In 2015 we saw some major payments themes come to fruition with EMV/chip cards and tokenization. Now it’s a new year and time for bankers to really focus on their payments channel profitability. So what will be the next thing to revolutionize the industry? Will it be biometrics or block-chain technology? How cool would it be to pay for goods with an iris scan?
OK, maybe we aren’t quite there yet considering 60% of the merchants I shopped at over the holidays still didn’t have “that fancy chip thingy” working yet, but I’m sure we can expect payments advancements to continue at a rapid pace (wink wink).
I recommend the following five mandates be on payments managers’ focus list this year:
1. Institutions that don’t have a payments manager should hire one.
Due to the importance of payments’ contribution to non-interest income and increasing pressure from alternative providers, financial institutions should consider creating a head of payments position that is part of the senior management team.
SO WHAT? Payments will be a key factor in determining future success and there should be a focus on setting a payments strategy and driving payments revenue. Ten different departments caring 10% does not equal 100% success—it equates to 10% success.
2. Get paid for the value that you contribute to the networks.
A. “Front of the card”: In 2015, according to Digital Transactions, both Visa and MasterCard spent approximately $6.75 billion on incentives to card issuers and merchants. That is a whopping 15% increase from 2014. Are you receiving your share of the incentive pool?
SO WHAT? The incentive money train will begin to shrink as the networks face pressure in other areas, such as rate. This could result in incentives no longer being offered at the level they have been. Many issuers “forget” about this, or maybe they think they aren’t “big enough” to warrant a deal—a potentially expensive misconception. Banks that negotiated their incentives earlier than 2010 should look at them again.
B. “Back of the card”: Issuers need to pay attention to two things in 2016 as they relate to “back of the card” networks (e.g., Accel, Jeanie, NYCE, Pulse, Shazam, Star). In the early days of debit cards, these networks were considered regional, and FIs with locations in various geographic areas typically belonged to many different networks in an effort to give their cardholders greater reach of coverage at the ATM. Although this hasn’t been the case for many years, we still see issuers that participate in multiple networks.
SO WHAT? Financial institutions only need one other network that is different from the one on the front of the card.
3. Select the right partner.
The partnering decision is becoming increasingly more difficult as back of the card networks try to look more and more like the signature networks of Discover, MasterCard and Visa.
A merchant now has the ability to send a credit transaction to a debit (PIN) network instead of Discover/MasterCard/Visa. This could be a financial game-changer for a short period of time because history has shown that MasterCard and Visa don’t sit back for very long when they begin to lose transaction volume.
SO WHAT? As Newton taught us in school, for every action there is an equal and opposite reaction. Only time will tell what the reaction will be, but it could be decreased signature interchange rates for the under $10-billion-asset crowd.
4. Ensure your product offerings are maximizing your revenue potential.
During the financial crisis in 2008, many financial institutions made the decision to sell their credit card portfolios entirely or convert them to agent relationships. The time has come for banks to bring the receivables back in-house and offer depositors another option. According to a recent study by TSYS, people who preferred debit cards for payments decreased 8% over the last two years, while those who preferred credit ticked up by 1%. While debit cardholders still utilize their cards an average of 20 times a month, the debit growth rate is declining. Nilson predicts that while both debit and credit will continue to grow in market share, the growth in credit will be higher at 8.5% compared to debit at 7.5%, with most of this growth coming from a decrease in cash payments.
There are 421 million credit cards issued in the United States, according to Statistica. Visa reports that 40%, or 168 million, of its cardholders are locked into the top 10 issuers due to specific rewards offerings. That leaves 253 million cards not “owned” by the top 10 issuers (the average U.S. household has 2.9 cards). Issuing credit cards as a regional/community financial institution is about SHARE of wallet, not top of wallet.
SO WHAT? Banks that find a way to be part of the 2.9-cards-per-household crowd can realize unlimited revenue potential. Run an ROI on credit and get back into the game, or refresh your game if you have a program, before depositors find an institution that offers the complete package. Remember that this is a three-to-five-year roadmap, not a year-one story.
5. Track performance and continue to drive growth.
Bankers need to fully understand the financial impact of payments within their organizations. How many PayPal transactions do depositors conduct on a monthly basis? Why does it matter? Every transaction conducted via PayPal results in $0 interchange for the issuer. Not hugely impactful if the volume is less than 5%, but as volume grows it will come at a loss to the institution.
Bankers often fall into the trap of thinking everything is fine, including margins, as long as the bank is growing the portfolio. FIs on average grow their debit programs 7% to 10% annually. However, PIN and sig interchange rates are compressing over the same period of time, sometimes as much as 2%. The only way to combat this trend is to stay in front of it by tracking it and exceeding growth expectations. No one wants to be left trying to explain how net income declined without anyone knowing why.
SO WHAT? Net income is declining. This is where you can really leverage your brand. You are paying a lot of money to your card brand but are you fully utilizing all of the features and benefits? Targeted and consistent marketing will help to maintain net income performance over time. It is time for bankers to sit down and create marketing calendars while holding their teams accountable to execute the plans.
Gonzo bankers who can achieve even three of these mandates will be setting themselves up for continued success. Don’t be left in the dust of the past and lose sight of the future.