Top 10 Trends in Banking: James Van Dyke, Javelin Strategy & Research
Javelin Strategy & Research has just released its Top 10 Trends report for 2010. James VanDyke, president of Javelin, discusses:
Van Dyke is founder and president of Javelin Strategy & Research. Javelin is the leading provider of independent, quantitative and qualitative research for payments, multi-channel financial services, security and fraud initiatives. Javelin's clients include the largest financial institutions, card issuers and technology vendors in the industry.
TOM FIELD: What are the top trends in banking, payments and security in 2010? Hi, this is Tom Field, Editorial Director with Information Security Media Group. We are talking today with Jim VanDyke, President of Javelin Strategy and Research, which has just conducted a new report on the top ten trend sin banking, payment and security. Jim, it is a pleasure to talk with you again.
JIM VANDYKE: Tom always a pleasure to catch up with you.
FIELD: So, you have got the new report you have just issued. Can you give us a sense of what some of the headlines are in banking, payments and security?
VANDYKE: There are a number of them and some of them, as far as the trends, will be wildly surprising. But what is intended to be surprising is what bankers should do about it, because really the key word is "unconventional," and bankers have to take an unconventional approach to extract profits from what will continue to be a very dicey 2010.
First of all is regulation. We all know it is coming; we have all had a lot of advance notice about it coming, but it will be natural for some people just to try to hunker down and think about how they comply, and really a lot of regulation is coming from a very bloodied image frankly. We just got the results back from a survey of over 3,000 consumers, very fresh data, and everybody knows that bankers dropped in the eyes of consumers in terms of the degree to which they are trusted, but some people might be surprised that our data showed that the degree of trust dropped by a 9 to one ratio. That is nine times as many people hold bankers in much less regard than they used to just a year ago, so that is a really problem, a real image problem, and bankers won't get the support they want from consumers.
They need to be thinking about pragmatic value, what they can do to make consumers feel like they are getting real value. And the answer is not just avoiding fees, by the way. There is so much lazy money, mis-invested funds that people will spend more to get their finances back in order. I firmly believe that and we have seen evidence of it in the past.
Also, financial technologies and solutions are opening up the third-party development app; we are all familiar with the iPhone phenomenon that has been going on for many years, but seeing PayPal and now American Express and Revolution Money announce openness to having plug ins, if you will, to their solutions has made us come to expect that it may not be that long before bankers, a bank -- it could be Bank of America or Wells Fargo or somebody else that says we are going to essentially have technologies called API's or standard plugins that allow third parties to provide consumer solutions to allow individuals, small businesses, payment users, to tap into data that exists within secure sites and do interesting things with it and applications that sit off to the side.
Also you will see a need for bankers to do a better job of prioritizing where their technologies go. And I don't mean just saying application or project "a" is more important than "b," but having a real structured way of doing that; taking market data, taking analysis of what the market trends are in regulation and fraud risk, shifting consumer sentiment, new technologies, all of that. We are certainly going to see more P2P; there will be steady growth there. Merchants will continue to call for more power, so more of the same in those areas. But there are a couple of old technologies -- old meaning "mature" -- that are still important, but we were excited about them maybe 10 or 20 years ago, and they have kind of gotten relegated to the back shelf, or the back office shop, and I think we are going to see more importance come back again on these.
One is federated identity, a word probably most people stopped talking about. It is an IT kind of a geek topic; cloud computing will reinvigorate interest in federated ID. We are also going to see real-time systems, the systems that allow the customers' data or the bank or payment provider's IT professional that uses that data to get information in real time. Well, that has always been great internally, but the question is who cares? Well, as you get always-on connections with mobile devices, and more people are walking around with the ability to have an up to the minute awareness, and therefore take immediate action based on the status of their deposit accounts, their card accounts, or even their investment accounts, now for the first time real-time architectures, real-time core systems are going to start to have some relevance. We have never seen that before.
Lastly, a few security trends that you are going to see include things like more data breaches, especially in the healthcare area with the High Tech Act coming into the mainstream and PCI compliance driving the cost of security higher. So, again, prioritization is going to be important, more ATM and PIN threats and social networking. While we will continue to see more data exposure, we are not convinced that will turn into fraud losses right away, but yet the degree of concern rightfully will cause people to have to buckle down on how much information is used out there, and bankers and processors will have to be advising customers to be more careful.
FIELD: Jim, you talked about the difference in the level of confidence among customers and their banking institutions. What else do you see as some of the major differences between 2009 and 2010 regarding your top trends?
VANDYKE: I think we are beginning this year to see this shift in empowerment. You know, we have been calling for it for years within Javelin, but we have never yet said that it is about to hit the mainstream, and I think this is the year in which our data of consumer sentiment as well as bank architectural shifts are showing that we are now ready to start having a more empowered financial customer. Customer meaning consumer and small meaning business, even a corporate customer, and by empowered I mean people having that real- time awareness of what is going on in their finances and taking action. Really, the model for financial services that I would characterize up to now has been paternalistic, meaning that you just trust somebody else to make decision on behalf of you because you just can't get that information.
So the big shift is, and it is going to be mostly precipitated by a different industry, which is the electronic music industry and the revolution they went through a couple of years ago, we are going to see the same thing start to happen in financial services in 2010.
FIELD: Well, you might be answering my question now and that is, which of these trends intrigue you the most?
