A collection of observations, ruminations, predictions and random thoughts from Cornerstone Advisors.

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October 15, 2014 by Steve Williams Steve Williams

The Miserable State of Cash Management Vendors

“Revenue is vanity … margin is sanity … cash is king.”

My heart goes out to the hard working professionals who run the Treasury Services or “Cash Management” divisions at community banks. For a long time, these rock-solid bankers have seen loan officers patronize them with passive encouragement while rarely referring a customer their way and never taking the time to understand their product offerings. Yet for more than a decade, cash management professionals have shown their resiliency. They have made it a daily ritual to shrug off credit officer arrogance and scrap together a pretty damn fine business of core deposit funding and fee income. It’s not always pretty, but these bankers have learned to package their offerings with duct tape and wire and land the latest big new deal with a health care group, municipality or homeowners association. And they have never asked for much of the bank’s capital to win these big deals.

But lately, there are deeper lines and fatigued expressions on the faces of cash management professionals. Their software vendors are letting them down and wearing them out in a big way. Let’s call it out, GonzoBankers. Most innovation, quality support and healthy competition has left the cash management vendor market, and it’s making it very hard for the resilient community banker to compete with the too-big-to-fail players upstream.

Every morning across America, cash management officers have to hit the streets and do battle with the mother of them all: Wells Fargo’s Commercial Electronic Office (CEO). Sure, it’s easy to poke fun at the big banks for being slow and bureaucratic. However, any banker peering into the screens of the Wells cash management portal has only one thing to say: “That is some very slick stuff.”

Community bank cash managers have long depended on major outsourcers and independent software providers to arm them with the tools to compete with larger players. There are several factors contributing to the malaise in the cash management solution market today:

1. The big vendors have not invested in big cash management solutions.
For such a critical product line to community bankers, it’s sad to see the Big Three outsourcing providers (FIS, Fiserv, Jack Henry) with more than $12 billion in combined revenue coming to market with such halfhearted solutions. Fiserv has been schizophrenic in its cash management offerings: a no-show on a Corrillian version for business customers, slow improvements to its Business Online (formerly E Corp) solution in the Premier core group, and a virtual burying of the former Banklink cash management offering. FIS has acquired solid products from its Metavante acquisition (BEB), but the company moved slowly to interface this solution across all core products. Jack Henry has catered its offerings to community banks but now must address solutions for its growing multi-billion dollar clients. It’s hard to believe somewhere in these behemoths there’s not $10 million to do some major league investing in innovative solutions for one of the most important product lines in bank software.

2. Integration and usability are still pain points.
The value in cash management is unlocked with strong integration and features for the customer such as multi-level security and single sign-on. Today’s cash management vendors are failing to deliver the slick portal offering that large banks are using to solidify commercial relationships. With mobile and web services technology, there has never been a better time to innovate usability. Unfortunately, cash management vendors have been slow to develop mobile and tablet versions of their products. Bottomline Technologies, which acquired Intuit’s cash management offering in 2012, has partnered with Malauzai to deliver business mobile solutions, but there is still a long way to go in integrating and reconciling web and mobile offerings. At Cornerstone Advisors, we applaud the efforts and hope more vendors will be able to deliver on these solutions soon.

141015c3. The unified payments hub is more theory than reality.
For a decade now, cash management providers have been issuing PowerPoints regarding the “payments hub,” which integrates automated clearing house, wire, Check 21 and international settlement into a single, least-cost routing solution. The challenge has been that most banks use separate modules for these payment channels and no easy migration path has been laid out by one vendor. Cornerstone gives credit to ACI Worldwide for doing the most work to further this vision, but the proof will still be in the implementations. ACI has the skills and resources to create a best-in-class offering, but it clearly must address a somewhat bitter client base from its S1 acquisition, which feels it has been given too many empty promises or changes in product direction from too many different owners.

4. Compliance and implementation challenges have frustrated bankers.
In the middle of trying to compete with large bank cash management offerings, community bankers have been smothered with compliance concerns around cash management security, business continuity, anti-money laundering and fraud. In the midst of these challenges, bankers see their own vendors coming under regulatory scrutiny. In the fourth quarter of 2013, the Federal Deposit Insurance Corporation entered a consent order along with the Office of the Comptroller of the Currency against cash management vendor Fundtech. The company was ordered to assess its information security risk and create a better vendor management program that meets agency guidelines. Bankers have also reported that cash management solution providers seem alarmingly scarce on resources to address new upgrade, integration and deployment projects. As one technologist at a $9 billion bank said to me, “They just nod their heads and ignore us.” To some extent, vendors have been able to get away with starving development and project resources because of the technology “lock in” effect – it’s just too big a pain and too much customer impact to switch cash management providers. However, frustration levels are becoming so high that many large community banks will be seeking new solutions and partners in the years ahead.

