fis strategic insights vol 7 may 2012

VOLUME 7 • MAY 2012

FIS STRATEGIC INSIGHTS • V 7 MAY 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved.

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By Fred Brothers EXECUTIVE VICE PRESIDENT, STRATEGIC INNOVATION

This month I’m going to discuss a few fi nancial instruments that didn’t exist a few years ago, some of which are already changing the way people pay for things. Several of these innovations could potentially turn the current payment system on its side. I also want to discuss a fast-growing form of lending, which could transform the historically symbiotic connection between a small business and its local bank into a relationship between a small business and anyone in the world. Here’s my list:

Innovation or Disruption? Six New Financial Instruments that Could Change the Face of Banking and Payments

I N T H I S I S S U E

• Innovation or Disruption? Six New Financial Instruments that Could Change the Face of Banking and Payments

• Engaging Customers through Loyalty Programs

• Large vs. Community Bank Customer Demographics and Rewards Program Participation

• Walmart MoneyCenter™ – Friend or Foe?

1. Mobile-assisted checkout2. Dual debit and credit cards

3. Merchant-funded rewards4. Square

5. Social media payments6. Person-to-person (P2P) lending

1. Mobile-assisted Checkout

Watch for more pilots and rollouts of mobile solutions that speed the checkout process at retail. Mobile-empowered retail payments are emerging faster than anticipated and in multiple forms. Several high-profi le retailers such as Old Navy®, Urban Outfi tters and Nordstrom have followed Apple’s lead by “bringing the terminal to the shopper” to reduce frustration in packed stores and to provide a more personalized customer experience even when stores aren’t jammed.


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Last holiday season, one of my colleagues went gift shopping at Old Navy when the lines were long and shopping time was short. While standing in line, she was approached by an Old Navy employee who asked her if she was paying with a credit card. When she replied “yes,” the employee pulled out his iPod Touch®, scanned the tags, totaled the sale, swiped her card, asked her to “sign” the screen with her fi nger and e-mailed her receipt to her.

Another version of facilitating the checkout process in “bricks and mortar” retail is exemplifi ed by Jeni’s Splendid Ice Cream – known to us locals as “Jeni’s.” Jeni’s has gained notoriety even outside of Columbus, Ohio because of its unusual fl avors such as goat cheese with cognac fi gs and Queen City cayenne. During warm weekends, a line of customers wraps around Jeni’s as “lickers and tasters” sample several fl avors before ordering. The long queue becomes an obstacle to the optimal customer experience for those of us who: 1) know what we want, 2) don’t want to sample, 3) don’t want to talk with strangers for a half an hour, or 4) have limited time to engage with ice cream no matter how splendid. To accommodate these customers, Jeni’s developed a mobile app for avoiding the line. Customers can now order, pay and proceed to a separate pickup area and get their cones in less than a minute from entering the front door.

2. Dual Debit and Credit Cards

Dual debit and credit cards made a re-entry into the U.S. last summer via Fifth Third Bank’s Duo CardSM about the same time that IDBI launched its debit/credit card – the Magic Card – in India. A year earlier, People’s Bank (POSB Bank of Singapore) debuted its Multi-tude card in Singapore – a debit card with micro credit tied to it and targeted to youth. While the reasons why banks are introducing these dual cards differ depending on country and target, the main message to consumers is universal. The cards offer fi nancial fl exibility to people who need it.

Dual cards look like a win-win-win proposition.

• The dual cardholder gets access to a line of credit, automatic overdraft protection and perks associated with credit cards, which are diminishing for debit cardholders.

• The U.S. retailer can (and will likely) steer the transaction toward debit, thereby reducing merchant service fees.• The issuer makes money on monthly card fees for those who don’t meet minimum balance requirements and on the

double-digit interest rate attached to revolving credit – for Fifth Third’s Duo, after the introductory promotional period with zero interest expires.

Credit cardholders who pay off their bills monthly are unlikely candidates for dual cards. The target for dual cards is the traditional debit card user who needs a line of credit until payday. For banked consumers who are able to access a line of credit, dual credit cards make a lot more sense and are more convenient than payday loans. 3. Merchant-funded Rewards

Groupon™ launched at the end of 2008 and LivingSocialSM morphed into a daily deal company the following year. The American public was in the grips of a deep recession and daily deals on restaurant fare, no doubt, kept some small businesses afl oat while providing consumers a rationalization for dining out. Flaws in these types of merchant-funded rewards (MFRs) have included: 1) until an individual displays a pattern of response to MFRs, offers are scattershot, and 2) the deals have to be so compelling to motivate consumers that merchants operating on thin margins sometimes even lose money. The only way these merchants can justify participation is through turning trial into repeat business.

