In what will surely be the first in a long string of similar headlines, the top of  yesterday's Wall Street Journal Money & Investing section declared:

BofA Plans to Cut 10% of Branches

The article, which has been picked up by nearly 100 news sites in the past 24 hours, reported that Bank of America was planning on reducing the size of its 6,000-branch network. There were no details on timing or whether the bank was retreating from certain markets or was simply pruning overlapping branches broadly.

But in later interviews with bank execs, it sounded like Bank of America was merely predicting a gradual shrinkage in its branch network over the next three years, and had no firm plans for specific closures. Here's a followup quote from president Liam McGee as reported by Charlotte NPR station WFAE:

"I think <CEO Lewis> was asked a question, 'Boy, could there be x-percentage less branches in the next few years?' And he was just saying, 'Yeah, could be, and if there was it would be in magnitude of this as opposed to a much higher number.'"

McGee says the bank is going through a 3-year evaluation process that could result in fewer branches, but that no particular number is targeted. He says customers' changing habits are driving the process.

What I found more interesting in the debate were some of the numbers the bank tossed out showing the growth of it's non-branch delivery:

• Nearly 50% of deposits are made in ATMs...up amazingly from 33% six months ago. The bank didn't say whether this was NUMBER of deposits or VALUE of deposits, but it's likely the former. Also, it's unclear if remote deposits made via scanner are included in the total. That new technology is making a significant dent in branch-based deposits at many financial institutions.
• 2.8 million customers are now using the mobile channel which was introduced in mid-2007. That's an average of about 120,000 new customer per month. However, growth appears to have accelerated slightly this year. In early Feb, the bank said it had 2 million mobile banking customers; so in the past 5.5 month, growth has been just under 150,000 new users per month.   
• The bank has a 60% market share in online bill payment; an amazing penetration for a bank with 12% of the country's deposits. 

Note:
1. See our Online Banking Report: The Demise of the Branch (April 2006), for more on the long-term trends in the mix of branch and alternative delivery.

A few weeks ago there wasn't a single dedicated ATM finder in Apple's App Store, and now there are three, not counting the bank-branded versions (more on that below). MasterCard is the latest entrant with a cute app called ATM Hunter (see inset; iTunes link) launched six days ago.

The free app can lead you and your iPhone to any of more than one million ATMs worldwide. The app automatically senses your location and lists nearby machines. And it's integrated with Google maps so you can map the location with a single click.

Unlike other ATM finders, MasterCard's version has a helpful filter to zero in on the following ATM types:

• surcharge-free
• drive-thru
• wheelchair accessible
• 24-hour
• deposit sharing

It also has a "share" function (upper-right of second screenshot below) that allows you to text the ATM location to a friend or to yourself for later reference. 

Here's what's in the app:

                         Main page                                   List after "location" search

              Filtering by feature                                           ATM detail

The launch is supported with a webpage at MasterCard's Priceless.com (see screenshot below).

Bottom line: It's an excellent app that should prove popular; however, I wonder if MasterCard is encroaching a bit on its banking clients' turf. Location-based ATM/branch finders are one of the cornerstones of a retail bank's mobile application (note 1). If customers are already using MasterCard's app, they have less reason to go mobile with their own financial institution.

On the other hand, the vast majority of financial institutions that don't yet have their own mobile app can safely recommend MasterCard's app and keep customers from using a banking competitor's app. 

MasterCard's ATM Hunter landing page (link, 10 April 2009)

Notes:
1. For more info, see our Online Banking Report on Mobile Banking: iPhone Edition.
2. Apple is approaching 1 billion downloads since the App Store opened last July. The company is celebrating the coming milestone with a $15,000 gift to the person that downloads lucky 1 billion. It also has a huge ticker on its website (below) that counts to the big number in real time (here).

