One of the great mantras in banking is that the payments business drives roughly one third of the industry’s revenue. Whenever a threat comes from regulation, innovation or new competition, bankers have been known to scream from the rooftops, “We must protect our payments revenue!”
Ironically, while protecting payments revenue seems to be a priority for most bankers, little evidence of this priority shows up in how banks manage their payments business. The oldest and most valuable tool of any business is the profit and loss (P&L) statement and, quite candidly, most banks do not produce a basic P&L for the payments business. Management may assume payments drives a third of revenue but they would likely struggle to prove it with data.
As we look toward the post-Durbin Amendment, mobile-dominant and prepaid-infused world of 2012, bankers would clearly benefit from becoming more disciplined in how they manage their payments business. One of the key challenges is that responsibility for payments is splintered across the organization – some in retail banking, others in cards and some in the bowels of operations. Whether or not a bank appoints a single executive in charge of payments, the development of a Payments P&L at the executive level will help to bring greater focus to opportunities and threats to this critical revenue stream.
Keep it Simple
Like any internal management report, building a Payments P&L requires some degree of assumptions and allocations of common expenses. When analyzing the payments business, it’s best to keep this exercise fairly simple and focus on the major revenue and cost drivers of the payments business (see chart, “Bank Payments: Key Revenue and Expense Drivers”).
Oftentimes, analytic reports like a Payments P&L can get bogged down in arguments about the allocation of branch, call center and Internet channel costs to payments products and the allocation of back office costs to servicing these products. Reasonable estimates based upon product volumes and estimated revenue can get banks “close to the pin” on these issues, and once a baseline is established, the bank can regularly review how well it is increasing the overall contribution from the payments business.
Importantly, organizing your payments strategy around a P&L will help you to better identify and focus on items and strategies to improve performance. Strategies can include better penetration in the customer base of payments products, improved margin on interchange through optimization and reduced costs to deliver the products by renegotiating contracts, managing account inactivity and streamlining delivery and back office processes.
A portfolio of projects should be developed to attack every viable angle for improving payments revenue. In addition, innovations and technology initiatives such as remote deposit capture, P2P, and mobile payments can be dialed into this P&L framework to better understand the impact of new investments. While innovative moves will not be profitable on day one, it’s important to understand the “burn rate” of these initiatives and how their emergence may impact the margins in legacy payment structures.
Banks are struggling to grow their top-line revenue today as traditional sources of revenue get pinched and consumers and business remain cautious in their outlook. Bankers hoping to meet their earnings targets in 2012 would be well served to get more serious and disciplined about what is driving revenue in their payments business. The Payments P&L is a pragmatic first step in changing the mindset for senior executives and building this important management discipline inside the organization.
Mr. Williams is a principal with Cornerstone Advisors, Inc., a Scottsdale, Ariz., based consulting firm specializing in bank management, strategy and technology advisory services. He can be reached at email@example.com.
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