Brett King

Posts Tagged ‘Innovation’

Outdated Checks and Magstrip costing the US $30Bn a year

In Bank Innovation, Economics, Mobile Payments on August 3, 2011 at 12:07

The US is enamored with outdated and costly modality that is costing Billions in lost revenue and fraud. While many argue the business case for moving to technology like EMV or NFC is hard to justify, the reality is it is incredibly simple to justify based simply on mathematics around today’s massive cost of fraud. The same goes for those that say shifting the US away from checks is too hard because of the momentum in the system.

The big cost of fraud

In the US alone, check (cheque) fraud costed US consumers and banks an estimated $20Bn a year in 2010, up from $10Bn in 1997. Identify theft is one of the fastest growing types of fraud. In the US identity theft victims grew by 12 percent to 11.1 million adults in 2010 (Source: Javelin Strategy & Research, “Identity Fraud Survey Report,” February 2010). 43% of this fraud, totaling more than $50Bn in costs, were check and card fraud. This doesn’t include the Billions of dollars spent internally by bank risk and fraud departments chasing, tracking and attempting to recover losses from fraud.

In 2009, three individuals were accused of engineering the largest case of card fraud in US history. The fraud involved the theft of more than 170 million credit and debit card numbers utilizing weaknesses in the payment processing systems based around mag stripe tech. Albert Gonzalez, the primary defendant in the case, was said to have thrown himself a $75,000 birthday party and complained about having to count $340,000 by hand after his currency-counting machine broke. The state retrieved around $1.65m in cash as part of a plea bargain, but the Secret Service identified that just one small part of Gonzalez’ operation a group of hackers called “ShadowCrew” took $4.3 million in the early part of the decade. It was also reported that Heartland Payments Systems Group, who was targeted by Gonzalez’ group, lost more than $12.6m in the attacks alone (source: Wikipedia).

Estimates for card fraud in the US banking range from around $5.7Bn a year to $8.6Bn a year (source: Oracle Financial Services Whitepaper).

Outdated technology killing the US banking system

There are various arguments given for keeping checks and mag-stripe going in the US, despite all evidence to the contrary. The biggest argument for keeping checks going is the momentum in the system around checks that stem from the practice of the mystical ‘float’ mechanism. The float has frequently been used as a mechanism in the practice of cheque kiting or ‘playing the float’, convincing a merchant to accept a cheque that takes 3 days for the fraud to become evident. Since cheques include significant personal information (name, account number, signature and in some countries driver’s license number, the address and/or phone number of the account holder), they lead directly to identity theft implementation.

In Germany, Austria, the Netherlands, Belgium, Finland, and Scandinavia, cheques have almost completely vanished in favour of direct bank transfers and electronic payments. In the UK, Ireland and France, while cheques are still used they are in rapid decline, with 95% of merchants not accepting them as a form of payment anymore. The key difference in EU markets where cheques have disappeared versus the US are two simple mechanisms:

  1. Cheques cost consumers to process, whereas electronic payments are free or cost less, and
  2. There are robust electronic payments systems like Giro that provide alternatives that are more efficient

As long as US banks insist on free checking and charging for wire transfers, along with a poor interbank payments capability, then checks have life left in them. Why they insist on this is beyond me?

Mag-stripe related fraud was successfully reduced by 75-80% in the UK and France as a result of the introduction of EMV chips. This is expected to be further reduced dramatically by the introduction of NFC and mobile payments, which allow multiple additional layers of security.

Savings pays for all the innovation we need

In the US alone check and card fraud costs close to $30Bn a year. By incentivizing the removal of checks and mag-stripe from the system, this could result in savings well in excess of 50% of these costs annually. $15Bn a year could pay for a lot of innovation.

In 2010 over 1.5million card terminals were shipped in the US. Accepting that these units cost around $1-3k to deploy, replacing mag-strip capable terminals annually would only cost around $10m for 3m merchants, $100m for 30m terminals. That solves the NFC/EMV issue very quickly.

Interestingly, removing cheques from the system not only reduces fraud, but reduces processing costs internally within banks by some 30-40%. Far in excess of the gains from the mystical float.

Mobile payments and NFC are clearly not only the way to go to reduce fraud, but to provide a massively robust business case for innovation. Anyone who argues for the longevity of cheques and magstripe in the US needs their head read IMHO.


