FIS strategic insights on trends shaping global digital banking

FIS ENTERPRISE STRATEGY VOLUME 1 • AUGUST 2011

The “Big” Trends in the IN THIS ISSUE

Big, Global and Digital • The “Big” Trends in the

Banking Marketplace “Big, Global and Digital”
Banking Marketplace

By Fred Brothers • Retail Channels
EXECUTIVE VICE PRESIDENT, ENTERPRISE STRATEGY
Never Die

At this spring’s Client Conference and InfoShare • Mobile Banking:
sessions on “Meeting Customers on Their Terms,” Clearing the Runway
I talked about eight trends shaping the future of
banking. The trends are framed within a banking market
that is increasingly big, global and digital. For those of • Economic Insights
you who missed the session or would like to pass along
these ideas to colleagues who couldn’t be there, I’ve
written this article about two of the eight major trends.

In 2008, Thomas Friedman, a New York Times columnist with three Pulitzer Prizes, wrote a great book entitled “Hot, Flat,
and Crowded.” It focuses on the impact that global warming (hot), globalization (flat) and population growth (crowded)
are having throughout the world. After reading the book, I thought about how hot, flat and crowded the banking world
has become — with a few modifications.

We’re competing in a banking market that is:
1. Big: The players competing for consumers’ financial attention, both within the banking industry and from outside it,
are more massive and influential than ever before.
2. Global: We are now a global banking system, and consumers care less about the home location of their services than
the quality of the services they are receiving.
3. Digital: Mobile Internet connections and social media are profoundly affecting the attitudes and expectations of
banking consumers.

In this month’s column, I’m going to talk about the trends behind our newly “big” banking market: the still-growing size
of the biggest financial institutions and the other huge players that are influencing the financial marketplace.

FIS STRATEGIC INSIGHTS • V 1 AUGUST 2011 ©2011 Fidelity National Information Services, Inc. and its subsidiaries.

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We are competing in the land of the giants. U.S. banks have been consolidating for years, but the new shift is the
massive consolidation of deposit share within the largest financial institutions. Twenty years ago, commercial banks with
deposits of $10 billion or more held about one-third of commercial bank deposits in the U.S. Today, banks of that size
hold nearly 75 percent of all deposits. And, due to several high-profile mergers of huge institutions during the recent
financial crisis, four now have more than a trillion dollars in assets each. Banks of this size were unheard of only a few
years ago. These are massive financial institutions, both domestically and globally, with very large presences in retail
FIS ENTERPRISE STRATEGY
banking, commercial banking and capital markets (Figure 1). VOLUME 1 • JULY 2011

Figure 1: Competing in the Land of Giants

The “mega” financial institutions have enormous resources. They will be the market-makers, setting the standards in
our industry, including efficiency ratios, innovation, and online and mobile products. When you include in this equation
the huge Global 100 financial institutions that have purchased mid-sized banks in the U.S., it’s clear that the competitive
landscape has changed enormously in the past few years.

Let’s look at one example of how these “mega” financial institutions define the competitive marketplace. Mobile is
exploding. We all know that. Some of the largest financial institutions launched mobile banking applications early
and aggressively. The result is quite telling. Last February, we completed a primary research project with 4,000 U.S.
consumers. Thirty-seven percent of our survey respondents reported that their primary DDA is with one of the top-10
financial institutions. But, of the consumers who are active mobile banking users, more than half (52 percent) have their
DDA with a top-10 bank. For these largest financial institutions, their share of mobile banking customers is nearly 50
percent more than their share of deposits.

Despite how big and influential the mega banks are, they’re not the only influencers who are setting your customers’
expectations. Let’s look at who else is doing that.

Have you noticed how good Amazon.com is at recommending products and telling you what else people who bought
your item also purchased? I’ve never seen this done in banking. The discount offers from Groupon are relatively
unsophisticated in their targeting, but their offers feel (and are promoted as) personalized. The Walmart® Money Center
looks, feels and acts like a bank branch, but with the store hours of Walmart. These companies are our competitors —
both now and in the future — and they are redefining our customers’ expectations of personalization, availability and
convenience.


