Webinar: Payments Must Lead the Way for Bank and Credit Union Digital Transformation Strategy

Like the rest of the industries, financial services industry will go through complete digital transformation, the task is daunting and bankers need to identify and accelerate which parts to transform first – payments by far is the highest frequency interaction consumers have with their banks and credit unions. Hence it is natural, that this is the area which must be a priority for all financial institutions and creates immense opportunities for those who take the lead. In this webinar we discuss why traditional payment methods must transform to digital form and how this is being done, creating Digital touchpoints on how consumers and merchants interact with payments which are crucial for issuers as they are now the preferred way to drive commerce. The speakers  share how to digitally transform the entire card business and to compete, why payment business executives need to provide compelling digital experience(s) that are underpinned by fast, digitized, real-time and interactive processes.

Join Peter Wannemacher, Forrester; Gary Singh, Ondot Systems and Braden More, Wells Fargo & Company.

Juniper Bank, UBS Wealth Management Create a Clever Marketing Tool

UBS Wealth Management US last week launched a new payments-card package for its brokerage customers that among other things cleverly turns an ordinary American Express card into what amounts to a debit card. The program was created for UBS by Barclay’s PLC’s Juniper Bank unit.

The whole idea is to bind its customers to the U.S. brokerage unit of Zurich-based UBS by giving them a payments-card package that the firm hopes will be their primary spending vehicle, says Peter Stanton, executive director of the UBS unit’s Banking Strategy Group. It’s not an effort to enter the very tight U.S. credit card business

“It’s definitely not our intention to be another credit card provider,” he says. “This is a consolidation strategy; it’s all connected to our role as their primary wealth-management advisor, and ties them closer to us because of the services we provide.”

On the surface, the package is an ordinary Visa credit card and an ordinary American Express charge card, bundled with a very extravagant rewards program that offers cardholders enticements like jet fighter rides or a sleepover at FAO Schwartz. Rewards run from one point to 1.5 points per dollar spent, depending on whether the customer chooses the basic “Select” Visa card or one of the more elite Visa cards that carry annual membership fees of up to $1,500. UBS says it has about 15,000 such accounts.

By offering its brokerage customers such payment packages, UBS joins a widening club of brokerage companies trying to retain customers whose loyalty is mercurial at best. “With acquisition costs so high, and turnover very high also, the emphasis has been to keep the customers they already paid for, happy,” says Ariana-Michele Moore, a senior analyst with Celent Communications.

The Amex card allowed UBS and Juniper to create a vehicle that functions like a debit card from the user’s perspective—UBS calls the card a “delayed debit card,” though Amex insists that the cards are ordinary Amex cards—while earning the issuer the much higher American Express interchange fees.

It does this by an interesting sleight of hand that seems to be built around the fact that none of the parties to the deal care what the card is called, as long as they get what they want from it. Cardholders use the Amex card like an ordinary debit card, including being able to use it to withdraw surcharge-free cash at ATMs that accept Amex cards. At the end of the month, their central brokerage account, or RMA (resource management account), is automatically debited, and no bill is sent to the customer. Purchases are limited to the funds available.

This way, UBS gets what amounts to a debit card for its customers, while Amex and Juniper get full price for an Amex card. And as an added bonus, Juniper gets a piece of the debit card market, which is quickly overtaking credit cards as the payment vehicle of choice in the United States.

How the parties came up with this deal is unknown. UBS’ Stanton says his shop approached Juniper around August of 2004 as part of a typical RFP process, and went to contract last April. Juniper refused any comment on the matter, referring all questions to UBS.

“It has in-between functionality,” says Stanton. “It functions as a debit in the sense that it accesses your available funds; it functions as a charge card because the charges accrue, and instead of having to make some sort of payment, the payment is automatic.” The idea, he adds, was to allow purchases to be made without interfering with a client’s trading accounts.

All in all, it’s a smart deal, says Celent's Moore—among other things, because people with brokerage accounts are typically wealthier, and travel overseas, so that the package gives UBS clients a secure spending vehicle.

