Current Trends in the Electronic Payments Industry

The following is a short summary of the keynote speech by Jeff Yabuki, President and CEO of Fiserv, Inc.

Jeff talked about four drivers to build growth, profit and loyalty in the financial services industry:

1. “Away From” is the New Global Position

Social media has become ubiquitous and is available on every mobile device.  You never really know where someone else is when you’re communicating with them … and it doesn’t matter!  Functionality that provides mobile banking and mobile payments is slowly coming to the US, years after it became common in Asia.

For example, Starbucks has enabled customers to access their pre-paid cards from their smartphones to pay for their coffee (see Everything is easier with Starbucks Card Mobile).  “Fast and easy” is a value proposition usually works.

How would banks respond if Apple announced that iTunes users could make P2P payments to each other?  How would that disrupt the mobile payments market?  Apple has filed at least nine (9) patents for a closed-loop payment system, as covered in Apple to build mobile payments business around iTunes credits?:

A patent application filed by Apple in August 2009 and published today [April 2010] describes the use of an iPhone, or other electronic device, to make payments to other consumers or traders using the consumers’ choice of a credit or debit card, their bank account or credit stored in their iTunes account.

How would the mobile payment industry be disrupted if Apple enabled their 200 million iTunes to make P2P payments to each other?

Google Wallet is already in field trials and assuming that Google’s purchase of Motorola is not blocked, Motorola phones running Google Wallet could be on the market shortly.  See Google Wallet: First Impressions.

In a real-time Fiserv conference survey, 69% of attendees plan to make new investments in mobile technology within the next 12 months.

2. Electronic Payments Options Continue to Grow

Debit transaction are growing faster than credit and now represent 35% of all non-cash payments.  Use of prepaid cards was up 21% last year with 6 billion transactions.  Payments processing generated over $280 billion in revenue in the US.  Only 53% of the 140 billion payments are electronic.

There is approximately $50 billion in uncaptured payment interchange transactions in US.  This is a tremendous opportunity for financial institutions to capture market share.

Electronic payments are also good for the environment!  They reduces paper, increases efficiency as well as drive new revenue. (see How do electronic payments benefit the environment?)  And 58% of users of online bill payment say that the environmental impact influences their decision to pay electronically.

Consumers who use online bill payment generate more revenue for banks.  They have lower “churn” and are 3-4x more profitable than others. Fiserv bill payment and presentment solutions can facilitate banks’ ability to offer online bill payments to their customers.  Bill payment data can also be used to predict customer’s future actions.  According to a study done by Fiserv:

… bill payment data can be used to reliably predict customer behavior. Decelerating online payment activity served as an early “red flag” that the customer was likely to move his or her account to another institution in the near future, providing the financial institution with an opportunity to take preventative action.

In another real-time conference poll, 70% of attendees say that their current online payment strategies are effective or very effective.

3. Peer-to-Peer (P2P) Payments Taking Off

There are still $2.4 billion in physical checks still being written and transferred in the consumer-to-consumer segment.  P2P payments are growing rapidly.  There were $865 billion in P2P payments (11 billion transactions) in the US in 2010.  That works out to about $175 in transactions per household per year.  This is another big opportunity for financial institutions to capture new revenue.

How can banks “electronify” these physical payments?  ZashPay from Fiserv is one option.  Popmoney was an alternative, until their parent company, CashEdge, was bought by FIserv.  These two services will most likely be combined in the near future.  PayPal is the largest player in P2P payments.  However, banks see PayPal as a direct competitor and have even teamed up with each other to create an alternative to PayPal, called clearXchange.   Jeff didn’t miss the opportunity to point this out to the audience, which contained a few hundred banking customers!

AlertPay and Obopay are two startups in the P2P payment market that haven’t gained much traction.

Managed Accounts: Future Trends, Projections and Opportunities

This post is a summary from a panel session at the Financial Research Associates 9th Annual Managed Accounts Summit in Boston, MA.

Moderator: Phil Masterson, Managing Director, Investment Manager Services Division, SEI.

Panelists: Andrew Clipper, Managing Director, Citi Investor Services, Tracy Gallman, SVP, Investment Products & Platform Development, LPL Financial, Paul Oliu, Director of Business Solution Strategy, Fiserv Investment Services, Jeff Strange, VP, Strategic Planning, Cole Capital, Russell W. Tipper, Director, Managed Solutions Group, Merrill Lynch Global Wealth Management, and Chris Wager, DMA Product Manager, Advisory Products Group, Wells Fargo Advisors.