Billion-download counter at Apple's website (10 April 2009, 6 PM Pacific)

While working my way through the RSS backlog tonight,
I found a post from Rob Findley at The Bank Channel, I wish I'd seen a week ago. It would have made a nice example in our latest Online Banking Report on the iPhone and other mobile applications. 

Last month, Dutch giant ING released a Google Android mobile application called ING Wegwijzer (see translated page below), that goes one step beyond the iPhone's GPS-enabled ATM finder apps.

In the ING (Netherlands) version, you have three choices of how to view the nearest ATMs (see below):

• List
• Map (regular or satellite)
• Camera

The camera option is very cutting edge. Users point the camera in their G1 mobile phone camera (inset) and the app overlays a pointer to the nearest ATM (see below). The application works for all ATMs, ING-owned and others, but only in The Netherlands. 

The application was developed for ING by SprxMobile using technology from Australia's Austria's Mobilizy.

I saw a Japanese startup demonstrate a broader mobile shopping app at TechCrunch50 last September, the Sekai camera from Tonchidot, but this is the first production app I've seen using the technology.

Bottom line: This is probably overkill in terms of a mobile ATM finder. However, it shows the power and versatility that's rapidly being engineered into mobile phones.   

ATM location as pointed out by ING app running in camera viewfinder

ATM locations also displayed via typical mapping

ING landing page for the Wegwijzer (link) (Google translation, 18 March 2009)

This is a report I've been meaning to write for a few months, but it kept getting pushed back for more pressing (Growing Deposits in the Digital Age) or timely (Year-end Wrap and Forecast) reports.

But a few days ago, we put the finishing touches on the latest Online Banking Report. It will be mailed to subscribers by the end of this week. It's also available online here. There's no charge for current subscribers; others may access it immediately for US$495.

--------------------------------------------------------

Mobile Banking 2.0: iPhone Edition
How to build a smartphone app even
your CFO will love

In the report (press release), we outline the reasons why every financial institution should consider an iPhone app, even if it's just a simple surcharge-free-ATM/branch finder like 1st Mariner Bank (iTunes link; see note 1) or a one-screen interface to your mobile website, essentially what Bank of America started with last year. Being on the iPhone is like having a website in 1995. Just by being there, even if it's crappy, you are ahead of the curve. And for the rest of time, you can brag that you were an early adopter of all things mobile.

And the icing on the cake, you get to slap Apple iPhone pictures all over your website. Baltimore, MD-based 1st Mariner, a bank that doesn't appear to even support basic mobile banking (note 2) has the most iPhone-ish website in the land (see screenshots below).

The report also looks at:

• Mobile banking application market (Apple's App Store, RIM's Blackberry App World, and Google's Android Market)
• Mobile banking forecast (U.S.)
• 33 features to consider for your mobile banking app
• Leveraging iPhone hype to increase interest in financial products and services
• Legal issues in mobile banking from our guest columnists at Chambliss, Bahner & Stophel
  

1st Mariner Bank homepage (16 March 2009)
Note: Nice job with the St. Patty's day theme too!

1st Mariner iPhone landing page (16 March 2009)

Notes:
1. The 1st Mariner app, built by PointAbout, identifies the nearest of 16,000 surcharge-free MoneyPass ATMs. It also features other integrated apps for local weather, lowest gasoline prices, accident alerts, traffic (powered by MapQuest), grocery stores, and Zagat restaurant listings (but not reviews or ratings).
2. Ironically, if you navigate to the bank's website on your iPhone, you cannot even see its iPhone homepage graphic (shown above) because the graphic is Flash-based which is not supported by the iPhone's Safari browser

This is the application I wanted to build, a surcharge-free ATM finder, but my business partner wisely talked me down from that ledge last month (see note 1). I can officially deep-six that idea with the launch of Regular Rate and Rhythm Software's Allpoint ATMs: Surcharge-free ATM Locator.

