From Payments to Cash Management

7/31/2019 From Payments to Cash Management

1/5

4

Payments can once again be a oundation o proftable revenue growth, but only

or institutions that can innovate to serve customers larger needs.

COVER STORY

by Rick SpitleR

Consumer and small business payments are the tradi-

tional oundation o retail banking, but the economics

o this business are shiting dangerously. In turn, banks

need to rethink their payments strategies and operations as

part o a total customer value strategy that encompasses lend-

ing, ee-based services and other revenue opportunities.

The benets o strong payments relationships are under-

stood. Banks that are central to their customers payments activ-

ities have better retention rates and can capture data about

customer activity that enables more eective cross-selling.

The economics o payments, however, are clearly under pres-

sure. The industry is awash in low-margin deposits, and banks

cannot count on rate increases any time soon. Meanwhile, gen-

eral economic conditions have depressed customer demand or

credit, and regulatory action has decimated ee revenue.

This leaves banks in a situation where they still handle

the vast majority o consumer and small business payment

transactions, yet with a sharply reduced revenue stream.

Most banks have reacted to this shit with short-term tactical

moves, including revising checking ee schedules in the wake

o Reg Q, closing the weakest 3% to 5% o branches and

paring stang.

While these moves may have been necessary, they are not

sucient. Cost structures remain misaligned with the reduced

revenue opportunity there is way too much branch capac-

ity (and thereore expense) devoted to handling paper-based

transactions. And while cross-sell opportunities are still there,

most banks have made insucient progress in realizing the

potential value o their core payments relationships.

Looking orward to 2013 and 2014, retail banks will need

to make a series o strategic structural changes. Payments

can be a oundation o protable revenue growth, but only

or institutions that can nd eective ways to meet customers

total cash management needs and realize the ull potential

value o consumer and small business relationships.

Four Priorities

To revive their position in payments, there are our priorities

From Payments to Cash management:

The NexT BIG IDeA?


2/5


3/5


4/5

7June 2012

sound nancial ooting, do not have signicant home equity.

Canadian banks are achieving double-digit growth in this

category. Worldwide, it has been a staple in the consumer/

small business banking product set or a long time.

A more undamental innovative opportunity lies withshort term cash fow-based lending to consumers. Customers

liquidity and payment deerral needs are not adequately

served by overdrat, deposit advance and credit card solu-

tions. Banks are well positioned to oer dynamic liquidity

lines, which provide a line o credit or short term borrowing

and adjust based on household cash fow characteristics.

Such lines provide valuable spending fexibility or customers

without creating needlessly large exposures or the bank.

These concepts, like everything related to consumer

credit, benet greatly rom the payments-related inormation

advantage inherent in the primary bank relationship that

regional banks enjoy with many o their customers. Mostregional banks could strongly improve their credit card

businesses by taking much uller advantage o customer

relationship strengths. In targeting, customer access, under-

writing and risk management, they have many advantages

over monoline card issuers, and there is no reason or these

strengths to lie allow.

deaLing with virtuaL customers

Banks are pursuing a host o initiatives to improve sales and

service productivity, and one o the most important is capi-

talizing on changing channel preerences. Branch transac-

tions are declining annually across the industry as custom-ers become ever more comortable with remote alternatives.

According to Novantas research, inrequent branch users,

essentially virtual domiciled customers, now constitute rom

20% to 40% o the customer base at various banks. While

these customers may open accounts at a branch, they seldom

return or subsequent services.

This trend mirrors that o other retail industries, such as

electronics stores and book store chains, which have seen

sharp declines in storeront trac. Over the past ve years,

in act, our research indicates that among new retail bank-

ing customers, the majority are virtually domiciled.

This development has caught many retail banks fat-

ooted, with no ormal strategy or a multi-channel market-

ing that is now ully coming to lie. Instead, many limp along

with loosely coordinated unctional teams branch, phone

center, online, mobile that tend to operate autonomously

and even as rivals.

An immediate priority is to explicitly assign marketing

and sales responsibility or virtual domiciled customers.

Because o their usage patterns, they are rarely exposed to

marketing through the traditional branch channel.

A urther challenge with virtual customers is guring out

what to do with the physical branch network in an era o

plummeting customer trac and transaction volume. Most

banks are making tough decisions about branch capacityand stang without the ull picture o customer transaction

patterns in each local market. Also there are opportunities

to harness the channel migration trend or cost reduction.

