Payments

It's been a while since I wrote about the payments business. Too much stuff going on& I've been remiss, though, since the importance and value of payments have been growing rapidly.

Payments are more important than ever to our customers, commercial, small business and retail. They more often identify payments providers as their primary financial institution.

Payments are also more important to us bankers, both because of the fee income they represent, one of the few high growth non capital intensive businesses we still have, and because of their importance as anchor to client relationships across all customer segments.

The trends in the payments business have not changed much, but continue to intensify:

1. Payments trends tip to electronics, with checks written declining, and debit card and ACH transactions growing at 17.5%+.
2. The last bastion of checks is B2B: consumers write most of them, but businesses and the government receive 76% of them.
3. Pressures of costs, regulatory expectations (especially on NSF/OD), customer expectations (multi-channel and enhanced services and timeliness) and the economy. There are also pressures on payments interchange income from merchants and legislators alike.
4. Competition is coming from all fronts, from PayPal to the less known LayawayMall, Moneta, eBillme, Acculynk and others. Example: an iPhone application to pay your bar bill online either at the bar or later...
5. Fraud (and its prevention) is becoming an important variable.

The good news is, despite these challenges, revenue growth and customer stickiness continue to improve. Further, the expectations of customers are more closely aligned across segments. For example: Both large corporations and small businesses look for cost effective payment services that are fast, secure, flexible (able to partner with multiple service providers) and easy to operate.

As we consider the corporate and small business market, which has the greatest volume of payments, the "sweet spot" for SuperCommunity Banks obviously isn't the Fortune 500 or the next 1500, but middle, small and micro businesses, as well as consumers. The scope of the opportunity is staggering:

Annual Sales # of firms $B sales

$100-$500 mil. 8,250 $2,475

$ 25-$100 mil. 21,800 $1,090

$ 10-$25 mil. 43,600 $ 654

$ 1-$10 mil. 1 million $5,000

Under $1 mil. 23,034,500 $3,273

The opportunity is further enhanced by prospect attitudes and expectations:

· More than 50% of companies with multiple payment vendors are planning to consolidate these payments

· 60% of companies expect payment cards to be more important in the future payment strategies

· 73% of Western European companies use ACH whenever possible compared to 32% of North American companies

· 74% of companies surveyed were dissatisfied with straight-through processing rates; 81% dissatisfied with auto-reconciliation rates; 85% dissatisfied with overall cost effectiveness of their payments usage

· Data accuracy issues are highest for paper checks and lowest for payment cards

· Positive pay reduces fraud meaningfully

Note: Source, gtnews survey, 2006

What this information indicates to me is, the market is wide open, especially for the target segments that appeal to community banks best. Further, community banks' ability to compete for these segments' payments business is strong, since almost all required services are available for rent by a myriad of providers.

Small businesses are looking for a simple solution, since they behave more like consumers: they use credit cards vs. loans, they want functional on-line banking, and they often pay higher transaction costs due to lower volumes. Over half of small businesses are also likely to switch banks to obtain better payment services, as BAI research found. They also consume as much as $120B of financial-related services.

Small businesses use cards for business purposes extensively (over 80%), but less than half use card or loan products from their primary financial institution. What they need and want is an integrated payments package linking payables, receivables and expense tracking:

· A straight through processing system to their bank

· Online banking

· An identity management platform to protect their business

· Anything that would improve workflow for cost effectiveness of compliance tools for privacy requirements

As you contemplate your small business online site, consider the following in descending order the most important functionality they'd like to see:

· Check account balance (80%)

· Review account activity

· Review/print statements

· Review/print checks

· Access other business/personal accounts

· Transfer funds (53%)

Interestingly, the smaller the company, the more likely it was to pay bills online (52% of respondents with sales $50-$99K, vs. 35% with sales $1-$5M). Also, of those who paid bills online, 61% considered that activity very important (a reaffirmation to the stickiness of the service).

Source: American Banker, 12/07

To summarize, payments are an important business to be in, especially for small and middle market prospect attraction. However, we are not organized against this opportunity well, since the business is fragmented across lines of business and operational fiefdoms. The first step toward success is creating a bank-wide strategy, possibly organization, accountability and call-to-action across silos. Some may want to establish a payments council that monitors new trends, products and industry implementation success and move quickly to adopt feasible opportunities. Some may want to establish a payments council that monitors new trends, products and industry implementation success and move quickly to adopt feasible opportunities. Some may want to establish a payments council that monitors new trends, products and industry implementation success and move quickly to adopt feasible opportunities. Some may want to establish a payments council that monitors new trends, products and industry implementation success and move quickly to adopt feasible opportunities. Having a single neck on the line helps!