An opportunity for disruption?

To every vendor or software developer in their garages today, a gonzo wealth opportunity awaits you! With mobility coming to business banking in full force and web services providing new ways to build portal interfaces and facilitate integration, the industry is dying for the next big thing in cash management. It’s encouraging to see retail e-commerce providers like Q2 putting their sights on developing a more robust cash management offering. We applaud when an upstart like Online Banking Solutions snags a big fish like Iberia Bank with its Messenger product. We love when Malauzai CEO Tom Shen promises he will progressively build deep commercial functionality into the mobile platform with Bottomline. These are all encouraging starts, but so much more needs to be done and more resources need to be allocated to this part of our industry. Twelve years ago I wrote a Gonzo column titled “Cranking Up Cash Management” that signaled a new growth era for this product line in community banking. For the past decade scrappy cash managers at community banks have been working their tails off on this crank up effort. It’s time for the major outsourcers and innovative technology companies to do their part.


Vendor Management Made Easy(er) 

Effectively managing vendors can stretch a financial institution’s time, energy and resources. Cornerstone Advisors can ease some of that strain.

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Whether shopping, selecting, converting or negotiating, there’s no better time to enlist the expert assistance of a seasoned partner to help manage your vendor relationships.

Contact Cornerstone Advisors today to learn more.


Filed under: Commercial Banking, Treasury Management, Vendor Buzz, Wealth Management, Web & Mobile Banking

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October 6, 2014 by Ryan Rackley Ryan Rackley

Repeat After Me: ‘I Will Not Overspend on Telecom’

141006aHigh performing mid-size banks are spending double what their low performing peers are spending on data communications circuits. That’s right, twice as much. And if that news isn’t mind-blowing enough, get a load of this: they’ve been doing it for years, according to The Cornerstone Performance Report.

Gonzobankers, what would make one institution pay twice as much as another for data lines?

OK, OK, telecommunications isn’t sexy to talk about. I get that. But it’s something every institution needs, and it is the underlying technology that enables our branches, ATMs, phone systems, vendors and Internet to talk to each other. It is the most expensive monthly recurring piece of any infrastructure budget, and one that can be drastically affected by vendor types, architecture decisions and internal institution choices. While bandwidth, architecture, and vendor type all apply to the cost of data communications, three common themes directly affect the bottom line.

Network Architecture: Design elements relate to how a data network contributes to the cost structure disparity. A review of an institution’s network architecture is the first step in understanding how architecture may be contributing. To get the conversation started, a number of questions must be asked:

  • Are backup circuits needed at all sites?
  • Does disaster recovery replication need to be real time?
  • Do all remote sites and branches need high bandwidth Ethernet circuits?
  • Are bandwidth decisions based on usage versus need?
  • Has Voice over Internet Protocol (VoIP) been implemented and the network circuits overhauled to drive costs down?
  • Is WiFi necessary in the branches?
  • Is employee Internet usage managed?

An institution’s decision making process, level of risk tolerance and sensitivity to cost will all affect how it answers these questions.

141006bMarket Commoditization: Every seven or so years a new technology emerges in the telecom space. Frame Relay was the rage about 15 years ago; in 2007, multiprotocol label switching (MPLS) was the hot technology. Today it is Ethernet. Ethernet offers greater change management flexibility, additional stability and a desirable cost structure at higher bandwidths. However, the cost benefit curve for Ethernet is only beneficial at higher bandwidths. At lower bandwidths it is often much more expensive and may not be the right choice given the fact that MPLS is very reliable and, in most cases, satisfactory. As technology matures, newer technology is introduced and the need for more bandwidth proliferates. While the cost per unit of bandwidth declines as higher volumes are purchased, if left unmanaged this can quickly lead to an overspending situation.

Vendor Choice: Four classes of telecom vendors are contributing to the pricing inconsistency:

  • Direct providers, sometimes known as long-haul providers. These vendors own their networks, have retail and wholesale sales teams, and manage a fleet of service folks to keep the lights on. We see innovation and new services first from these vendors.
  • Resellers, which buy bandwidth from the direct providers and act as middlemen for service issues
  • Brokers, which work with direct providers as well as resellers and typically step out of the day-to-day relationship once a contract is signed
  • Smaller regional niche networks

Gonzobankers can manage this very important piece of the infrastructure budget by following these three simple techniques:

  • Evaluate the contracts. As branches open and close, internal apps are updated or swapped out, and people are shifted internally, data communications needs change. Telecom vendors are typically fairly easy to work with through these changes, but every so often the contract needs to be revisited from a relationship level to hit the “reset” button. Telecom vendors are notorious for non-coterminous circuit dates, making it very difficult if not impossible to seriously consider switching to another provider.
  • Assess the architecture. An understanding of peer spending is very powerful in this area because there are so many architectural decisions to make. Vendors and I.T. infrastructure staff are always very willing to spend as much as possible. Making decisions on a needs basis as well as variance from peers goes a long way toward knowing the correct decisions are being made.
  • Have a three-year plan. Just as Wheaties is an important part of a balanced breakfast, telecom planning is an important part of a strategic technology plan. Telecom upgrades and contract negotiations should be closely coordinated with the overall technology strategy and married to each institution’s application stack, branch strategy and long term technology planning.