Fast forward to post-Durbin when MFRs become an attractive substitute for debit card points. Financial institutions – especially those with customer loyalty programs in place – have a competitive advantage in the MFR arena. They have the ability to leverage marketing analytics to target customers with relevant offers. And, they have direct ties to local merchants to develop programs that benefi t these small businesses.


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4. Square

I was in a cab the other day and had to pay with a $100 bill for the ride because the driver’s credit swipe system was down. I asked the driver why he doesn’t use Square™ and he told me that his taxi company wouldn’t let him use it, because they want to charge him 10 percent of the fare for using their system instead. Square only charges 2.75 percent per swipe. Regardless of my recent anecdotal experience with taxis and Square, Square is making friends with New York City Taxi Commission and is testing in-taxi devices with a simpler and cooler-looking setup – a combination of the Square credit card acceptance app with an iPad® secured in a black metal case. Riders swipe, sign with their fi ngers and receive receipts via e-mail or mobile text.

5. Social Media Payments

My nephew plays FarmVille™ and pays for his equipment and livestock in Facebook Credits™. I’m fl oored by the number of channels that exist for buying and earning Facebook Credits. For example, leading retailers such as Target™, Walmart™ and Best Buy™ sell Facebook Credits gift cards. Through ifeelgoods™, a promotional company for Facebook Credits, online retailers such as 1-800fl owers.com™ and CPG companies such as Coca-Cola™ offer Facebook Credits as promotional incentives – which are more interesting to my nephew than coupons.

According to Facebook’s S-1 fi ling, 15 percent of its $3.7 billion in 2011 revenue came from payments. That’s a ton of 10-cent Facebook Credits and 30 percent interchange on games. As Facebook receives money transmitter licenses across states – 15 as of February according to Bank Technology News – speculation about what Facebook will do with its licenses ranges from arming itself for potential run-ins with state regulators to expanding its payments business to P2P transfers.1

6. Peer-to-peer Lending

Peer-to-peer (P2P) lending in its current form emerged around 2006 – 2007 with the founding of Prosper and Lending Club™ – the largest players in the U.S. Despite halting operations at the height of the fi nancial crisis when the SEC shut down Prosper, both companies were able to resume business in 2009 after complying with SEC rules. Neither Prosper nor Lending Club represents a pure P2P model because they are intermediaries in the transaction – charging fees to facilitate the transaction and using WebBank for funding the transaction.

Gartner has forecasted that P2P lending will grow to $5 billion in outstanding loans by 2013.2 Growth in P2P lending is being fueled by factors associated with the current economic climate and the current P2P models:

• Loans have been hard to get and expensive for entrepreneurs, especially those without sterling credit histories. Because P2P lending cuts out additional expenses associated with traditional fi nancial intermediaries, loans are often made at lower-than-market rates.

• Investors are looking for opportunities that provide higher rates of return and diversifi cation of their portfolios. • The act of staking a struggling small business owner can provide “feel good” benefi ts to an investor. Prosper

encourages social networking among borrowers and lenders to foster a sense of community.

All of these new fi nancial instruments are not just interesting, but potentially game-changing for fi nancial institutions. In future articles, I’ll delve deeper into some of these topics and other innovations that are reshaping our industry. In the meantime, we’ll continue monitoring, analyzing and strategizing these opportunities and threats so FIS™ can help you to better serve your customers and compete more effectively. As always, I welcome your insights.

1 Sean Sposito, “Facebook Fast-Tracks Its Payments Business.” Bank Technology News 21 February 20122 Gartner, “Gartner Says 50 Percent of Banks Will Still Lack an Innovation Programme and Budget by 2013,” 5 January 2010


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Interview with Bob LegtersSENIOR VICE PRESIDENT, LOYALTY SERVICES

Background

Today’s marketplace is crowded with loyalty programs and “deals.” Loyalty programs are so common in some industries they have become “cost of entry” in attracting and retaining the most desirable customers. However, growth in loyalty programs overall is slowing as the market becomes saturated. The average U.S. household is enrolled in more than 18 loyalty programs, though only active in 8.4 of them according to Colloquy. During the 2008 – 2010 period, growth in fi nancial services loyalty programs declined precipitously from previously robust growth to a meager 1.6 percent due to cutbacks in credit card offers from fi nancial institutions and credit card charges by

consumers.1 Today, a resurgence of credit card loyalty programs is occurring as large fi nancial institutions, in particular, migrate loyalty program participation from debit to credit and as consumers regain their appetites for using credit cards.

