A drum roll please. We know that bankers and technologists around the world have been waiting in unbearable anticipation of this final GonzoBanker newsletter of 2004. It’s that time of the year when a few folks will tell us “thanks” for the recognition and the rest of the world will call us pure idiots. Once again, the team at Cornerstone Advisors has developed our year-end awards utilizing our highly scientific scoring process that involves least-square regression, Bayesian analysis, Monte Carlo simulation and linear programming (…or maybe we just WAG’d it). The paparazzi are everywhere. The limos are pulling up. The red carpet is full of well-dressed bankers and vendors. And now, the live feed is coming to you…
JP Morgan Chase and Bank One. Yet another example of two elephants hoping they can dance and create some “synergy” for Wall Street. In the meantime, niched banks will be going after commercial and wealth management talent from Bank One while doing everything possible to steal some of Bank One’s best regional banking customers. The gift that keeps on giving.
Free bill pay. Bank of America has made waves by touting its business case for free bill pay, justifying it primarily through customer retention and balance/relationship expansion among bill payer users. Now regional and community banks are jumping into the free bill pay game, hoping somehow the $50 in additional non-interest expense can be justified with cross-sell and retention. For most players, we’ve seen way too little quantitative analysis and accountabilities for payoff and way too much following the herd.
October 28, 2004 – when Check 21 went into effect with nary a hitch or hiccup. Hey, it made event organizers some cash, but otherwise so far a major league yawner.
Six Sigma. After leading process improvement projects for more than 15 years, the team at Cornerstone Advisors has always loved the concepts of “define, measure, analyze, improve, control,” but stamping a new name on this common sense approach and throwing around a bunch of colored belts doesn’t mitigate the blood, sweat and tears that process improvement ultimately takes. Six Sigma is just one of many tools that will be used in both highly successful and disastrous process improvement initiatives.
Free small business checking. This product offering popped up like wildfire across the country during 2004. The small business competitive wars are escalating.
Continued low mortgage rates and another final year of solid gain on sale income.
Bank check cashing operations.
Negotiating a truce between banks and credit unions.
The growing debt bubble. With the gazillion combined years of credit training our industry possesses, it’s amazing we’re not nauseated by record levels of consumer debt, mortgage debt and personal bankruptcies. There has never been less liquidity/equity and higher debt service ratios in the history of consumer lending. What happens if the music stops?
SEC’s investigation of FNMA, forcing the restatement of three years of earnings.
Separately managed accounts or “SMAs.” We haven’t seen anyone pull this off with impressive volumes, though the product idea still makes a ton of sense.
“We have repositioned the balance sheet to allow for future earnings growth.”
Charter One – this aggressive and creative retail banking shop kept things interesting – we worry about this energy being diluted as part of a behemoth.
First State Bank of New Mexico, Albuquerque, NM. Mike Stanford and the gang have struck a blow against larger banks with hip and damn funny advertising. Picture a biker from Taos, NM, riding a Harley with the tag line, “An independent bank for independent people.” Amen brothers and sisters!
Jay Vachon, Application Delivery Manger, First Indiana Bank. Widely respected by the business lines, sound banking understanding laced with techie and project skills to flat-out get things done.
Cathy Batson, South Financial, Greenville, SC. Here’s a lady who truly treats the shareholders’ money like it’s her own. Very focused on measurements, accountability, and bottom line performance – sounds like a GonzoBanker.
David Hargraves, Carver Federal Savings Bank, New York. An energetic sales leader who uses humor effectively to bring together and fire up his team.
Keystone Nazareth Bank, Bethlehem, PA. A $1.6 billion thrift doing a merger of equals with a $600 million commercial bank, and then converting the merged entity to an entirely new core data processing system? It may sound crazy, but the team at Keystone Nazareth did the whole thing from idea to operational conversion in less than a year. Nice job.
First Republic Bank, San Francisco. This upscale niche player has built one heck of an entrepreneurial culture while putting incredible growth numbers on the board. The entry into New York has been a resounding success in a very competitive private banking market.
Bank of Hawaii, Honolulu, HI. Call it a captive market for foreign acquirers, these folks on the island have more revenue per ATM than any bank we’ve seen.
Jim Giancola. The former CEO of Civitas is back in action at Midwest Bancorp, Melrose Park, IL. Here’s to hoping for another great mid-size bank success story.
Steve Hennigan, San Antonio Credit Union, San Antonio, TX. Used Monte Carlo simulation of financial models to build a predictive model of the 5 year cost.
Whether payroll should report to HR or accounting.