An unmanaged or undermanaged telecom environment will eventually put an institution on the upper end of the spending spectrum, but implementing a few simple techniques can go a long way and produce eye-popping results in the bottom line of an I.T. budget.


Where does your spending fall on
the spending yardstick?

A financial institution’s technology solutions play a major role in its growth and success.

A Telecom Contract Negotiation from Cornerstone Advisors can help you determine whether your organization’s systems and processes are supporting your  strategic goals and helping you stay competitive.

Contact Cornerstone today to talk about reaching best practice levels for your telecom contract management.



Filed under: Call Center, Information Technology, Retail Banking, Web & Mobile Banking

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September 15, 2014 by Steve Williams Steve Williams

Everyone Wants Under the Apple Tree

Well it happened. We knew it was coming. It may have even taken a bit longer than expected but it happened.

Never in the history of payments has there been such a media-frenzied, corporate disrupting and consumer-captivating moment as last week’s unveiling of Apple Pay as part of this week’s release of the iPhone 6. Make no mistake – this was a direct “pyrus malus” hit into an entrenched and profitable caste system of payment providers.

Changing the trajectory of an existing payment system is difficult because it’s basically a powerful, self-reinforcing feudal power system. Apple shrewdly coopted its greatest weakness as an inexperienced new entrant. It charmed the royalty, provided pressure about the villagers being restless and cut a deal with those who ruled the current kingdom. Cheerily waving flags for the new “knight of Apple” were the dukes of Visa, MasterCard, American Express and Discover, and the earls of Chase, Wells Fargo, Bank of America and Capital One. These cozy royal alliances today may not last forever, but for now a worthwhile truce has been established.

Terence RocheIn the world of issuers and card brands, there is now an innovator asking to take “just one thin wafer” of interchange revenue. Where does it go from here? No one really knows. Cornerstone Founder Terence Roche concluded, “It seems to me like the big question is whether Apple plans to disrupt that at some point.”

The key takeaway from last week was not necessarily that Apple Pay is guaranteed to end up being a popular consumer product or that near-field communication (NFC) is guaranteed to be the ultimate mobile payment standard. The key takeaway is that one innovative company has pierced the feudal payment system with serious strategic intent and resources to make every existing member of the system scurry.

September 9, Apple Pay Day, will be remembered as the day the payments industry woke up to mobile.

Now, GonzoBankers are a bit nervously thinking about what their banks’ response should be to Apple Pay. For the past week, I have been consulting the Cornerstone brain trust for its initial impressions and recommendations. It will take a few months for the dust to settle on the strategic reactions, but any bank should be focused in the following areas:

1: Formally Monitor the Threat Assessment

The growth of Apple Pay will be tracked by the growth of iPhone 6s at the consumer level, NFC-ready terminals with merchants and Apple Pay certifications at the card issuer/processor level. Although Apple expects to sell an amazing 70 to 80 million iPhone 6s in its first release, The Wall Street Journal reports that only 220,000 of the 9 million merchant terminals in America currently support NFC (2.5%).

Bob RothIn this instance it would be wrong to just assume Apple Pay and NFC will start conquering the market. Usurping the payments kingdom will be perhaps the biggest challenge Apple has undertaken to date. As Cornerstone Managing Director and payments guru Bob Roth predicts, “Expect the merchants to now work on their MCX payment option all that much harder.” Let’s look at it through the merchants’ lens. They now have to upgrade millions of POS terminals to handle EMV  [Europay, MasterCard and Visa] and NFC? And Apple’s going to start taking a cut out of their transaction fees? It may appear to merchants that they are essentially funding the ease of use for the customer.

Watching this interplay of devices, NFC and issuers will be critically important. Banks should now be checking in on a formal payments threat assessment at least every six months to their boards and executive team.

2: Closely Watch the Online and Self-Checkout Uptick

Ryan RackleyA sleeping giant in the growth of Apple Pay could have nothing to do with NFC. Online sales and the emerging world of self-checkout are also where Apple Pay will play. Apple will now work to squeeze out giant PayPal online and take its own innovative self-checkout processes to many national chains. Open Table is on board with Apple Pay because of its vision for consumers to not only make reservations online, but also to check out and pay their bill directly from the table – another fraud-reducer by never handing the card to some shady waiter. How fast until we are all purchasing a ton of goods in physical stores but acting like we bought them on line? This could happen much faster than expected because of the huge staff productivity benefit retailers gain. As Cornerstone’s Director of Contract and Payment Solutions Ryan Rackley noted, “Down the road this certainly opens an easy path for Apple to gain transaction volumes at card issuers’ expense.”