“It’s all about providing flexibility to their brokerage customers, but it could also be enticement for people considering opening a UBS account—it could be the thing that tips the scale,” she says. (Contact: UBS Wealth Management US, 212-882-5698; Celent Communications, Ariana-Michele Moore, 503-617-6112)

Contactless Payments Systems are the Future

Contactless payments systems in their various stripes are the future of retail point-of-sale systems, and banks still own the networks. But unless they stop trying to control the process, they could lose the system to merchants with their own private-label card programs, thinks Bruce Cundiff, a research analyst with Javelin Strategy and Research.

There’s really nothing to stop such merchants from outmaneuvering the banks, if they want to, he says. “The possibility exists among those merchants considering contactless, and really have a robust card issuance card network to begin with. They’re well-versed in credit, debit, and closed-loop card operations—and they see their private label brand as a lower cost channel.”

The merchants have plenty of good reasons for moving away from bank-owned cards. Doing so would not just give merchants more money from each transaction, it would also reinforce customer loyalty—making for more repeat business—and enrich marketing programs by giving merchants better access to the customer data in the payments stream.

Merchants increasingly view private-label, contactless payments as their best bet for driving revenue. According to Cundiff’s research, 20 percent of merchants considering enhancements to point-of-sale payments consider the technique among the most productive choices they can make. Only signature debit (31 percent) and ACH payments (33 percent) scored higher among merchants as possible new payments options.

Even worse news for banks: Cundiff’s survey of 900 retailers included all sorts of merchants, from large chains to the iconic Mom-and-Pop store. “We reached out to all types of merchants, even to those with only one location,” he says.

The irony here is that banks started this phenomenon in the first place.

“Contactless payments are the wave of the future because issuers like (JPMorgan) Chase got into the game,” he says. It was Morgan Chase’s decision to jump into contactless payments with both feet that solved the chicken-and-egg question surrounding contactless payments, because it was a signal to cell phone manufacturers that there would be a market for RFID (radio frequency identification) chip-enabled cell phones that can facilitate payments. “Prior to that, merchants were saying ‘It’s not broke, and I’m not going to fix it. They didn’t think people were going to come in and ask ‘Where’s your contactless terminal?’”

But that historical fact is irrelevant to the future, because with the genie out of the bottle, the challenge for issuers is to do everything they can to enable the technology now, before merchants do it for them. And since, as Cundiff’s research indicates, those merchants are a substantial fraction of the overall universe, the prospect that banks could be disintermediated by these merchants is a very strong possibility.

The fact that banks will have laid the foundation for this turn of events by educating merchants about the benefits of the technology is merely one of life’s injustices; the most disturbing element in this scenario is that bank disintermediation is entirely avoidable, if institutions will just make it in the merchants’ interest to work with the banks—even if that won’t be so easy. “If I’m Macy’s, and I’ve invested millions of dollars in contactless, I’m going to make sure that as many transactions that flow over that system are going to be Macy’s cards,” says Cundiff.

That prospect will be made easier by the widespread availability of cell phones that can make payments, he adds. The logic is perfectly clear, if brutal: With so many people carrying payments-enabled cell phones, he says, it makes perfect sense for stores to offer to download their own card onto a customer’s cell phone at the point of sale. Then, unless the banks have already beaten the merchant to it, more and more payments volume will go to merchant cards—edging out the bank and cutting into the fastest-growing segment of payments-fee revenues.

How to avoid this? “They (banks) need to consider the fact that they need to work with the merchants in a more integrated fashion—especially a large merchant that has a high profile and has plenty of locations and payments volume,” he says. A promising tactic to make sure the banks are still involved is to approach the merchant and offer to issue a co-branded, contactless card.

But to do this, banks have to recognize that contactless payments are the key to the future at the point of sale, and that they either turn the lock, or don’t. And if they do, they either continue to insist that everything be done their way, or they can start working with their customers to integrate themselves into that next generation of payments.

Luckily, the best banks already get this, says Cundiff. When Morgan Chase went to market last year with their Blink contactless cards, for instance, “they were talking about how they had to approach merchants and not only build acceptance, but build affinity for the product with both cardholders and merchants—that meant co-marketing agreements and signage,” he says.

But what this also means is an apparent shift in the balance of power between issuers and merchants. While some will argue that issuers have always valued their customers and tried to accommodate them, that posture is undermined some by the ongoing interchange war: After all, if the issuers had always been so accommodating, the years of complaints from merchants that interchange was too high would have resulted in adjustments—not lawsuits.

