Innovation in the payments industry is occurring at an impressive pace. We have seen the rise of mobile banking in a relatively short period of time, and advanced features such as remote check depositing are now expected rather than mere luxuries.
The average bank payments business provides 25 percent to 30 percent of revenues, and mobile banking presents an incredible opportunity to increase market share while lowering marginal costs. Banks, however, currently face many financial pressures, including tighter profit margins, escalating costs and increased operating demands. Key factors contributing to these conditions are unease about the regulatory environment and the ability to maintain compliance without too severely impacting the bottom line.
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And given the quickly evolving nature of payments, financial institutions also are confronted with information silos and the lack of streamlining between departments. Siloed payments systems often lead to infrastructure duplication, outdated technology platforms, and a surplus of back-office staff to monitor and execute payment processing. Therefore, payments systems have the potential to limit strategic growth if not appropriately addressed.
There are in effect two primary payments models that are utilized by banks. The first is a fragmented retail or wholesale unit with little organizational continuity. The second is an enterprise division that drives the firm's payments agenda and resources, leading to more interaction and collaboration. But a fully integrated payments business, such as the one employed by U.S. Bank, presents an even better option for financial institutions going forward. This type of wide-ranging payments structure controls corporate, retail card, corporate payments and merchant acquiring services.
Customers' Payments Needs
Banks today are responding to a different set of consumer needs and behaviors than ever before. Individuals want access to a comprehensive selection of convenient and reliable payment methods. Banks, well aware of this, are pursuing cost-saving actions and encouraging the use of new technology through drivers such as paper-to-electronic conversion, fee waiver reductions and even disincentives. Wells Fargo, for instance, currently charges a $1 transaction fee for customers who choose to print out ATM statements. Furthermore, issuers are dropping debit card loyalty programs and rewards to mitigate their costs. In response, households may choose to consolidate their accounts, seek new providers or even leave traditional banks altogether.
The other side of the equation consists of commercial clients. They are looking for a "control platform" to manage their payments needs all in one place, and banks are beginning to put forward cross-business offerings. Citi, for example, recently implemented a global enterprise payments division to coordinate all of its payment-related activities. Conflicts involving enterprise payments mostly occur at the intersection between commercial and consumer payment functions, so it is incumbent upon each bank to bridge the structural payments divide between wholesale and retail banking.
Another aspect of the payments industry that should not be overlooked is security, particularly with the continued growth in both international e-payment transaction volume and online and mobile banking. Consequently, establishing an adaptable IT structure that supports advanced security measures can be thought of as an investment instead of just a compliance-related expense.
A fully integrated payments approach has the potential to inspire new product development and improve service levels. Payment hubs and ACH-electronic transfer payments can also lead to economies of scale. And in order to counteract fees passed onto customers, banks have recognized the need to improve their payment offerings to better compete with one another. As a result, treating payments as a single business unit is the best course of action to leverage the strategic payments opportunities in the near future.
Peter Ognibene is a managing director in the financial technology group at Berkery Noyes, a New York-based independent investment bank specializing in M&As in the information and technology industries.