5 Payments Themes Bankers Need to Watch in 2018

“I put a dollar in one of those change machines. Nothing changed.” —George Carlin

It’s November. Normal people think about the holidays, the new necktie/fruitcake/gift certificate that will no doubt be under the tree, and maybe winding down the year. At Cornerstone Advisors, we think about payments. (Right. We know.)

Payments represent 10% to 30% of a bank’s net income. When the playing field changes, it can impact that income in a big way, so the payments arena has our full attention. Along with intrepid Gonzo-reporters Terence Roche and Emily Waite, we have been hip-deep in vendor conferences, Money 20/20, Executive Roundtables with bank and credit union payments executives, and client visits. Plus, we’ve all been poring over the data in the soon-to-be-released Cornerstone Performance Report. Our ears have been hard at work and our pencils sharp.

In our travels, certain payments-related messages have surfaced over and over, and as we enter 2018, bankers need to pay attention to these five themes:

1 – Debit: In 2018, market forces will take 3% of banks’ current interchange income. Banks can sit and watch, or they can try to offset it.

A constant theme we’ve heard is commoditization of revenue. Average revenue from a PIN transaction has declined one cent in each of the last five years (to $.24 this year), and 2018 won’t be any different. Sig transactions, while more lucrative ($.54 per transaction), are showing the same compression owing to network/merchant deals. Add to this that in the last two years PIN transactions increased from 35% of transactions to 39%. While individual banks’ numbers may vary slightly, the trend won’t. These shifts, which are outside of banks’ control, could reduce current revenue by 3%.

What bankers can control is net new checking accounts, active cards in wallet, and transaction volumes per month. These areas need strong focus and management in 2018, not just to make up for the compression loss, but also to grow revenue.

2 – Credit: It takes data-driven marketing to win business.

Sure, airline and hotel rewards junkies are out of reach. But many community banks and credit unions have done very well targeting market segments that respond to cash-back programs, or no rewards program at all. The message from those that have successfully grown credit cards is this: the mass-mail-and-hope approach won’t do it.

Success requires good data:

• Better targeting of prospects using behavioral data
• Better matching of the product to the buyer (a transactor product, a revolver product, a cash-back rewards-junkie product)
• Mining spending data for transaction mix (digital wallets, recurring payments, Amazon, travel) and incenting adoption to drive stickiness
• Leveraging debit and checking data to develop product and campaign strategies (debit spend patterns, ACH to other cards, bill pay data)
• Better and more effective use of rewards strategies at a granular level (e.g., maybe this segment will respond as well to a 3X offer as it does to a 5X)

Many payments executives said they have a tough time getting this kind of data from their vendors. Some can’t even get transaction information by BIN. Good grief, we’re in 2017. That’s ridiculous. We need to fix information gaps, and fast.

3 – Fraud: A welcome reduction in losses, but nobody is resting.

The good news is that EMV did what we thought it would do: it reduced card-present fraud. Fine-tuning fraud system rules also paid off. Almost everybody saw fewer losses in 2017 as a result of these efforts. The bad news is that the fraudsters are moving where we thought they would move, which is to card-not-present and account application fraud. Everybody’s game needs to step up.

4 – Fintech: Short-term “monitor” with a good chance of long-term disruption.

Most of the innovation we are seeing is on the front end (Apple Pay, Samsung Pay, cool integration into the buying transaction) and not targeting the Visa/MasterCard back-end rails. This is good because that’s where the revenue is, and Cornerstone Payments Roundtable attendees agreed that those rails will not be dislodged in the near term. However, the same group felt that the long-term goal of the Venmo/PayPals of the world is to make checking accounts irrelevant, which they will do through a cool and easy experience (e.g., payments tightly integrated with purchases) that has a good chance of succeeding. Banks need to match the Venmo/PayPal experience with their own payments solutions – and fast.

5 – P2P and Zelle: Another product with limited customer demand and no immediate ROI. That said, get ready to offer it.

The big banks have clearly made Zelle a priority in 2018. They are pissed off about Venmo’s early success and are ready to do battle with all the “we’re faster and easier” marketing they can get out there. They might even be willing to cannibalize some of their debit revenue to succeed, for reasons none of us could explain.

Unless a bank has a serious strategic reason to be an early adopter of Zelle, the consensus is that it’s just too expensive to offer. It’s early-stage bill pay pricing all over again – banks pay a lot to providers, but customers don’t pay the banks anything. Let the big guys create the value proposition and the customer demand. Then get in quickly. Phase 1 could be a retention strategy for key profitable clients.

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Finally, a note about bank payments executives/leaders. These smart and passionate people are all over this fast-moving area that is at the center of banks’ customer acquisition/retention strategies. These folks deserve all the resources they need and a seat at the senior management table. Let’s make that happen in 2018.