USAA, Part II

The last post I made was an informational one where I made note of the atypical banking features that USAA offers its customers. Allowing members to deposit checks by scanning them in to their personal computer as well as other features which one would deem ahead of its time sets USAA apart from nearly every other bank in the country.

With only one physical branch located at the bank's headquarters in San Antonio, Texas you and I might not see USAA as a threat to the standard brick and mortar banks such as Commerce Bank (now known as TD Bank), Bank of America, and the thousands of others we hear about or pass on the street wherever we go.

Well, we're wrong.

In an article titled, "Some See Threat to Banks in New Criteria at USAA," Thad Peterson, the vice president of strategy and solutions for financial services at the St. Louis market research firm Maritz Inc., said that because USAA has only one banking branch, it does remote banking and customer service, largely through its call centers, "better than everybody else."

USAA, a bank that offers membership only to those who have served in the military and their immediate families has decided to open membership to those extended families, widows and others which has created the opportunity for capturing greater market share in the financial services industry.

The spokeswoman for USAA, Robie Cline stated USAA Federal is so small it is "not on the radar screen" of major banking companies. However, Peterson disagreed and stated that "They've never really had a branch banking operation, and banks should view them as a serious player regardless of geography."

The noteworthy part of this article is that the Internet has changed competition and business so much that even small banks like USAA whom offer incredible online and over-the-phone services and support now have the ability to compete with the big guys. It seems that its no longer about how many branches, employees, or accounts a bank has. But rather about how technologically advanced they are and how they can use it to their advantage and providing financial services unique to the industry. People go where the services offered and customer service are the best. The biggest name is no longer enough.
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http://proquest.umi.com/pqdweb?index=3&did=1534091771&SrchMode=1&sid=1&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1226429164&clientId=31806&cfc=1

Kate Berry Some See Threat To Banks in New Criteria at USAA. American Banker [serial online]. August 12, 2008:10. Available from: ProQuest Information and Learning, Ann Arbor, Mi. Accessed November 11, 2008, Document ID: 1534091771.

Virtual Currency as a Way Out for Web Sites

It's tough not to laugh at articles that talk about the idea of giving someone a virtual gift. Back in the old days of the Internet the idea of transferring money for a virtual item stems from hardcore Diablo 2 video game players who would trade real money for virtual weapons in the game.

The trend obviously never took off outside of certain internet circles so it is hard to look at such trades as signs of anyone company pulling a profit. In the case of trade, a company might find it hard to break even if it is only taking a commission out of the trade.

So let's look at the practical reasons for having a virtual gift system in place. The new web era is rolling in and websites are looking for ways to monetize their websites in a down economy. Traditionally a website without a business strategy will use advertising to support itself economically but as money gets tight these sources of income become scarce.

The blog Venture Beat has an article on sites like MySpace and their plan to implement a virtual gift system just like Facebook. The high number of people on sites like Facebook and Myspace might explain for the reason as to why sites are pulling in the cash.

Sites like Myspace might actually have a chance of pulling a profit due to the fact that they are ten times the size of Facebook and probably have more users who have a vested interest in the site.

I am amazed that a person would be willing to purchase a virtual piece of property or to that end that the site is making up to $40 million. The old conventional wisdom said that people are most comfortable with purchasing tangible goods but obviously not every site can provide what Amazon and Ebay have.

Perhaps we are heading towards an era where people can find value in virtual commodities, a not so strange concept when you consider the fact that sites like Facebook control the number to virtual gifts to artificially create the illusion of demand.

Financial Crisis Boosts Online Peer-to-Peer Lending

With the financial crisis drying up loans from traditional banks, would-be borrowers are have begun looking to alternative channels for financing. They have turned to the fast growing online industry of peer-to-peer lending, which connect people who need money with people who have it. Going through companies such as Lending Club, Prosper, and Loanio, borrowers can get the money they want at lower interest rates than banks or credit cards, while individuals lending money get higher rates of return than many traditional investments. With the stock market down, lenders are bragging about the double-digit returns peer-to-peer lending is bringing. The industry is expected to grow over 800 percent by 2010, with lending reaching $5.8 billion.