The Curse of the Innovator

In Bank Innovation, Customer Experience, Strategy, Technology Innovation on April 14, 2011 at 16:38

Recently we’ve been discussing at many organizations what it takes to get innovation done in large businesses with embedded behavior and practices. One side of the coin is obviously the impact of Disruptive Technology, but the other is purely the issue of Innovation Management or creating an organization that embraces or assists innovation.

In a recent EPCA workshop I was conducting in Amsterdam, John Chaplin (Ixaris) related a session he had with a bunch of senior banking executives tackling the problem of creating innovation within large organizations. The bankers were asked what the issues with ‘innovators’ were. More often than not it was sighted that strong innovators clashed with the organization culture and so eventually they were fired because they were too good at their job.

In an organization where you can’t change the culture overnight because it is too embedded, it appears that your only option as an innovator is to soften your approach so it is acceptable, or push to the point where you have to walk away because the organization has got to its limit in respect to absorbing ‘innovations’. The problem is, that to survive the types of disruptive innovation we’re seeing, the organization has to adapt. So it really means that you need innovators, but they need to be powerful enough in the org chart that they can force the organization to steer a new course. If not, you get a Blockbuster or Borders moment. Organizations that were faced with disruption and couldn’t change, despite probably having some very innovative thinkers around.

The concern I have is that increasingly I’m seeing some of the most innovative people I know leave their organizations because their desire to implement change is being hit with the brick wall of inertia. This is a serious problem.

The Innovator’s Organization

There are two broad approaches to traditional organizations faced with disruptive innovations that is successful. Obviously we aren’t talking the “bury your head in the sand” approach.

Google uses the 20% time initiative, GE uses “time to think” to assist leaders in their change efforts, and others talk about the VC Approach. For those of you that follow my blog you’ll know I talked about Banks that are “Too big to Innovate” recently where I discussed some of these various approaches.

The two broad approaches, however, are to either try to build innovation into the organization DNA, or to circumvent the organization when innovation is required. There are problems with both approaches.

Changing the organization culture or DNA to become innovative is really hard. The larger the organization, the harder such innovation is because you first have to change the organization structure, the metrics, personnel, and attitudes to change before you can get constructive stuff done. There are some organizations that have achieved this, but usually through a very painful process where many executives who preferred the old world traditional approach have to be exorcised before change can take place.

The second approach creates a maverick structure outside of the broader organization chart, but allows the freedom to go get stuff done, that the broader organization would not be capable of executing on. This can produce some really innovative approaches. The problem with this is that absent the traditional organization structure, sometimes these initiatives take on a life of their own and spin out of control. Egg is a good example in the UK. Egg was very successful at rapidly growing customer support and innovating the customer experience, but they took too many risks on the lending side and were left exposed. This doesn’t mean Egg was a total failure – there are still many banks today that could learn from their customer experience approach. When these initiatives are successful, sometimes they outshine the existing organization and so can never be fully integrated back into the mainstream structure because they show up the weaknesses of the parent organization.

Sometimes Innovation success presents real challenges

Success can be a curse

In some ways then, the successful innovation as a spin off or project becomes a pariah, an illustration of why the larger organization is out of touch. Then those embedded in the current organization work very hard to justify why it would never work in the larger scheme of things. Why? Because if they didn’t take that approach the obvious question would be – well, why haven’t you done this before?

So I figure the only way is to build innovation teams that survive successful innovations is to seed these teams with members of the real organization, that split their time between both the innovation team and their real job. That way their enthusiasm spreads throughout the organization as they see real change being enacted.

The second essential component is to have someone at the top that is smart enough and powerful enough to call an innovation exactly what it is – positive change for the business at large. This individual then can use this to justify further experimentation and to force the organization at large to adopt the positive changes that the innovation has created. This individual can also make the call when the innovations engine of the organization is getting too far off track and drag it back into reality.

Get a sponsor at the top that can use the success to motivate real change, but get broad participation by seeding teams with skills from within the organization. Experiment often, and rapidly to see what innovations have the best chance of success at changing the broader customer experience and providing real future revenue opportunities in a ever more disruptive landscape.