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We’re also watching social media sites closely. Some are moving into payments directly, while others are offering services
that are radically changing consumer interactions. Google predicts the search results you need before you’ve finished
typing in the request. Smartphone app stores are providing you with all the content you need — anywhere, anytime —
and suggesting more content you might like, as well. These are the companies shaping the expectations — and setting
the bar — for our customers.

FIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011
Non-traditional providers of financial services have proven they can capture significant market share from financial
institutions. According to the latest reports from these companies, PayPal® has 94 million active accounts. NetSpend®
encompasses 30,000 purchase locations and over 100,000 reload locations. MoneyGram® has 227,000 locations in 190
countries. Walmart® Money Centers process five million transactions each week. Prosper® has one million members and
has funded $223 million in loans. Apple® holds more than 200 million credit card numbers in iTunes® accounts. These
numbers keep growing as non-financial institutions process more and more financial transactions.

Put your customers in the middle of your market landscape. See where they connect and how they interact in their daily
lives. Think about the lessons that could be applied from companies that have built market value because they are
experts at connecting with their customers in unique ways. Success in today’s banking market will depend on meeting
customer expectations that have been set by very big players, most of them unconnected with traditional banking.


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Retail Channels Never Die
By Paul McAdam
SENIOR VICE PRESIDENT, RESEARCH & THOUGHT LEADERSHIP

Consumers want options when it comes to accessing their banking information, adding or
removing account funds, and resolving service issues. When accomplishing these tasks, some
consumers prefer self-service banking, some prefer a more traditional in-person approach and
many actively use all delivery channels. Despite the expansion of self-service banking, consumers’
person-to-person interactions with branch staff and live phone reps remain significant. As certainly
as we can say that self-service banking is the way of the future, it seems we can also say that old
banking channels never die — or at least they don’t die quickly.

These are some of the key findings from recent primary consumer research completed by the FIS™ Enterprise Strategy
team. The implications for financial institutions are significant.

Consumers Want a Multichannel
Experience Figure 1: Majority of Consumers Use Two to Four Banking Channels

When we asked consumers about their
interactions with their primary checking
account provider, we learned that the
majority (61 percent) of consumers use
between two and four channels within a
30-day time period (Figure 1). Nearly a
quarter of consumers (24 percent) reported
using five or more channels. Consumers
have proven that there isn’t a retail banking
channel they don’t like.

Generational differences have a huge impact
on channel usage. When looking at the
consumers reporting use of five or more
channels, 41 percent were Gen Y but only
9 percent were classified as Mature (born
before 1946).

In-person Service Remains Essential
Given the acceleration in self-service banking and electronic payments adoption over the past decade, it’s easy to overstate
the importance of self-service channels while downplaying the importance of the in-person experience. But in reality, a
consumer’s choice of banking channels is situational.


4

Consumers want the flexibility to use whatever
point of contact suits their needs at any given Figure 2: Most Consumers Are Multichannel and Use a Mix of
time. The auto insurance provider Esurance® Self-service and In-person Banking
captures this spirit perfectly in its recently
developed marketing tagline, “People
when you want them, technology when you
FIS ENTERPRISE STRATEGY
don’t.” Our research validates this concept. VOLUME 1 • JULY 2011
Of retail banking consumers, 57 percent are
multichannel, having used both in-person
and self-service channels of their primary
checking account providers within the past
30 days (Figure 2).

Only 20 percent of consumers are completely
self-service customers. These consumers
don’t use any in-person channels — only
online, mobile, ATM and/or automated
telephone banking. This segment is
comprised primarily of younger generations
and self-directed, mass-affluent consumers.

Conversely, 23 percent of consumers
are primarily in-person banking customers. These are consumers who conduct in-person branch or live telephone rep
transactions and reported no use of online or mobile banking channels. Many, but not all, of them are older.

