“I had an unfortunate misunderstanding at the store today. It seems that when the cashier said ‘strip down, facing me’ she meant my credit card.”
–Unknown
Navigating the payments ecosystem is no easy job, and GonzoBanker salutes the bank and credit union professionals who can translate the world of payments into pragmatic strategies at their institutions.
Every year, the team at Cornerstone Advisors hosts a two-day roundtable [1] for payments managers. This year, a few major themes emerged as we sat in with this group of smart, interesting people. These are not necessarily the big-picture things you’ll hear from the pundits, the observers or the vendors. But it is the point of view of the team that crawls in the trenches and slugs it out every day. So, boards and C-level execs – we are passing along some of their insights here with the goal of recruiting your support for their ideas and initiatives.
Insight #1: For all the talk about blockchain et al, this is a Visa/MasterCard “rails” world for the next two to three years.
MCX was the perceived threat to bypass Visa/MC and crush financial institutions’ interchange revenue. Man, what a lesson in “big corporations that can’t get their act together” that was. (Our roundtable groups went against conventional wisdom and called this one right two years ago, by the way.) Bitcoin is a fascinating technology story that could completely change the payments landscape down the road, but the earliest date a commercially viable application could hit the banking industry with real impact is likely several years away.
SO WHAT? On the good news front, there will by all estimates be steady growth in both debit and credit transactions. Not eye-popping, but solid. So, Visa and MasterCard are the “rails” for transaction routing for the near-term, and their interests align with yours. Let’s exploit this and manage that relationship actively.
Insight #2: Growing the credit card portfolio is a strategic priority, and cards are gettable.
The top 10 credit card issuers own 85%-90% of the market. Forty percent of credit card holders are sweating, panting rewards junkies that are tied to their current cards like they’ve been hot-glued to their recliners. But here’s the thing: there are 420 million credit cards issued in the United States. Your offers, rewards programs, and customer loyalty combined can get you a share of this market.
My colleagues have done detailed analyses of how a bank can grow a credit card portfolio, even from scratch, and be profitable in a very acceptable period of time. Your payments leaders aren’t the slightest bit cowed by the top 10 issuers – they want to take them on.
SO WHAT? The “C” level is looking at a great product, a relationship growth opportunity, and a smart team that can execute. Put some focus on this.
Insight #3: Payments has morphed from a growth business to a margin business, and margin is compressing.
Walmart’s 2016 punch in the nose to Visa was to stop accepting Visa in some stores in Canada. Kroger and Visa are in court over Kroger pushing PIN versus signature debit. PIN-less debit has made a big dent in sig interchange. All these things add up, piece by piece, and this is without Walmart or another merchant trying some route to bypass Visa and MasterCard altogether.
For every dollar you made in 2013 from debit interchange, how much did you make in 2016 for the same transaction volume? Probably $.90-$.94. How visible was this compression at your bank? Probably not enough, and merchants are hard on the task of reducing it more.
SO WHAT? For several years, rapid growth of transactions solved everything because total revenue increased even if incremental per-transaction revenue didn’t. Those days are largely over. You manage interest rate risk well. You manage net interest margin well. You need to take those skills and start managing debit margin/revenue compression with the same skill level.
Insight #4: EMV conversion is a hot mess.
Nobody thought it would be this hard. Cards were in shortage and nobody knew which merchants had upgraded hardware. And, card reissues are just plain painful. As if all this weren’t bad enough, the big issue behind doing EMV was fraud reduction, and the first thing your teams had to deal with was MORE FRAUD. Ugh.
SO WHAT? If you have not been debriefed about fallback transactions and fraud, get an update from your expert. The reality is that you are going to see some unexpected fraud early on. That’s life, and your teams are on it.
(Has it occurred to anybody else that if these fraudsters focused their talent and energy on doing something productive we’d all probably be driving cars powered by air and beer would be good for us?)
Insight #5: Campaigns don’t have to be complicated but they have to be constant.
For all the talk about rewards, there was a lot of focus in our meetings on campaigns to get usage up. Nothing complicated here, folks – send something to people who stopped using their debit card in the last 90 days. Give incentives to people who typically use their debit cards fewer than five times a month if they use them 15 times.
SO WHAT? This is pretty basic, bare-knuckled marketing that even a fast-deteriorating ’60s hippie like me can understand. And they do work. The results are clear and they are indisputable. But these campaigns need to be run regularly, and they need to be focused. Make sure your team is on this.
Insight #6: There is a big gap between what the brands say they can support and what the core/IB/mobile vendors are rolling out.
We need to make this more transparent. Strong customer self-service capabilities are the ante in the payments arena now – card personalization, proactive alerts set by customers, card on-off tools, to name just a few. The top 10 issuers have good self-service tools, and you must match them. To do so, you need the brands, the networks, and your mobile/Internet banking/core vendor(s) working closely together to provide those capabilities.
Your payments leaders don’t think this is happening well enough. We agree. It does no good for, say, Visa or MasterCard to tell you, “You’ll have X capability as soon as your mobile banking vendor can support it.” Or if your mobile banking vendor says it’s ready as soon as it can get the information from the network/brand.
SO WHAT? We need to get the brands, the networks and your technology vendors in a room and understand exactly how they have all synced up their road maps to get you crucial capabilities now. We need to get on this. Hey, Cornerstone will even emcee the meetings.
Insight #7: We need new metrics, and the processors and networks need to give them to us.
Good information can help you see trends and act on them in a way that provides great customer products/experience and makes you as much money as possible.
SO WHAT? It’s time to have a discussion about what the senior team needs to know and who is going to provide it.
Payments is one of the most dynamic and interesting areas in all of the banking industry and it presents a great opportunity for community FIs to grow relationships and revenue.
Your payments leaders are smart, and they are ready to take on the big banks and card issuers. Give them the C-level support they need and turn them loose.
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HOW IS YOUR PAYMENTS PORTFOLIO PERFORMING?
Non-interest income is more important today than it has ever been.
Credit and debit card interchange are key sources of revenue.
A Payments Growth Initiative [4] from Cornerstone Advisors helps you:
- Measure and manage your payments performance
- Evaluate your credit and debit card programs against the market
- Increase your competitive presence and maximize non-interest income
Contact us today [5] to learn more.
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