The app went on sale today in the Apple App Store for a one-time $1.99 fee (iTunes link). The app, which directs users to one of 37,000 Allpoint ATMs, could not be simpler: 

• Launch the app
• See the nearest Allpoint ATM
• Tap for walking/driving directions courtesy of Google maps (see inset) 

Using WiFi, it took 19 seconds from the moment I pressed the application button to when the nearest ATM location was listed, inside a Safeway five blocks away (note 2). With WiFi off (Edge network), it took just 4 seconds longer. Mapping the location, if necessary, took a few more seconds.

There are very few finance apps where users will willingly pay a fee. But this ATM finder, which saves about two bucks every time its used (note 3), should be popular at $1.99. Of course, it won't be long before the free, ad-supported version comes along, so the windfall may be short-lived.

Bottom line: This is a great tool for credit unions, community banks, and direct banks looking to compete against the massive ATM networks of the major banks. The best strategy is to build this right in to your own iPhone/Android/Blackberry app. But until then, you can at least point customers to this app.

Notes:
1. While it's a great opportunity for financial institutions, or scrappy coders to build, it's ultimately not what we want to focus on. Still, it could be a gold mine, at least until financial institutions, especially credit unions and community banks, start adding it to their own iPhone applications.
2. This was news to me, even though I've lived in then neighborhood for a decade. 
3. Assuming you would otherwise use an ATM which levies a $2 surcharge.

Illinois-based West Suburban Bank <westsuburbanbank.com>, which offers an array of prepaid card services through its subsidiary, Prepaid Solutions USA <prepaidsolutions.com> is promoting payroll cards to employers.

The powercash card website, powered by FundXpress <portal.fxfn.com/c2wsbli>, includes a surcharge-free ATM finder that points to nearby machines within Allpoint's 32,000 ATM network <allpointnetwork.com> (click on inset for closeup).

Analysis
The surcharge-free ATM is an important benefit for payroll card clients, because it allows them to point their employees to ATMs where they can withdraw their paychecks without an additional charge.

--JB

Verifone Holdings Inc. bought Israel’s Lipman Electronic Engineering Ltd. last week for a total of $793 million, giving Verifone pole position against its nearest rival in the point-of-sale terminal business, Hypercom Corp.

The deal, expected to close following regulatory and shareholder approvals in the fourth quarter, is engineered around a complex combination of cash and stock. It includes a special dividend that the companies would only say would likely exceed $23 million. An unspecified cap on the deal, based on undisclosed conditions, makes it almost impossible to fully value the transaction. Verifone is borrowing most of the money for the deal from an unidentified lending syndicate, and refinancing its existing debt, for a total of $540 million. 

The stock market liked the deal: Verifone’s shares spiked more than 10 percent on the news before trending back to the $30 range at which they had been trading before the news.

One good reason for that approval is the fact that Lipman’s business is strongest in relatively untapped markets like India, China, Eastern Europe and Brazil, all of which have relatively under-developed point-of-sale terminal markets. Lipman's product line is strong in advanced point-of-sale terminals, including contactless and Internet-protocol devices, and advanced ATMs.

“Arguably, the growth of this industry is in the emerging markets,” says Sam Ditzion, president of Tremont Capital Group. “Look at China. The percentage of consumers that have credit or debit cards today, versus five or ten years form now, is going to be absolutely extraordinary.”

That phenomenon is also in operation in the other markets Lipman has been active in, says Ditzion, and should greatly help Verifone’s future growth, assuming Verifone can preserve and extend Lipman’s footprint in those markets.

The deal will also reinforce Verifone’s bottom line. Verifone’s 2005 net income was $33.2 million on revenues of $485.3 million, and Lipman’s were $20 million on revenues of $235.4 million. Hypercom, by contrast, reported a 2005 net loss of $33.3 million on revenues of $245.2 million.

What the deal will not do is bring Verifone into the ranks of corporate point-of-sale vendors, a space currently dominated by IBM and NCR Corp. Aside from the sheer size disparity—NCR’s 2005 net income was $529 million on net revenues of $6 billion—Verifone and Lipman both sell to smaller operations than the large retail chains that typically use IBM and NCR systems.

