The Digital Transformation: Empowering Consumers and Businesses Through Technology Innovation

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1 Point of View The Digital Transformation: Empowering Consumers and Businesses Through Technology Innovation There is a digital transformation underway that is central to the growth of productivity and competition in the United States economy. Shaped by social, economic, technological and regulatory forces, digital technology is not only changing the way consumers, businesses and government interact it has become a driving force for future economic success. Consumers of every age and enterprises of every size are being challenged and empowered with a gamechanging array of electronic devices and applications that fundamentally change the way they communicate and interact. Social, economic and regulatory forces have driven their rapid adoption; everyone from the soccer mom to the Commander in Chief has become a player. Figure 1. Exponential Growth in Devices 44 percent of bills are now paid electronically versus by paper check 1 8 trillion text messages will be sent in percent of the global population are now mobile subscribers and within five years, mobile devices are expected to overtake the PC as the most popular way to access the Internet 2 The rapid advance and adoption of digital technologies has been nothing short of stunning. In the U.S., about 470 million devices are connected to the Internet and used to manage many aspects of business and personal life. By 2015, the number of connected devices is expected to reach three billion in North America alone, according to IDC research (Figure 1). This dynamic is creating enormous opportunities to improve relationships, create new levels of efficiency in government and, perhaps most urgently, to optimize cost structures. In an era of fiscal austerity, new technologies will be the key to providing services faster, better and cheaper. Source: John Gantz, IDC, The Embedded Internet: Methodology and Findings, January 2009 The Forces Accelerating Digital Transformation Technological The pace of technological change is speeding up. As illustrated in Figure 2, it took 27 years to reach 100 million users of magnetic stripe cards. The first wireless Intel Centrino laptop was introduced in 2003, growing to 100 million users in just three years. New types of billable services are being developed every day. The proliferation of Internet-connected devices has caused the number of financial transactions to explode, and our ability to leverage ever-more-capable machines for higher value creation is increasing exponentially Online Bill Pay Longevity and Lifetime Value Study, Fiserv, Inc. and Aspen Analytics with the Marketing Workshop and Harris Interactive 2 Mobithinking, July 2011,

2 Figure Million Isn t What It Used to Be Financial institutions will allow consumers to send SMS text messages to receive immediate answers regarding balances, transaction history and bill payments Smart phones equipped with near-field communications (NFC) chips could make wallets obsolete as information stored on the chips will be scanned at a register to make purchases and payments Source: TowerGroup projections and First Data, The Risks & Opportunities in a Mobile Commerce Economy, 2008 Economic With laptops, netbooks, tablets and smart phones becoming more affordable, adoption curves are bending sharply upward and this trend is expected to continue. A greater number of devices in the hands of a growing number of citizens have, in turn, led to an explosion of mobile applications for businesses and consumers. For example, mobile connectivity has enabled a variety of financial services that save both time and money. A digital image of the check can be captured by a mobile phone and sent to the bank electronically for processing Applications written for smart phones and tablet devices are allowing businesses and consumers to conduct a variety of transactions anywhere, anytime; they can pay bills, see transaction histories and send third-party payments With each new innovation, organizations have the potential to connect with and understand their customers as never before. These innovations benefit providers through increased efficiency and cost reductions. Remote deposits can save a bank millions of dollars in transportation, check processing and clearing costs while improving their cash positions. Internet and mobile payments offer greater convenience to consumers while reducing printing, mailing and labor costs for utility companies. Websites provide 24/7 access to information, reducing customer service and call center requirements. In an era of global economic turbulence and uncertainty, these and other bottomline benefits will accelerate the adoption of new technologies by consumers, businesses, and state and federal government offices. Regulatory Both business and government organizations must learn to adapt, in the most efficient manner possible, to a rapidly changing regulatory environment. Amidst this sea of change, technology will play a major role in helping organizations to ensure compliance, deliver value and improve customer interactions. As Robert Hunt, senior research director at TowerGroup observed, the regulatory environment has become so complex that organizations are increasingly looking 2 Fiserv

