special mention has to be made to the following categories of persons. Resource persons: Internal Ms. Nicole Brown – GOTD Mr. Howard Gordon – GOTD Mr. Kyle Lewis – GOTD Mr. Lennox Channer – FCD Mrs. Darcy Parkins – RBD Mr. Garfield Palmer – RBD Mr. Stephen Wyles – FCD External Mrs. Arlene Stephens – FISD, BOJ

    Mr. Roderick Wisdom – IT Manager, Digicel Jamaica Table of Content Aim and objective To improve top line revenue growth by identifying an additional source of fee while reducing the cost of serving the banked, under-banked and unbanked. Emerging Trends in Retail Banking – The Global perspective Customer Customer demographics are shifting, making Generation Y and ethnic groups vitally important. More than 70 million strong , the Generation Y customer segment whose members have not yet reached age 30 is second in numbers only to the 80 million baby boomers.

    Generation Y is positioned to become the wealthiest generation to date, with a collective income that is expected to grow to $3 trillion over the next 10 years ( Brown et. al. , Deloitte Center for Banking Solutions, 2008). In addition, further research conducted by the Deloitte Center for Banking Solutions and Harris interactive reveals that members of Generation Y have individual characteristics that make them a different breed of bank customers, requiring banks to employ different kinds of channel strategies to attract or retain them.

    An important characteristic of Generation Y is practicality. Generation Y demands affordable, accessible banking and are not brand loyal, particularly relating to fees, convenience and online capabilities. Another characteristic of Generation Y consumers is that they view technology as a way of life, an extension of themselves. At the same time, they value direct interaction with people for some types of banking transactions such as answering questions, resolving issues, and opening an account.

    They also like to do their own research before making buying decisions, but they look to family and friends to support their conclusions, a tendency reinforced by their participation in social networking Web sites. These characteristic suggest that Generation Y consumers are well-connected, multi-channel buyers who have high expectations for convenience, information, and service. To attract and retain them, banks must offer channels that are easy to navigate, that provide a consistent customer experience, and integrate seamlessly.

    Indeed this evolution has occurred as a natural ongoing response to increasing complexity and sophistication of changing markets, economies, needs and expectations of customers as well as the technological revolution spurred on by the internet and globalization. Technology New technology is gaining widespread adoption, allowing customer relationship management to become channel independent. Internet banking has received most coverage in the past decade; however, the adoption of new technologies may profoundly influence the distribution of retail banking services.

    One area of impact may be the movement toward greater mobility as mobile phone become more sophisticated and therefore, more capable of handling advanced applications and services. Banking via mobile phones appeals to consumers on multiple fronts. Customer may not know the location of their closest branch or even where their credit or debit cards are but they always have their mobile phones nearby. Mobile phone also serve as an efficient vehicle for making contactless payments or person-to-person transfers, providing greater security protocols and storing in-depth preference information.

    This is efficiently accomplished via an existing device, without the need to load an extra smart card. Various software platforms for mobile phones and other devices will allow consumers to use the Web through their handhelds as easily as they do through their computers. It is anticipated that this will spur rapid demand for mobile-banking services over the next decade. Other technology is poised to affect the distribution of retail banking services. For instance, growing broadband internet penetration and wider use of low-cost, high quality webcam will allow banks to use Web 2. or other collaborative tools to reach customers at their homes offices, in branches and at ATM. This capability is providing banks with fresh alternatives for customer interaction such as video conferencing or co-browsing to support dynamic consultations at convenient locations. One Australian bank has a VoIP (Voice over Internet Protocol) network with enough bandwidth to handle video streams so that remote relationship managers, loan officers and insurance professionals can advise and serve clients at a distance.

    Additionally, the growing use of instant messaging as a business tool, the expanded use of social networking sites, and increasing consumer acceptance of self-service kiosks are likely to influence consumer preferences for banking delivery channels going forward. Three Models for Mobile Payment ¬ Premium SMS based transactional payments Thin involves the consumer sending a payment request via an SMS text message to a short code and a premium charge is applied to their phone bill or their online wallet.

