The banking payments conversation has been floating dangerously on the surface between acronym-rich tech gadgetry and helpless buzzwords. The message can come at you like it’s from an angry coach: “Are you telling me this team isn’t playing with a robust, big-data, real-time, omnichannel framework enabling your P2P and EMV rollouts? Come on, team – get it in gear!”
Seriously, business depth and practical reality need to be brought to the payments playbook, and there are a few ways bankers can keep it grounded around a critical business element: revenue. We typically find payments to be 20% to 30% of a bank’s direct revenue. That doesn’t even factor in broader indirect relationship revenue and the franchise value impact on a bank. When the math is done, payments amount nearly to the revenue equivalent of lending, more often viewed as the revenue fuel of a bank.
So, what can be done to lead payments revenue while some of the technology, standards and vendors are all in a swirl? Quite a bit, actually, and the lending area is a great proven place from which to adopt some approaches. Here are few ideas for the playbook:
Build visibility and knowledge. Develop a profit-and-loss (P&L) statement and scorecard of key payments levers. Payments reporting is often fragmented across multiple departments or by payment rails. Regardless of whether a bank is considering designating a chief payments officer role, reporting can bring a sense of urgency and create internal payments champions.
If the bank is stress-testing loan related revenue a dozen different ways, consider stress-testing payments revenue. Develop reports that show key stakeholders the developments in the payments space and their potential impact (similar to what they might see in lending). Use some basic reports or analytics that show whether there is an increasing use of competitive payment types emerging in the customer base. With payments competition coming from both inside and outside the regulated banking industry, building this internal visibility is critical for both short-term revenue growth and long-term survival of the bank.
Defense through improving and adapting. With knowledge of payments levers, a first key defense is to reduce costs for all payments transactions. Freeing up costs permits a resource shift to investments in emerging payments technology in a profit-neutral way that acknowledges things like margin pressure. This is not incremental, but a significant six or seven figure opportunity for many banks.
There are debit processing and bill pay processing spending gaps of 71% and 45%, respectively, between 75th percentile banks and median banks that cannot be explained by volumes, according to the latest spending data from the Cornerstone Performance Report. This is opportunity cost in action. Getting to market or better prices on mature payments types is essential because, otherwise, money is being left on the table that should be directed elsewhere, like innovative payments initiatives.
And, driving utilization and activation for revenue-creating payments is essential. There is a 25% gap in debit card adoption performance between 25th and 75th percentile banks. For near-term impact, closing even a modest amount of that gap is a significant boost to near-term revenue. More importantly, for longer term impact, customers using the bank’s payments channels are less likely to be taken in by competitors and disruptors. The battle is for wallet (literally) share – help customers and keep competitors out of their wallets.
Strong offense through experiments and niches. The bank should be developing its own strong ideas and payments vision. Technology vendors provide critical execution, but they shouldn’t be relied upon for all of the ideas and the bank needn’t have a dedicated innovation lab. Carving out a modest 1% to 2% of the technology budget for pure research and development efforts is a great start. It is an effective bridge between the “risk-it-all” cross-industry innovation rants you might hear and the practicalities of managing an established and highly-regulated bank.
From a risk appetite and management accounting perspective, the bank’s board needs to understand the mix of technology and payments investments being made and how some are known to be immediate successes and some are purposefully controlled risks. Dedicating some of these investments also sends a message to bank employees and the community that the bank is a leader in exploring new ways to help customers. Beyond some pilot experiments, expand on established influence and contacts in customer niches or industries the bank already serves. Also, while hard payoff justifications may be elusive, favoring projects that the bank sees at least supporting revenue-bearing payments down the road makes sense.
Differentiate through service and fund innovations that drive future revenues. Most banks do a good job at in-person service conversations like explaining options, security and dispute resolution. Banks should use those to their advantage in differentiating and find ways to use innovations that accentuate the in-person footprint. Instant card reissuing is a classic example. Offering in-person education on mobile money movement or business billing services, or scheduling time to demonstrate the bank’s latest payments innovation as an integral part of financial counseling are great examples. Beyond fee income generation, innovations that drive future revenues can typically be self-funding through better vendor management of more mature offerings.
These are just a few thoughts to add to yours in developing your bank’s Payments Revenue Playbook. Bankers, let’s move the ball down field. Go Team!
Mr. Kilmer is a senior director with Cornerstone Advisors, Inc., a Scottsdale, Ariz.-based consulting firm specializing in bank management, strategy and technology advisory services. He can be reached at firstname.lastname@example.org.