Beyond Credit Push - A Strategy for Financial Institutions to Develop a Common Framework for Online Financial Services

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					                                  Beyond Credit Push

A Strategy for Financial Institutions to Develop a Common Framework for
                        Online Financial Services
                                          March 15. 2006

                                  EXECUTIVE SUMMARY
Current developments in the market may create an opportunity for financial institutions to
generate new streams of revenue from the online channel. The demand for new online products
and services and the investments mandated through FFIEC Guidance may create an opportunity
for financial institutions to use the online banking channel to generate additional revenue from
non-depository third parties. Below is a summary of this strategy.

• FIs can meet this opportunity by developing a suite of separate-but-related online services
  based on FIs’ ability to authenticate their depositors through the online banking channel:
      o Authentication – The FI authenticates its own depositor at the request of a third-party
         business or government agency;
      o Bill and document presentment – The FI presents a bill or other document to its own
         depositor at the request of a third-party business or government agency;
      o Online payments – The FI guarantees payment to a third-party business or
         government agency.
• Each service would generate revenue for the FI from third-parties.
• Individual FIs could choose which, if any, of the services to offer.

• FIs generate little direct revenue from the online banking channel today, while costs to
  support the channel continue to increase, particularly in the areas of authentication and
• Demand continues to grow from businesses and governments for online authentication,
  information and payment services.
• Consumers’ concerns about online security and privacy may erode their use of the online
• Non-FIs continue to develop products to meet marketplace demands and address consumers’
  concerns, sometimes using the banking industry’s own infrastructure.
•   Businesses, governments, and consumers trust FIs with their money and sensitive
    information, making FIs the desired provider of new online authentication and payment

• FIs could offer an “authentication-only” service to government agencies and private sector
   companies that have a need to authenticate consumers for purposes of managing information
   online. Government agencies and associations have expressed a strong need for such a
   service, and a willingness to compensate FIs for providing it. As an example, Massachusetts
   is currently limited in conducting business online with its 350,000 vendors without a better
   authentication system.
• FIs should consider a new bill presentment service using the ACH Network as a channel for
   delivering bill summary information to their online banking sites. Billers would compensate
   FIs for presenting the bill summaries, FIs could reduce their costs of outsourcing payment
   services to non-banks, and FIs would entice more consumers to use their online bill payment
   service if they were able to present more bills. This bill presentment service could serve as a
   model for the secure presentment of other types of documents through the online banking
• FIs could generate new revenue by providing a guaranteed payment to third parties. A
   guaranteed payment initiated via the online channel would offer FI depositors security and
   privacy, and offer third-party businesses and government agencies a non-revocable payment
   on behalf of an authenticated payor.
• FIs should evaluate all three of these potential new products and services as part of a
   comprehensive strategy that meets the demands of market participants, leverages existing
   investments and infrastructure, and creates the potential to generate new revenue for FIs.
• The services could be linked or affiliated through a common trade name that would be
   recognizable to users. Individual FIs would be able to utilize proprietary brand identities
   through their own online banking sites.

• NACHA is well positioned to assist the banking industry in implementing this strategy by
  playing its historic role in the development of new products, services and payment
  applications of importance to FIs. This work would be consistent with NACHA’s strategic
  plan and wouldn’t impact current activities.
• NACHA’s core competency as a rulemaking body is critical to developing both the business
  and payment system rules that would be necessary to support the new products and services.
• NACHA can play an active role in developing these new products and services without
  creating risk or liability for board members and the membership at large.

I.        Introduction
A.        Online Banking Today

Financial Institutions (FIs) have made significant investments to set up and support virtual
distribution channels such as online banking. These investments in online banking include the
set-up and maintenance of the website, the integration between the website and financial services
and the development of new services within the channel. Substantial investments have been in
implementing the security infrastructure necessary to support online banking. The heart of that
security is the ability to authenticate customers, but also includes increasingly sophisticated fraud
detection and data protection tools.

With more than 30 percent of households now using online banking,1 the channel has produced
many benefits for FIs, including cost savings, increased customer loyalty, and deeper
relationships. Online banking customers are generally more profitable for FIs than customers
who do not bank online. To drive this revenue, they have offered services such as information
access and management, funds transfers, and bill payment to customers free of charge as
incentives for them to retain and broaden their relationship with the bank.

