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1 Disruption in Financial Services: Threats and Opportunities Written by Andrew Tilbury 11.12.14

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Page 1: Banking Disruption in Financial Services: Threats and Opportunities

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Disruption in Financial Services: Threats and Opportunities Written by Andrew Tilbury 11.12.14

Page 2: Banking Disruption in Financial Services: Threats and Opportunities

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ABOUT BLUEPOINT SOLUTIONS

Bluepoint Solutions provides end-to-end payment processing and

content management solutions to community financial institutions.

More than 1,400 credit unions and community banks nationwide

have deployed its enterprise technology, including the largest

corporate credit unions and credit union service organizations in

the country. Learn more at bluepointsolutions.com.

Page 3: Banking Disruption in Financial Services: Threats and Opportunities

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THE FUTURE OF BANKING IS AT RISK.

This report examines data from multiple sources to identify and explain the forces that are shaping payments and banking today. With substantial banking income at risk, it also suggests potential defenses for banks and credit unions to fend off competitive threats from non-traditional financial services firms entering the payments and banking arenas.

If you have difficulty answering any of the following questions, this report will be helpful as a strategic guide to plan your future product roadmap and IT budget allocation.

• Are you prepared to compete with technology firms that start providing financial services?

• Do you have a well-articulated strategy for attracting and retaining Millennials?

• Have you determined which digital wallets or services you will adopt and offer to your customers and members?

• How are you adjusting your product roadmap to accommodate shifting consumer preferences and the growing importance of the mobile channel?

• Do you have a future growth strategy that relies more on mobile and social technology than it does on your branch or ATM networks?

Page 4: Banking Disruption in Financial Services: Threats and Opportunities

Disruption is Here

Technology Innovation

New Business Models

Demographics

BANKING REVENUES ARE AT RISK

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35% of banking revenues are projected to be at risk by 2020 due to disruption in the financial sector

Source: Accenture

Page 5: Banking Disruption in Financial Services: Threats and Opportunities

The Apple Effect

In Q3 of 2014, Apple generated $4.5b in revenue from iTunes and its App Store. There are more than 800m active users of iTunes — many of which already have stored debit and credit cards.

Apple could quickly become the dominant, global provider of mobile wallets with the unique combination of its global smartphone market share, launch of Apple Watch — the first wearable device capable of making point-of-sale purchases, and reach of its card-issuer, retailer, and banking partnerships.

Add to this unique set of capabilities the immense brand recognition, brand loyalty, and trust that Apple has with its users, and a vision quickly emerges of a new banking ecosystem wherein traditional banking institutions rely upon Apple for inclusion in the world of payments.

Apple has the potential to disrupt financial services with the same effect that Walmart had on retailers Home Depot had on hardware stores, and the Internet had on travel agents.

5

Source: Company Filings

Page 6: Banking Disruption in Financial Services: Threats and Opportunities

Banking with Non-Banks

The majority of Americans are willing to bank with at least one non-traditional financial services firm with which they already have a relationship.

Traditional financial services firms no longer need to compete with just their peers; they now face a new challenge: competing with companies from other industries that previously weren’t competitors.

58% of Americans aged 35-54 are likely to

77% of Americans aged 18-34 are likely to

Source: Accenture

How likely would you be to bank

with a non-bank?

This creates difficulty in both how to compete, but also where to compete.

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Page 7: Banking Disruption in Financial Services: Threats and Opportunities

New Threats — Present and Future

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Source: Accenture

Which of the following

companies would you be willing to use as a provider

of financial services?

New Threats To Finserv

Page 8: Banking Disruption in Financial Services: Threats and Opportunities

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Your biggest threat isn’t other financial services providers.

Your biggest threat is non-financial services firms entering banking and payments with

innovative products, respected brands, and massive

customer bases.

Page 9: Banking Disruption in Financial Services: Threats and Opportunities

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TECHNOLOGY

1b Android users globally 800m iTunes users

106m active accounts Retailers, salons, meals sold

100,000

Source: Company Filings

Established technology firms are developing new products — think digital wallets — that enable the creation of new business models with enormous existing customer bases.

