| Special
Report: The Changing Face of Payments
No
More Business As Usual
By Pat Allen
With old business models under
pressure, banks are urged to consolidate payments businesses,
innovate products and rationalize offerings.
What more has to happen? What else needs
to be said? In its own way, each of the articles in this
Banking Strategies
special report addresses what has now become a litany
of issues cited to command bankers' attention to the strategic
direction of their payments businesses:
- Banks rely on payments revenues
— as demonstrated by the 1999 Federal Reserve study attributing 40% of revenues and income at the
top 25 bank holding companies to payments.
- Rich fees generated by credit card
portfolios have been threatened by the success of recent
protests against interchange rates — and less
profitable debit cards are easily overtaking credit
cards in consumer popularity, if not yet dollar volumes.
- Product development expectations
are being raised by the emergence of e-checks and other
low-cost high-convenience payments offered by eBay Inc.'s
PayPal and other nonbanks. (You'll read more about them
in "Future Threat?")
- Ever-declining check volumes leave
the industry with an oversized check processing infrastructure
at the same time bankers are crunching the numbers on
making significant investments in Check 21-enabled check
imaging capability.
Industry consultants and solutions providers,
including the provocative Steve Mott writing in this report,
become quite exercised on the subject of banks and payments.
Mott, the principal of Stamford, Conn.-based BetterBuyDesign,
says major credit card issuers have allowed the "narcotic"
of high interchange income to "dull their desire and ability
to experiment with new technologies and business models."
Boston-based Celent Communications' Gwenn Bezard contends
that banks have become over-reliant on overdraft fees.
For banks that fail to develop a unified payments processing
model, according to a presentation made by Alogent Corp.,
Alpharetta, Ga., at a recent payments conference, "the
price of inaction could be another payments franchise
lost."
And yet for banks to heed the exhortations,
some of the prescribed actions are ambitious indeed, potentially
including:
- Reorganization of siloed payments
businesses and management;
- New and different (translation:
high cost/high risk) product innovation;
- Infrastructure and business process
change designed to wring expenses while enhancing customer
service.
Within bank managements across the country
today, there likely is a struggle underway between the
status quo and near-term profit motivations (there's no
alternative payment that offers banks as many advantages
as good old checks and credit cards) and the dawning recognition
that the payments products that worked in the 20th century
are not suited for this century. In the "Rational Choices?"
Q&A that follows, Federal Reserve payments executive
Richard Oliver acknowledges this. "Ultimately, as we've
proved over time, it's not what the banking system wants;
it's what the end user is willing to do." Recently, Oliver
believes, the new payment discovery process has raised
costs for banks indiscriminately supporting a range of
choice.
Indeed, there are some hardy organizations
that are attempting to right-size for what appears to
be a new payments environment. Bank One Corp. and Washington
Mutual Inc., whose branch-based automation and back-office
consolidation are profiled in "The Waiting Game," are
just two leaders. In his bylined article "Reverse Flow,"
TowerGroup Inc. analyst Robert Hunt advocates a review
of the entire processing operation, beginning with a vision
of what an ideal system would look like, based on current
technology.
But while the report presents expert
admonishments and a regulator's call for moderation, conspicuously
absent are multiple best practices. Business as usual?
It hasn't applied to payments in several years. Yet to
emerge, however, are proven solutions for approaching
the payments business in nontraditional yet profitable
and successful ways. That, we expect, is yet to come.
Ms.
Allen is managing editor of Banking
Strategies.
Copyright © 2004 by Banking
Strategies, published by BAI.
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