Channel preerences are shiting by as much as 3%

to 5% a year. This raises the need or an explicit channel

migration strategy that promotes convenience and mini-

mizes transition hassles. It also suggests that branch sta

will increasingly be occupied with problem solving and

advice (versus account opening and check cashing), which

will be a challenging cultural transition or many banks.

skiLLs & metricsAlong with new skills, the rapidly changing environment will

require new measurement systems. The emerging market cer-

tainly will be dierent, but it is impossible to exactly predict

the right winning plays, given the uncertainty o the economy

and the regulatory environment. To cope with the changes,

banks will need to invest in new guidance systems that will

allow them to measure, track and deal with changing cus-

tomer behaviors, changing product economics and changing

regulations. Some o the capabilities that need to be strength-

ened include:

Channel migration tracking. With the rapid shit in chan-

nel preerences, banks need to know who is using whichchannel, or what purpose, and the implications or pro-

itability (or example, we have ound that the virtual

domiciled customer is only 40% to 50% as expensive

as branch-centric customers to serve). To manage expen-

sive sales and marketing eorts going orward, it will

be critical to understand which products are originated

online by which customer segments. In our experience

in building such tracking systems, banks have not yet

pushed customer management databases down to the

level o channel/transaction patterns, and there is a

need to substantially invest in this expanded capability.

Better cost accounting. Branch-based payments busi-

nesses, i.e. retail banks, have near term, substantial

xed cost (perhaps only 15% is variable), yet with his-

torically at margins (as much as 40%50% ROEs). In

ormer hospitable markets, careul costing has not been

a strategic requirement. Given the rapid shit in customer

behavior and the likelihood o razor thin margins going

orward, however, banks need a ar better understand-

ing o cost dynamics to guide them through the transition


5/5

8

and identiy and resolve problems.

Multi-channel customer coordination . Multi-channelusage introduces the problem o multi-channel commu-

nication. This now becomes an essential capability in

the brave new world. A grand plan or deploying such

capabilities is probably too ambitious or most banks,

so a targeted, gap-closing approach will be needed as

banks invest more in direct-to-consumer marketing.

New metrics. Each bank has its own avorite set o man-

agement metrics according to the strategy it is pursuing,

yet resh types o inormation will be needed at many

perhaps most institutions. Some o the emerging

metrics we believe should be considered include:

Channel usage and migration characteristics (usage,

account sales, satisaction, etc.).

New payment relationships acquired (gross and net).

Protability/potential o new relationships.

Depth o relationships (mostly revolving and realty-

secured credit).

Return on sales resources (consumer and small

business).

think diFFerentLy

Banks have built their retail ranchises by providing pay-ments unctionality to consumers and small businesses. In

turn, the industry now has 100,000 branches and billions in

expenses to support across the country, largely in the service

o unding the balance sheet. The retail expense base usu-

ally can be changed only gradually, given the critical need

to preserve customer relationships. Yet the companion rev-

enue streams have been quickly damaged by a number o

actors, creating, in essence, the perect storm.

In righting the business, banks have completed the rst

round o responses this past year, largely crisis mode actions

to trim costs and boost revenues within the existing product

set. Longer term, banks will need to think dierently about the

retail payments category, both the products and the distribu-

tion system that will be needed to support the business and

und the bank.

Rick Spitler is a Managing Partner at Novantas LLC, a management

consultancy based in New York City.

Duration

Size ofbalancesand linesof credit

Overdraftcoverage &

deposit advance

Dynamicliquidity lines

& loans(DLL)

Credit Card

Unsecuredline of

credit (ULOC)

Event-Based Loans Cross-sold; positioned as HELOC alternative Higher rates than HELOC; lower than credit card Fixed line based on household cash

flow, lower than HELOC, higher than credit card

Transaction Liquidity Alternative to credit card or occasional overdraft Positioned as integrated cash management and

bundled with checking Dynamic line of credit based on track record

Home equityloans and

lines of credit(HELOC)

Figur 2: Nw Ways to Srv Rtail Customrs and Lvrag Cor Rlationsips

Using the inormation advantages o core relationships, retail banks can feld new credit products lines toexpand the pool o eligible customers and deepen share o wallet.

Source: Branch productivity benchmarking and analysis by Novantas, LLC

From Payments to Cash Management: The Next Big Idea?

From Payments to Cash Management

Documents

Transcript of From Payments to Cash Management