Page 10: Banking Disruption in Financial Services: Threats and Opportunities

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237m accounts at the

end of 2013

76.4m members

15 MINUTE

90% of Americans live within 15 minutes of a Walmart store

8 cents of every dollar spent in America is spent in Walmart

$100b in Revenue in 2013

RETAIL Retailers looking to cut costs, collect valuable customer insights, and boost loyalty programs are looking for — and developing their own — new payments systems, including full service checking accounts.

Source: Company Filings

Page 11: Banking Disruption in Financial Services: Threats and Opportunities

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50.5m subscribers

TELECOM

110m subscribers34% market share of wireless subscribers in the US

54m subscribers

Source: Company Filings

Telecom providers enable adoption of new business models through expansion of high-speed data access and mass adoption of smartphones with built-in NFC functionality.

Page 12: Banking Disruption in Financial Services: Threats and Opportunities

Devices are pulling people away from traditional FIs and branch networks

The attraction of digital banking — especially for Millennials — is undeniable

Paradigm Shift in Banking Channels

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Page 13: Banking Disruption in Financial Services: Threats and Opportunities

Away from traditional financial institutions, and towards non-traditional financial service providers

Out of the branch, and onto the computer

Off the computer, and onto the mobile device

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Paradigm Shift in Banking Channels

Page 14: Banking Disruption in Financial Services: Threats and Opportunities

94% Are active users of online banking

72% Are active users of mobile banking

72% Would be likely to bank with non-financial services companies with which they do business

67% Feel the traditional and digital experience they receive from their bank is somewhat or not at all seamless

39% Would consider using a branchless digital bank

33% 1/3 of the US Population

Millennials: By the Numbers

14Source: Accenture, Nielsen, Pew Research

Page 15: Banking Disruption in Financial Services: Threats and Opportunities

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Branch growth has peaked. Online banking growth has stabilized.

Mobile is the current avenue of growth. Social is on the horizon.

Page 16: Banking Disruption in Financial Services: Threats and Opportunities

Clicks versus Bricks

Online and mobile have grown at the expense of the branch.

47% of people use mobile or online channels as their primary method of banking.

47%

30,000

60,000

90,000

120,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Credit Unions Commercial Banks

Num

ber o

f U.S

. Bra

nche

s

16Sources: Bank of America, Business Intelligence, CUNA

Page 17: Banking Disruption in Financial Services: Threats and Opportunities

ChaseChase

How are the Big Banks Approaching Mobile?

0

22.5

45

67.5

90

Q4 201

1

Q1 201

2

Q2 201

2

Q3 201

2

Q4 201

2

Q1 201

3

Q2 201

3

Q3 201

3

Q4 201

3

Q1 201

4

Q2 201

4

Online growth has stabilized; Mobile use has doubled in the last 3 years

Wells Fargo

Bank Of AmericaOnline

CustomersMobile

CustomersWells Fargo

Bank Of America

Sources: Company Filings, BI Intelligence17

Page 18: Banking Disruption in Financial Services: Threats and Opportunities

Each week…

of customers use ONLINE BANKING

use MOBILE BANKING

visit a BRANCH

Social will be the next wave of growth.It is an opportunity for FIs that embrace it, but a threat to those that ignore it.

57%

22%

14%

Online and ATM are still the 2 most commonly used banking channels.

use SOCIAL MEDIA to interact with their FI10%

Shifting Habits are De-Emphasizing the Branch

18Source: BI Intelligence

Page 19: Banking Disruption in Financial Services: Threats and Opportunities

The paradigm shift towards mobile and social banking is gaining momentum.

CAGR of mobile technology spend in the next 4 years.

Change in total technology spend between 2013 and 2016.

14.6% 4.2%

Consumer Preference is Driving Future Technology Investment

FIs are shifting technology investments accordingly.