What innovations will rock our world in the next 25 years? #Innotribe #SIBOS

In Retail Banking on October 23, 2010 at 07:33

As preparation for my SIBOS Long Now Innotribe sessions next week I’ve been talking to lots of geeks, thought leaders, bloggers and innovators about what comes next. This is by no means an extensive list, but here are a few of the disruptive innovations that are coming our way in the next couple of decades or perhaps sooner.

The end of content, the rise of data
As we have to deal with more and more content, data and stuff coming our way, we’re going to have to treat all content as data and start to manage, curate and aggregate the stream. There’s a bunch of interesting initiatives at the moment that are starting to have a shot at this like Flipboard (which I love), My6sense, Google’s priority inbox. But one thing we know is that we will increasingly need help to manage the massive amount of data we’re receiving. Ultimately, I’m going with the concept of an agent avatar that acts as your proxy in collecting, filtering, and prioritizing your data. Your agent would also be contextualizing content and recommending actions or strategies based on context, behavior, location, etc.

The network of things
Your fridge, kettle, oven, airconditioner talking to the internet? Why? The network of things and the man-machine interface is more about integrating ‘things’ more seamlessly into our lives than having a fridge you can surf the web on. The fact is that if you look at our TV today, it actually makes more sense for your TV to get content from the web, than from cable or the airwaves. It makes more sense for your radio to do the same. This is because increasingly the ‘data’ will be tailored to our needs, wants, habits, etc. So our car, our home, our devices will interact with us more efficiently due to this connectivity. For example, your car’s nav system will know where you have to drive because of the appointment you just made on your iPhone 7…

Use of cloud
Ok, so we are hearing lots about ‘cloud’ computing these days, but the cloud will be about the computer disappearing. The fact is that a laptop or desktop computer as they become increasingly mobile, will morph into something else. It won’t also be necessary to have supercomputer-like power built into your handheld device, because by accessing the cloud you’ll have access to supercomputing power without needing it in the device. A good initial example of this is dragon dictate who have an iPhone app that uses the cloud to process your speech to text, rather than loading all that goodness on the device locally.

We’re seeing a lot of thought being put into design today. Apple is a great example of an organization who gets the need for great design. More than that though, we’re thinking about designed intelligence, behavioral economics, usability, ethonographics, and more. The next 25 years will be about simplicity and great design. Complexity is not valued in world that tends towards greater complexity.

Augmented reality, Geo-location, No more log-in, no more check-in, just connected – these will continue to be the driving force of mobility in the short-term. Right now we are probably seeing the beginning of the next ‘dot com’ bubble if you like. But this time it is the intersection of mobile devices, social media, augmented or enhanced reality, geolocation services, and the web of things. The mobile device is at the centre of all of this activity – because whatever we end up with, we’ll be doing it on the move.

Energy production and storage
We need better batteries, faster charging, less impact to environment, domestic closed-loop systems – essentially we are looking for cheaper, more abundant energy, with a much lower impact to the world around us. Battery technology needs to dramatically improve, maybe through the use of fuel-cell technology or similar. But we need more POWER scotty!

Nanotech and manufacturing
Nanotech and materials science will bring us lighter, stronger, intelligent materials. We’ll find new uses for exotic materials. We’ll build devices, buildings and environments that we could only imagine. We might even go mining landfill for all the precious metals that are still down there.

Disintermediation or changes in government and big business
As cash disappears the state will move to tax or collect off the transaction, rather than your income. But as we become more networked, interactive, and collaborative, it will be impossible for government to manage the ‘spin’. So what happens? Doesn’t government shrink? Does government really become by the people for the people? Good questions. In the networked world, big is not necessarily better. Fast is the key measure of success, not size.

Personalized medicine
Personal Genome or Bio-Mapping will be a feature of the next decade. Instead of going to the doctor to get a broad based solution, we’ll start to understand how the unique immune system of an individual reacts, their biochemistry, their genetic tendencies and markers – this will be a future where (those who can afford it) get tailored, personalized medical attention right down to the drugs we receive over the counter.

Also check out Ray Kurzweil in his TED talk on the ‘singularity universe’.