    The merchant involved is informed of the payment success and can then release the paid for goods. Since a trusted delivery address has typically not been given these goods are most frequently digital with the merchant replying using a multimedia messaging service purchased music, ringtones, wallpapers etc. A multimedia messaging service can also deliver barcodes which can then be scanned for confirmation of payment by a merchant. This is used as an electronic ticket for access to cinemas and events or to collect hard goods. Direct Mobile Billing The consumer uses the mobile billing option during checkout at an e-commerce site—such as an online gaming site—to make a payment. After two-factor authentication involving a PIN and One-Time-Password, the consumer’s mobile account is charged for the purchase. It is a true alternative payment that does not require the use of credit/debit cards or pre-registration at an online payment solution such as PayPal, thus bypassing banks and credit card companies altogether.

    This type of mobile payment method, which is extremely prevalent and popular in Asia, provides the following benefits: 1. Security – Two-factor authentication and a risk management engine prevents fraud. 2. Convenience – No pre-registration and no new mobile software is required. 3. Easy – It’s just another option during the checkout process. 4. Fast – Most transactions are completed in less than 10 seconds. 5. Proven – 70% of all digital content purchased online in some parts of Asia uses the Direct Mobile Billing method ¬ Mobile web payments (WAP)

    The consumer uses web pages displayed or additional applications downloaded and installed on the mobile phone to make a payment. It uses WAP (Wireless Application Protocol) as underlying technology and thus inherits all the advantages and disadvantages of WAP. However, using a familiar web payment model gives a number of proven benefits: 1. Follow-on sales where the mobile web payment can lead back to a store or to other goods the consumer may like. These pages have a URL and can be bookmarked making it easy to re-visit or share with friends. 2.

    High customer satisfaction from quick and predictable payments 3. Ease of use from a familiar set of online payment pages The Philippines has been consistently referred to as the texting capital of the world, with an estimated 200 million text messages sent daily in the country. No doubt mobile banking is catching on and it has the potential to extend financial services through virtual accounts to millions of poor people globally. Utilizing mobile phone technology for micro-financing significantly lowers transaction costs, while expanding outreach to rural areas.

    This change is being driven by the falling costs of mobile phones including airtime, by competition and by the ability of electronic banking solutions to offer customers an enhanced range of services at a very low cost. Text-a-Payment in the Philippines builds upon the familiarity and comfort that people around the world have with sending text messages (or SMS) via a mobile phone. Instead of travelling to the bank to make a loan payment, customers can now text their loan payment directly to the bank thus saving both travel time and money.

    This is also beneficial for the bank, since it can increase its outreach to rural areas while reducing its costs. Technology – Products ZOPA – Zone of possible agreement – Launched in 2005 a UK based company providing an online money exchange services, allowing people who have money to lend it to those who wish to borrow, instead of using savings accounts and loan applications at traditional banks. Zopa operates within the UK, Italy and a service is being developed for Japan. Each geographical area operates a slightly different model. http://en. wikipedia. org/wiki/ZOPA [Accessed September 13, 2011].

    It is conceivable that as rates trend downwards customers may look towards this product. Zopa was previously launched in the US however due to the concern that the bad debt rates of new borrowers could potentially rise beyond acceptable levels as the economic situation deteriorated in the US. This would also be a concern in the Jamaican economy. Zopa however continues to thrive in the UK and Italy. Zopa organization is regulated by watchdog, the Financial Services Authority and the Office of Fair Trading www. thisis money. co. uk/money/cardsloans/. [Accessed September 29, 2011].

    Robobank: no human hands needed – A mobile telephone only bank launched only a few months ago by a major Japanese bank. It is a bank with no branches or internet site as such, but everything focused upon self service through the mobile. http://thefinancier. co. uk/fsclub/2009/03/robobank-no-human-hands-needed. html [Accessed September 13, 2011] SEPA – (Single Euro Payments Area) – the European banking industry developed Sepa Credit Transfer (SCT) and Sepa Direct Debit (SDD). In 2009 SDD for first time facilitated cross-border direct debits and this was seen as a significant.