Sixteen years following the launch of Internet banking in the U.S., we are still at a stage in retail banking where the
population of primarily in-person banking consumers is slightly larger than the totally self-service crowd — and the
majority of consumers are truly multichannel.

Multichannel Delivery Dilemma
This situation sets up a strategic dilemma for many financial institutions. Given the host of revenue pressures facing the
industry, it is starting to become prohibitively expensive to simultaneously maintain branch-based and self-service delivery
systems that are equally robust. A balancing act must be achieved. Many financial institutions will be forced to ask their
customers to support all of this multichannel access through one or a combination of the following:

• Paying higher fees
• Bringing the provider greater financial wallet share
• Substantially shifting transactions to self-service channels

Acting on these strategies for improving customer profitability involves addressing a complicated set of considerations in
order to execute them in a way that is perceived positively by customers. All of the strategies require convincing customers
to change well-established behaviors. And, all of them hold a certain degree of risk of alienating customers who are unable
or unwilling to make changes in their banking behavior. In upcoming editions of FIS Strategic Insights, we will discuss the
challenges and opportunities associated with specific strategies for improving customer profitability.


5

Clearing the Runway for
Mobile Banking Adoption

By Mandy Putnam
DIRECTOR, RESEARCH THOUGHT LEADERSHIP

Consumer interest in all things mobile is higher than ever, providing banks an opportunity to
launch mobile banking applications that could potentially generate a great deal of interest.
But is it worth the investment? FIS™ Enterprise Strategy studied the market and conducted
an online survey of 4,000 mobile phone owners in February 2011. Our research indicates that
three things are propelling mobile banking penetration:

1. Better technologies for mobile devices. Recent double-digit growth in smartphone adoption has enabled
consumers to expand the activities they can perform via mobile phone connections — from creating a video and
sharing it (with one special person or with millions of people) to accessing just about any information, including
one’s bank account, anywhere and anyplace.
2. Proliferation of banking apps. Recent estimates place the number of mobile banking apps between 1,400
and 1,6001.
3. Desire to stay connected. Nearly three-quarters (73 percent) of mobile phone owners “agree” or “strongly agree”
that they don’t go anywhere without their mobile phone. How many other things could people cite that they
don’t go anywhere without? Maybe their wallets today, but tomorrow, even wallets could morph into chips
in smartphones.

Who Are the Mobile Bankers?
The number-one predictor of whether someone will engage in mobile banking is if they download a banking app
for their phone (rather than just accessing the bank’s site through their phone browser). Two characteristics of app
downloaders define who is most likely to use mobile banking apps:

1. Generation. Gen Y accounts for 26 percent of mobile phone owners but more than one-half (54 percent)
of banking app users — that’s double the representation. These mostly 20-somethings (the oldest ones are now
31) are beginning to build and feather their nests. They demand quick access to funds wherever they are and
whenever they need them. Access to mobile banking is the cost of entry if you want to do business with Gen Y
(Figure 1).
2. Large-bank patronage. Because large banks have led the way in providing apps to their customers, customers of
the top-10 banks account for nearly six out of 10 banking app users (Figure 2). According to our survey findings,
large banks also have provided their customers with a more satisfying mobile banking experience, which makes
them “stickier” customers.


6

Mobile banking consumers are also marked by
their frequent use of the Internet via mobile phone. Figure 1: Mobile Banking App Usage by Generation
Nearly nine out of 10 mobile banking users
(88 percent) describe their mobile phones’ Internet
capabilities and usage this way: “I have Internet
access on my mobile phone, and I use it frequently.”
So what else, beyond being young, connected and a
big-bank patron, defines mobile banking users? One
important thing that sets them apart is their financial
habits, which are driven by their above-average
mobility and online orientation.