B.        New Revenue Opportunities

FIs may have a new opportunity to generate revenue from the online channel by using the
investments they have made in the online banking and payments infrastructure to support new
products and services in demand among third parties (businesses and governments) who want to
leverage the internet ‘eco system’. More than any other entity, consumers trust FIs with their
money and sensitive personal information primarily because FIs historically have been trusted
providers of financial services. This relationship combined with recent investments in online
security systems puts FIs in the ideal position of being the largest network of institutions with the
ability to remotely identify and authenticate large numbers of consumers in a secure and trusted
manner. FIs are well positioned to provide authentication, payment and information services in
demand now and in the future of the online marketplace. Much of the infrastructure to support
the services is already in place, and consumers, businesses and government agencies trust FIs
and want them to provide these services.

Offering these new products and services would enable FIs to optimize the investments and
infrastructure in the online channel to generate new revenue opportunities while continuing to
derive the existing benefits of online banking with their own customers.

C.        Need for a Strategy

FIs need a comprehensive strategy to evaluate, develop and implement new products and
services that would both generate new revenue from third party beneficiaries and optimize the
investments they have made in the online banking channel and in supporting risk

    The TowerGroup, 2005.

management/compliance tools. There are three primary factors that warrant the consideration of
such a strategy.

First, despite the benefits of online banking and trusted relationship FIs enjoy with their
customers, FIs generate relatively little direct revenue from the use of online banking while the
costs to support the channel continue to increase. One example of rising costs is the new FFIEC
Guidelines that require FIs to deploy multi-factor authentication by the end of 2006.2 Finding
ways to turn these investments into opportunities to provide new products and services that
generate revenue and meet the demands of the online marketplace would benefit FIs.

Second, there is growing evidence of increasing demand from government agencies,
corporations and consumers for new products and services that build off of existing services FIs
provide like authentication, online bill payment, and online payments. In particular, as reports of
identity theft increase, so too does the value of reliable and secure authentication services, both
to support payments and the flow of information online. Today, FIs use their authentication
capabilities primarily to identify consumers accessing online banking. FIs could instead provide
a variety of authentication services that capitalize on their existing investments while generating
new revenue streams.

Third, online commerce and the exchange of information electronically will continue to grow
significantly in the coming decade as the paper to electronic trend continues inevitably onward.
Online bill payment is growing 30% annually, online purchasing is growing 20% annually and
FIs are well positioned to foster the growth of the online marketplace by providing products and
services that meet unmet needs among participants.

FIs could adopt a strategy to develop a suite of new services and products that anticipate the
demands of the evolving marketplace. This strategy should emphasize the creation of products
within the suite that generate new revenue opportunities for FIs while optimizing the investments
already made and infrastructure that already exists. Individual FIs could offer all of the services,
perhaps unified under a single trade name, or individually based on which of them would provide
the greatest return on their investments.

II.       Suite of New FI-Centric Online Services
This section describes three new products FIs should evaluate as part of a strategy to develop a
suite of new online services: an authentication-only service for third-parties with a need for
secure authentication of consumers and businesses, an FI-centric model for online bill
presentment and payment, and authentication and guarantee of online purchases.

A.        Authentication of Consumers to Third Parties

FIs could more widely offer an “authentication-only” service to federal, state and local
government agencies and private sector companies that have a need to authenticate consumers
and businesses prior to permitting them to manage confidential information online. Government

    FFIEC Guidelines.

agencies, in particular, hold a great deal of information about citizens and have a need to interact
with citizens about that information. Today, much of that interaction is forced offline and is
paper-based because the agencies do not have adequate methods to assure them of the identity of
the citizens.

Furthermore, government agencies and many private sector companies are also expected to
comply with a myriad of regulations, many of them pertaining to ensuring they have properly
identified citizens or vendors when conducting business with them electronically. Yet, most
government agencies do not have the resources or the desire to issue multiple credentials to
citizens and vendors. As a result, progress in moving towards ecommerce on a federal, state and
local level has been slow going. Massachusetts, for example, has found that it is not cost
effective to develop in-house authentication infrastructures, and has expressed interest in an FI-
Centric offering.3

There are countless numbers of applications that could be supported by an FI authentication-only
service. Government agencies not only demand this service, but expect to compensate FIs for
the authentication, which could create a new revenue stream for FIs that leverages their existing
authentication infrastructure.4

This service would greatly benefit government agencies and private sector companies, which
would no longer need to issue multiple credentials and could generate more online activity from
their websites.5 Consumers would benefit from the ability conduct business with multiple
government agencies and private sector companies using a single credential – one supplied by
his or her trusted FI. For FIs, this service would likely promote customer retention and generate
new revenue all while utilizing its existing authentication infrastructure.