Loanio, which opened on Oct. 1st, is aiming at borrowers who have been turned away from other lending sites because of poor credit. In its first week over 1,000 people signed up to participate. The company encourages borrower to use friends and family as co-signers and verifies a borrower’s financial footing for a fee. With the economy sliding towards recession, they are here to stay.

Lending Club limits itself to borrowers with good credit histories and brags of a default rate of less than 2 percent. It now has started a secondary business where lenders can cash out of their loans early after getting regulatory approval from the Securities and Exchange Commission. The average return for their lenders is a hefty 13 percent. This has led to Lending Club doing $20 million in loans in 18 months.

Peer-to-peer lending companies generate profits by collecting a one-time 2 to 3 percent fee on funded loans from borrowers and assessing a 1 percent annual loan-servicing fee on lenders. People willing to lend money bid on loan request by offering the lowest interest rate they are willing to accept. Though borrowers are generally selected based on credit rating and current debt, there is also a social element of how compelling their story is. One of the areas expected to thrive is in student loans, with students being prime low income and little credit candidates.

While demand in this industry is growing, this model is not without its problems. Earlier this month Prosper stopped signing up new lenders while the Securities and Exchange Commission evaluates its regulatory filings, a process that could take up to six months. This is amongst a gradual decline in the amount of new lending and average interest rate were increasing. As the economy continues to worsen, lenders are becoming weary of tying up their money in deals that typically run three years. As the industry grows, questions will also have to be answered as to the industry’s regulation, with many having to get bank licenses.

However in a time where we have seen our first ever drop in GDP, this person to person lending process could prove to be a vital way of keeping our economy growing.

We create the consumer experience of the future

A trend analysis of the financial services industry is a perfect example that depicts cycles of change in the economy. Such changes include more or less regulation, emphasis on technology, advanced business models, diversified business units, amongst others. One can argue that no two-time period in the financial industry has been identical. In an interview given to two Microsoft leaders, David Vander, who is the worldwide banking industry manager of Microsoft and Brian Jackson, who is the worldwide banking technology strategist of Microsoft as well, a lot of ground was covered with regards to the role information technology has played over the years and will play into the future in the financial services industry, most especially banking.
David asserts that there is a growing awareness and understanding that financial services is largely a digital industry and technology underpins everything this industry does. In addition to that, he states that a major strength of this industry is the tremendous innovation over the years, such as ATMs, mobile phone based interactions and Internet based interactions. On the other hand, he believes that the current turmoil will lead banks to re evaluate where capital is invested and will really enable businesses know where their comparative advantage really lies. I personally believe that we can already see this trend occurring in the economy. A lot of divisions in banks are being shut down and are reduced in size due to redundancy and cost saving strategies. I believe that the consequence of this trend will lead to a very slow growth in the banking industry for a long period of time and a smaller investment in human skill.
On the other hand, Brian strongly believes that the future of this industry lies within the clients from other businesses and the general public. He believes that there is going to be a trend of innovations beginning in the consumer market and making its way to onto the enterprise. Furthermore, he believes that there will be a technology trend around powerful and expensive hardware both in terms of processors and storage. Given this data, there will be a lot of change as to how businesses analyze consumer behavior and also build their models. Finally he believes that the future world of having numerous applications that may consist of several different services may deploy virtualized infrastructure and that may need a lot of information technology complexity.
In conclusion, I believe that the future of the financial services industry goes to technology and the customer. Technology has helped make the financial industry what it is today and will pave the path for tomorrow. There will be heavy reliance of technology in helping guide banks and other financial institutions in improving efficiency and producing accurate data that will help make more rational decisions. In contrast, we can also expect technology replacing more humans in the financial industry. There will be very slow growth in this industry for long periods of time, but as demand rises, we can expect an expansion in this industry, not just with technology, but also with human beings.


http://www.paperjam.lu/archives/2008/11/2410_Techno_Microsoft/index.html

This article focuses on five traits that financial services are going to have to develop in order for them to remain competitive in the market. These traits are hungry for change, innovation beyond customer imagination, globally integrated, disruptive by nature, and genuine, not just generous.