At this point—as many observers have argued—the better part of valor for issuers may be collaboration with merchants instead of battle, lest contactless, private-label cards prove to be yet another army rising on the issuers’ flanks. (Contact: Javelin Strategy and Research, Bruce Cundiff, 925-225-9100)

JPMorgan Chase Launches New Corporate Payments Vehicle

Last week, JPMorgan Chase & Co. launched ExacTrac, a new card-based corporate payments vehicle designed to be integrated into a company’s purchasing systems.

The product issues users a unique credit card number, complete with spending limits, for particular events. The system automatically reconciles the transactions connected to that event and includes that special account number on all bills and payments connected to it, and populated within company books.

Bryan Clancey, chief financial officer of Embryon Inc., has been using ExacTrac for a year to control spending on his pharmaceutical marketing firm’s conferences and roundtables. Clancey says he likes the system because it allows him to closely track his expenses—and because it’s free.

“I like it because I have no administration,” he says. “When that record comes in, it goes right into my system. We send out a request for a unique card, and when that transaction is passed back to us and the transaction has occurred, Morgan passes the same meeting ID back to me, so I can automatically load it into my system.” Clancey describes that system as a financial supply-chain logistics program that was developed in-house seven years ago. Using the product, he adds, meant writing a lot of customized security software to protect the interface with the bank.

Clancey also likes the JPMorgan Chase product because of its perks. “I get rebates (when using ExacTrac),” he says. “I pay face value on the bills, and get 100 to 145 basis points back on total annual value spent.” Embryon was one of ExacTrac’s beta sites; it’s been using it since last July. Another, unidentified company has been testing the product for about 18 months. The product which JPMorgan Chase issues under both Visa and MasterCard branding is part of its PaymentNet core payments processing system.

Clancey says he pays for thousands of meetings in restaurants every year, and to have a major credit card issuer like Morgan Chase forgo a lucrative revenue stream like that may sound unusual. But Frank Dombroski, a Morgan Chase vice president of commercial card solutions, says one of the reasons for launching ExacTrac was to reinforce Morgan Chase’s card business.  He also confirms the rebates.

Because it would be a poor CFO indeed who carried an interest-earning credit card balance, clients would typically use it only as a transaction account, meaning that Morgan Chase earns only between 55 and 100 basis points per transaction—not much more than the program’s administration costs.

“We do make money on it,” says Dombroski. “The margins are thin in this business, much more so than four or five years ago, but for us, it’s a numbers game and (allows for) efficiency of processing and automation.”

That may be true, says Christine Barry, a research director at Aite Group, but it’s hardly the only reason Morgan Chase chose to promote a card system like this: It’s mostly a matter of shifting priorities, and of meeting the competition wherever it happens to be.

“There’s been a lot more investment by banks, recently, on the corporate side, instead of the retail side of their business,” she says. Barry estimates that until now, about 60 percent of bank technology expenditures have been on the retail side of the bank.

“They’re shifting focus, and a lot of the new investments they’ve been making don’t necessarily result in cost savings for the bank, or even new revenues being generated,” she adds. “It’s been a big focus on providing more service and convenience to customers. It’s the customers that are getting the benefits, and not the banks, except on paper.” (Contact: Embryon Inc., Brian Clancey, 908-231-6000; JPMorgan Chase & Co., Frank Dombroski, 212-270-7013; Aite Group, Christine Barry, 917-546-9180)

Prepaid Topup May Mainstream M-Payments

Cellphone_pay_2Aite Group’s Gwenn Bezard thinks he’s figured out the avenue cell phone carriers may find themselves taking on their way to becoming financial services providers: By selling air time to nontraditional markets like the under- and unbanked through prepaid cards. Over time, he thinks, serving that market could lead them to become merchant acquirers.

Cell phones are the great disruptive technology for the financial services industry: To the extent that mobile payments take market share from other vehicles, they have the potential to atomize the value of bank brands and even minimize payments cards’ market share.

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Internet Sales Now Migrating to Debit Cards

By 2007, debit cards will edge out credit cards as the Internet payment vehicle of choice, says Ed Kountz, senior analyst at Jupiterresearch.