Where are the assets flowing from the standpoint of the managed accounts solutions segment?

We’ve seen a return to outstanding flows for the advisory industry as a whole, with approximately $50-$70 billion of net inflows per quarter across different managed account programs, according to Jeff. We’re almost at the point where we have more assets than before the financial crisis. Separate account programs has been the exception to this, since we’ve just recently started to see net flows turn positive and those are really just going into dual contract programs, he said.

Most of the focus of the industry has been rep-driven programs, which have been pulling in around $20 billion per quarter, Jeff reported. We’ve seen a little bit of a turn towards SMA flows. New sales and asset growth in UMA has been around 35%, while SMAs have been growing at around 2%.

The growth in traditional SMA’s has been more in international equities and municipal bonds, while UMA programs are still mainly concentrated in large cap equities and doesn’t have critical mass to diversify into too many styles, he said.

Similar trends are occurring in Citi’s managed account programs, Andrew reported. They’re seeing large movement into SMA space, less into UMA, with a tremendous movement into dual contract programs and away from single contract programs. On the sponsor/distributor side, they’re seeing growth of over 3,000% into the UMH space.

Where do you think flows will be going from the solution segment perspective as well as the asset cost perspective?

According to Russ, the easy money says that client-directed and RPM are where the flows are going to be. But in this market environment, they’ve been seeing more traditional nine box, asset allocation-driven investments within SMA and UMA.

Merrill’s clients aren’t asking for relative performance anymore, they’re looking for absolute performance due to market volatility, Russ asserted. RPM has more flexibility to look towards absolute performance products, however, over the longer run, we’ll see a return towards more active management outperforming more traditional asset allocation, he believes.

While RPM is the fastest growing product type, there are serious scalability issues with RPM as well as client-directed programs, which have a growing base but absolutely no scalability. Client-directed is largest advisor program at Wells Fargo, but scalability is a real concern, according to Chris.

At LPL Financial, they’re starting to see an increase in the use of ETFs through separate account managers, Tracy announced. This brings more of a tactical approach and provides the ability to go to cash or move into different sectors. Individual equity positions are being replaced with ETFs, which is a trend that’s going to continue, with mutual funds possibly being used more as core with ETFs as satellite, she said.

Could you define UMH and contrast it with UMA from the perspective of an investor, manager and sponsor?

A UMA is an account that is typically invested only in equities, ETFs and mutual funds and is rebalanced by an overlay manager, Andrew suggested. It exists as a separate, siloed product from wrap mutual funds, RPM, RAA, SMA, he added.

UMH is more of a delivery mechanism for the investor, Andrew continued, and allows for the elimination of product silos so that the investor can have a holistic rebalancing across all security types across all of their accounts. Citi has being running UMH in production since 2009, he claimed.

Andrew explained that there are three key components to a UMH: Household-level rebalancing and performance, asset aggregation across multiple books and records platforms and tax and cash flow optimization.

A typical independent financial advisor might have accounts at three or four correspondent clearing firms and broker-dealers and the last thing an advisor wants to do is to tell their client that they have to do is move their accounts and repaper them, Andrew commented.

The ability to aggregate assets across multiple brokerage firms requires a tremendous amount of connectivity, he asserted. More than simple aggregation tools like Yodlee, but actual electronic connectivity to the financial institutions.

But it’s more than just reporting, Andrew warned. You must be able to selectively aggregate at the portfolio level, which could be multiple accounts, but not all accounts, in the same household. While a manager sleeve, such as large cap growth, still exists, sleeve level performance itself doesn’t exist, it’s just part of the overall household performance. Individual manager performance also doesn’t exist on a segregated basis in an UMH account, Andrew contended.

I would disagree with Andrew on this point. I believe that just because a sponsor doesn’t need to report individual performance, there are still important reasons for sleeve-level reporting. Corporate actions, for example. How are they handled when the same security is held by two or more managers in the same UMA? Without sleeve-level identification of tax lots, managing corporate actions is difficult, to say the least. — Craig

For UMA sponsors, what is your focus on client segments?

