Gatekeepers on Watch

By Thomas P. Johnson Jr.

While working with nonbank vendors and processors to advance the cause of e-commerce, banks must also protect vital relationships and information.

Payments are banking's lifeblood. So it is something of a comfort to see the private sector rather than government driving innovation in this area - particularly on the new frontier of e-commerce - because imposed solutions simply will not do in such a dynamic market. At the same time, banks must carefully protect their interests as they take on new partners and technologies.

First Data Corp., this issue's cover story, exemplifies the private sector approach to payments. The Atlanta-based company already dominates credit card processing in this country; now it's working with various technology companies and bank partners to invest in both electronic billing and Web site support for merchants. The end result should be a swifter transition from paper-based to electronic-based payments, which is well and good for the banking industry since electronics are cheaper and faster to process.

Even so, banks have to keep alert to potential threats to their role as payment system "gatekeepers." When transactions are initiated, whether paper-based or electronic, the funds generally flow from one bank account to another. As made clear in last year's Bank Administration Institute/PSI Global study, "Profiting from Change in the U.S. Payments System," banks need to leverage their control of the core checking account relationship to maintain their central position in payments.

It is incumbent upon banks to work with nonbank companies such as First Data to advance electronic payments and e-commerce. The banks and nonbank vendors have a mutual dependence; one side cannot accomplish much without the other. However, bank executives must keep relationships and economics in mind. Specifically in e-commerce, they must guard accounts, customer information and brand identities - a particularly difficult challenge when alliances and technologies can turn on a dime.

This delicate balancing act also comes to the fore in the debate over electronic benefits transfer. As explained by author Julie Monahan, the Treasury Department is attempting to persuade banks to offer the new Electronic Transfer Account, which allows for the electronic deposit of government checks. While some banks are answering the call, others are holding back because of concerns over profitability and fraud.

The success of ETAs would have the beneficial effect of hastening the transition from paper payments to electronics, but banks realistically cannot be expected to underwrite this cause by taking on vast numbers of new customers on an unprofitable basis. The government must play its part in making ETA economics viable. Since imposed solutions won't work, and banks are obliged to protect shareholder interests, some further compromise may be required to move ahead.

Copyright © 2003 by Banking Strategies, published by BAI.

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