Ricky Hill of Hancock Bank, Gulfport, MS, who refers to them as “grand mal seizures” of the phone system.
Fraud detection. Fraud detection products have captured the attention of banks and credit unions. Flashy new products and services are being offered by traditional core vendors and several upstart companies. Names in the hunt include multiple Fiserv offerings, Jack Henry’s Yellow Hammer and newcomer Mitek Systems. Catching a fraudulent item faster can reduce risk and improve the bottom line.
Mozilla Firefox starts a new browser war and now has nearly 8 percent of the market. Every time Mr. Gates feels comfortable sitting atop billions in monopolistic tech cash, a new entrepreneurial glimmer of hope arrives. Firefox may get crushed like Netscape, Novell and Sybase, but it’s great to see a new band of rebels storming the castle.
NACHA – for the continued growth of ARC, TEL and WEB transactions over ACH. While everyone talked about Check 21, these conversion and electronic payment transactions just kept booming.
Phishing of bank Web sites.
Data warehouse/information management.
Similar to VH1’s “Where are they now” award, this recognition goes to the Dexy’s Midnight Runners of bank technology – Internet portals. It’s almost comical now to think that Bank One once paid $125 million to have a spot on the Excite portal. Heck, we would have sold out and put Bank One on the GonzoBanker site for only $1 million and free coffee for life.
Sonic Software. Here’s another low-cost middleware provider (owned by Progress Software) that’s starting to win the hearts and minds of techies at places like Pacific Capital Bancorp and Cole Taylor Bank. Here’s a year-end toast to affordable, practical integration technologies.
Loan origination systems. There is no function more critical in banking than the fast and efficient origination of quality loans. Unfortunately, loan origination is still a hodge-podge of modules that specializes in either the sales, underwriting or doc prep side of lending. Word to the vendor market: Web services is here. You’ve got the right brochures and PowerPoint presentations – now let’s see some new functionality and integration!
Road warriors – consultants, vendors and bankers alike – should be careful about wishing too hard for the FAA to approve of cell phone usage on airplanes. Now, your irritating row-mate will shut up if you start reading a book or put on your headphones. Think about the annoyance factor of sitting next to a hyperactive “deal maker” screaming into his cell phone for the duration of your next LA to Boston flight.
Tom Parsons from FTI. When referring to the revved up horsepower required to do serious activity-based costing, Tom said, “Your amp has to go up to 11 for this, sorta like in This is Spinal Tap.” Nice.
Metavante picks up two big wins with AFS and NYCE, vaulting the company front-and-center into the payments system business. Nice combo.
Ropav Systems. We’re not sure if it’s middleware, CRM, information management or what, but it is the slickest piece of software we have seen in some time. Here’s proof positive that the Indian programming market can create competitive products that should scare U.S. vendors.
Per user pricing for outsourced internet banking and cash management options. Come on guys. The technology is mature and now it’s basically a VRU on steroids. A buck a user per month? You’ve got to be kidding!
These are impressive names, but the history of bank technology is littered with big names that delivered nada. We love to see new core system competitors, but it’s still going to be cold, hard functionality and real-world implementations that win the game.
IntegraSys. New Fiserv business unit attempts to staunch defections and win new business after years of EDS neglect.
MemberStreet. Quietly, this once fledging Internet banking platform, originally developed by a consortium of large credit unions and now owned by Corporate Network eCom, is gaining heavy market share in the credit union industry. It’s winning for three reasons: in-house delivery, simplicity and price.
We love the people that actually present and demonstrate products to the bank and credit union community. They have one of the roughest jobs in the business. They also are a source of some of the best one-liners every year. The 2004 sampling:
The skit. Yes, vendors are now working in a little drama to the otherwise mundane core demos. The good news is that their bank and credit union prospects overall seem to appreciate the effort. The bad news is that it is horrifyingly embarrassing to watch. These poor presenters didn’t sign up to put on dramatic productions with a second grade Romeo and Juliet look and feel. Ever see the look on the face of the girl playing spin the bottle, right before she has to kiss the ugliest boy in the room? That’s how these presenters look before they go “on stage.”
When asked why their product pricing was based on users rather than asset size, the salesman replied, “Because if we did it based on assets you’d probably pay us less.”
When talking about his company’s selection of a middleware product, one programmer said, “We’re very committed to this solution….well, is there something you guys like better?”
Forget the acquisitions of Maxxar, re:Member, DataWest and EastPoint. The truly impressive byproduct of OSI going public is its new, cool, demo giveaway gear. Serious upgrades from plastic to apparently solid gold pens at demos give OSI a chance to show off its newly fattened checkbook.
