Chief Investment Officer
Commercial Loan Automation
payments business ideas
The first Payments forum was overbooked and very successful. Many ideas were discussed on the organization and approach to payments. It is clear that most banks do not approach this multitude of income streams as a business. It is also clear that SuperCommunity banks are focused on finding fee and payments-related income streams to replace those lost through Durbin and Dodd-Frank.
The only way to capture the full range of the thought-provoking ideas shared at the meeting is to attend our next Forum, December 10-11, 2012, in Miami. In the meantime, below are some of the great ideas shared at the meeting to whet your appetite...
- Consumer and small business payments. Banks still don't manage the entire payments revenue base from their consumer business. They employ a highly fragmented approach, considering each opportunity a one-off product introduction. Among the ideas shared which can be used to cobble together a complete strategy to the consumer payments segment are:
- Online banking. Best practice penetration levels exceed 70%. While online banking by itself does not have direct payments implications, it does directly correlate to e-Statements, which have a meaningful impact on customer profitability. Up to 92% of online customers have signed up for e-Statements. The savings associated with this delivery method are huge, and go well beyond statements to disclosures, notifications, alerts, etc. Also, some banks are now charging for paper statements, following the "self-service" principle: if you can do it yourself and choose to use the bank to get it done, you should pay for it. Banks that have switched to eStatements en masse found little customer friction. E-Statements are an excellent opportunity for wealth management customers as well.
- Bill-pay. Online banking leads to bill-pay. Some banks charge for the service at the consumer level, and others are considering inactivity.Penetration levels of 30%+ among online users is a good benchmark to start with.
- Debit cards. Those are less profitable, I understand, but they still have value, especially to banks <$10B. Giving up on debit cards doesn't make sense. Just because a portion of the revenue went away it doesn't mean we should pursue whatever revenue there is, so long as it is profitable. Best practice banks have exceeded 90% penetration of their checking account base, and 80% of those are active users. Average annual profitability of a consumer debit card is $40, and $80 for small business (due to higher transaction size). Affinity card holders use the card more often, at least 2- 2 ½ transactions per month more. Many banks have discontinued debit card rewards programs and replaced them with activation campaigns. Those work best with medium to heavy users, who easily up their usage levels.
- Credit cards. Most banks have abdicated the credit card business to the very top originators, but many are realizing that it's a core product to their own customers which they can offer and own profitably. This is true for both consumer and small business customers. The largest issuers are helping all of us by working hard to shift their debit card users to credit card swipes in the post-Durbin era. The product itself can be owned by the bank and serviced soup-to-nuts or in a modular fashion by a handful of providers. Offering cards to your own customer base without aggressive growth goals has proven most profitable, even during the downturn, for those banks that use the card as a part of a relationship.
- Cards are also becoming multi-faceted as technology evolves and plastic consolidates such that a single card can act as a debit and a credit card, or a debit card and a student ID and a key to the dorm room. While phone is the device of choice, plastic isn't obsolete yet and is an important payments service to all customer bases.
- Commercial banking. The first opportunity for commercial banking is to do a better job collecting the payments-related fees we already charge. Many banks collect 50% or so of those fees, which are often waived by the Relationship Manager. Other opportunities, which partly also pertain to small business, include:
- Segmentation for Treasury Management. Money Service Businesses (MSBs), the bane of many a regulator, are deprived of banking services given the regulatory risk they carry. Charging for the risk and for the cost to mitigate it is an accepted practice among the few banks that do serve this segment. Banks charge risk management fee, BSA and AML compliance fee etc. Ensuring regulatory compliance through frequent reporting to the bank's Chief Risk Officer helps, as well as periodic surprise audits of the customer practices, especially check cashers and remitters. It is wise to audit the MSB before accepting them as a customer. Other segments for TM services, which are all payments-related, include property management firms and franchisees.
- International business. The demand for international payments services is on the rise. It might be relevant to your bank. One must have the necessary expertise to enter the business, but the profit margin is solid.
- P cards. Purchasing cards and reloadable cards are the highest growth segment among payments vehicles today (18% CAGR). They are attractive to all bank customers, both consumer and commercial. They can become a strong bond between larger commercial customers and the bank through revenue sharing agreements that create a win-win situation for the bank and its customers.
- Derivatives. Another payments business that requires deep understanding (don't rely completely on the brokers who come knocking on your door; resident expertise is critical) of the product and its suitability. Too many banks sold too many derivatives to customers who didn't know what they were buying and got caught during the last downturn. There is a need for the product, but careful application is called for, especially when the customer is less sophisticated. The first step to success is ensuring that the customer fully understands the agreement they are entering and the downside as well as the upside of the transaction.
- Elements of correspondent banking. Correspondent banking is often perceived as a credit-driven product, and perhaps it is. But there is a host of payments-related products that appeal to downstream correspondents which is especially relevant today as the large players have pulled back. Clearing for downstream correspondents, for example, is all image-based and leverages existing capacity and scale resident within many SuperCommunity Banks. One such bank reduced their own clearing costs 38% in 2011 by leveraging their cost through correspondents. Their service includes coin and currency as well. In many instances the bank also offers Treasury management services to the correspondents, as well as other services that build on the larger bank scale.
- Comprehensive receivable solutions. Banks can leverage their own billing capabilities to offer solutions to their customers, from small medical group practices to utilities, hospitals, county treasurers, insurance companies, property management firms etc. The bank leverages its lockbox operations, most of which are fully imaged, and becomes a one-stop shop for large billers.
- Processing your own payments on your own cards. If you own your credit card portfolio, processing your bank payments using your own plastic will give you the interchange fee on significant dollar amounts. This isn't a negligible number, and all it takes is a shift in internal remittance procedures.
Thinking of payments outside the usual solutions can generate meaningful revenues for banks that are light capital users. It's time we all get more creative in identifying niche and other opportunities to reclaim our spot in the Payments space.