| Innovation,
Not Protection
 By
Thomas P. Johnson Jr.
Prospering in payments will require
a customer-centric strategy and full-scale organizational
commitment.
To characterize the pressure in payments
today as a "revolution" may verge on hyperbole. While
the fact that we're in the midst of far-reaching changes
cannot be disputed, the so-called payments revolution
is reminiscent of what's occurred elsewhere in recent
banking history: disintermediation as a result of product
and pricing innovations from more nimble competitors.
All too often, the industry has responded
with "me-too" products that fell short of distinguishing
themselves. For example, they emulated nonbank providers
by offering money market accounts and mutual funds, but
then failed to support those products with the highest
rates and best managers, respectively. Ultimately, banks
chose to guard their profitability by protecting their
core deposits rather than run the risk of offering investment
products with the potential to cannibalize.
Today's challenge is similar. The industry's
most profitable payments instrument, the credit card,
is being challenged by a plethora of competing technologies,
including debit cards, e-checks and stored-value cards.
Yet many banks are responding to this assault on their
traditional business model by trying to extract more revenues
from cards, mainly by raising fees.
Protecting legacy products at the expense
of product innovation and experimentation is not a recipe
for long-term success. Customers will always gravitate,
over time, to the best value proposition. Merchants' growing
preference for e-checks over the more expensive credit
card is just one example. Consumers, likewise, have embraced
stored-value cards offered by merchants such as Starbucks.
Innovation that produces $400 million in free capital,
which is what's being carried on Starbucks' estimated
16 million cards, is an impressive win-win.
If bankers are to learn from the missteps
of previous decades, they will need to start now to design
a long-term payments strategy that seeks to address the
needs of their customers, rather than their own institutional
requirements. As bankers learned with money market accounts
and mutual funds, half measures won't do. Trust the customer
to look for best-in-class solutions, or at least those
that are competitive.
Tackling this challenge begins with
elevating payments as a strategic priority. To be sure,
many large institutions have appointed high-level strategists
to oversee their planning processes. But those planners
must then be backed up by some real decision-making authority
— not always the case today — and serious
resources must be committed to the plan. In that sense,
bridging this transition period in payments requires a
commitment to both planning and execution.
Mr. Johnson
is publisher of Banking Strategies
and president and chief executive officer of BAI.
Copyright © 2004 by Banking
Strategies, published by BAI.
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