Goes to the bank and CU vendor that went into great detail to explain that the system’s lack of workflow technology is really a benefit: “We don’t force you to do things in a certain order. That takes away from your freedom.”
Demonstrator giving an example of how to run a marketing campaign with a new CRM tool: “We have a great ‘and/or’ feature. You can target market to customers that have, say, either a credit score above 640 OR a credit score above 580. I know that doesn’t make sense, but do you get the idea?”
When asked about a core product’s migration to a browser user interface, the sales rep replied, “We have nothing that I would consider to be a real ‘timeline’ for this. I can’t give you an actual date, but I can definitely tell you that it will be sooner rather than later. I mean, we have a white paper on this. This is real.”
“Every vendor talks about ‘openness.’ But, from what I’ve seen in the past two weeks, you either need a techie, an expensive piece of software, or both to get any piece of data out of any system.”
When asked if their loan origination system could handle mortgages, the demonstrator said, “Well, as long as they work like car loans, that shouldn’t be much of a problem.”
Asked by a branch employee if the vendor’s browser-based system made tellers more productive, the presenter opined, “Well, we know it makes them more productive, but I can’t tell you that it actually makes them faster.”
An executive began a presentation to a client who had been using his system for eight years by proclaiming, “We want to become your technology partner.”
When asked at a conference about the biggest trend in banking in 2004, an “industry expert” replied, “It all became about the customer.” Damn. All this time, we’ve been basing everything on accounts payable.
This award goes to the newly open ITI Premier product, whose sales reps can’t blurt out, “This is not your grandfather’s ITI” enough. Time will tell, GonzoBankers, time will tell. We’re waiting for news of a lawsuit from the folks at Oldsmobile.
Faced with margin compression and the never-ending quest for additional sources of fee income, more banks will begin to offer claims processing services to their commercial clients that are involved in the healthcare, insurance, and benefits industries.
Metavante will acquire S1 to try once again to have a solid retail and business internet banking product.
A new liquidity crunch will start to hit the banking industry. With rising short-term rates and businesses/consumers putting lazy cash back to work, most banks will have little or no deposit growth while the Federal Home Loan Bank will turn in a year of solid growth in advances.
Debit card loyalty programs will emerge as the hot new trend to build debit usage and will be well on the way to being mainstream.
With the end user market demanding free electronic bill payment services to complement their online banking, Internet banking vendors who offer their own bill payment solution or depend on the revenue from partnering with bill payment providers are likely to see even more dramatic margin compression. Look for DI, ORCC, or S1 to be owned by one of the core providers in 2005. I’ll put Harland and Metavante at the top of my potential acquirer list.
Fueled by the recent market share gain of the Mozilla Firefox browser, Oracle’s takeover of PeopleSoft and its unsuccessful attempt at an SAP merger, Microsoft will unleash the hounds of acquisition hell buying up niche middleware and application vendors in an attempt to become the ultimate “enterprise-wide killer application platform.”
Check 21 and image exchange, clearly more of a boon for conference organizers and industry pundits than financial institutions, will be outclassed by growth in ARC, ACH and debit card usage. Financial institutions with traditional check safekeeping products (think “check truncation”) will smile all the way to the bank. Check sorter hardware prices will eventually plummet, but not in 2005. Check fraud (facilitated by compromised check images made available via phished Internet banking accounts) will increase.
Driven by compliance nightmares such as SOX and the USA Patriot Act as well as competitive pressures, ECM (enterprise content management) will replace its infamous acronymic predecessor CRM as the new buzzword in banking.
Every year, we make bold predictions based on keen industry insight, acumen, or maybe no more than our desire to see what a foot tastes like. A review of the 2004 efforts:
#1: Total check volumes will reduce 15 percent in 12 months due to the combination of Check 21, check-to-ACH conversion, and debit card transaction growth. (Terence Roche)
Result: Not a complete whiff, but we did feel a bit of a breeze. The actual reduction was more like 5 percent if you believe recent Fed numbers. This, and Terence’s equally brave prediction that Check21 would take off like a rocket, were both likely the result of working out that day with Barry Bonds and Jason Giambi, if you catch our drift.
#2: Linux moves to banking. The cute little penguin will make inroads into banking as a strategy to reduce reliance and cost of Microsoft products. Look for print and file servers to be the first thrust of this movement. Look out Microsoft, banking CIOs are tired of paying for software that is the primary target for hackers and malcontents. (Carl Faulkner)
Result: Bingo. At least one core vendor has announced support for Linux, and many banks are under way with some server-level initiative (experiment).