3 to partner on their technology strategies rather than going it alone. Today, technology firms are more likely to participate in the development of business strategies. In addition, organizations are becoming more receptive to solutions that combine in-house systems and outsourced processes to achieve their goals. Social Technology has brought about significant social and behavioral changes that will continue to transform the relationship between consumers, businesses and government. The failure to predict how quickly technology can change social behavior has resulted in major shifts of power and wealth in a variety of industries; think Polaroid, Hasselblad and Konika Minolta, all entrenched leaders in the camera industry prior to the rise of digital photography. It is doubtful that executives at these now-defunct enterprises would have guessed in 1981, when Sony Corporation created the first prototype digital camera, that one of the most popular uses of digital photographs would be the ability to share them with friends and family on social networks and smart phones. Regardless of economic sector, broadband Internet access and mobile connectivity have combined to produce savvy, discriminating consumers. They want information in real time and on their own terms. For any organization that interacts with the public, there is a pressing need to adapt to this reality or face the certain wrath of dissatisfied consumers. Clearly, technology has raised the bar for customer service. Consumers are becoming more receptive to change as well. By 2014, 40 percent of financial transactions will be originated out of a Generation Y household. Gen Y consumers those born in the 1980s and 1990s are unique in the following ways: On average, year olds initiate or receive 265 telephone calls and nearly 800 text messages each month 3 Face-to-face communication has taken a back seat to texting, Facebook, and for Gen Y moms 4 The behaviors of people in other demographic categories are evolving too. New technologies and applications will continue to influence their behavior and service providers must stay continually tuned-in. Reducing Operational Cost and Complexity While Improving Service The federal government is dealing with unprecedented financial issues. Already faced with shrinking budgets and hiring freezes, federal agencies are now challenged to adapt to $1.2 trillion in cuts agreed to by congressional leaders and President Obama in July The deal includes further cuts that are scheduled to be proposed by a bipartisan committee. 5 For IT managers, the days of adding staff and systems to solve problems are over. Budget constraints are forcing all government agencies, from defense to social security and healthcare, to scrutinize both current and future expenditures. Setting an example for other departments to follow, the U.S. Agency for International Development saved an estimated $20 million over a five-year period by moving its servers to the cloud. 6 We urgently 3 Nielson, Texting Now More Popular than Calling, The Nielson Company, September 22, Young Moms Prefer Digital Communication, By G Colcannon, October 2010, Advertising Agency Blog, 5 President, Congressional Leaders Reach Debt Limit Deal, ExecutiveGov, August 1, 2011, 6 IT Reform Can Reduce the Deficit While Improving Government Performance, By Pratap Chatterjee, Center for American Progress, June 15, 2011, Point of View 3

4 need to invest in technology that will save money and make government programs work better, wrote Pratap Chatterjee of the Center for American Progress. Doing so will be an important part of any deficit-reduction strategy. Fortunately, technology innovations and changing social behaviors are converging to help organizations achieve their goals. On the one hand, technology reduces spending by automating processes, improving accuracy, reducing fraud and enabling self-service capabilities. On the other, an increasing number of consumers accept, or even prefer, handling transactions online when and where they choose without having to wait in line or be put on hold. In short, the role of technology in government is advancing because it empowers organizations to cut costs while maintaining and often improving service. Demand for Multiple Payment and Remittance Options Is Increasing Research has found that a majority of consumers are interested in using new forms of electronic payments, including personal payment transactions and mobile banking: 7 Checks will continue to be displaced by card and ACH payments, as check volumes decline at a rate of eight percent a year Online bill payment, debit and prepaid cards are leading the shift toward electronic payments by consumers; signature debit transactions alone are growing at eight percent annually Online and mobile payments are the fastest growing segments in the payments industry; the mobile person-to-person payments market is expected 7 First Annapolis Consulting Analysis, Javelin, Forrester and CheckFree, October 2009 to grow 48 percent over the next five years and e-commerce payment volumes are projected to grow at 15 percent annually ACH transactions are estimated to grow at a rate of 12 percent through 2014 The number of ATMs appears to be stabilizing, as consumers migrate to electronic payments It is clear that going forward, people will expect the organizations with which they do business to offer multiple electronic payment options and do it seamlessly. A growing number will shun the idea of driving to a physical location or using stamps and envelopes to make payments. Instead they will opt for credit, ACH, online bill pay, debit signature and debit PIN as well as remote and mobile deposit capture, e-coupons, prepaid cards and person-to-person (P2P) payments. The Opportunities Organizations are developing multiple payment capabilities to promote customer interaction, engagement and loyalty but there are significant bottom-line incentives as well. Consumers can be directed to lower cost channels to reduce costs and improve efficiency. Some examples include: Electronic Payments Most U.S. households are connected to the Internet and a significant majority, 83 million, use online banking. 8 Over the next five years, industry analysts expect electronic billing and payment adoption levels to reach about 50 percent for financial institution customers. A significant opportunity, then, exists in driving the adoption of online transactions. Government agencies 8 Javelin Strategy, 2009 Online Banking & Bill Pay Forecast, August Fiserv