Primary research conducted by FIS (see this issue’s article by Paul McAdam) found that participation in loyalty programs is higher among profi table customers, but lags signifi cantly among community bank customers. We recently talked with Bob Legters, senior vice president of Loyalty Services, about how smaller fi nancial institutions can leverage loyalty programs to differentiate themselves and improve the quality of their customer bases.

Time to Evaluate Loyalty

Why is it critical right now to re-evaluate your current loyalty program or establish a loyalty program if you don’t offer one?

Bob Legters: Much has been included in the marketing communications and offer space people call a loyalty program. At FIS, we defi ne a loyalty program as one that drives customer engagement and keeps customers connected to your products. The three key components of any rewards programs are:

1. The earnings ratio – how many points per transaction; 2. The content of the redemption offer – cash back, merchandise, travel or something unique such as gifts to

charities; and 3. Engagement in the marketing engine – the way the program is messaged and marketed to drive desired behavior.

In both fi nancial and retail industries, loyalty programs are table stakes for the vast majority of companies. A steady stream of deals and rewards has trained consumers to expect added-value benefi ts. Only low-cost leaders – selling an everyday low price value proposition instead of an engagement proposition – can afford not to offer a loyalty program. Unless you can be the low-cost leader in your industry, you’re going to have a competitive disadvantage without some type of incentive or rewards program. Logic tells you that if you have someone’s primary checking account but not their primary credit card, a competitor has it. And that competitor is likely to pursue their checking account. The points-based rewards card is a staple in the marketplace. And if you don’t offer rewards, you are at risk of losing the banking relationship because someone else is talking to your customer at least 12 times a year through their credit card statements and other communications.

Engaging Customers through Loyalty Programs


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How do we know that loyalty programs are worth the investment? How much participation does a bank need to make a loyalty program worthwhile?

Bob Legters: To gauge the performance of loyalty programs, we measure acquisition, activation, usage and retention. We measure number of transactions per month, dollar amount per transaction per month and percentage of active accounts (Figure 1). Our loyalty programs have rarely failed to increase the transactions, the dollar amount per transaction and the percentage of active accounts.

There are additional benefi ts that fi nancial institutions gain through loyalty programs, but we don’t count those in our performance statistics. For example, if the fi nancial institution meets certain requirements, it can get incentive-based points from MasterCard™ or Visa™. It’s also generally the case that engaged customers buy additional products from you. But we steer clear of taking credit for everything the cardholder does to ensure we don’t overstate the value of the loyalty program.

You need to have a program that has suffi cient scale. We used to say that 500 or 1,000 cards were a minimum to offer an affordable loyalty product, but we have clients with as few as 50 loyalty cards. Those small programs are part of an overall value proposition to exclusive customers because the cost of losing those customers exceeds the back-end expense of the program. That being said, our experience says that 500 − 1,000 cards is usually a barebones number to make a loyalty program worthwhile. At that level, the loyalty program is keeping the fi nancial institution competitive, but not generating signifi cant revenue. While the direct revenue a fi nancial institution generates through these smaller loyalty programs may not be signifi cant, the program increases the level of customer engagement and greatly reduces the odds a competitor will steal the credit card relationship.

Total Relationship Banking

FIS research has shown that when a customer has their primary credit card with their primary checking account provider, their overall deposit and loan balances and the profi tability of that customer is signifi cantly higher. How do you build that total relationship?

Bob Legters: The biggest challenge for total relationship rewards programs is breaking down the silos among departments within fi nancial institutions. Typically someone is in charge of loans, another person is in charge of deposits and a third person may be in charge of payment mechanisms. Often, there isn’t an overarching strategy that connects the products.

A powerful tactic for building a successful relationship rewards program is householding all the points into one pool. Once you can offer that, you are in the consumer’s consideration set for any fi nancial decision. Your customer will consider what you can do for them before looking at other options because the rewards points just keep pouring into their pool.

How do you strike the right balance between offering rewards that help retain and strengthen relationships with customers and overwhelming them with so many messages that they stop responding to key selling messages?