3: Determine Your Bank’s Tokenization Road Map

Michael CroalIn the past week, bank technologists and payments managers have been digging into the technical specs of tokenization. At Cornerstone, our very own rain man Michael Croal was drawing flow charts and war gaming what tokenization will mean. As Croal concluded: “It appears the agreement between Apple and a bank is for Apple to be allowed to convert the card number into a routable token before the merchant sees it. The merchant and merchant processor only need the first six digits, the BIN [bank identification number], to know how to handle it. Since the real 16-digit card number is only exposed from Visa back to the issuer, and the Big Apple ‘doesn’t save it,’ Apple Pay should be more secure and bring more tokenization strategies from Apple competitors.”

The faster banks that understand their position with this technology, the better. Roth notes that Visa and MC came up with this concept almost a year ago. This process would eventually eliminate the need for merchants to analyze and read magnetic stripe info. Adoption up to this point has been minimal. Roth concluded, “Apple Pay will be the first major payments method to take advantage of this. This is a big win for MC and Visa and a major step forward in eliminating the simpler forms of card fraud.” Roth sees industry players quickly jumping into the world of tokenization, as demonstrated by industry giant Fiserv rushing to communicate its tokenization strategy last week.

Sam KilmerTokenization has just also moved to a priority requirement for payments vendors in the community banking and credit union space. Cornerstone Senior Director Sam Kilmer noted: “Right now, everyone is saying banks are winners. No one is telling the segmentation story. Bigger banks are winners with early adopters because they are ahead on the app process.” Like many new innovations, community banks and credit unions will need to determine how quickly they can become fast followers. As Kilmer noted, “I could see a segment of loyal Apple users switching banks over this purely on timing and perception of their bank being backward.”

4: Redouble Efforts to Create a Slick Mobile Banking Experience

Banks today are seeing a rapid merging of Web and mobile channels, and new companies are seeking to disrupt a staid Internet banking vendor market. Integrating payments is one of the hot new areas of functionality in which vendors are competing for the business of community banks. The release of Apple Pay underscores the fact that a killer mobile banking experience will be table stakes going forward. Banks today are woefully under-resourced in the E-channel area, and the Redirect of delivery resources has just moved to Defcon 1.

5: Blow Your Customers Away with Payments-Related Customer Service and Fraud Monitoring

Who does a consumer call when Apple Pay has an issue? Naturally, Apple is a technology company that has no interest in becoming the “back office” of payments. Banks have traditionally done the gritty work that innovators get bored with fast. If bank CIOs are drawing flow charts to review NFC, tokenization, mobile and BINs, think what the CIOs’ parents are thinking about emerging payments. The truth is, banks have a decade of education and migration opportunities with their customers. Front line knowledge of a bank’s payments offerings and delivery channels should be off the charts if banks are going to fend off the continued encroaching threats of payments innovators.

6: Recognize That EMV Marches On

Apple Pay’s sexiness aside, there is ramp-up time and future competition. Apple’s move is not an EMV killer at this time. As Cornerstone’s Roth observed: “I don’t see momentum ebbing on EMV. The industry finally drank the Kool-Aid on this, and I am seeing a wholesale movement to EMV. For one of our clients to ‘leapfrog’ the need to do EMV would be to assume that they can cut a deal with Apple and then get close to 100 percent of their transactions over to NFC and tokenization before the October 2015 deadline. That would never happen.

“For community financial institutions, an EMV roll-out needs to be branded with customers as a continued focus on security and privacy. It’s a great ice-breaker to begin a long-term discussion of being THE trusted payments providers with customers.”

More to Come

In the next few months, GonzoBanker will dig deeper into the strategic scurrying that has been set off. Competition is always good and fun in an industry – so let the competition begin. The early scores are in. As Roth concluded: “Overall, this is a huge win for the evolution of the payments industry, but it’s not a great deal for merchants and issuers. This seems like a loss for small and mid-size financials. Nothing good can come out of it all. Banks can ride the apps, and if they have to pay to ride the apps then it would seem like another loss of revenue.”

Scott SommerFor now, it’s a mad rush for players of all shapes and sizes to figuratively sit under the Apple tree. Maybe Cornerstone CEO Scott Sommer said it in the most sophisticated and profound way last week: “I just think it’s so totally cool ;-).”


Filed under: Cards & Payments, Retail Banking, Vendor Buzz, Web & Mobile Banking

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