Chief Investment Officer
Commercial Loan Automation
BirdsEye Viewpayments: business dynamic and emerging consumer preferences
Greetings from Rio de Janeiro, where Liat and I are making up for lost time during the Food Pilgrimage in Brazil (as you may recall, we weren't admitted into the country due to the highly technical reason that we didn't have a visa). The food at Marius is still totally amazing, and pictures will be posted on the website tomorrow night. In addition, Liat wrote a brilliant review of the restaurant, to be found on BirdDroppings at www.anatbird.com. We also climbed up on foot the Corcovado, the huge Christ sculpture that watches over Rio. It was quite an experience, including being totally drenched in a downpour of tropical rain. I now know they don't call it the rain forest for nothing!
Much has been written about the Payments Business, including a couple of offerings from me. The insights below are relevant to scoping out the extent of the impact of the evolution of the business. They offer a methodical view of the payments space, its various segments and its growth. Ignoring the data will prove costly to the income statement going forward.
PAYMENTS: BUSINESS DYNAMIC AND EMERGING CONSUMER PREFERENCES
The traditional bank checking account binds together two services that comprise the foundation for consumer banking:
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:
As the customer selects which payment vehicle they use, they consider the following variables:
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 the 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:
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?