VANDYKE: Yeah, it really is that; you guessed it Tom. It is the way that you will take -- and it is going to sound a little bit geeky here -- but you know predicted analytics, which has always been this backend technology used in credit decisioning and by companies like Experian, Trans-Union, Equifax and others, it has been great in the way that it has been used by them as a way of making decisions on behalf of the customer, but it has never been used by the customer. And predicted analytics uses a whole bunch of data to predict what someone should do next. Well, it has always been used by bankers to do something on behalf of their customer, and yet again in the music industry it is used by the customer to say 'This is how I want my music collection to work.' As simple of an application as that is, it is a really complex one when you think about how much diversity there is.
So when we see predictive analytics become what I call interactive, so what I call interactive predictive analytics, with the customer controlling all of these various choices in terms of how their money is managed and used, then we will start to see the nature of the relationship shift. It is already being used. and we will start to see it being used here, at the very inkling is towards the end of 2010.
FIELD: Now, Jim, I noticed a few moments ago you snuck in the thought that we can expect more data breaches in 2010.
VANDYKE: Yeah, we certainly expect to see that. You know part of what is going to happen is that, frankly, it has just been regulated or incented in terms of stimulus money I meant to say. Because with the High Tech Act that went in last year, doctors/medical providers got an incentive for putting more records online, and it is kind of interesting that this law at the same time gave stiffer penalties for medical records that are breached.
Well, what we are going to see is a lot more action here by attorneys, by privacy advocates and others, and there will be more outrage as medical records are breached, more and more fines will be extracted from those providers. And these healthcare providers, they are not going to be ready to deal with this. Frankly, doctors are just not good at managing the operations side of their business; they never have been, and I doubt we will ever see them be that way. Financial services institutions are actually in good position from a corporate banking standpoint to offer added-value services to help the healthcare industry, which will have a real spike in need in that area, and across the board we will see more data breach notifications.
And, I want to mention a data point here. You know, all this data comes from--all our consumer data, our studies of banks and scorecard fashion and all of that, but an interesting one relates to what a data breach means to consumer exposure to fraud. We have previously said there was no data showing that if your data was breached you had an increased likelihood of becoming a fraud victim, and we recently had to change our position on that. We found that those people who have been notified of a data breach had a four times likelihood of becoming an actual fraud victim.
FIELD: So, we can thank Mr. Gonzalez and friends for that.
VANDYKE: That's right.
FIELD: You talked about healthcare, what do you see shaping up as the biggest threats to banks, payments and security?
VANDYKE: The biggest threat is just the mass exposure of data. You know when I give blood at the Red Cross, they still prefer to go off of Social Security numbers, and these private records are out there. You could say that the horse is out of the barn, and we still have people carrying checks around in their purses and wallets that have ceased writing checks, and people are giving up private information left and right. So breaches are really just the beginning of the problem, and what I think the biggest issue is there is so much private data around it is impossible to lock it all down, and we sometimes act and even legislate as if though that is the solution, to lock down the data. It just can't happen.
So what we need to start doing is allowing individuals to set parameters as well as receive notification based on the use of their information. Because what criminals will continue to do this next year in tough economic times is try to commit more and more crimes using someone else's identity, because frankly that is a whole lot easier than embezzlement or just direct brute force attacks. So, we will see more and more security threats, and we believe ID fraud will be going up, and security will rise even more as a perception issue that affects the customer relationship and stickiness.
FIELD: Jim, you talked up front about regulatory reform. Based on your trends, how do you see regulatory reform shaping up this year?
VANDYKE: The way we see that shaping up is that a lot of banks will be like the proverbial "deer in the headlights" where they just try to clamp down on everything they do and then look for other punitive fee opportunities trying to get around the law. The banks that succeed through this time and actually add more market share we believe will also be those that charge fees to customers, but they will look to be more proactive versus punitive fees.
And the biggest trend in terms of how banks need to react to regulation is again to go from punitive to proactive. And I will say it again: The consumers don't mind paying more fees, and they have got the wasted funds to do it from. I will give an example. It will sound slightly crass, but here in the San Francisco Chronicle in our own Bay Area, there is a column they run from a guy named, pardon the phrase but, "Broke-Ass Stewart" and it is about a guy who won't spend an extra nickel on anything. What bankers need to do is figure out how to get Broke-Ass Stewart to pay more with a smile on his face because he says as a result of paying my banker a higher fee, I am in a better financial position overall.
FIELD: One last question for you, Jim; in terms of emerging technologies and banking services, what do you see as "the next big thing?"
VANDYKE: The next big thing we will see is consumers like omnipresent to use the word from religious circles. The awareness, the omnipresent kind of awareness and control of their financial services position, and the spearhead of this is mobile banking, which has had healthy adoption. Now there are going to be some bumps in the road in how this rolls out, so we were surprised to see in our data that alerts adoption actually had a reduced growth rate last year, not an increased growth rate like we and everybody else were expecting to see. So bankers need to figure out ways to make all this stuff easier to use.
But I will tell you there is the one fly in the ointment, the one solution that every banker should be working on right now, that is to take the controls for alerts and capabilities to turn off certain transactions by the customer, and stop putting those into the control panel. But rather when you give someone a communication message, allow them to change future notifications within the body of that message itself. And for those that are wondering what in the world I am talking about, it is no different than when you get a song from your electronic music provider and you say 'Change the settings on this song' and the provider says 'yeah, great, I'm glad you told me, so I will change everything you get in the future based on how you reacted to what I gave you just now.'
FIELD: Jim, as always, it is a pleasure to talk with you and hear your insight.
VANDYKE: Great, thank you, Tom. I enjoyed being on with you today.
FIELD: We have been talking about the top ten trends in banking, payments and security, and we have been talking with Jim VanDyke with Javelin Strategy and Research. For Information Security Media Group, I'm Tom Field. Thank you very much.