    SmartyPig – is a leader in social banking which helps individuals to save funds for specific goals and allows friends and family to contribute towards it. It is an online high savings interest account and is regarded as best in class. Users choose the savings goal and timeline and Smarty Pig will help them track their progress and give motivation to reach their target. You can withdraw your savings via ACH withdrawal , SmartyPig debit card or you can redeem your savings for discounts of up to 12% of gift cards from major retailers such as Amazon, Travelocity and more. http://cashmoneylife. om/smartpig-review [Accessed September 13, 2011]. Users can authorize SmartyPig to access their FaceBook or Twitter account to post updates to their wall anytime you add funds to your account. This trend may however, not be attractive to NCB at this time given our target market and regulatory environment . In addition there are no fees applicable to the product offering. Managing Finances gets Social Thanks to a combination of demographic trends, technology capabilities and uncertainty in the bankling competitive arena, personal financial management tools—online resources geared toward helping consumers and small business

    Text-a-Payment (TAP) – is an innovative mobile technology product that uses the SMS technology of Globe Telecom to pay for microfinance loan payments of borrowers. It seeks to bring in new and low cost technology tools to improve efficiency and outreach. Small borrowers can utilize the service for payments of their microfinance loans. Regulatory Changes in the regulatory environment are altering the playing field. Many recent regulatory changes were designed to foster innovation and enhance efficiency in the payments system.

    Other regulatory trends have been designed to foster innovation and enhance efficiency in payments systems. These include: •        Increased customer goodwill policies – This has been a significant trend in European retail banking and US retail insurance and investment businesses. Stipulation associated with increased customer goodwill often include more transparency on pricing and fees; stricter requirements to supply consumers with real-time information so they can make better informed choices; and the ability to produce an audit trail that demonstrates that the bank acted in the customer’s best interest.         Implementation of Basel 11 in the United States- Although this focuses primarily on capital adequacy, this development will likely lead to differential in pricing by product and channels as a result of explicit strategies to attract certain segments of customers. The infrastructure created by banks to comply with Basel 11 will provide retail banks with enriched insights into their books of business and customer behavior •        Enhanced security and privacy regulations: More stringent requirements in these areas will make it more costly and complicated to share information about a customer across legal entities.

    In the Philippines BSP (Central Bank) is responsible for approving all banks offering electronic banking application. In compliance with the Anti-Money Laundering Act (AMLA), BSP has set transaction limits and “Know Your Client” procedures. BSP has the Core Information Technology Supervisroy Unit (CITSU) to regulate and monitor all aspects of electronic banking. Bank Fees Increased customer awareness and scrutiny of the banking business by the regulators have posed various challenges to banks levying fees and is a trend that is unlikely to ease in the near future ( Landry, 2010).

    The situation is similar in Jamaica as customers demand lower transaction fees. There is also an emergence of online banks with significantly lower operating expenses which allow for more attractive terms including little of no fees and this has been eroding the volume of business conducted by the brick and mortar big banks. Johnson ( 2010) refers to this as “online banks stealing customers from big banks. ” Take for example, PerkStreet Financial saw twice as many new customers sign up Friday, days after Bank of America announced recently they would charge $5 for using debit cards. Banks such as PerkStreet often have far better terms than traditional banks, for example PerkStreet only requires a $25 minimum deposit and their debit card not only doesn’t cost anything, they provide perks such as free coffee, music and even cash (2% back) when users earn points from their debit card use. Other online institutions offer higher variable interest rates on accounts because their cost of operation is less than traditional brick and mortar banks which pay maintenance fees on their buildings while staffing a large employee base to operate their various locations.

    If nothing else the online banking system slowly proving that big banks crying about overdraft protection and debit card swipe fee laws simply don’t know how to create a profitable business structure in the age of digital banking. There are of course some issues with online banks, such as the inability to easily deal with paper checks and customer service related issues as more customers continue to join the online banking sector as those online banks are rushing to add more employees to their call centers.