Bob Legters: There are a lot of people trying to determine the answer to that question especially with the advent of merchant-funded rewards (MFR). The MFR model is one of the few models in the market that is win-win-win. The merchant gets an incremental transaction, the fi nancial institution gets a self-funded rewards offering and the consumer gets to earn more.

Figure 1: FIS loyalty value

Rewards vs. Non Rewards

Percent of Active Accounts

Sales Volumn/Active/Year

Average Ticket

Transactions/Active/Month

Finance Charge Income/Active/Year

Interchange Income/Active/Year

Average Outstandings/Active/Year

Comparison (+/-)

4.22%

$2,359

$6.00

2.13

$20

$37

$684

Source: FIS


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Our MFR strategy was predicated on rolling out a merchant-funded destination site to offer additional engagement opportunities for the consumer. We didn’t want consumers to feel as if they were being spammed or their privacy was being invaded. You want:

1. The MFR to be easy to fi nd; 2. The message to be tailored; and 3. The message to be conveyed at tolerable intervals.

We do caution clients that MFRs have the potential to drive consumers’ loyalty to the coupon rather than the fi nancial institution. You don’t want to turn customers into deal-seekers because when the fi nancial institution across the street offers a better short-term deal such as a teaser rate, you could lose the customer.

Differentiation from the Large Banks

With the big fi nancial institutions refi ning their loyalty programs, where should smaller fi nancial institutions direct their attention to get the best return on their investment and how can they differentiate their programs?

Bob Legters: The fi nancial institutions with more than $10 billion in assets are using very aggressive offers to migrate the revenue opportunity they lost on debit to the credit side of the business. If I ran a small- to mid-tier fi nancial institution, I would: 1) have a competitive credit card program because it’s very profi table and without one, I’m vulnerable to competition, and 2) leverage the advantage I still have in debit to offer a program that’s richer and more enhanced than what the large fi nancial institutions can offer. A good, competitive client might say, “I see what the large fi nancial institutions are doing in debit and while they’re backing down, I’m going to step it up and steal business.” On the credit side, the playing fi eld is very level, which means you must be competitive to retain market share. The best thing you can do to differentiate your loyalty program is to incorporate it into your overall strategy.

Next Generation Loyalty

What’s on the horizon? What does the next generation of retail fi nancial services loyalty offerings look like?

Bob Legters: I believe that mobile and GPS-oriented space for the deal is the next “big thing.” Instead of being targeted when they are on their banking site, consumers will receive messages when they are engaging in shopping activities and considering payment choices.

There may be some new currencies for rewards, but consumers respond well to cash back and points so I don’t anticipate a sea change in that arena. The points programs work today because they are relevant.

The future includes social media for deal shopping as well as rewards earning. As we move forward, social media currency could provide an earning opportunity for consumers who spend a lot of time in the social media space. Social networking could drive comparison shopping – including shopping for fi nancial produces – to new levels. That’s another reason why it’s so critical right now to re-evaluate or establish customer loyalty programs.

1 Colloquy, “The Billion Member March: The 2011 COLLOQUY Loyalty Census: Growth and Trends in Loyalty Program Membership and Activity.” April 2011


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By Paul McAdamSENIOR VICE PRESIDENT, RESEARCH AND THOUGHT LEADERSHIP

In my past two articles I’ve discussed challenges and opportunities associated with community banks and credit unions that are driven by the characteristics of their retail customer bases. Although community bank customers and credit union members are more loyal to the fi nancial institutions where they have their primary checking account relationships, they are not as profi table to their institutions as the average bank customer. The affl uence gap between community bank customers and the average bank customer limits opportunities. In contrast, the level of affl uence of the credit union member base is consistent with the average bank customer, but credit unions capture a smaller share of the fi nancial wallet from their members.

This month’s article analyzes the characteristics of the U.S. “large bank” customer base. Our analysis defi nes large banks as the 12 institutions that have more than 1,000 branches. In particular, I’ll talk about differences between community bank and large bank customers, differences in reward program participation, and how these factors drive variations in consumers’ fi nancial behaviors.

Analyses cited in this article are generated from primary research conducted with a sample of 3,345 adults with checking accounts conducted by FIS in August 2011. Large bank customers account for 52 percent of the representative sample. And, because they are such a large percentage of the bank customer population, their characteristics are often similar to the norm.

Demographic Differences

One big difference between large bank and community bank customers is their place of residence (Figure 1). Large bank customers are less than half as likely to live in a small town or a rural area while community bank customers are concentrated in small towns, rural areas and small metropolitan markets. Large bank customers tend to reside in mid-size or large metro areas – areas where growth tends to be faster, job opportunities more plentiful and incomes higher.

