“New Year’s Day: Now is the accepted time to make your regular annual good resolutions. Next week you can begin paving hell with them as usual.” ~Mark Twain
Many banks are entering 2011 with cautious optimism – we’re looking at an economy that is showing signs of recovery (even if slow), credit quality that is holding, and customer retention and loyalty that is encouraging. Nonetheless, we face the inevitable and dogged job of creating our resolution list for the New Year. Since at this point in 2011 we have already made our personal list (which looks suspiciously like last year’s) and have already broken about half of them (exercise, several types of comestible consumption, fiscal responsibility … the usual suspects), it’s time to look at a “quick hit” Gonzo list of resolutions for the bank. Today, we focus on the ever-fun payments arena, appropriate since we are likely to see significant changes in the payments landscape in the next one to two years.
So, with resolve, we will:
1. Re-aim the free checking strategy.
The proposed $.12 cap on a debit transaction has already set the big banks on a path of all but eliminating what had comprised free checking, and the letters announcing this are being sent. While this in theory applies at $10 billion in assets, most banks and industry analysts believe there will eventually be some second-wave impact on all financial institutions.
In looking at the checking fee changes announced by the top 10 banks, there will still be some opportunity to bank with them without charge. I have already started thinking of this as the “If You Never Sully Our Branches and Don’t Do Anything Else Too Expensive and, Oh, Opt In for Debit OD It Might Stay Free” checking account. The under-$10B team needs to decide how to respond. This really starts by asking what you’re really trying to accomplish now with free checking programs. One direction is to differentiate and try to take market share – if market penetration is the goal.
Another is to up the ante on rewards programs and usage incentives – if growth of card transactions is the goal and the perception is that debit revenue might not be affected heavily. A third is to agree with the assessment that debit revenue will be severely cropped (the general estimate seems to be that $.12 would reduce revenue by 60%) and make the changes needed to ensure that these accounts remain profitable.
In any case, there is a free checking strategy review and a directional adjustment to be made, especially as debit regulations become clearer.
2. Re-aim the rewards strategy.
This could be resolution 1-A that is part of the checking discussion, bit with a twist. The goal of rewards programs is to increase card transactions. If the net profit of a debit transaction is reduced, usage may no longer be the goal, and debit rewards programs may need serious scrutiny.
However, this may also be a time to consider focusing rewards programs back on credit cards. My partner Steve Williams has been talking for a while now about the idea that the credit card may become a much bigger piece of the core relationship we offer – tied to/bundled with checking, promoted more heavily as a payment vehicle, and seen more as the “sticky” relationship builder. Many banks that sold their credit card portfolios are now considering re-entering the market not just for the relationship but also for the payments revenue. To be sure, we may see debit margins challenged by the National Retailers, and any success on their part may reduce this opportunity.
However, for now, there is a need to decide what to do with debit/credit rewards programs. The answer may not be to reduce or eliminate, but it may be to adjust focus or expectations.
3. Look at bill payment in light of the overall payments picture.
Let’s be clear on bill payment. First, it is undoubtedly a service that increased customer retention. The statistics are undeniable – attrition among customers who use bill payment is less than it is for those who don’t.
Second, it’s expensive. If you consider the total cost of a bill payment transaction – per-user fee, per-bill fee, support, disputes and other servicing issues – it can approach $1 or more, and almost certainly is $.75 at most banks. If a customer pays five to seven bills a month, that can total $4-$6 a month.
What will make this issue come front and center is the emergence of payment options that will be available through mobile/smart phones. Person-to-person and other mobile payment options are, for now, focused on purchases and P2P transfers that bill payment is not used for. But it will not take long before customers are given the option to get notified through their phones of a bill that’s due, opt to pay it, and have the payment be completed through methods other than traditional bill payment. Apple, Verizon and other big players are already contemplating how to get into the payments business, and they have the money and technology to compete.
While this all won’t happen tomorrow, banks need to start planning for these possibilities:
- Mobile banking and mobile payments may usurp bill payment as the “sticky” relationship builder;
- In addition to rivaling or besting bill payment for stickiness, these payments could be significantly cheaper than bill pay; and
- Banks don’t want to increase overall cost of payment processing, and there will be a need to re-direct bill payment budget to new payments. (This is more than a possibility. Just ask your CEO.)
This all points to a change in the rationale for offering free payments. Bill payment was offered free of charge to get growth and retention, not because it was cheap to deploy. Frankly, it was a loss leader on some checking accounts. Now, new payments such as mobile and P2P will be offered for growth and retention, and possibly because they are cheaper than bill payment (or what’s left of checks, for that matter).
There are two things banks can do right now. One, it’s time to look at customers who use bill pay heavily and have a low balance and no other relationships. They may not justify free bill pay any more. Two, if you have a bill payment contract coming due in 2011, renewing long-term at a fixed price with high minimums may not be the best idea.
4. Create a P&L report for payments and manage it as though it is a line of business.
Too many banks do not know how much revenue each payment channel creates, what the costs are, what profits ensue, and what revenue growth will occur in 2011. Often, debit payments are managed in one area, credit payments in another, bill payment in a third, and mobile/emerging payments in the who-knows-where department. While it is not necessary to change the organization chart to have all these areas reporting to the same manager, there is a need to coordinate strategies, technology, spending, pricing and profitability management. At a minimum, there should be a senior manager responsible for payments. There is too much cost, too much profit, and too much customer impact to leave important payment decisions in the back office or with middle management right now.
These are important issues that banks need to address with purpose at the senior level. It is likely that nothing will change faster than the payments landscape in 2011/2012. Not all of the changes will be good, but there will be opportunity for banks with focus and clear direction to benefit.
And there is one final consolation. We will all be so busy with this we’ll have a pretty legitimate excuse to take yet another pass on the personal resolutions. To paraphrase Jay Leno, if over half of Americans are overweight, and therefore being overweight is now normal, didn’t we already make our 2011 fitness goal?
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