If you think that mobile banking is a substitute for
a physical trip to the bank or ATM, think again.
Mobility increases exposure to places where
financial transactions can be conducted. For mobile
banking users, mobile banking is an additional point
of contact with their financial institution, not
a substitute.

Mobile banking users also are likely to access online
financial services outside of conventional financial
institutions. If you don’t offer a person-to-person
(P2P) payment solution, you are likely losing
business to PayPal: six out of 10 mobile banking
users make P2P payments.
Figure 2: Mobile Bank App Usage by FI Type

Are Mobile Banking Users Worth the
Effort?
The answer to this question is, unequivocally, yes.
When compared against non-mobile banking users
within their generations, mobile banking users have
higher asset balances. The young ones — Gen Y and
Gen X — also have higher credit and loan balances as
a result of their acquisitive life stages.

There is abundant runway ahead for growing a
mobile banking market beyond the early adopters
who compose today’s mobile banking segment. Key
tailwinds include the continued growth in smartphone
and tablet adoption, as well as mobile payment
options on the horizon. Today’s mobile banking users
will become the early adopters of mobile payment —
at least that’s what they told us.


7

There are also headwinds to mobile phone adoption: to ensure mobile app success, financial institutions need to increase:
1) awareness, 2) banking app penetration and 3) appetites for mobile banking among consumers who will become the
“early majority.”

1. Lack of awareness. Currently, 44 percent of mobile phone owners do not know if their financial institution offers
mobile banking. Although no financial institution is going to run a campaign announcing that they don’t offer
FISmobile banking, those 1,400 to 1,600 financial institutions that offer mobile banking apps need to improve their
ENTERPRISE STRATEGY VOLUME 1 • JULY 2011
communications and onboarding processes for new app users.
2. Lack of apps. Again, the number-one predictor of mobile banking usage is downloading a banking app. Increasing
app availability will increase penetration.
3. Lack of appetite. Preferences for online banking via computers and concerns about security also represent
impediments to the diffusion process (Figure 3). One in five (19 percent) non-users report that they simply have not
bothered to try mobile banking yet. Their indifference could be reversed through communication of a clear value
proposition and “sampling incentives.” Those with security concerns (28 percent) will require different messages to
assuage their worries.

Figure 3: Reasons for Not Doing Mobile Banking

This article is derived from the recently-published white paper, “Clearing the Runway for Mobile Banking Adoption.”
1 Interview with Jim Breune, netbanker.com. April 8, 2011.


8

Record Earnings in the Midst
of New Risks and Regulations

By Jim Gamble
DIRECTOR, RESEARCH THOUGHT LEADERSHIP

Corporate earnings have been the brightest spot so far in the U.S. economic recovery. U.S.
corporations have enjoyed strong gains in profits as a result of increased efficiencies and member
companies of the Standard Poor’s 500 index are expected to show record-high earnings in
2011 and 2012 (Figure 1). Bank earnings are recovering, albeit more slowly than in most other
industries. Although new regulations are forcing financial institutions to adapt their business
models, bank earnings are expected to return to their historically high levels by 2015.

While corporate earnings have benefitted
from trimming payrolls, workers have not and Figure 1: Estimated SP 500 Index Earnings
unemployment remains high. We are in a “jobless”
recovery — reminiscent of the recovery after prior
recessions, but more severe this time. Improvement
in the labor market has lagged improvement in
the broader economy, which has led to an overall
modest economic recovery despite bullish
corporate earnings.

In order to stimulate the economy, the Fed lowered
interest rates to an unprecedented level. Until the
economy chalks up sustained improvements in the
jobless rate, the Fed is unlikely to raise interest rates
(Figure 2). Banks will benefit from the wide yield
spread between long-term Treasury bonds and the
Fed funds rate. As long as inflationary pressures
remain mild, this wide yield spread will likely persist
through the remainder of 2011 and into 2012
(Figure 3).


