A SECOND LOOK AT PAYMENTS

PAYMENTS: BUSINESS DYNAMICS AND EMERGING CONSUMER PREFERENCES

The traditional bank checking account binds together two services that comprise the foundation for consumer banking:

  • Safekeeping - storing the money until it's needed
  • Payments facilitation - accessing the funds via check or electronic draft drawn on the account

Increasingly, market forces and new technologies are driving a wedge between these two services.

In 2004 the US Payments industry revenues amounted to a staggering $208.3 billion. Consumer credit cards constituted 48% of this revenue, consumer DDAs 28%, Business and government DDAs 20%. Given the fact that, by and large, the banking industry has abdicated the credit card business, these are sobering facts. Between AMEX, who controls 20% of the business, and other major card players, they share north of 50% of the business.

As you consider traditional deposit account revenues, excluding credit card income, NIM accounts for 30% of that income, closely followed by overdraft fees at an amazing 23%. Cash management (14%) and other DDA fees (13%) are also important, and interchange income is only 10% of the total but growing rapidly.

Certain elements of the DDA revenue stream are under pressure from regulators and consumer advocates, most notably DDA and overdraft fees (altogether 33% of the total income stream). Other aspects, such as interchange fees, have already been curtailed by Wal-Mart and might suffer further setbacks. It is interesting to note that credit card interchange fees (that is, NOT margin income) amount to $1.47 per transaction, vs. $0.77 for signature debit (and even lower for pin debit). As Wal-Mart and other large retailers continue to pressure regulators for lower interchange fees, our income could be meaningfully reduced.

Consumer-to-business payments constitute 81% of the payment transactions, but only 13% of the dollar volume. Business to Business payments are only 6% of the transactions but 65% of the dollar volume. Our revenues are currently based upon dollar volume and not unit volume of transactions.

As we review the world of payments, note the precipitous decline in paper payments, from 77% in 2001 to 44% in 2007. Debit card usage is rising almost in direct proportion to the decline of the paper check.

Payments fall into three main categories:

  • Daily cash payments (ATM)
  • Daily purchases (signature POS)
  • Monthly bills (bill pay and now ACH debit)

As the customer selects which payment vehicle they use, they consider the following variables:

  • Acceptance in person (e.g. the grocery store)
  • Acceptance remotely (e.g. online)
  • Disbursement control (ensuring that the bill is paid on time)
  • Record-keeping (does it occur, where is it stored, how easily is it retrieved)
  • Access to cash
  • Fees (what does the consumer pay in order to access the payment media)
  • Float
  • Every payment media, from checks and debit cards to ACH and bill pay, meet these needs to various degrees. The customer's payment media selection tells us much about them and their preferences. For example, traditional customers use only checks, ACH and credit card, but no POS, ATM or bill pay. They tend to be low transactors , disproportionately wealthy and likely older. More specifically, "low transactors" means low rate of transaction activity on yhe checking account, including ATM, teller etc.

    • Conversely, those who use debit cards and no bill pay tend to be very high transactors, a bit older, middle income and slightly below average balances.

    Recent trends indicate that some mega-changes are afoot:

    1. Debit card usage is emerging as the key discriminator of behavior
    2. Credit card revenues dominate the payment system and account for almost half of all revenues
    3. ACH debit is beginning to compete with bill pay Debit card usage is a good predictor of likelihood to buy another product from the bank; PIN based debit produces the highest likelihood, while credit card purchases have the lowest likelihood of another bank product purchase. To be clear, it is the usage of the payment media, not the volume, that is the predictor of future sales.
    4. There is an explosion in the payments space, where vendors attempt to cut out the middleman - the bank - from the transaction
    5. Customer acceptance of other payments vendors is very high, especially PayPal and Google, and especially among younger, urban customers
    6. Payment vendors' customers are very experienced on-line banking customers and might be a good indicator of future consumer preferences
    7. USAA is aggressively advertising its remote capture scanner product to consumers nationwide, and growing kits base by 100,000 customers per month
    8. Bank of Stockton, a $1B+ bank in California, is among the first institutions to introduce mobile banking

    Each of these trends has profound implications, tremendous opportunities and major threats associated with it. Banks have been slow to move on the opportunities or prepare for the threats. Such slowness will prove costly in 2008 and beyond. Are you ready to tackle this business in an organized and deliberate fashion, clearly state and stake your strategy and then act on it?