In developing this potential service, significant challenges will have to be met. Some of these
challenges include technical issues, the lack of a standard approach to authentication in the
banking industry, and determining the right balance between financial institutions’ acceptance of
a new type of risk and the appropriate level of compensation to offset the risk.

B.       FI-Centric Online Bill Presentment and Payment

FIs should consider Electronic Bill Presentment and Payment (EBPP) as an opportunity to
generate new revenue while capitalizing on existing investments and infrastructure. Online bill
payment is growing at a rate of 30% annually, and because most FIs have outsourced most of the
supporting technology, they are not generating revenue commensurate with this growth. In fact,
because of this outsourcing, most FIs actually lose money for each bill a consumer pays online,6
amounting to a range of $.02 - $.60 per bill paid. Strategically, FIs need to shift from a “loss
leader” to a profit center strategy for bill payment. A critical component to executing this

  Confirmed in conversations with the Comptroller of Massachusetts.
  Confirmed in conversations with one large state government association and state government office.
  This same service could also be marketed within the private sector, particularly in industries where there is a need
to enable consumers to manage and move information online..
  Revenue on a per-transaction basis; FIs may view bill pay as a loss-leader for other products/services within the

strategy is the ability to acquire more bills to present and to entice consumers to initiate more
payments from online banking, all at a lower cost.

While bill presentment at FI sites lags behind the bills paid (180 million to 760 million
respectively),7 consumers consistently report a desire to view and pay bills from a single site –
specifically through online banking. However, more bills are paid each year directly from
billers’ websites than online bank sites. One recent study indicates that one of the reasons
consumers pay more bills from biller sites is the perception that they can view more bills from
biller direct sites than from aggregated (including bank) sites.8 This suggests there is an
opportunity for FIs to entice more of their consumers to adopt online bill payment and to provide
better services to existing online bill pay customers simply by presenting more bills to them from
their sites.

The NACHA Council for Electronic Billing & Payment (CEBP) is developing a product that
would represent a paradigm shift from using online bill payment as a loss leader to an FI-centric
product that would generate new revenue for FIs. The product, Electronic Billing Information
Delivery Service (EBIDS), would use the ACH Network as a channel for the distribution of
summary bill information. Consumers would view the bill summaries via online banking, and
pay the bills with an ACH credit. In EBIDS, billers would compensate FIs for presenting bills.
EBIDS also provides FIs with an alternative to current presentment and payment channels,
enabling them to generate and keep the revenue for bill presentment rather than paying nonbanks
to provide those services.

The CEBP conducted a survey of 27 billers, representing 155 million consumer bills per month,
to assess interest in EBIDS. The results of the survey indicate that billers are not only interested
in EBIDS,9 but recognize that there would be a “fee for service” to the FI for presenting the bill
summary information. Additionally, the subset of billers who will participate in an EBIDS pilot
have agreed that they will pay such a fee.

The Council is also working with anti-trust counsel to determine the appropriate “fee for
service,” model, which would also be tested during the pilot. Four FIs and five billers have
signed up to participate in the pilot program to date.

C.      Authentication and Guarantee of Online Payments

The market for ecommerce, currently growing between 14-25%10 annually, is expected to
continue that growth in the coming years. As the market grows and diversifies, the demand for
new payment options intensifies for businesses, governments and consumers.

  The Tower Group, 2005.
  As Online Bill Presentment/Payment Grows, Tower Group Explodes Myths on why Biller-Direct Model has more
  85% of respondents view FIs as viable partners for EBPP; 89% said bill presentment is very important to them, and
81% were interested in learning more about interoperable models for wider distribution of bills.
   This represents the current range of analyst projections.

Consumer demand for new payment options focuses primarily on concerns about privacy,
security, payment flexibility and control. Current industry research suggests that a significant
body of consumers is unwilling or hesitant to provide any sensitive account information online,
and more consumers say they would purchase more frequently if given a more secure method of

For businesses, the focus is to provide consumers with choice, increase market lift by offering
more payment options, reduce shopping cart abandonment, receive guaranteed payments and
receive relief from costly risk management responsibilities. One recent study showed that online
merchants are losing as much as $5 billion in potential revenues due to consumer fears regarding
security and privacy.12 Some merchants, such as Tool King, saw increased sales the first day a
new product called SECURE e-Bill was offered.13 This product allows customers to pay for
online purchases directly from their online bank account without sharing personal information
with the seller.

