Worldwide electronic payments are set to double over the next four years and will outpace the growth of the global economy, according to a Global Insight study sponsored by ACI Worldwide Inc.

Also in the study: The United States writes ten times the number of checks (35.25 billion) as France (3.7 billion), which writes the second-largest number of checks. And while the United State currently has the largest global share of electronic payments measured by percentage—31.5 percent, compared with the second-place United Kingdom’s 8.8 percent—the U.S. compound annual growth of electronic payments trails nine countries, including Poland, Mexico, and Russia, and is only about equal to worldwide transaction growth. 0Charts can be seen by following this link, courtesy of ACI Worldwide: http://www.aciworldwide.com/pdfs/2006_Payments_Market_Study.pdf

Much of that growth will take place in the world’s emerging economies, especially China, India, and Eastern Europe. This is partly because those economies are still largely cash-based, and any measured growth in electronic payments reflects expansion from a small statistical base. But it’s also because as emerging economies grow, increasing numbers of payments are made electronically, while much of the paper that needs to be wrung out of the global payments system originates in the United States.

While Europe, Canada, and the United States continue operating what are, at best, enhanced legacy systems, developing regions are installing the latest payments technologies. Trends taking shape today suggest that going forward, the world’s emerging economies will enjoy the benefits of advanced-payments technology, allowing stronger and very competitive financial institutions with greater liquidity to develop and grow, while the world’s established economies, constrained by slower payments processing, will experience some erosion of their current dominance.

This result will obtain because modern payments processing is more efficient and less expensive than payments processing on legacy systems. In turn, this creates larger operating margins and greater profits for institutions not wrestling with cobbled-together legacy systems.

Institutions free of the relative operational constraints of such legacy systems also have access to better and more timely portfolio information, which in turn creates more balance-sheet liquidity and more effective risk management.

As a result, such institutions will qualify for the lower-risk capital requirements permitted under the Basle II accords, giving these institutions—and their customers—more money to invest or lend. Resources like that will enable both the institutions and their customers to be more competitive on the global stage, probably at the expense of U.S., Canadian, and European institutions and businesses.

“There’s certainly a need for some reinvention and recapitalization on our part in order to bring things up to a more competitive level,” says Mark Lauritano, Global Insight’s managing director of the lending and payments practice. “The margins are shrinking, which makes it more difficult (for the legacy system-based institutions), and it’s a big challenge, I think, for players in that industry.”

Going forward, and even though the operational risks and costs implicit in meeting the challenge posed by more modern payments systems are large, Western institutions have little choice but to make these investments, because India and China will be able to be quite aggressive on the world stage.

An institution with the modern risk management systems made possible by advanced payments and reporting mechanisms can, for instance, bid more aggressively for large loans, because they can more finely granulate any portfolio risks. That allows them to accept tighter margins, and thereby edge out less well-supported competitors.

The danger to Western economies posed by such modern systems in the hands of our competitors—but not in ours—is even more fundamental than mere business lost, thinks Lauritano, if Western institutions continue to outsource their operations to the lowest-cost provider.

“It’s definitely a competitive threat down the road, but you also have to wonder about the (national) security questions about having all your processing done in China or India,” he says. ”There are certain factors that will prevent a wholesale movement of transactions away from this country, but that having been said, there’s a certain class of transaction that will just go to the lowest-cost provider. I think it’s definitely something people in the industry are paying close attention to, and need to, to position themselves down the road.”

One horrible example: If India and Pakistan go to war again, India could easily choose to punish us—if we tilted towards Pakistan because of the war on terror—by curtailing, or merely slowing down, our access to our own payments transactions. Similar calculations based on perceived national interest could affect other nations, should we begin diversifying our outsourced operations from India.

As a result, thinks Lauritano, Western institutions need to start making the large but necessary investments implicitly called for in the study.

“One of the takeways of the study is that despite the relative growth patterns that are emerging by region, it in no way suggests that the level of investment should follow the same relative patterns,” he says. “There is a need to continue to invest and upgrade, because many of the emerging markets are getting the latest technology, and that will put them good position on a global competitive basis.” (Contact: Global Insight, Mark Lauritano, 781-301-9123)

No U.S. bank and only one payments processor made a recent listing by Business Week of the world’s 100 most innovative companies.

This was embarrassing to say the least: In a business in which revenues are relatively fixed and operating margins thin, and the best way to make money is to refine operations, you’d expect that any top 100 innovator’s list would be littered with the MasterCards and CheckFrees of the world. But only Capital One Bank (# 37) represented payments processors on the list, and only three banks made it—Australia’s Macquarie Bank (#62), Holland’s ING Bank (#68), and Spain’s BankInter (# 86). No payments vendor appears anywhere, although Woolworth’s made the list at #75.