9

Despite recent congressional agreement to raise
the debt ceiling after the contentious debate, lack
of resolution about budget issues has the potential Figure 2: Fed Funds Rate Will Remain Low
to disrupt the current pattern of economic recovery.
Potential cuts in entitlement programs and increases
in taxes remain uncertain. Also uncertain is the
long-term impact on demand from abroad to hold
U.S. debt. These issues could dampen consumer
spending and borrowing as well as business
investment and hiring.

Outlook for Bank Earnings
The improvement in the economy and, in particular,
increased consumer appetite for borrowing and a
sustained wide yield spread produce a favorable
environment for financial institutions to generate
increased earnings on deposit balances. Having
deleveraged themselves during the recession,
consumers will become more confident about
borrowing again as unemployment subsides.

The outlook for bank earnings is based on two
separate methods of forecasting — a “top-down”
macroeconomic model based on a long-term Figure 3: Treasury Yield Spread
correlation between the bank income statement
and economic growth, and a “bottom-up” model
which is a summation of earnings estimates for
individual financial institutions.

(See Figure 4 for key economic forecasts that drive
the “top-down” model.) The separate methods
produce similar outcomes.

Figure 4: Key Economic Forecasts


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1. Top-down macroeconomic model
(Figure 5). This earnings forecast is Figure 5: Estimated Bank Earnings
based on the assumption that the rise
in gross domestic product will drive
increased lending. The combination
of earnings gained from the wide yield
FIS spread between long-term Treasury
ENTERPRISE STRATEGY VOLUME 1 • JULY 2011
bonds and the Fed funds rate on top
of increased lending will provide a
strong boost to net interest income.

Examination of non-interest income shows
its growth historically following growth in
gross domestic product. However, recent
changes in regulation have added a new
layer of complexity to the forecast for
non-interest income as financial
institutionslook to new sources of
non-interest revenue.

Recent financial institution research
conducted by FIS™ Enterprise Strategy
found that financial institutions view Figure 6: Provisions for Losses
improvement in customer profitability
as the primary way they intend to meet
their financial goals. They are looking
at new options for generating income
that will not be jeopardized as a result
of regulatory changes. Assuming
alternative options will fill in the
non-interest income gap are attained,
the non-interest income growth will likely
continue to parallel growth in GDP.

Financial institutions also are likely
to benefit from reduced expenses as
provisions for losses decline in response
to economic improvement and a lessening
consumer debt burden (Figure 6).

2. Bottom-up earnings estimate (Figure 5).
This estimate of earnings is based on the compilation of estimated earnings of larger, publicly traded banks — a
good proxy for the broader universe of regulated financial institutions. These estimates are generated by a variety
of financial analysts, typically employed at brokerage firms. The estimates take into account both macroeconomic
forecasts and unique characteristics of individual financial institutions.


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Conclusion
The U.S. economy and banking organizations are both resilient. Even in the face of new challenges, there is sound support
for an optimistic outlook and a return to normal levels of profitability for banks. For further proof, look at the stock market
— another leading indicator of economic growth. As of late-July 2011, the SP 500 has roughly doubled in price since the
recession low in March of 2009. The recovery will likely not move in a straight line, but it will occur, providing an optimistic
FIS ENTERPRISE financial performance of banks.
outlook for the STRATEGY VOLUME 1 • JULY 2011

Strategic Insights is a monthly newsletter that provides research, thought leadership and strategic commentary on recent
events in banking and payments. The newsletter is produced by the Enterprise Strategy team at FIS. FIS is one of the
world’s top-ranked technology providers to the banking industry. With more than 30,000 experts in 100 countries, FIS
delivers the most comprehensive range of solutions for the broadest range of financial markets, all with a singular focus:
helping you succeed.

If you have questions or comments regarding Strategic Insights, please contact Paul McAdam, SVP, Research Thought
Leadership at 708.449.7743 or paul.mcadam@fisglobal.com.


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FIS strategic insights on trends shaping global digital banking

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FIS strategic insights on trends shaping global digital banking