This fact hasn’t diminished investor enthusiasm for Verifone. Since it went public last May, Verifone’s stock has risen over 300 percent; shares originally priced at $10.50 now trade in the $30 range.

The general approbation on Wall Street wasn’t universal, however; Standard & Poor’s, for instance, lowered its outlook on the announcement to negative from stable, mainly because of execution concerns. S&P left its credit rating of Verifone at BB-.

“It does seem that this acquisition cements Verifone’s lead [in its niche],” says Lucy Patricola, the S&P analyst who covers Verifone. ”Our concerns were really that they have yet to do an acquisition this substantial. From what I know, management has done very well running Verifone, so they certainly bring something to the table, but this acquisition is of a size and a scope in which they’re untested.”

The problem for Verifone is that it is already composed of several product lines from previous acquisitions, and it’s acquiring quite advanced systems from Lipman, including terminals in which Verifone has little experience manufacturing  or supporting.

That combination—unabsorbed product lines combined with new, advanced products—will be a challenge for Verifone executives, despite their good track record, and is an issue that’s tripped up acquisitions before.

This is especially true because acquisitions typically result in a certain exodus of top executives and important technical staff of the acquired company, stripping the buyer of the talent and internal knowledge it needs to hit the ground running with its new products. Considering the fact that so many of Lipman’s recent sales have been in relatively underdeveloped markets—markets that lack the sort of readily available, technical support infrastructure that’s a commonplace in the United States—those facts may result in unexpected problems for Verifone, in turn creating sudden expenditures.

“Those are some of our concerns,” says Patricola. “There’s also the concern that the increase in leverage might be worse than they’re projecting because of some issue [related to integration matters] that might lead them to spend more money than they’re planning to.” Integration costs, she adds, “are always the issue.” (Contacts: Tremont Capital Group, Sam Ditzion, 617-482-8866; Standard & Poor’s, Lucy Patricola, 212-438-3006)

The U.S. Treasury’s U.S. Money Laundering Threat Assessment, published last December, says that many types of stored-value cards have the potential to become major avenues for money laundering, suggesting—although not saying explicitly—that stringent anti-money laundering regulations are in the offing for the card products.

Industry groups are preparing what amount to pre-emptive negotiations to keep the issue off the floor of Congress, hopefully minimizing potential regulations that could, in the view of many in the industry, cripple the business case for what bankers and other payments executives consider several promising new revenue streams. But prepaid-card executives are declining to speak publicly about the issue, hoping to keep public discussion about stored-valued cards “positive.”

Continue reading "Money Laundering Creates Problems for Stored-value Cards" »

In Sept. 2004, TRM Corp. borrowed $150 million from a Bank of America syndicate and bought 17,200 ATMs from eFunds Corp. The deal made TRM, which already had 4,300 ATMs, one of the world’s biggest operators of ATMs in retail locations.

Today, after many stumbles, the main question on the minds of most observers is who, if anyone, will buy TRM.

“Things are very, very tough there right now, and in the next two to three months, we’ll see if they can save themselves,” says Sam Ditzion, president and ceo of Tremont Capital Group, which specializes in the ATM business.

Since the eFunds deal, TRM’s shares have fallen from a high of $26.00, to a low of $6.73. Sales roughly doubled, from $126 million in 2004 to $234 million in 2005, but sales discounts more than tripled—from $33 million to $109 million—and operating income slipped from $13.8 million to a loss of $5 million. Net income fell from $7.9 million in 2004, to a 2005 loss of $8.9 million.

Last September, the company said it was in default of the Bank of America loan, and gained forbearance. Last month, the forbearance ran out and it was still in default. Although the bank gave TRM more time to straighten things out, or refinance, the default may affect TRM’s NASDAQ listing. Meanwhile, Allen & Co. has been hired to pursue the usual strategic options, and CEO Kenneth L. Tepper and COO Thomas W. Mann both left the company, which was late filing its 2005 10-K. And two new acquisitions were cancelled, costing TRM $5.2 million in break-up fees alone.

