The Green Sheet Online Edition
April 25, 2011 • Issue 11:04:02
What a bank core processor means to you
I wrote "What does a processor do?" for The Green Sheet, Feb. 14, 2011, issue 11:02:01, to address a subject that is central to ISOs and merchant level salespeople (MLS). Everything you do ends up at a processor. It is often said that nothing happens until someone makes a sale; the corollary to that is nothing happens with a bankcard transaction until it gets to a processor for capture, authorization and settlement.
Now I want to tackle something a bit outside of the traditional ISO realm: What does a bank "core processor" do? Recently, I saw "core" defined as "centralized online real-time exchange."
This cannot be accurate because the term "core processor" has been around since the days when all transactions were entered in batch mode at the end of the day, and there was no intra-day memo posting. For the purpose of this article, "core" refers to the actual data processing platform a bank operates on.
In March 2011, I attended the annual users group conference hosted by Jack Henry & Associates Inc., one of the major core processors. As an ISO or MLS, you should know what a core processor does. It's likely one of your clients will need a financial product - such as check or automated clearing house (ACH) processing - that cannot be obtained from your credit card processor.
A banking overview
To explain, I'll start with a brief overview of the banking system, and by that I mean commercial banks. A commercial bank is one that takes deposits and makes loans primarily to businesses. Slightly more than 8,000 Federal Deposit Insurance Corp. insured commercial banks are in the United States; 95 percent have less than $1 billion in assets.
Looking at the list of top 100 banks, I see that the 100th-ranked bank has about $11 billion in assets. The curve falls off steeply after that. Very large banks, called "money center banks" or "superregional banks," have large, internal information technology departments, but small banks do not have the resources to maintain such departments.
Many small banks, called "community banks," operate without a reader-sorter to process checks; they send their checks to an "item processor" to be encoded and cleared.
This is a big business, since 25 billion checks are expected to be cleared in the United States this year. And banks are motivated to clear checks quickly, because check float (checks in the process of presentment) constitutes a nonearning asset to banks, which hampers banks who are measured, in part, by return on assets.
When forming a bank, the hardest decision to make is choosing a vendor to serve as a core processor. This entity must process and clear checks and run all of the standard banking and accounting functions, such as the deposit, loan and liabilities systems for time deposits. This includes platforms for typical cash management services, such as ACH processing, wire transfer and so on.
To further complicate this, some banks use "upstream correspondents," which are larger banks that specialize in a particular product or service; foreign exchange is an example. And many large cities have a "bankers' bank" to provide wholesale services.
Then there are independent, third-party vendors. There is a lot of activity here because banks spend billions of dollars on core processing every year. Probably fewer than 20 players occupy this space, and the market is dominated by three companies: Fiserv Inc., Fidelity-Metavante and Jack Henry.
I would like to share insights about this arena from the Jack Henry conference. First of all, if you have enough customers, you can form a user group. In this case, ProfitStars (the Jack Henry subsidiary) presented over 170 individual sessions during the conference, with 73 approved for continuing professional education credits and 13 for ACH Professional credits.
Jack Henry is approaching $1 billion in annual revenue, with 20 percent of that attributable to ProfitStars. According to Celent LLC, ProfitStars is the most widely installed provider of remote deposit capture (RDC). It serves over 150,000 clients, including over half the top 100 U.S. banks.
It processes nearly 2 billion transactions annually. In 2009, ProfitStars purchased Goldleaf Financial Solutions Inc., the dominant third-party ACH processor for small banks; Pemco Technologies; and IPay Technologies. This brings the number of companies it has acquired since 2003 to 17.
Conference keynote highlights
Lee Wetherington, Director of Strategic Insight for ProfitStars, was the keynote speaker at the conference. He also taught a couple of classes. To say he is a dynamic speaker would be a really gross understatement. With his permission, I am going to relate several of his most compelling comments:
- Prepaid card usage, particularly open-loop prepaid, is growing rapidly.
- Prepaid is not only the fastest growing payment mechanism, but general-purpose, reloadable prepaid cards are exempt from Durbin Amendment interchange regulation.
- 87 percent of all checks are presented at the counter (creating an opportunity to sell RDC).
- For each customer a bank converts to online banking, the bank saves up to $167 annually.
- We have moved from being PC-centric to being smart-phone-centric.
- Two-thirds of all businesses lack a business checking account or cash management system.
- 70 percent of small businesses earn less than $500,000 per year.
- The average lifetime of a commercial bank relationship is eight years. The average bank churn rate is 12 percent, which is offset by new-customer acquisition for an average annual net attrition rate of 1 to 2 percent. The cost of client acquisition is five times the cost of client retention.
- PayPal Inc. dominates 87 percent of alternative payments; Amazon Inc. and Google Inc. get the crumbs.
- Durbin Amendment predictions: banks will expand prepaid card issuing and offer merchant-funded rewards programs; regional debit networks will thrive.
- Opportunities in payments include RDC, general-purpose, reloadable prepaid debit cards, expedited bill pay, mobile person-to-person payments, alternative payments (for example, eBillme), merchant-funded rewards, online statements and payments via personal financial manager.
- Bill pay is the gateway to full blown cash management with usage right-sized for small businesses.
- With VeriFone Inc. acquiring Hypercom Corp., all new POS terminals will be near field communication (NFC) capable; the Apple Inc. iPhone 5 is expected to have NFC capability.
- 84 percent of consumers are actively engaged in social media; only 11 percent are currently connected with their banks; 36 percent would like to be.
- Smart phone applications will optimize usability; the priorities will be personalization, widgetized features, standard symbology, data visualization, better bill pay and cash flow forecasting, and a dedicated presentation for small and midsized businesses.
- The income hit to banks from the Durbin Amendment and Regulation E overdraft regulations is expected to be $16 billion.
- Convenience always trumps security. People become addicted first and address security issues later. The smart phone will effectively fight fraud because it will deputize consumers to be vigilant in real time.
- 600,000 payment-related applications are available. You may have an app store in your ISO website for real-time view, bill pay, credit monitoring, top-up for prepaid cards and even comparison shopping.
- Mobile is now the hottest topic. ProfitStars mobile RDC, a partnership with Mitek Systems Inc., offers reliable image capture in a mobile environment.
- 4G phones do not need as much information to reside on them as earlier phone models, so the optimal architecture becomes a hybrid between the wireless application protocol and the app.
Avoiding RDC mistakes
Jerry Federico, National Sales Director for Enterprise Payments at ProfitStars, also gave an excellent presentation titled Ten Ways to Get Remote Deposit Capture Wrong. We don't have the space to print it here, but if you email me, I will send this to you. If you are selling RDC, it contains information you should know.
Finally, here are the watchwords for the conference. They provide good guidance for the ISO and MLS community as well:
- Understand profitability and act on it.
- Cut costs and empower customers.
- Generate new revenue.
ProfitStars, a leader in both RDC and ACH processing, is actively searching for ISOs.
For more information, contact Chris Brammer at 559-324-8702 or by email at email@example.com.
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at firstname.lastname@example.org.
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