Merrill Lynch has multiple investment platforms, Russ explained, and they break them out into three legs: FA-directed, client-directed and firm-directed.

UMA is the chassis on which they want to deliver all of their firm-directed advice, he said. What previously required multiple programs containing traditional separate accounts, mutual fund wrap or other programs are now all rolled up into UMA. They have the ability to provide tax optimization, to rebalance across multiple investment vehicles, and sleeves as well as ability to have a stand-alone offering or allow FA’s to build their own offering through our line of all due diligence, covered strategies, Russ offered.

Customized offerings are constrained to those assets in the program and by registration type. But they have a platform that has the ability, through common pricing, common reporting and common rebalancing to deliver a true UMA, he claimed.

Looking ahead over the next few years, Merrill is driving to take the next steps and get closer to UMH, Russ said, confidently. They’re going to be creating a single advisory program that will have RPM, client-directed and firm-directed in a single contract under a single pricing schedule under a single reporting tool. For advisors, it takes the complexity, such as pricing arbitrage and reporting arbitrage, out of delivering advice.

They won’t have a full UMH, in the near future, where they can go across multiple registration types or across different product sets. However, Russ assured us that they’re looking to expand the breadth of investment offerings in their UMA program.

UMA definitely is garnering a lot of attention at WFA, Chris said. From a product-enhancement perspective, that’s where they’re spending most of their time. They’re not pushing one advisory program over another. Overall, UMA is the most immature program and there’s a lot of room for improvement and growth. There’s not been a lot of work being done in the UMH space, he confided.

Because of the independent culture and having financial advisors who want to use their own technologies, LPL has a different approach from these other firms, Tracy told us. They have established unified managed accounts that can handle all investments. Their advisors like to control reporting to clients, so instead of coming up with a single, unified approach, they provide a robust set of tools and allow advisors to take their own approach for their practice. The investing is more centralized, but the management tools and reporting tools can be customized by their advisors, Tracy added.

What is your experience with the willingness of managers to join models-only programs?

Fiserv has 3,500 third party models on their platform, plus maybe double that in internal models, Paul reported. They’ve seen that 85-90% of SMA managers use or manage to models. Fiserv believes this to be a long-term trend, with tremendous efficiencies to be gained, he said.

One of the biggest catalysts for models-only programs is the drive towards UMA, Paul explained. It’s the account structure that Fiserv is advising their clients to implement. From the ability to offer advice and product neutral solutions, the UMA facilitates this.

Paul referenced MMI’s third quarter newsletter (MMI Central), which contains an article titled, “Market Uncertainty Causes Industry to Pause”:

Our interviews with industry leaders indicate that financial advisors and investors are staying the course, at least for now. No significant trends have emerged across the advisory industry such as material shifts to cash or movements between advisory programs or among asset classes. This may be the calm before the storm. Or, it may be that sponsor firms are more prepared to address investor concerns. Enhancements to advisory programs, such as enabling investors to hold up to 35% of advisory assets in cash, the introduction of more tactical managers and better prepared advisors will help to quell investor fears in the short term.

A lot of Fiserv clients want to take a step back and look at model management very broadly, Paul continued. They want to make sure they have an effective model management process that is effective from the idea all the way through to implementation and reporting.

Fiserv is consulting on many levels with their clients, Paul said. Not only about implementing their UMA programs, but also their model management process. “Clients want to implement it right the first time,” he insisted.

Wells Fargo is in the process of moving to a models program and have been doing a lot of due diligence and talking to a lot of managers about providing their models, Chris informed us. Almost all of the managers they’ve spoken to are open to the idea of providing models. 95% already provide models to another sponsor firm. From the Wells perspective, the willingness is definitely there, it all comes down to the specific strategy, he assured us.

Russ told us that Merrill has already migrated their traditional separate accounts program entirely to models only. 99% of their existing managers agreed to participate in the program. It’s a bigger mindshift for larger firms, Russ claimed, since they have to give up trading control and due to the fee impact. They allow some managers to step in and they manage dispersion, he said.

This post is part 1 of a multi-part series. Additional posts are on their way that cover the rest of the panel sessions.

Now that you’ve read the entire article, did you agree with everything written? Did you disagree with anything? Either way, let your feelings be known by posting a comment below!