Large vs. Community Bank Customer Demographics and Rewards Program Participation

4281

116

331

138

53

Small town/rural Small metro Mid-size/large metro

Figure 1: Relative to community bank customers, large bank customers are concentrated in mid- to large-sized markets

NationalAverage = 100

* Read as: Within rural and small towns, consumers are less than half as likely to bank with a large bank (index = 42).Source: FIS primary consumer research, August 2011; n = 3,345

Large bank Community bank

Concentration of large bank and community by market(national average = 100)


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Another signifi cant demographic difference between large bank and community bank customers is lifestage (Figure 2). On average, large bank customers are younger than community bank customers. Lifestages of large bank customers tilt toward Gen Y (20- and early 30-somethings) and, to a lesser extent, Gen X (mid-30s to late-40s) while community bank customers are older and particularly concentrated in the Mature lifestage, which is composed of consumers who are more than 65 years old. Differences in lifestage drive a large part of fi nancial behavior as younger lifestages are nest-building and accumulating and older lifestages are clearing out their nests and preparing for retirement, if not already retired. The geographical and age differences between large bank and community bank customers infl uence other demographics, which affects fi nancial behaviors. Large bank customers are:

• A little more likely than the national average to be employed while community bank customers are much more likely to be retired;

• Seven percent more likely than the national average and 28 percent more likely than community bank customers to be college graduates;

• About as likely as the national average but 15 percent less likely than community bank customers to be married/living with a partner;

• Above the national household income average by about fi ve percent, but well above (18 percent higher) the average household income for community bank customers.

The favorable demographics of large bank customers help these fi nancial institutions capture higher deposit and investment balances as well as higher loan and credit card balances on average (Figure 3). Among customers who have their primary checking account relationships with large banks, they hold an average of nearly $36,000 in deposits and investments and about $31,000 in loans and credit card debt with their institutions. Community banks are able to capture about $32,200 in deposits and investments but, at about $16,300, fall well short of the amount of loans and credit card debt that large bank customers have with their institutions.

Because older customers tend to hold higher deposit balances, the older community bank customer base’s deposit balances are relatively high given their earning power. Older demographics are a double-edged sword, however, because they also dampen the need for loans. The biggest difference between large bank and community bank customers in lending behaviors is found in the category of fi rst mortgages on the primary residence. We see signifi cantly greater dollar amounts in fi rst mortgages held by large bank customers with their primary fi nancial institutions, which is refl ective of their younger, more accumulative lifestages as well as higher real estate costs in the more urban areas where these customers tend to reside.

NationalAverage = 100


113*105

93 93 84

62

91

117 114

143

Gen Y Gen X Younger Boomers Older Boomers Mature

Figure 2: Large bank customers skew younger than national norms while community bank customers are older

* Read as: Large bank customers are 13% more likely than the national norm to be members of Generation Y (index score = 113).Source: FIS primary consumer research, August 2011; n = 3,345

Composition of large bank and community bank customers by generation(national average = 100)

Figure 3: Large banks capture higher deposit, investment, loan and credit card balances on average

* Read as: Consumers who identified a large bank as their primary checking account provider hold an average of $35,861 in deposit and investment balances with the bank.Source: FIS primary consumer research, August 2011; n = 3,345

$35,861*

$24,016

$32,240$30,306$31,029

$16,539 $16,273$13,389

Large bank Regional bank Community bank Credit unionDeposits and investments Loans and credit card debt

Average balances consumers hold with primary checking account provider


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Demographic differences between the two customer bases contribute to large bank customers’ greater likelihood of being profi table compared with community bank customers (Figure 4). An estimated 41 percent of the primary checking account relationships of large bank customers are profi table compared with only 34 percent of community bank customers. Our research took several factors into account in computing estimated profi tability including fees, interest income and payment and channel usage. Other factors that contribute to the higher profi tability of large bank customers are higher fees charged by large banks and usage of lower-cost channels by their customers.

The Loyalty Advantage

Although large bank customers are more likely to be profi table, community banks hold the edge on the issue of customer loyalty. Only 39 percent of large bank customers exhibit some degree of loyalty, but 54 percent of community bank customers are loyal. Our research scored customers’ loyalty to their primary checking account providers based on several factors, including: trust in their institutions and willingness to recommend; willingness to make a repeat purchase and consolidate funds; and identifi cation with the institutions’ brand values. The gaps between customer profi tability and loyalty highlight the key challenges faced by both large and community banks.