Financial service companies need to build an environment that encourages constant change and development of their offerings. They will need to build upon Internet and mobile services in order to stay competitive in a world where mobility and ease are everything. This also applies to innovation. The technology that the companies are going to develop are what is going to keep them in the market. If they can not come up with some unique idea that separates them from their competitors, they are not going to get customers to switch over to their business.

Being able to spread their market overseas is another key aspect for financial service companies to remain competitive especially with the increasing ease of travel. The world is becoming more globally integrated and people are going to need to be able to access services when they are traveling. Without a globally integrated environment, financial service companies will not be able to provide for their customers, and they will lose them.

In terms of being genuine, services will have to provide good customer service that they can rely upon any time of day, at any location. This means offering customer service via the Internet, telephone and through mobile devices.

The main emphasis for next generation financial services is going to be mobile offerings, ease of use, and global integration. The constant desire of customers being able to do anything, everywhere is going to have to be provided for by financial services as well.

"The Enterprise of the Future in Financial Services." The Bankwatch 23 Oct 2008 5 Nov 2008 .

“Security-on-a-Stick”

While technological change is slow in the banking industry, consumers are demanding more innovation along with heightened security. Many large banks are trying to remain competitive through increasing their convenience by means of a push to their online banking applications. As this becomes an increasingly common mode of making bank transactions, hackers are finding ways to breach online account information.

IBM has released a new devise that uses the same hardware as a USB drive in order to counter these would be attacks by hackers. It is called the Zone Trusted Information Channel (ZTIC). When the ZTIC is plugged into your computer it is able to bypass the PC software and “create a direct, secure channel to a bank’s online transaction server”. Currently banks use two-factor authentication methods such as, PINs and one-time validation codes, to provide security for online transactions.

However, these are not enough to inhibit sophisticated hackers who can redirect and change the information flow in a PC. The IBM press release states that “nearly 90 percent of identity attacks online are targeted at the financial services sector”. Clearly a heightened form of security, like the ZTIC, is necessary to protect customer’s sensitive financial information.

The ZTIC is one way for banks to remain competitive and try to gain new customers. The first banks to get access to ZTIC technology will be able to better market the security of their online banking features, which will make them more distinguishable in the banking industry.

The ZTIC is easy to use and requires no additional software configuration on either the bank’s server or a customer’s PC. This makes implementation fast and easy with reduced costs when compared to other security devices pointed out in the article. There are only two buttons on the ZTIC for confirmation, “OK” and “X” (cancel). The ZTIC has already been manufactured and is ready for pilot tests. So hopefully we will be seeing this new technology in the near future, especially as online banking becomes more popular.

Sources:
http://www.zurich.ibm.com/news/08/ztic.html
http://www.zurich.ibm.com/ztic/

The social networking of financial services

In my search for next-generation financial services, I stumbled upon a website called Wesabe. It purports itself to be a service for anyone who facing monetary problems (and who isn't, these days?). Users can post questions and advice to each other. It seems like a pretty supportive community and is fairly casual. I haven't seen anything like this before; this sort of thing usually comes in the form of self-help books or static how-to websites without much interaction. I think this can really go places.

Now, the social networking aspect of the site is something that I find particularly interesting, probably because it's such an integral part of a young person's life, but that neglects the other tools that the service provides. Wesabe enables users to see all of their financial data in one centralized location, much like Mint.com, a service that I've frequented for more than half a year now.

Both sites actually share quite a few similarities. They allow you to categorize transactions posted from your various bank accounts using different tags (something common to blog services and site aggregators) as well as set spending targets. They can be automatically set based on aggregations and averages of your spending patterns over time or manually.

This does bring about a number of issues, however. Probably the most prominent is security. How is a site like Mint or Wesabe supposed to guarantee peace of mind for users who are centralizing all of their bank information in one spot? What do you think about this reasoning? Is this enough peace of mind for you?