According to Kountz’ research, online credit card payments accounted for 42 percent of all online purchase volumes, compared with 39 percent of payment volumes for debit. But by next year, those numbers will reverse—39 percent for credit and 42 percent for debit. And by 2010, says Kountz, credit cards will account for 35 percent of online purchase volumes, compared with 46 percent for debit. That translates to an 8 percent annual compounded growth rate for credit between now and 2010, compared with 14 percent for debit.

“The conventional wisdom you’ll hear from the associations is that there’s really no overlap (between credit and debit),” says Kountz. “And from a value perspective, credit will continue to predominate. I don’t think you’ll see debit wipe up the floor or eliminate credit—that’s much too simplistic to say. But issuers need to be prepared for that shift as it comes down the pike; the short-term impact on credit will be moderate, but longer term, it does clearly pose a challenge for what has traditionally been a credit-dominated world.”

Credit’s predicament is only compounded, according to Kountz’ research, by the rise of non-card payment alternatives available online, such as stored-value cards and peer-to-peer payments. Such alternatives won’t be taking over the space anytime soon, but the growth rates will be strong: 21 percent for stored-value cards and 12 percent for peer-to-peer payments. And even though they’ll be coming off a very low base (4 percent of online payments in 2010), and be restricted to items like wireless content, market share for those payment vehicles will more likely be cut from credit’s hide than debit’s.

This can’t be good news for the credit card business. Even though some analysts like to spin the shift in consumer preference from credit to debit spending as no big deal, since the issuers collect their fees from whichever card a buyer uses, the fact is that the credit apparatus is deeply entrenched in issuers’ establishments. This means that at a minimum, the increased use of debit will create internal shifts at those companies as credit revenues and transaction volumes decline. Since e-commerce sales is the fastest-growing segment of card payments, Kountz’ research is at best unlikely to give credit establishments much comfort looking forward.

This is especially true because, as Kountz points out, paying online with a debit card means low-fee, PIN debit transactions, since no signature can be given to authenticate the transaction. Today, no adequate online PIN-entry mechanism is widely deployed, but so-called screen-based floating PIN entry is one possible solution. That innovation involves an on-screen PIN pad into which the buyer makes PIN entries by mouse click, instead of using numbers on their keyboard, thus maximizing security by making it impossible for a keylogger virus to steal the PIN. ATM Direct is currently conducting a pilot program for this system.

”The alternative is some sort of token that’s not necessarily a hardware plug-in,” says Kountz. “I’m still skeptical of the whole token approach. You can lose them or not have them with you when you need them, and for a consumer, it’s just one more thing they have to manage. But assuming (floating PIN entry) can be done securely and effectively from a consumer perspective, it’s a much more intuitive approach than adding hardware.”

The implications of Kountz’ observations for issuing banks can’t be encouraging. Although he declined to speculate on how the phenomenon he describes would affect them, the fact is that revenues from credit card operations are a significant fraction of the largest American banks’ earnings. Some 60 percent of credit card earnings are debt, and PIN debit interchange is significantly lower than signature debit and credit card interchange.

To the extent that online transactions migrate from credit cards to PIN debit, then, it’s a small step to conclude that the fastest-growing payments sector today is set to yield lower per-transaction revenues than the rest of the cards sector, in turn minimizing the revenues growth curve for those banks’ overall card operations. This hardly means that credit cards are disappearing, but combined with the likely future minimization of interchange fees, either through regulation or litigation, it does mean issuing banks are going to have to start running faster, just to stay in place, and much faster to get anywhere.

“Certainly, credit profitability, and credit overall, has been moderating growth-wise, and I expect that trend to continue,” says Kountz. “Resting on the laurels of the past is no longer enough.” (Contact: Jupiterresearch, Ed Kountz, 617 423 4372)

Paper Checks Remain “Business as Usual”

BizchecksWhen the last paper check is dropped in the mail, it will be a business check. All signs point to that day being over the horizon.