Coffee Shops as an economic indicator for innovation

In Technology Innovation on October 15, 2010 at 07:54

spend a lot of time in coffee shops writing these days. I don’t know why, perhaps many of you have experienced this, but I seem to have a very productive time writing when there is the smell of fresh coffee, the sound of cappuccino machines and the white noise of the coffee crowd to add to the ambience. Sometimes this environment triggers a burst of creativity that is second to none on the productivity front. My wife tried to fight this tendency for a while arguing that it was all in my mind and I could be just as effective at home sitting quietly in my office, but we’ve since come to an understanding on this matter. Besides – caffeine is a big part of my success at this juncture in my life.

I must not be alone in this, because the so-called “coffee culture” effect has been measured in many economies and can be seen as directly contributing to growth in both economic terms and in relative growth in the retail sector. However, there is an additional element here that I’ve noticed as a leading indicator of an economy’s capability to absorb innovation.

In 2007 in the UK McDonald’s announced that it was going to provide free WiFi in it’s ‘family restaurants’. The US, Australia and many other countries soon followed and by January 2010 most of McDonald’s network in developed economies globally is already wired for WiFi. McDonald’s figured out early that this was an easy win-win. Customers are increasingly dependent on WiFi access as they move around and if you provide this, it becomes a key driver for their decision to visit your store or outlet. Starbucks in the US has also realized that free WiFi is a big draw for customers.

Even McDonald's has free WiFi

Since the launch of BANK 2.0 I’ve been visiting many countries to speak on the future of banking, and I’ve seen a direct correlation between the progress of an economy as regards innovation and integration of WiFi in the local Starbucks or coffee chains.

Take Australia for example. The Australian dollar is at an all time high against the US Dollar, potentially about to reach parity. Since the 1980s Australia has long held an extremely competent ICT industry capability, but this has been somewhat threatened by an ongoing exodus of many of the most talented resources often leaving for overseas opportunities (the so-called “Brain Drain”) due to high taxation and lack of career growth locally. Australia’s net permanent gain in immigration is still strong, but over time this effects the skill mix in innovative industries.

How innovative is Australia though from a global perspective? Research and Development is a dwindling segment in Australia. Long ago the government dismissed or made tax-breaks for R&D so difficult to attain that Australia has lost any competitive positioning it had in this respect. Certainly in respect to industries like software, telecommunications, internet start-ups, mobile platform development, Australia just doesn’t have the capability to compete with many other countries like India, China, Hong Kong, Singapore, Korea, United Kingdom and Northern Europe.

So back to coffee shops. Today as I was walking around the CBD of Sydney, my goal was to find a coffee shop where I could relax for a few hours and get some blogging, writing, online research and emails done. My primary criterion for this was great coffee (which is not hard to find in Sydney fortunately), a comfortable environment and free WiFi. I tried 5 different coffee shops around Pitt Street and George Street before I finally succumbed to a Starbucks where I could pay for my WiFi with Skype credit instead of having to purchase an annoying, overpriced voucher for 10 minutes access at a time.

Here’s the thing – maybe the reason I can’t get very basic, coffee shop WiFi infrastructure in Australia is because Telstra still largely maintains a monopoly in Australia, maybe it is the fact that coffee shops are concerned about attracting droves of students who don’t drink enough coffee (yes I was given this excuse), or maybe it’s just that as an economy Australia doesn’t get the need for innovation to be about the philosophy of being connected. WiFi is like water these days – it is a basic commodity, or at least it should be. You can’t hope to drive innovation by stifling basic access to a resource that enables connectivity, curation, publication and collaboration.

10 days ago I was in Cairo, where I visited two separate hotels where Internet Connectivity through WiFi and broadband was provided free. The hotels I’ve stayed at in Australia this week have charged me A$29.00 a day for in-room or WiFi internet access at the hotel, and while in both Melbourne and Sydney I struggled to find coffee shops that had any WiFi capability, let alone free WiFi. In Hong Kong, my mobile provider provides me with unlimited wireless broadband internet access for free with my mobile account and WiFi is readily available wherever I go.

Why in some countries is such a basic ‘fuel’ of the innovation cycle still being used opportunistically by a cartel of organizations trying to eek out a small fortune in overpriced service fees? If leaders of industry and government don’t get this and in your economy today you still can’t get easy access to free WiFi in major cities, I contend that this is a leading indicator of the economy’s ability to absorb or adapt to innovation opportunities. If you still find yourself struggling to get decent WiFi in your city and your in the innovation space…you might consider relocating to an economy who gets the big picture.