Adding to the disgrace was the fact that there seemed little reason for it. Boston Consulting, which conducted the research for Business Week, asked 1,700 top executives—including chief information, financial, and operating officers—which companies seemed to them to be most innovative. Since any changes in a supplier’s computer system would have been brought to their attention so they could adjust accordingly, people like that would have been aware of any such events, and that awareness should have affected their judgments.

The fact that no payments processors and only one U.S. bank made the list strongly suggests that the people responding to the list hadn’t heard much from their payments processors in at least a year, the inference being that at a minimum, companies like First Data Corp., Fiserv, or Bank of America aren’t engaged in the same level of continual improvement as the companies that made the list.

Even Boston Consulting was at a loss to explain the apparent lapse: “My guess is it’s a perception issue,” says Jim Andrews, the Boston Consulting senior vice president who was responsible for the research. The list was created by asking those 1,700 senior executives—worldwide—who came to mind when the issue was posed, he says, adding, “I’m not sure their payments processor, or even their credit card company, necessarily comes to mind relative to organizations” such as Google and eBay—list members which near-daily tell customers about upgrades and changes in how they’re doing things.

What’s causing this sorry state of affairs? Perception, agrees George Thomas, executive vice president of the Clearing House Payments Company LLC. “People don’t even know who we are— we’re the plumbing,” he says. “We’re in a dull business. It’s exciting to us—it’s held my interest for 25 years—but it’s not to anybody else. Most people take payments for granted.”

Thomas says the main reason for the lapse is money. Primary payments channels—the ACH or ATM networks, for instance—are so entrenched that replacing them would not only be a tremendous headache, but also hugely expensive.

A good example, he suggests, is the $10 billion bill the European Central Bank has sent to Europe’s banks as their contribution to the Single Euro Payments Area (SEPA). And in fact, creating an entirely new payments channel—especially since the current avenues work perfectly well—could hardly pass some cost-benefit analyses. The exception: Some sort of government mandate to spend the money in the name of a higher good. This was the case with the estimated $600 million spent by all parties to create the Continuous-Linked Settlements Bank, which clears and settles most of the world’s currency transactions.

“All the innovation is in the user interface. The core processing doesn’t change, because it’s too hard to make the changes,” says Thomas. “All the constituencies that would have to be involved to make that change have to participate and spend the money, so what companies like PayPal are doing is trying to innovate on top of the existing payments systems.”

Even his own company’s innovations, which he concedes build upon the existing payments infrastructure, take long times for adoption, he says, because the constituencies resist change. Corporations, he notes, still rely on checks for most payments, despite some inroads made for the ACH network by companies like his.

True enough, says Dan Schatt, a senior analyst at Celent Communications. He agrees that many of the issues arise from perception, but says there’s also a fair amount of inconvenient truth to the list. “Most of what payments companies do is a matter of saying ‘me too,’” he says.

Another problem: Protecting the status quo, says Schatt. “Look at how Visa is rolling out its mobile platform,” he says. “They’re so concentrated in ensuring that there’s complete control over the payments stream, from the issuer’s perspective, that they kill it.”

The real problem for payment companies, though, is that however inconvenient or expensive it may be to innovate in the payments space, it’s still necessary; otherwise, over time, the alternative is to go out of business.

“What this (list) tells me is that companies like First Data are really dinosaurs,” he says. “They are being disrupted. They are not fast enough to go into this new space, nor do they have an innovative culture.”

The full Business Week list can be found at www.businessweek.com/magazine/content/06_17/b3981413.htm (Contact: Boston Consulting, Jim Andrews, 617-973-1382; The Clearing House Payments Company, George Thomas, 212-612-9200; Celent Communications, Dan Schatt, 650-627-8897)

The following matrix is designed to assist your business planning
process. Consumer strategies are divided into three broad categories:
product, general marketing (on- and off-line), and customer
satisfaction/service. Each broad category is further divided into groups of
tactics aimed at a common goal. Finally, every tactic is categorized as
either:

·         Best Practices (column 1): Required
features that every competitive financial institution should support

·         Competitive Advantage (column 2): Top-rated
features that differentiate you from the competition

·         Others (column 3): Other optional features to
help set you apart and/or support other company objectives

Source: Online Banking Report, 9/04
Notes: (1) Features to put you at parity with the best online banks; (2)
Differentiating strategies that provide either a competitive advantage,
incremental profits, or both; (3) Other optional tactics to create competitive
advantage and/or support other company goals.