Not that no efforts are afoot to squeeze business checks out of the payments system. At least a dozen companies around the world are trying to automate business payments with so-called order-to-pay software systems, including, in the U.S., Bottomline Technologies, Harbor Payments, and Xign Corp.. Various business payment card systems continue to emanate from the nation’s banks. And advocates of routing business payments through the automated clearinghouse have been working diligently at the task for years.

But checks remain stubbornly alive: According to the Federal Reserve's landmark 2004 Payments Study, total check volumes between 2000 and 2003 only declined from 41.9 billion items to 36.7 billion items. And according to the US Census Bureau's 2005 Statistical Abstract of the United States, consumer payments made by check between 2000 and 2003 only declined from 28.8 billion items to 26.8 items. The 10 billion item difference, says a Fed spokesman, can be considered business checks. This suggests some little progress in squeezing paper out of the system, but no reason to write checks’ obituary.

The most progress in eliminating paper checks is seemingly being made in online bill payment. According to the American Banker’s Association, less than half of all consumer bills—49 percent—were paid by check in 2005, compared with 72 percent in 2001. Since bills represent a large fraction of consumer checks written, this suggests an accellerating trend away from consumer checks,.

But if civilians seem to be edging away from checks, business is apparently sticking to the tried-and-true. This is actually counterintuitive, since businesses would seem to have a lot to gain by giving up paper checks, if only for efficiency’s sake, while civilians, who get free checking, have no such incentives.

As usual, things look different once you’re in the weeds. In this case, a superficial analysis ignores simple balance-of-power and treasury-management issues, not to mention the tyranny of sheer habit.

Aside from sheer convenience, consumers have little to gain from paying their bills online, but as indicated by the numbers, that matter alone–combined with minor carrots and sticks from billers and banks–seems to have turned the tide.

Businesses, on the other hand, not only have a lot more power in their financial relationships than a typical consumer, but also are loath, to say the least, to abandon a treasury-management game that businesses have been playing since prehistory: demand immediate payments (even prepayment), but don’t pay yourself until the sheriff is coming up the driveway; meanwhile, use the float for a hundred purposes.

The irony is that the vendors of order-to-pay software systems can make a very good argument that discarding those old-fashioned treasury-management techniques is good business. Companies using order-to-pay systems, they say, free up working capital from their balance sheets, and that what they lose in float, they more than gain from being able to pinpoint exactly how much money they have on hand.

Tom Glassanos, for instance, president and chief executive of Xign Corp., points out that 19 Fortune 500 companies use his firm’s order-to-pay products, including Charles Schwab & Co., MetLife, Pacific Gas & Electric, and The Williams Companies.

But even he will concede that not every company thinks order-to-pay is a good thing. "There are good reasons why this hasn’t happened yet and continues to go slow,” he says. “There’s a certain (business) population that would like to get on board, but can’t get remittances across. And there’s a lot of work involved in telling your suppliers that you’re going to pay them via ACH instead of by check.”

The result, says Glassanos, is that “Just to get it to work, they find out, seems to them to be a lot more work than the value they get back, and they also have to deal with losing some float. So when they add the plus and negative columns, it doesn’t come out to be all that different, and they decide to go with what they’ve been doing.”

Banks are likewise not overly enthusiastic about the order-to-pay idea, except for US Bank, which has a patented order-to-pay product it calls PowerTrack. Even Glassanos concedes that only one bank uses his stuff, JP Morgan Chase & Co., which uses Xign in conjunction with Vastera, the trade receivables system which it bought early last year. Glassanos says two other big banks have recently signed on, but that he couldn’t disclose their names at NB’s press time.

Why the slow uptake at banks? The reasons are pretty simple. Banks make too much money from the various fees attached to business checking to embrace order-to-pay; for one thing, when you can charge your customer for removing every paper clip in a pile of checks, it’s a hard business to give up. For another, there’s no reason to expect checks to be disappearing anytime soon, so there’s little reason to close a profitable department, especially when most banks’ revenues are under pressure in the first place. And, banks tend to view change as something that has to be adapted to the bank’s interests, leading banks to come up with ideas that make sense for the bank, and not necessarily for the customer.

Card-based corporate payments systems, like Bank of America’s new ePayables product, are a good example. Cards would seem to answer a lot of problems for corporations, including digital data streams, easy tracking, and a means to mimic traditional pay-at-the-last-minute treasury-management games.