Mobile Spend Total Tech Spend

vs

Sources: Aite, BI Intelligence, CEB Tower Group

Page 20: Banking Disruption in Financial Services: Threats and Opportunities

All of the 20 largest banks and 20 largest CUs in the country have NATIVE apps for

both Android and Apple devices.

Banking Apps are as Prevalent as ATMs

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Page 21: Banking Disruption in Financial Services: Threats and Opportunities

Wallets: By the Numbers

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38% 38% of people would use a smartphone as a wallet.

50% 5 out of 10 of the largest banks launching with Apple Pay.

220k 220,000 merchants accept Apple Pay.

110k 110,000 merchants accept CurrentC from MCX

$27b PayPal's mobile payment volume in 2013.

6 of the largest card issuers are partnering with Apple at launch

Sources: Bank of America, Company Filings

Page 22: Banking Disruption in Financial Services: Threats and Opportunities

The Future Will be on Your Wrist

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Wearables Todayalready own wearable technology

would purchase wearable technology

would not buy it

5%

44%

47% Apple Watch will be able to make point-of-sale purchases.

CaixaBank and Visa are piloting payment wristbands to 15,000 customers. Linked to credit or debit accounts, the wearer simply will wave it in-front of a reader to make a purchase. Barclays is also piloting a wearable

called “bPay Band” that will be available in 2015.

Apple will ship 15m watches in 2015, securing ~40% market share of smart watches. The launch of the Apple Watch will validate wearables as a viable product and payment category — just like iPod, iPhone, and iPad validated their categories.

Sources: Bank of America, BI Intelligence Estimates, Company Filings

Page 23: Banking Disruption in Financial Services: Threats and Opportunities

The Wallet Wars Have Started

Millennials are the largest potential pool of new members and are also the least satisfied.

The mobile wallet could deliver the seamless, frictionless experience that Millennials crave.

Retailers such as CVS and Walmart are trying to pick sides and keep Apple Pay out of their stores.

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Banks and Credit Unions are evaluating their options for staying relevant in the wallet ecosystem.

Banks and credit unions need to be on the forefront of delivering the technology, services, and experience Millennials are looking for today.

Page 24: Banking Disruption in Financial Services: Threats and Opportunities

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The potential for retail, technology, and telecom firms to disintermediate financial

institutions from payments and, ultimately, their customers is real; but there are distinct growth opportunities for those willing to adapt to the

new environment.

Page 25: Banking Disruption in Financial Services: Threats and Opportunities

Move Beyond the Transaction

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The goal of these financial institutions should be to shift service offerings,

business models, and culture to stay positioned as critical players in the

value chain of payments and the larger banking ecosystem.

of customers in the US and Canada have been at their current bank for 10 years or more.

40%

Source: Accenture

Page 26: Banking Disruption in Financial Services: Threats and Opportunities

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Create the Banking Experiences Millennials Want

Recognize they value different things than their parents

Convenience over

Brand

Immediacy over

Trust

User Experience over

Relationship

Self-Service over

Face-to-Face

Page 27: Banking Disruption in Financial Services: Threats and Opportunities

Eliminate the Reasons to Switch to a Non-Bank

International remittances p2p payments

Wallet Mobile deposit

Prepaid cards Personal financial management

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Page 28: Banking Disruption in Financial Services: Threats and Opportunities

mobile

online

social

branch / ATM

It’s the key to creating a seamless banking experience that is defensible against new threats and marketable to new customer segments.

Omni-Channel Banking is not Just a Buzz Word

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Page 29: Banking Disruption in Financial Services: Threats and Opportunities

Move Beyond the Transaction

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of people in the US characterize their banking

relationship as

VS

TRANSACTIONAL RELATIONSHIP

74%My relationship is defined by

simple transactions like paying bills, checking account

statements, etc…

Source: Accenture

Page 30: Banking Disruption in Financial Services: Threats and Opportunities

Relationship banking that delivers long-term strategic guidance is where traditional financial institutions have

the advantage.

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Page 31: Banking Disruption in Financial Services: Threats and Opportunities

Who Will the Winners Be?