This state of affairs came to pass for a number of reasons, some TRM’s fault and some not.

“The eFunds transaction has proven to be more of a challenge to integrate than initially anticipated. The industry in general has become a more challenging environment just in terms of transaction volumes being lower and costs being higher, and there’s been some bad luck here and there. Collectively, it’s a problem,” says Ditzion.

Some of that bad luck could have been minimized, and some not. The British pound rose against the U.S. dollar last year, costing the company $72,000. The loss would have been greater, but it was cushioned by the Canadian dollar’s fall against the U.S. dollar. Unlike most companies with international operations, TRM doesn’t hedge its currency exposures, and doesn’t explain why. Eighteen percent of TRM’s ATM portfolio is in the United Kingdom, but it accounts for 23 percent of company sales. TRM’s Canadian ATM portfolio accounts for 8 percent of its machines, and 10 percent of its sales.

The company’s U.K. results were also hurt by two events beyond its control: The government required all ATM networks to be upgraded to the expensive triple-DES encryption standard (the United States only requires double-DES); and thieves in the United Kingdom began stealing ATMs outright by picking them up and driving off with them. Those thefts have declined, but are still occurring. TRM, which wasn’t the only ATM operator affected—it’s a regular crime wave, by most accounts—estimates that the thefts cost it $2.2 million, including $1.3 million in unreimbursed losses. Those losses were probably magnified by a company decision made earlier in the year to cut back its ATM crime insurance to cover only catastrophic losses because of increased premiums and deductibles.

But most of the company’s problems came from the eFunds deal. According to TRM’s tardy 10-K, and the analyst’s presentation that accompanied its release, buying that portfolio turned out to be a disaster. For one thing, eFunds’ performance, under the terms of a five-year management contract that it got out of the deal, was disappointing at best. Even worse, the portfolio itself underperformed the rest of TRM’s locations, both in terms of traffic and amounts withdrawn.

These problems point to important management lapses, and especially to poor due diligence. At the time of the deal, TRM said it expected to improve the portfolio’s performance by weeding out underperforming locations, raising fees 18 percent, and reducing processing fees by 50 percent, resulting in a 30 percent overall cost reduction (see Electronic Payments Week, Sept. 28, 2004).

None of this came to pass, aside from reducing the number of locations from a total of 21,000 to 19,930. Withdrawal transactions, for instance, grew from 26.7 million to 77.3 million, but average withdrawals per machine fell from 359 per month to 323, and net transaction-based sales per transaction fell from $1.76 to $0.97. This was aggravated by disappointing results in TRM’s other business line, in-store photocopy machines, which experienced falling volume of 20 percent for 2005 over 2004, to 485 million copies from 609 million copies. The company says this is an established trend.

As for the goal to cut processing fees by 50 percent, there’s no way to tell from the recent 10-K since TRM doesn’t break them out separately. Much of those savings were expected to come from the five-year management contract with eFunds, under which that company agreed to manage the ATM network, replacing a patchwork of smaller third-party providers.

But comments at the analyst’s presentation after persistent questioning on the subject—TRM executives wouldn’t consent to be interviewed—indicated that there have been substantial problems with the eFunds contract under which eFunds agreed to manage and enforce the contracts with the individual merchants operating the TRM locations. TRM’s new interim president and CEO Jeffrey F. Brotman said they’d been working closely with eFunds to correct problems, and that “…things are better now,” a sure indication of a disappointing experience, at best, for TRM.

Whatever those problems have been, they apparently didn’t go so far as to have spawned a lawsuit—the two companies are still working together—but it apparently did nothing to enhance value for TRM’s shareholders, 46 percent of whom are 47 institutions.