• Large banks have a higher portion of primary checking account relationships that are profi table, but could perform even better if they increased the portion of loyal customers.

Figure 4: Large banks have higher percentages of profitable customersbut significantly lower percentages of loyal ones

* Read as: 41% of consumers who hold their primary DDA relationship with a large bank are profitableSource: FIS primary consumer research, August 2011; n = 3,345

41%* 37% 34% 36%

39%

47%

54% 55%

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

Large bank Regional bank Community bank Credit unionLoyal

Profi

tab

le

Percentages of Customers Who Are Profitable and Loyal to their PrimaryChecking Account Provider

Figure 5: Large banks’ customers are much more likely to participate in a rewards program

23%*

31%

26%

13%10% 10%

Checking account rewards Debit card rewards Credit card rewards


* Read as: 23% of consumers who hold their primary DDA relationship with a large bank participate in a checking account rewards program with the bank.Source: FIS primary consumer research, August 2011; n = 3,345

Percent of consumers who participate in each type of loyalty program withtheir primary checking account provider

• Community banks generate strong loyalty, but capture lower profi tability due to customer demographics and lower cross-sell of loans to existing checking account relationships (particularly fi rst mortgages and credit cards).

Our research also reveals signifi cant differences in rewards program usage among customers of large and community banks and suggests how these programs can provide remedies for both types of institutions.

When comparing the customer bases of large and community banks, a much higher portion of large bank customers participate in their providers’ loyalty programs (Figure 5). Twenty-three percent of large bank customers participate in their primary checking providers’ checking account rewards programs, 31 percent participate in their providers’ debit card rewards programs, and 26 percent participate in the rewards programs of the credit cards offered by their primary checking account providers. Participation rates in these same rewards programs by customers of community banks are signifi cantly lower (ranging from 10 − 13 percent).


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These rewards program participation rates contribute signifi cantly to the customer profi tability differential between large and community bank customers because: 1. Banking customers who participate in any of these

three rewards programs (regardless of the size of the institutions’ offering the programs) are 100 percent more profi table than customers who do not. Large banks realize rewards program participation rates 2 − 3 times higher than community banks.

2. Among all primary checking account customers who participate in any of these three varieties of rewards programs, large banks generate higher levels of profi tability than community banks.

Drilling deeper into this second point on the profi tability gap between large and community banks, our data reveals the following:

• Among large and community bank customers who participate in their primary providers’ checking account rewards programs (the 23 percent and 13 percent in Figure 5), large banks generate average customer profi tability 48 percent higher than the profi tability attained by community banks.

• For debit card rewards programs, the average profi tability differential between the participating customers of large and community banks expands to 199 percent − three times the profi tability.

• Among large and community bank customers who participate in the credit card rewards programs offered by their primary checking providers the average customer profi tability gap narrows to a four percent difference in favor of large banks.

So clearly the large banks have a rock solid business case for driving customer utilization of rewards programs. In addition, there’s strong evidence that rewards programs are the secret sauce that encourages some large bank customers to consolidate balances and keep the bank’s payment card top-of-wallet. In other words, while these consumers may not feel a particularly strong sense of “loyalty” toward the large bank, they value receiving competitive products and the benefi ts associated with rewards programs. Thus in the expansive, mass-market distribution networks of the large banks − where achieving high levels of sales and service consistency will always be a challenge − rewards programs are the glue that encourages some customers to expand and maintain their relationships.

Community banks face a different challenge. While it’s true that some community banks do not place a high degree of strategic emphasis on retail credit card programs and residential mortgage lending, there is evidence that card-based and relationship rewards programs can boost profi tability. Recall from Figure 4 that although community banks have a large loyalty advantage relative to large banks, this doesn’t necessarily lead to wallet share and customer profi tability advantages. As this article points out, customer demographics certainly infl uence this, but there’s no reason to believe that community banks cannot also use rewards programs to their advantage to signifi cantly increase wallet share and profi tability. Community banks excel at a model of providing high service levels through local presence and decision making. Driving customer rewards program participation beyond the current levels of 10 to 13 percent of primary checking account relationships can fortify the community banking business model and help attract younger customers.

I’d be interested in your perspectives and experiences on the impacts that customer rewards programs have had at your institution. Feel free to contact me at paul.mcadam@fi sglobal.com with your comments or questions.


