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NACHA Payments Conference 2006: Payments Free-for-All

Banks need to make clients realize nothing is free.

According to Mark Webster, fraud consulting client partner with Minneapolis-based Fair Isaac, Europeans have a better concept of what a transaction costs than those in the U.S. That is because U.S. banks have conditioned American consumers and, to some extent, businesses, to expect something for nothing -- think "totally free checking." In reality, Webster told attendees at a session at this year's payments event, "There's no such thing as a free lunch." The person making the payment decision is not the one who ultimately has to pay for it.

For example, consumers and businesses still like checks, so banks have to continue to develop and support a paper check infrastructure even though they know electronification is cheaper and more efficient. Webster also noted the credit versus debit preference among consumers. Although debit card use is beginning to outstrip use of credit cards, some consumers continue to pay with credit because they think it's safer than debit -- they're not dipping into their bank accounts. Then the merchants continue to accept credit because of consumer demand, even though it would be cheaper for the merchant to accept debit cards. Banks, business clients, merchants and consumers all have different points of views on payments, leading to what Webster called "a broken market" where there is no relationship between price and demand.

"Banks are selling based on price, not on the benefits of their products," he said. "They're creating a standardization of [payments products]," which leads to commoditization. They're also missing out on valuable fee revenue, he added.

"There's no silver bullet for this situation," Webster said. He predicted there would continue to be pressure on margins. The concerns about risk and safety will still be around, as will competition from nonbanks. His best advice for dealing with all this is communication and education so that wholesale and retail customers are aware of these issues. He mentioned the importance of stressing relationships with corporate clients as a must in creating value in the payments area. Also, Webster emphasized the need to "get rid of the silos. You should manage payment and the related information holistically. There's so much information around transactions. Look where you're investing money and see where the value of that information is. There are things you can do with data mining today that will help you replace the costs in other areas."

"The value chain concept is changing," he explained. "Instead of a value chain, you have a value circle where you receive feedback from customers about what's valuable to them so you can build what they need."

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