5 will strive to entice more consumers to make online payments for many of the same reasons financial institutions and other businesses do. For example: Banks can cut $8.3 billion in operating costs by shifting consumer behavior online 9 Online payments enable the accounts receivable process to be automated, reducing overhead costs Online services reduce printing and mailing expenses Online payers are 35 percent more likely to pay bills on time The data that accompanies an online payment is valuable: it can be pooled, analyzed and leveraged for future initiatives End-to-end electronic billing and payment solutions reduce errors as data flows directly into the billing system At the same time, electronic payments drive significant value for consumers. Studies have shown that the added time savings and convenience of paying bills online creates consumers who are extremely loyal and satisfied, according to an Online Bill Pay Longevity and Lifetime Value Study conducted by Fiserv, Inc. and Aspen Analytics. 10 In addition, online bill payers are 30 percent more satisfied than those who do not pay their bills online. Prepaid/Stored Value Cards Prepaid or stored value cards simplify payment disbursements in a wide range of applications, including health care flexible spending accounts and government benefits. They are particularly successful in serving Online Banking and Bill Payment Forecast, Javelin Strategy and Research, October Fiserv, Inc. and Aspen Analytics, Online Bill Pay Longevity and Lifetime Value Study, March 2009 young, un-banked and under banked consumers. By using a third-party card processor, organizations can gain access to cost-effective card management services including card issuance, transaction processing, fraud detection, payment authorizations, online Web portals and customer service call centers. Loan and Grant Management Electronic loan and grant management services enable paperless loan fulfillment, closing and storage all accessible via the Internet or directly integrated with a lender s existing system. By partnering with a third-party processor, organizations can quickly gain access without capital investments in new technologies to capabilities such as electronic disclosure services, electronic closing services with e-signature options, and electronic vaulting to track and store documents. Benefits include compressed loan cycles, increased consumer satisfaction and reductions in closing costs of up to 47 percent. Web-Based Remote Deposit Capture Remote deposit capture reduces costs and improves cash flow while offering the ultimate in convenience to consumers and businesses. Wherever there are checks, organizations and individuals can reduce transportation costs, streamline operations, mitigate fraud and escape geographic limitations by processing and clearing checks as image-based, electronic deposits. By eliminating check transportation costs, remote deposit capture offers dramatic cost savings. On-Demand ACH Payments Using the automated clearing house (ACH) for direct payments and deposits can eliminate the costs associated with paper check handling, transportation and processing and greatly improve operational efficiency. By partnering with technology providers organizations gain access to an automated, efficient and reliable means Point of View 5

6 of processing and controlling ACH electronic funds transfer operations as well as automated settlement and returns processing. And because of Reg E and NACHA s Operating Rules, consumers have greater protection with check conversion. Real-time, web-based solutions are enabling a holistic view of accounts and relationships, as well as fraud and compliance risk, so that organizations can increase detection rates, reduce false positives and mitigate millions of dollars in financial losses. On-Demand Card Payments Additional cost savings can be realized through ondemand card payments, which enable consumers to make payments using credit cards, ATM debit cards and electronic checks via the Internet, telephone and mobile devices. These services accelerate cash flow, reduce returns and exceptions and reduce collections. Solutions include real-time text messaging to alert individuals when a payment is posted or is cleared. Predictive Analytics The digital transformation enables organizations to learn about consumer behaviors as never before. New data analytics technologies allow the consolidation and analysis of consumer transaction information so that organizations can predict future behavior. This new level of intelligence allows for better insights, improved planning, and the ability to deliver the right products and services to consumers at the right time. Fraud and Financial Crime Reduction The tax dollars lost each year to fraud and financial crime are staggering, but digital technologies are helping government agencies fight fraud, financial crime and improper payments in real time with greater accuracy. For example, in 2011 the Centers for Medicare and Medicaid Services began using real-time risk scoring technology and predictive models to identify suspicious claims before they are paid, a vast improvement over the pay and chase operations of the past. Taking Part in the Digital Transformation To seize the opportunities related to new payment types and mobile devices, organizations can invest in these capabilities directly or gain access to new technologies through partnerships with technology providers. Faced with shrinking budgets and economic uncertainty, many organizations have turned to outsourcing as a way to deploy new technologies and services without further capital investments. Mounting regulations are also driving organizations to shift fixed IT costs to variable costs by outsourcing selected functions. In this way, the burden of maintaining, integrating and updating complex hardware and software which must be frequently modified as new rules are developed can be transferred to technology experts. The digital transformation is far from over. As Bill Gates of Microsoft Corporation once said, We re changing the world with technology. And technology is changing us. One innovation at a time, it will continue to shape the business and consumer environment, unleash possibilities and create opportunities for prosperity and growth. Fiserv is the global leader in financial services technology, driving innovation in Payments, Processing Services, Risk & Compliance, Customer & Channel Management, and Business Intelligence & Optimization. Our solutions can help you improve efficiency, manage risk and grow your business. Fiserv, Inc. 255 Fiserv Drive Brookfield, WI getsolutions@fiserv.com Copyright 2011 Fiserv, Inc. or its affiliates. Fiserv is a registered trademark. Other products referenced in this material may be trademarks or registered trademarks of their respective companies COL 09/11