#3: Fueled by the BofA/Fleet deal, regional bank M&A activity will get very hot in 2004. The main beneficiaries will be mid-size/community banks, who will achieve their best commercial loan growth in five years. (Steve Williams)
Result: Circle the bases, high five, home run. Regional merger activity was white-hot in 2004. The downside is that Cornerstone said farewell to too many old friends as a result. Mid-size community banks turned in 19 percent commercial/commercial real estate loan growth compared to a paltry 5 percent at big banks.
#4: Mentored and inspired by former Iraqi Minister of Information Muhammed Saeed al-Sahaf, proponents of the branchless bank, teller-less branch, multipurpose ATM and wireless banking will band together in an appropriately named “Believing Our Own BS” self-help society. (Scott Hodgins)
Result: Emboldened by our own Tripp Johnson’s rose-colored Gonzo on 7-11’s headline-catching, multi-purpose ATM venture, the “Believing Our Own BS” self-help society is thriving. This actually happened. Check out believingourownbs.com for further information.
#5: Misys, SAP and i-flex will make a big push to penetrate the U.S. banking market, probably having to buy their first customers with well-below-market core system pricing. (Scott Sommer)
Result: Half right. They pushed, but they didn’t buy or enter much. Maybe a better 2006 prediction. (Note: Scott was, uh, working out with Terence/Barry that day.)
#6: Banks will continue to sink money into enterprise-wide CRM-like initiatives but (despite the press releases you may read) the Holy Grail will remain a mystery. (Tripp Johnson)
Result: Sorta kinda. More banks got pragmatic about the money sinking and focused on the all-important organizational and design issues rather than spending. The appearance of the holy grail is still pending.
THE MOST OVERRATED ROCK BAND AWARD:
Terence Roche: Fleetwood Mac
Silk scarves. Twirling. Most certainly did not “Make Lovin’ Fun.” Where’s my Hendrix?
Carl Faulkner: All of the current ones
Let’s get back to real rock and roll like Bill Haley, Little Richard, et al.
Steve Williams: Dave Matthews Band
Totally annoying vocals. Repetitive hooks. Screeching collision of unrelated instruments. A bunch of yuppy professionals and college drunks acting like this is some sort of genius, multi-cultural, artistic “fusion.” Give me a break.
Scott Sommer: Hootie and the Blowfish
Two Grammy Awards in 1995 and mucho hype. Ten years later – lots of fizzle.
Scott Hodgins: The Beatles
A candy-coated quartet. Did some cool stuff on Sgt. Pepper’s while ‘sperimenting. However, any band that claims “Good Morning Good Morning,” “Ob-La-Di, Ob-La-Da” and “Love Me Do” on their writing credits simply must appear on someone’s Overrated list. Also spawned tons of annoying lollipop bands like Oasis, The Refreshments or The Gin Blossoms and British wuss-rockers like Squeeze, Finn Brothers, Ultravox.
Tripp Johnson: Nirvana
Sub-par musicianship, stupid lyrics, annoying singer, Courtney Love – ‘nuff said.
Bill McFarland: Anything written after 1900 is pretty much useless, except for Roy Orbison, Billy Joel, and Sergei Rachmaninoff.
Eric Weikart: Madonna
White trash in Versace. Untalented pop ‘ho. Inescapable since the mid-‘80s.
Larry Young, creator of the Jolly Terence, GonzoBanker’s logo: Elvis Presley
A cover artist. Colonel’s [girlfriend]. Bad actor. Lounge act. White leather. Died sitting down.
Eric Weikart: Tesla (Five Man Acoustical Jam)
Terence Roche: “Elephant Mountain” by The Youngbloods
Scott Hodgins: “Chocolate & Cheese” by Ween
Tripp Johnson: “Hotter Than Hell” by Kiss
Steve Williams: “Everywhere at Once” by the Plimsouls
Bill McFarland: “Oh, Pretty Woman” by Roy Orbison
Scott Sommer: “Bush Doctor,” by Peter Tosh
Well GonzoMongers, the team at Cornerstone Advisors, Inc. is heading off now to our famous end-of-year, Xerox-your-rear, holiday bash. 2004 was a wild year for us:
Tonight we’re going to raise our glasses to the great team we have built at Cornerstone, to the incredible families that have supported us through it all, to Seinfeld re-runs, free first class upgrades and loud rock and roll. But rest assured, our most important toast will be to our clients and partners who made this dream all possible.
Thanks and happy holidays.
THE GONZO TEAM AT CORNERSTONE ADVISORS, INC.