There’s only one fly in this particular ointment: The payee has to pay to get their money, in the form of interchange. The alternative would be to accept a discounted invoice in order to get paid early. “If you’ve been paying cash or check or anything for a transaction, the payor has been footing the bill, but here the recipient is paying for the transaction,” an unappealing prospect at best, says Penny Gillespie, president of Gillespie International, and one that payees can easily block.

Looked at this way, it’s not surprising that checks will likely linger—some would say malinger—for many more years. But there’s another reason, one that many overlook: Most businesses aren’t the Williams Companies or Pacific Power & Lights of the world. According to the U.S. Census Bureau’s 2001 Statistics of U.S. Business, only 26,000 companies had sales over $50 million, out of a total of 5.5 million; and only 103,000 of America’s 4.9 million firms that have any employees at all had more than 100 employees, although those larger companies employed 74 million of the nation’s 115 million workers.

That’s the real rub. There are some 5 million companies in the U.S. that have little time to  automate their accounts payable and receivables departments, which means that trying to sell them an order-to-pay system is a waste of time. At a minimum, the annual return on such a system is not enough to make a compelling case for expensive, complicated software. And payment cards likewise have little application, since smaller companies tend to pay higher discount rates.

This being the case, banks aren’t foolish to hold on to their business checking departments. And your local Postman probably isn’t headed for the unemployment line. (Contact: Xign Corp., 925-469-9446; Gillespie International Inc., Penny Gillespie, 703-815-0706)


News from the Online Fraud Cyberwar

The same week that Pay By Touch settled outstanding government claims against CardSystems, news of a new computer breach that could be at least as damaging emerged from California, while keylogging made the front page of the New York Times.

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Cash and Cards Are Both Endangered Species

Right around the corner is a world with neither cash nor payment cards. Contactless payments mechanisms—built into cell phones or even jewelry—are helping create this world, and the result will help change banking, thinks Theodore Iacobuzio, managing director of Tower Group’s executive research office.

The reality is that companies that once fed the banks’  payment networks—merchants, for instance—will be future competitors. But banks shouldn’t panic about this, any more than when, not so long ago, the Internet was supposed to be extinguishing banks. And banks won’t be disappearing now, either, thinks Iacobuzio: the anxiety over banking’s future, so prevalent in boardrooms around the country, is overdone.

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Credit Card Portfolios: More Pressure, Less Profitability.

Graph_debit_credit_heqPeople have grown wary of credit cards. They’re paying them off faster; generally, debit cards are edging them out as payment vehicles. And at least for now, home equity loans are increasingly more popular than credit cards among consumers (click on inset for more details and see tables below).

The result? Credit card portfolios are losing profitability, even though net losses and delinquencies are down, and serious questions about the industry’s future are surfacing. So are questions about how wise banks were when they snapped up most of the monoline credit card operations last year. The business model needs an overhaul, says observers, but so far, issuers are just changing the oil. And there may be no way out.

Continue reading “Credit Card Portfolios: More Pressure, Less Profitability.”

Western Union Spin Off May Do Little for First Data

Last week’s news that First Data Corp. will spin off its Western Union operations to First Data shareholders and create a company worth an estimated $20 billion is probably good news for Western Union. Noting that the parent company will be keeping its card processing, card services, and international business lines, observers were asking what had otherwise changed.

The answer: Nothing. “The bottom line for me is that this doesn’t change the realities, which are that even though they’re going to reconstitute what First Data will be, it doesn’t change the facts that Western Union, while it’s a good business, is facing increasing competition around the world, that the card business is struggling mightily, and that merchant processing is a commoditized business,” says Scott Kessler, who follows First Data for Standard & Poor’s.

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Mobile Payments: Japan Leads the Pack

The potential of cellphone-based mobile payments to eventually squeeze banks out of their central role in payments can already be seen in East Asia, says Andrei Hagiu, a principal at Market Platform Dynamics, and by ignoring it, American banks have nothing to lose but their business.

Octopus_cardHong Kong’s Octopus prepaid debit card (see inset) is one example: Issued by Hong Kong’s subway system and several other transportation companies—with no bank involved—Octopus cards drive about $2.2 billion in annual payments volume.

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