FRAMINGHAM, Mass. – The race to deliver Internet-based retail financial services has barely begun, many experts believe. However, credit unions now may want to begin thinking about how to gear up for the next stage: exception-based banking. According to a new report from Financial Insights, managers in the not-too-distant future may find they have to toss out existing products and systems. Those that can successfully wrap new information technologies around the new model can be among the industry winners. Mincing no words, the FI report calls exception-based banking "the most important development since the Internet" and "the ultimate expression of Internet banking and investing." "Act now," says the report, authored by FI analysts Richard Bell, Jim Beams, Shaw Lively and Aaron McPherson. "They should start with alerts and notifications, become the electronic bill present and payment provider of choice (a must-win battle), become competitive providers of financial advice, and expand their product sets to allow them to be single-source providers for their customer's financial needs." Because the seamless integration of complementary enterprises will demand vision, time, and the willingness to continually tweak IT solutions, vendors will be watching their opportunities to realize the new exception-based model. Financial institutions must attune themselves to what the competing vendors are offering and which solutions best fit their current structure and plans, the think-firm report says. The FI report recognizes that there is yet no generally accepted definition of exception-based banking, but says the model can be understood by example-and by understanding what messages consumers are hoping to hear from their financial institution: The new model begins with flawless execution of what most credit union members presumably regard as the boring routine of account maintenance. Here are some sample maintenance situations, and how the credit union should be able to respond: A check, arriving for posting, would cause an overdraft. The credit union notifies the member via automated phone calling, text messaging or e-mail to ask the member to authorize a funds transfer from another account. The credit union is saying, in effect, "Let us do all those tedious money-handling chores for you." A credit card bill, arriving for automatic payment, shows suspiciously large number of charges in another city. The CU alerts the member for advice on whether to suspend the card, to begin investigating possible fraud, and to issue a new card for overnight mailing. The credit union is saying, "Let us guard your finances against any outside threat." But the new model must go much further than the familiar responses above. "Get into the financial advice game," the report's authors urge. The next three sample situations, according to the FI report, break new ground in institutional challenges and opportunities: The financial institution, having already received and dispersed funds according to the consumer's financial plan, becomes his or her income tax preparer and advisor on the disposition of the refund. The credit union or bank is saying, "You've shared with us your financial parameters. Let us use what we know about the tax system to minimize your liability." Member's auto insurance premiums are paid automatically by the financial institution. When the policy comes up for renewal, the member or customer is reminded and could be offered an alternative policy through an insurance partner of the credit union or bank, which is saying: "We understand your current coverage. Let's see if we can help you do more with less." Investment security in a consumer's portfolio experiences rapid market change. The credit union or bank alerts the member or customer to the change and its possible impact on the portfolio. If holdings require rebalancing, the financial institution suggests alternative courses of action and arranges a meeting between the member and a financial advisor. The credit union is saying, "We can follow all the events that affect your money. Let us protect your portfolio and maybe even maximize your return." Exception-based services are a whole new game, as suggested by the huge range of financial activities for which institutions can become a consumer's trusted agent. Today, only private banking and trust arrangements approach such all-inclusive service. "While some of the examples may seem far fetched," the report says, "there are surprisingly many today. Each is a predecessor, an enabler, a component, or a leading indicator for full-blown exception-based banking." Here are some: Direct deposit is used by an estimated 60% of private sector employees to receive their paychecks. Electronic bill payment and presentment: Growth rate in online payments "continues to exceed 40% year over year," the report notes. An estimated 500 million of about 15.3 billion bills will be presented electronically in 2004. Alerts and notifications: Many credit card companies, but only some credit unions, banks and investment firms, have activated this leading technology. Automatic account debits for mortgages and other bills. Direct to credit card billing: Now a requirement of AOL and other Internet service providers. Encouraged by a growing number of businesses. Not all vendors are prepared to support such pervasive involvement of the financial institution in individual financial decisions, the FI report recognizes. Key elements of this architecture, and its impacts on the credit union: *Self-service is the rule. Total member interactions will increase without additional staff. But qualified financial product advisors must stand ready when a member's financial plan needs review and revision. Wealth management will become a service goal for the newly affluent. *Automated voice telephone and secure email are just the first of many electronic channels (e.g., wireless text messaging) that vendors must begin to provide. As the branch and contact center wither away, expect to hire more problem solvers, financial advisors, and technical support personnel. *Consultative services will increasingly be delivered through real-time, two-way multimedia interactions. *Alerts and notifications are a key enabling technology. *Traditional host systems and data repositories are still needed. *Interfacing with other financial institutions will still be necessary, even though the goal is to centralize as many of the member's service needs as possible. Understanding the member's financial plan, and seeing how well the member's stated preferences fit the plan, will now be necessary. -

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