Innovating the Bank that’s too Big to Change

In Customer Experience, Strategy on September 26, 2010 at 09:43

Getting a head start on customer centricity

As I tour the globe talking to banks and other financial institutions, the issue of how to make the migration to a truly customer centric organization is often agonized over. While many are keen to see that goal materialize, there are just as many who feel organizational inertia and long entrenched silos are just too significant a hurdle to circumvent.

Innovation in the customer space is often a challenge too. How do you really create an innovative organization when your traditional roots are all about, well…tradition. The big ships of industry, banks definitely included, are like massive supertankers. Ships that turn slowly and once they have a head up of speed are very difficult to slow or turn when set on a course. In a world where channel complexity, technology adoption and consumer behaviors are pushing the envelop of just about every service organization to adapt at warp-speed, how do we create speedboat type instincts when the organization is lumbering along supertanker style?

Big Banks are like SuperTankers - they don't change direction easily

The Google Time Initiative

Google gives it’s engineers 20% of their time to work on the project of their choice. The Google time initiative is consistently cited as one of the reasons why employees rank Google as one of the best companies to work for as voted by Forbes, FastCompany, etc. It’s also a great generator of innovations as adhoc collaborations are born out of necessity, common interest or just the pure exploration of a better user experience. Some of those initiatives like Android end up becoming a stable of Google’s core range, while others like Google Wave burn bright for a time, create great learnings, but go on to become something entirely different from what started.

Getting a bank to give their employees 20% of their time to work on a project or initiative of their choosing, might be too much of an ask for those ships of industry, but it is a way to drop a speedboat in the water and see how it performs. If the idea works, it can then be incorporated back into the overall business as part of a longer-term shift.

The VC Approach

If you’ve ever engaged in discussions with Venture Capital firms about a business plan, you’ll appreciate how brutal the process is in dismissing badly thought out ideas or poor business cases. If we ran a lot of the existing bank processes, products and business units through a VC selection process these days, many simply would not survive. But because they are embedded ‘traditions’ they get retained. Good examples of this today are paper statements sent by snail mail, or offering a checking account to new customers by default. If we were a brand new start-up bank, it’s unlikely these would be the preferred approach in a business plan today.

Using the VC approach, however, can select the most likely candidates for success in the innovation sandbox. VCs often use the formula of reviewing 100 business plans, selecting perhaps 5-10 for further review and selecting perhaps 2 or 3 for some scale of investment. This is a solid approach to pitching new ideas for seed capital internally to see if individual innovation initiatives have merit versus other competitive ideas or bids. It also means that work isn’t done on the basis of simply cool technology, but real revenue or cost savings thinking.

The IDEO Approach

I’ve always admired the IDEO design team for their deep dive methodology. I think that the deep dive remains probably the most creative management and design process that there is today. By dividing teams into separate groups to brainstorm innovative approaches, you get not a single idea, but many competing ideas to flesh out. The advantages to this process can best be summed up by a great quote from their design team:

Enlightened trial and error succeeds over the planning of the lone genius…
IDEO Design

Once a month, or once a quarter, try getting your channel team together and brainstorming a new customer journey or experience. Then use the VC approach after you’ve prototyped the idea to come up with something better for the customer. The deep dive process will take you to new heights of innovation much quicker than the planning of the lone banker. Especially if that banker has had 30 years of banking experience – trying to get him to think innovatively is like trying to turn that huge supertanker.

The Customer Centric Initiative

So putting all of these best practice approaches to innovation together, I propose a new initiative for your bank today to get started on the path to customer satisfaction, deeper relationships, and more profitability.

Give everyone in your product and channel team, 20% of their time over the next 2-3 months to spend on improving customer journeys and experience. Underpin this by creating a multi-channel deep dive session once a quarter where all of the channel teams, supported by product representatives, look at new ways of engaging the customer. Prototype the customer journey on paper. Sketch up new web, mobile, or ATM screen flows to show how the interaction could be simplified and improved, or even come up with completely new ideas based on behavioral analytics.

Let’s get this customer centric initiative on the road. It takes a long time to break silos, so let’s not even try to tackle that until we can get the team thinking about customers. The Customer Centric Initiative is a way of doing that without breaking the bank…