In response to epochal changes in the payments business, banks are appointing executives to develop strategies cutting across multiple lines of business. "We don't see the siloed walls coming down yet, although we see a lot of appointments of payment czars," says Richard Winston, a partner at consulting firm Accenture (New York).
While some of the new czars are "figureheads" in charge mainly of organizing meetings, others wield real organizational power, he says. "Some of the banks are really giving them the ability to examine the economics of all the different payment streams, valuing those and saying, 'This is where we should be pushing our customer transactions,'" says Winston.
The need to call in the czars stems from immense cost pressures on traditional banking services. "They recognize that the business has a set of economics that's changing very rapidly," says Winston.
In retail banking, the demand deposit account (DDA) is turning into a loss leader. "Most of the banks are moving towards offering [DDAs] as a free service to customers," says Winston. "That's a primary anchor for most of their other offerings."
Managing expenses for a free product certainly has its challenges. "If the customer wants free checking, [banks] have got to get their check economics in place to the right point to be cost-competitive," says Winston. "They've got to make checks a profitable business, reduce churn and migrate [customers] to payment channels that do deliver revenue."
Cost reduction initiatives include the elimination of processing centers, through the use of image exchange and check truncation technology. "Say I've got 10 day-two sites today that do returns and exceptions," says Winston. "Once all of it's image-based, I can go to one [site], and I can have maybe an offshore site."
But don't ignore revenues on the other side of the coin. If the benefits and cost savings of check images are equally available to all market participants, then it's the entities that make the most of their access to "free checking" customers that can gain the competitive edge.
For instance, firms like E*TRADE (Menlo Park, Calif., $21.5 billion in assets) offer interest-bearing checking accounts tied to brokerage accounts. With online trading revenues subsidizing the banking component, such players can afford to invest in high-quality systems. "The brokerages have established a great model in account acquisition and deposit acquisition," says Bill Ingram, director of product management, Financial Fusion (Concord, Mass.). "You can go to a brokerage, establish that account and fund that account in one session."
That raises the bar for traditional banks. "[Banks] need to get competitive with those brokerage firms," says Ingram. "They're not [competitive] today."