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Agility

Early adopters

Innovators

Embrace change

First-movers

Move fast

Fast growth

Low risk aversion

Grow market share

LEADERS

Copy catsWait and see

Reluctant to be first mover

Never try new technology without seeing its feasibility proven

Slow to change

Moderate risk aversion

Stable market shareFOLLOWERS

Late adopters

Zero innovationReactive / not proactive

Resistant to change

Shrinking market share

High risk aversion

LAGGARDS

Page 32: Banking Disruption in Financial Services: Threats and Opportunities

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FIs need to refashion their internal culture to embrace innovation and become

the first-movers in delivering new service offerings or they will lose the fight for

Millennials — and their future.

Page 33: Banking Disruption in Financial Services: Threats and Opportunities

Sources

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Disruption is Here: 1 Accenture, “Banking 2020,” 2013 The Apple Effect: 1 SeekingAlpha.com, “Apple’s (AAPL) CEO Tim Cook On Q4 Results- Earnings Call Transcript,” 2014 Banking with Non-Banks: 1 Accenture, “The Digital Disruption in Banking,” 2014 New Threats- Present and Future: 1 Ibid Technology: 1 TheVerge.com, “Google touts 1 billion active Android users per month,” 2014 2 Asymco.com, “Monthly Apple Users,” 2014 3 Paypal.com, “Online: Love at first site,” 2014 4 Square.com, “Business Types,” 2014 Retail: 1 Statisticbrain.com, “Wal-Mart Company Statistics,” 2014 2 Trefis.com, “Costco Wholesale (COST),” 2014 3 GeekWire.com, “Amazon Prime tops 20 million members as c company touts its best holiday season ever,” 2013 Telecom: 1 T-Mobile.com, “T-Mobile US, Inc.: America’s Un-carrier,” 2014 2 Statista.com, “Market share of wireless subscriptions held be c carriers in the U.S. from 1st quarter 2011 to 2nd quarter 2014,” 2014 2014 3 Sprint.com, “Sprint Reports Results for the Quarter Ended M March 31, 2014,” 2014 Millennials: By the Numbers: 1 Accenture, “The Digital Disruption in Banking,” 2014 2 Nielsen, “Millennials: Breaking the Myths,” 2014 3 Pew Research, “Millennials in Adulthood: Detached from Institutions, Networked with Friends,” 2014

Clicks versus Bricks: 1 Bank of America, “Trends in Consumer Mobility,” 2012 2 BI Intelligence, “The Mobile and Online Banking Report: Mobile Is Pulling Customers Away from Branches and Online Banking,” 2014, p. 7 3 CUNA, “Credit Union Report year-End 2013,” 2014 How are the Big Banks Approaching Mobile?: 1 BI Intelligence, “The Mobile and Online Banking Report: Mobile is Pulling Customers Away from Branches and Online Banking,” 2014, p. 10-11 Shifting Habits are De-Emphasizing the Branch: 1 Ibid, p. 3 Consumer Preference is Driving Future Technology Investment: 1 Ibid, p. 12 2 Ibid, p. 19 Wallets: By the Numbers: 1 Bank of America, “Trends in Consumer Mobility Report,” 2014, p. 11 2 MCX.com, 2014 3 Apple.com, “Apple Pay,” 2014 4 Paypal-media.com, “Financials,” 2014 The Future Will Be On Your Wrist: 1 Bank of America, “Trends in Consumer Mobility Report,” 2014, p. 12 2 CaixaBank.com, “CaixaBank launches the first Visa contactless wristband, supporting payments with a simple tap of the wrist,” 2014 3 BI Intelligence, “The Wearable Computing Market Report: Growth Trends, Consumer Attitudes, and Why Smartwatches Will Dominate,” 2014, p. 10 4 Mobile Payments World, “Bayclays Set to Launch Contactless Payments \Wristband,” 2014 Move Beyond the Transaction (1): 1 Accenture, “2014 North America Consumer Digital Banking Survey: The Digital Disruption in Banking,” 2014, p. 2 Move Beyond the Transaction (2): 1 Ibid, p. 4