Finally, secure payment options are in high demand among government agencies. The National
Association of State Auditors, Comptrollers & Treasurers (NASACT) estimates that state
governments are probably realizing only 5% of their potential volume of online payments. The
identification and evaluation of payment alternatives is now one of NASACT’s top initiatives.
All of these trends and studies suggest that a significant amount of potential ecommerce
transactions go unrealized due to a lack of payment options that offer the features in demand
among market stakeholders.

For the past several years, NACHA has been evaluating a payment option that would enable
consumers to make payments via their FIs, using existing online banking and authentication
infrastructure, and with the ability to keep their financial information private with the FI. This
payment option would also offer a guaranteed payment to businesses and governments. These
features address the most significant barriers that exist to ecommerce growth today.14

To use this payment option:
1.     The consumer selects the new option and his/her FI at the merchant site.
2.     The consumer is redirected to the FI site.
3.     The FI authenticates the consumer using same credential(s) as for online banking. At the
       same time, the transaction information is sent to the FI via a secure, private channel.
4.     The FI redisplays the transaction information to consumer for confirmation.
5.     The consumer is redirected back to the business site, and a notice is sent to the business
       in real time that a guaranteed payment was approved.
6.     The business provides confirmation to the consumer that the purchase is complete
7.     The FI initiates an ACH credit to the merchant via the traditional ACH Network.15

   2005 Payment One study conducted by Javelin Strategy & Research.
   PaymentOne 2005.
   Moda Solutions January 27, 2006 Press Release.
   The payment option could be used for all consumer payments – online purchases, bill payment, funds transfers
and government payments – and could be extended for business-to-business payments.
   The same process could also be used to authorize other consumer payments via the FI, such as credit and debit
card payments.

This payment option represents a new revenue opportunity for FIs, as merchants, billers, and
governments would compensate FIs for the value-added services of authentication and payment
guarantee. Furthermore, NACHA recently completed a Proof of Concept (PoC) of this payment
type focused on building a business case for the payment option. The PoC results indicated that:
•      technically, the model works, and is fast and easy to use;
•      costs would vary by stakeholder, but are not a barrier to deployment;
•      the payment option could be offered profitably by both FIs and businesses;
•      demand for a payment type like this exists among businesses and consumers; and,
•      the impact to other online payment types FIs currently offer would be minimal.

In summary, an online payment option that offers security and privacy to consumers,
authenticated and guaranteed payments to businesses and governments is in high demand in the
marketplace. FIs are in an ideal position to provide such a payment type, and by doing so could
generate new payments revenue that both increase the market for ecommerce and optimize their
existing online banking and authentication infrastructure.

III.   Conclusion
The common linkage in the three proposed products and services described above is that they
leverage existing investments FIs have already made in virtual distribution channels. FIs could
embrace the evaluation of these products as part of a strategy to develop a suite of new online
services to meet the needs and demands of its customers. Each of the proposed products would
require robust evaluation and testing to determine if the business models project an adequate
return on investment, but work conducted to date on these products suggest that each offers
significant revenue potential for FIs.

NACHA is uniquely positioned to assist the banking industry in implementing this strategy to
develop and evaluate these products and services. NACHA has consistently served as a catalyst
for change in the industry, and as a voice to rally a critical mass of financial institutions to adopt
new products and services. NACHA has historically played a key role in the development of
new products, services and payment applications of critical importance to FIs, and has also
served to educate the industry about them.

NACHA’s core competency as a rulemaking body is critical to developing both the business and
payment system rules that would be necessary to support these new products and services.
NACHA is skilled in bringing all of the necessary stakeholders together, even when their
interests are competing, to ensure successful product development in order to find viable
solutions to marketplace problems.

NACHA has successfully run and managed many pilot programs, both within the ACH Network
and as research & development for technical solutions such as PKI and authentication. NACHA
has contributed a significant body of work to the industry on authentication via its Internet
Council, and currently has an entire department dedicated to fostering public/private sector
partnerships that could be utilized to examine the authentication-only service.

Finally, none of the proposed products or services would require NACHA to do anything
differently than it has done in the past, and all of the functions would be considered within the
scope of NACHA’s responsibility and mission to support the banking industry. Facilitating the
development of the strategy would fit with one of the key action items from NACHA’s strategic
plan, which is to develop new applications that are responsive to the priorities of FIs.