While much has been made of banks' strategic shift to a consumer-centric culture, perhaps nowhere in banking do consumers have as much influence as they do on the retail payments sector. Increasingly, banks are under pressure to provide multiple payments options to keep customers from going to the bank down the street or even to a nontraditional financial services provider.
As the competitive landscape changes, so too must banks' strategies for retaining and gaining customers -- and doing so profitably. According to Bruce Cundiff, a senior analyst with Javelin Strategy & Research (Pleasanton, Calif.), a shift in mind-set already is beginning in some banks. "You're seeing a lot more focus on the demand deposit account (DDA) as the cornerstone of banks' retail payments strategies, as opposed to their going out and starting a new credit card business," he says. "There's a move away from a card-based strategy. Banks are seeing the DDA as the genesis of their payments strategies. They're looking beyond the revenue of each transaction to actually expanding the relationship with the customer. The DDA is still the primary touch point with consumers." >>
This approach, Cundiff believes, allows banks to more readily leverage opportunities for increasing profits. He points to the growth of debit cards, which are linked directly with a checking account, as an example of extending relationships with customers. But, "Debit is just part of the strategy," he says. "Banks also should look at ACH and other transactions and accounts as ways to expand their relationships. The engaged consumers who have a DDA account at a bank are more likely to do other business with that bank, too. Financial institutions want to provide whatever payments vehicle the consumer wants."
The importance of the DDA is not lost on Columbus, Ga.-based Synovus ($31 billion in assets). Kenneth Richey, the bank's director of corporate cash management services, says some of the financial institution's greatest growth is coming from direct deposit. "We're finding more small businesses want the ability to originate direct deposit of payroll," he relates. "This is one of our fastest-growing segments. Today, more people want the convenience of direct deposit -- it's an expected service. People are looking for more means of electronic payments. Why should they have to visit the bank anymore?" To help its e-payments efforts, Synovus has enlisted the services of CheckFree (Atlanta), for example, for its online bill pay platform.
Convenience and Speed
According to Suzette Massie, president of global payments consulting with Dallas-based financial solutions provider Carreker (which will be acquired by CheckFree), when all is said and done, the overarching trends in the retail payments space are providing convenience and speed for consumers. As such, Massie says, banks need to look at their channels differently.
"The channels a bank offers are becoming more specialized in use and less general-purpose," Massie observes. "Why go to the branch to make a deposit when you can use an ATM? Why call the call center for a check image when you can get it online? The capabilities in one channel are becoming so advanced that they're pushing what's happening in other channels. With the enablement of convenience comes a shifting and evolving of specialized delivery models. It gets expensive if you want to service everything in one channel. So banks have to evolve their channel delivery strategies around these trends."
The mobile banking channel, in particular, is fast gaining the attention of U.S. banks, and numerous financial institutions launched mobile banking pilots since the beginning of the year alone. But industry insiders warn that U.S. consumers may not be ready to embrace the concept of using a cell phone or some other wireless device to make payments at the point of sale (POS).
"Mobile was being cautiously hyped at [the BAI] TransPay [conference in February], but I think it's definitely more than five years off in the U.S.," says Kenneth Kerr, VP, retail payments strategy, with Phoenix ESP Payments Research Group. "But our consumer research shows there is very little appetite for doing payments on cell phones now because security is such a big issue in the U.S." He notes that the picture is quite different in other countries where comfort with the mobile phone is higher and where the wireless carrier market isn't as fragmented. In Japan, for example, mobile provider NTT DoCoMo has a virtual monopoly on the mobile market, making it easier to launch large-scale payments programs.
"There's a lot of interest in mobile, but the right model hasn't emerged yet," adds Richard Winston, director of North American payments with Accenture (Chicago). "It has got to be very simple for consumers to do a transaction at the point of sale. The simplest way to me is going to the register, performing the transaction and getting a text message to confirm the transaction. If you can't make it this simple for consumers to use instead of a card, they won't do it."
A number of banks have launched mobile banking pilots to see just how much consumers will do with their cell phones. US Bank (Minneapolis; $219 billion in assets), for example, recently embarked on a mobile payments pilot through its Elan Financial Services payments unit. Elan is partnering with Sapphire Mobile Systems (West Conshohocken, Pa.) to enable Elan PayCard customers to access their accounts via the vendor's Phire Mobile Debit Network. "Mobile payments is a significant area to us," relates Patrick Coll, VP of retail payments solutions with US Bank. "To make these new product introductions relevant to consumers, you have to make them simple. There's an entire area around mobile where you can perform balance inquiries, make peer-to-peer payments or transfer funds."