    Do you think online banking will continue to grow as large banks alienate customers with an ever increasing number of banking fees. Attention turns to P2P Payments Major players including S1 and FIS have teamed with PayPal to offer banks mobile or online P2P solutions. Meanwhile Fiserv has started to offer a new P2P personal payments service to the 3,000 –plus financial institutions in its online payment network. In many ways the personal payments space is the last bastion of the personal cheque, but perhaps with these new developments, that will finally start to change.

    Outsourcing closer to home Fed up with your current big banks new debit card and other monthly fees? Perhaps now would be a good time to try out online banking. The Local Perspective Regulatory FISD – Financial Institutions Supervisory Department – Bank of Jamaica – Arlene Stephens – Director 1. Currently preparing a discussions paper to be issued to all of the financial Industry by the end of September 2011 2. This will invite the institutions to provide feedback on the document 3. This is to establish a legal & regulatory framework to carry out this functionality 4.

    BOJ has ascertained that mobile payment mechanism because it holds value, therefore it is a deposit taking activity so whoever issues that product would have to be regulated. 5. It is proposed to keep it within the banking environment but consideration would be also given to licensing other institution. 6. Mobile financial services are a means of delivering financial solutions to the unbanked. Consideration has to be given to how we will get around the KYC documentation and how they can be facilitated without breaching National & International regulations 7.

    Interoperability – viz how various networks can be connected to the different banks in similar fashion to JETS. The Digicel Story Of the approximately 2. 7 million population in Jamaica, Digicel Jamaica has 2 million customers, representing a 75% market share. Additionally, scores of small entrepreneurs owe their successes to a reliance on their Digicel phones, especially in areas where there were no previous mobile signals by the competition. Access to mobile phones and coverage is therefore not a challenge in Jamaica. References Armour, S. 2005) Generation Y: ‘They’ve arrived at work with a new attitude”, USA, Money Today [ Online]. Available from : http://www. usatoday. com/money/workplace/2005-11-06-gen-y_x. htm ( Accessed October 11,2011). Auto Banking basics Avia Collander http://mobile. jamaicagleaner. com/gleaner/20110508/business/business7. php [ Accessed September 21, 2011] Catching the technology Wave: Mobile Phone Banking and Text-a-Payemnt in the Phillipines http://www. ruralfinancing. org/fileadmin/template/rflc/documents/1146217136444_phillipines_mobile_phone_banking. df [ Accessed September 27, 2011] Deliotte Center of Banking Solution ????????????????????? First Caribbean revolutionizes mobile banking once more with bill and third party payment in Barbados – http://www. firstcarribbean. com Johnson, J. , (2010) ‘Online banks Stealing Customers from Big Banks’, Business Author [ Online]. Available from : http://www. inquisitr. com/149497/online-banks-stealing-customers-from-big-banks-study/ ( Accessed 10 October 2011). Kotler, P. & Keller, K. L. (2009) Managing the Environment, 13th ed. University of Liverpool & Laureate Online Education.

    London: Pearson Prentice Hall. Mobile Payment Magazine (2010) “ Direct Mobile Billing”, [Online]. Available from http://mobilepaymentmagazine. com/direct-mobile-billing Mobile Payment Magazine (2010) “ Mobile Web Payments”, [Online]. Available from : http://mobilepaymentmagazine. com/mobile-web-payments-wap. Pires, D. G. , Stanton, J. & Rita, P. (2006) The Internet, consumer empowerment and marketing strategies, European Journal of Marketing, 40 (9/10), pp. 936–949, Emerald [Online]. Available from:http://www. emeraldinsight. com. ezproxy. liv. ac. uk/journals. tm? issn=0309-0566&volume=40&issue=9/10&articleid=1572765&show=pdf (Accessed: 23 April 2011) Reinventing Retail Banking – Deloitte Center for banking Solution http://www. deloitte. com/assets/Dcom-UnitedStates/Loc [Accessed September 8, 2011] Robobank http://thefinancier. co. uk/fsclub/2009/03/robobank-no-human-hands-needed. html Smartypig http://cashmoneylife. com/smartpig-review [Accessed September 13, 2011] The Digicel Story http://www. jamaicatradeandinvest. org/index. php? action=investment&id=37&oppage=5&opid=3 [Accessed September 21, 2011]

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