And a sale might not do the trick for them, either. Capital IQ estimates TRM’s enterprise value at $312 million, while the entire market capitalization is only about $95 million, debt is $220 million, and of a 10.9 million share float, there were 2.58 million shares short as of March 10—almost 21 percent. Coming back from conditions like that will be tough, at best, and those conditions, says Ditzion, may not exactly encourage private equity investors to step into the breach.

“Private equity firms are unlikely to be interested in buying companies that are not profitable or unlikely to be turned around, or hopeless,” he says. “Overall, they’ve done a pretty good job, but things have fallen through the cracks, and that hurts. These deals (like eFunds) are all done on very specific return on investment, and if a couple of things fall through the cracks, you can lose out.”

eFunds, meanwhile, is doing pretty well. According to its last 10-K, it had 2005 revenues of $502 million, only $112 million in debt, and 11.8 percent quarterly earnings growth. Since last June, its shares have risen from $17.10, to $25.84 at last Friday’s close. (Contact: Tremont Capital Group, Sam Ditzion, 617-482-8866; TRM Corp., 503-257-8766)

The 1997 American Banker/Gallup Consumer Survey shows that PC ownership is widespread among households with at least one bank account. Exactly half now own a PC compared to 48% last year. And 39% now have a PC and modem compared to 36% last year. Compared to last year, the biggest changes are in the area of Internet usage. A whopping 73% of PC owners have used the Internet, up from 59% last year. Surprisingly, 56% of PC owners have used the Internet for commerce (rather loosely defined as having bought something or requested info), more than double the 27% recorded last year. Online banking usage doubled to 12% of PC owners compared to 6% last year.

One area of concern is the decline in PC owners interested in PC banking, from 52% to 44%, likely an inevitable backlash from all the hype. Users actually experiencing the realities of the online medium show a decline in enthusiasm at least initially.

Usage of Direct Deposit, ATMs, and POS Debit (U.S.)

Usage of electronic banking services continue to grow though growth in direct deposit and ATM use will be slow. Bigger gains will be in telephone banking, POS debit card use, and of course online banking.

Last year capped a three-year surge in the installed base of ATMs in the United States that saw nearly 60,000 machines added. More than two decades since the first ATM was installed, widespread surcharging has finally made ATMs a measurable profit center.

number of ATMs and billions of transactions (U.S.)

1996 ATM Usage by Frequency

number of transactions per month

Source: Synergistics, 1996

There’s not much difference in the bill payment habits of PC owners vs. non-owners. Non-owners even pay bills via PC nearly as much as PC owners.

Methods Used for Payment Online

According to Jupiter Communications www.jup.com which closely tracks electronic commerce, credit cards will continue to be the preferred method of payment through the year 2000, though its share will fall from 88% in 1996 to 51%. Picking up the slack will be electronic checks, electronic cash and smart cards.

We don’t think credit cards will be displaced so quickly. The Jupiter projections seem more than a bit optimistic on the adoption of new payment methods. We expect credit cards to maintain their dominance well into the next decade. By year 2000, we project that credit cards will have a market share in the 70% range with electronic checks (including ACH debits initiated online), used primarily for bill payment, accounting for the remainder. We don’t expect significant dollar volumes of electronic cash or smart cards by year 2000.

Web-based services:

• set daily, weekly, monthly withdrawal limits for ATM access, POS use, and/or off-line use
• apply for higher ATM withdrawal and/or off-line debit limits (permanent or temporary)
• set “quick-cash” ATM withdrawal amount
• design “personal menu” presented at ATM
• set access parameters for each account
• PIN selection

E-mail/push services:

• fraud alert notices for off-line debit (e.g. send a notice when card used out-of-state)
• special rate offers
• new ATM locations
• new POS locations
• ATM deposit confirmations: automatic message with date and amount of each ATM deposit
• POS charge confirmations: automatic message when a new POS charge is authorized
• notification of lost/stolen reports or address change