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By Mandy PutnamDIRECTOR, RESEARCH AND THOUGHT LEADERSHIP

My friend Dan’s niece is in need of a cash infusion routinely, but doesn’t have a checking account. Before Dan became the hapless benefactor to his niece, he was a member of the small part of the population that never shops at Walmart. Now he’s on a fi rst-name basis with the woman who handles wire transfers at the Walmart MoneyCenter. Walmart MoneyCenter brings together a number of services – credit cards, prepaid cards, money transfers, bill pay, money orders, check cashing, etc. – under its umbrella and makes it possible, as well as convenient, for people such as Dan’s niece to have access to fi nancial services. Even if she becomes solvent enough to have a bank account, I’m not sure she’ll become banked. Like many members of her generation, she’s embraced alternative ways of navigating the fi nancial waters.

We recently completed a consumer survey, which focuses on trends in payment methods. One of the survey questions asked how many transactions consumers made in the past 30 days at the Walmart MoneyCenter. Of our 3,205 respondents, fi ve percent had made at least one transaction there. MoneyCenter users in our survey averaged 2.2 transactions per month. That’s about as many trips that banked consumers make to their fi nancial institutions (not counting ATM-only trips).

One of the outputs of our payments survey is a payment typology. We segmented adult consumers into fi ve categories based on the payment methods they favor:

1. Cash users typically pay with cash, prepaid cards or gift cards and represent 27 percent of the sample.

2. Debit carders are the biggest segment, at 34 percent.

3. Innovators – a very small two percent of the sample – are generally young folks who make a relatively high percentage of their payments via mobile and/or contactless devices.

4. The dwindling Paper Check Writers currently account for 11 percent.

5. Credit Carders represent 26 percent.

Walmart MoneyCenter customers are concentrated in the Cash User segment though a disproportionately high (16 percent) number of them are Innovators (Figure 1). Both segments also exhibit higher-than-average usage of prepaid cards, but similarities between the two segments end there. Demographically, the two groups differ dramatically. Cash Users are very similar in age and income to Debit Carders while Innovators are much younger and more affl uent.

Walmart MoneyCenter – Friend or Foe?

45%*

25%

16%

7%

7%

26%

34%

2%

11%

27%

Cash users (27%)

Debit carders (34%)

Innovators (2%)

Paper check writers (11%)

Credit carders (26%)

Walmart MoneyCenter Users

Non-users

* Read as: 45% of Walmart MoneyCenter Users are in the Cash user segment.Source: FIS Payment Survey, February 2012; n = 3,205

Figure 1: Walmart MoneyCenter users are most likely to be cash users


12

55

114

267*

4169

138177

288

3368

* Read as: Walmart MoneyCenter Users are more than two-and-a-half times as likely than non-users to be in the Fiscal Fledglings P$YCLE segmentSource: Nielsen and FIS Payment Survey, February 2012; n = 3,205

Figure 2: Indices of Walmart MoneyCenter users show concentration in Fiscal Fledglings and Working Class USA P$YCLE segments

Younger Years Family Life Mature Years

* Read as: 37% of Walmart MoneyCenter Users have their primary checking account with a national bank.Source: FIS Payment Survey, February 2012; n = 3,205

Figure 3: Walmart MoneyCenter users are less likely to have checking accounts

37%*

17%

14%

9%

4%

20%

46%

16%

20%

11%

3%

4%

National Bank

Regional Bank

Credit Union

Community Bank

Other

Do not have checking account Walmart MoneyCenter Users

Non-users

The Cash User segment also is well-known at point-of-sale (POS) in Walmart, not just at the Walmart MoneyCenter. Mike Cook – a vice president at Walmart who’s described as “the most powerful man in payments” – is working on systems to make cash payments easier and faster for Walmart to accept at POS because many customers pay in cash. Credit cards only account for 15 percent of Walmart’s transactions.1

Walmart has yet to exhibit much enthusiasm for existing mobile payment technology, which could incentivize Innovators – a segment that will expand with technology diffusion – to engage in signifi cant shopping beyond the MoneyCenter if its members don’t already. Recently, the mother-of-all-retail-giants has joined forces with other retail giants to explore a merchant-led mobile wallet solution, which, no doubt, will be focused on lowering transaction costs either directly or indirectly. (Slicing one second off average transaction time saves Walmart $12 million annually in cashier wages, according to Walmart’s CFO Charles Holey).1

We also looked at the relationship between MoneyCenter customers and Nielsen P$YCLE lifestage groups (Figure 2). Indices point to two segments – Fiscal Fledglings and Working Class USA – with well-above-average percentages of MoneyCenter customers. Both segments have limited discretionary funds for investment though Working Class USA members often have home mortgage loans. Demographic comparisons between MoneyCenter users and non-users reveal that users are likely to be members of the “working poor.” Compared with non-users, they are more likely to be:

• Young – 30 percent are members of Gen Y (18 – 32 years old) and 30 percent Gen X (33 – 48 years old) • Employed full-time for someone else (48 percent)• Renters (52 percent)• Single (46 percent)• Not college graduates (70 percent)• Low income (38 percent with annual household incomes less than $30k)

Walmart MoneyCenter users are less likely to have checking accounts than non-users (Figure 3). One-fi fth doesn’t have checking accounts, but the fl ip side of that is 80 percent do have checking accounts. Among those with checking accounts, a higher-than-expected percentage is composed of regional bank customers.


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Walmart MoneyCenter customers are heavy users of alternative fi nancial services, including those offered through MoneyCenter (Figure 4). Purchases of prepaid cards (42 percent in the past 30 days) and money transfers (40 percent in the past 30 days) are especially high. More than one in fi ve MoneyCenter customers have used a walk-up, short-term loan service and just about as many have used an Internet short-term loan service in the past 30 days though the MoneyCenter does not currently offer payday loans. (Walmart does offer small cash advances via its credit card to customers who make purchases.) We also asked our survey respondents to rate the importance of a variety of attributes associated with various payment methods. Of the list of attributes, three rise to the top in importance among Walmart MoneyCenter users (Figure 5). • Two-thirds (65 percent) of MoneyCenter users

want a payment method that helps them maintain spending within their means. Cash fi lls that bill for many of them.

• Six out of 10 need payment methods that allow them to control the timing of when funds are deducted from their accounts. This refl ects a “living from paycheck-to-paycheck” lifestyle and jibes with heavy usage of short-term loans.

• Nearly half (46 percent) want payment methods which allow them to pay for goods or services over time. Walmart MoneyCenter customers generally have credit cards – 75 percent have some type of credit card, most often a Visa or MasterCard – but the penetration of credit cards among MoneyCenter users falls short of credit card penetration among non-users, at 82 percent.

So is Walmart a friend or foe to banks? One side of the debate could argue that although recent users (i.e., past 30 days) of Walmart’s MoneyCenter represent potential customers, most of them are people with limited profi t potential and from whom fi nancial institutions are willing to walk – or run – away. The other side of the argument could point out that, according to Walmart, 85 percent of the U.S. population shops at Walmart at least once a year. Much of that population is exposed to MoneyCenter’s offers, which compete with at least some services potentially provided by their primary fi nancial institutions.

I’d like to hear your opinions about whether you perceive Walmart MoneyCenter, and other alternative fi nancial service providers, as allies or competitors. Please contact me at: mandy.putnam@fi sglobal.com. Respond and we’ll share your comments, with your permission or anonymously, in future newsletters.

1 Jessica Leber, “The Most Powerful Man in Payments” Technology Review published by MIT 29 March 2012

* Read as: 42% of Walmart MoneyCenter Users used a prepaid card in the past 30 days to make paymentsSource: FIS Payment Survey, February 2012; n = 3,205

Figure 4: Walmart MoneyCenter users exhibit high usage of alternative financial services

42%*

40%

35%

34%

23%

21%

11%

3%

4%

7%

2%

2%

Used prepaid card in the past 30 daysto make in-person payments

Used a service to transfer moneyoversease or domestically

Used a check-cashing service

Used a walk-up bill paying service

Used a walk-up short-termloan/payday lending service

Used an Internet short-term loan/payday lending service


Non-users


Non-users

* Read as: 65% of Walmart MoneyCenter Users believe that “helps me to not spend beyond my means” is very or extremely important when making any kind of payment in person for goods or services.Source: FIS Payment Survey, February 2012; n = 3,205

Figure 5: Walmart MoneyCenter users are more likely to choose payment methods that help them control their spending and timing of payments

65%*

60%

46%

50%

52%

25%

Helps me to not spend beyondmy means

Allows control over the timingof when funds are taken out of

my account

Allows me to pay forgoods/services over time


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Strategic Insights is a newsletter that provides research, thought leadership and strategic commentary on recent events in banking and payments. The newsletter is produced by the Global Marketing and Communications 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 fi nancial 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@fi sglobal.com.

fis strategic insights vol 7 may 2012

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