NEW ORLEANS - With the volume of electronic payments expected to surpass paper checks for the first time this year, banks face a growing surplus of check processing capacity.
And with paper check volume expected to slide to 38.5% of the noncash payments by 2007, Bank One Corp. chief information officer Austin Adams warned that banks could be saddled with an oversupply of check processing equipment. The industry currently has the capacity to process 700 million to a billion checks a year, and at least half of that capacity represents fixed costs.
"If there's a 2% decline in check volume over the next four years, that will increase the excess check processing capacity by 59%," Mr. Adams said at the Bank Administration Institute's TransPay Conference here. "A lot of us are building excess capacity, and that is going to lead to a disequilibrium. We have to match our growth with our volume."
Executives from Bank One and MasterCard International predicted at the conference that banks that invest now in their electronic payment infrastructures will be best positioned to take advantage of this trend.
But these are not small investments. MasterCard is just finishing a $160 million technology overhaul, which included replacing every major core system and rewriting the global clearing management applications.
"You have to spend money to make money," said Jerry McElhatton, the president of MasterCard's global technology and operations unit. Speaking to a crowd of bankers and vendors from the rapidly growing electronic payments industry, he said, "My message today is that technology is creating a major business opportunity in your payments operations."
Mr. Adams detailed Bank One's plans to spend roughly $200 million upgrading its information systems. That includes upward of $30 million to fortify an outdated telecommunications infrastructure and $90 million for an advanced teller banking system. The Chicago company's budget also includes replacing 55,000 desktop computer systems that are reaching the end of their three-year life span, and coming later this year is a customer relationship management system, Mr. Adams said.
"One of the real opportunities in our industry today is in the payments arena," Mr. Adams said, noting that payments-related businesses represent 65% of Bank One's revenue. That is higher than the industry average because Bank One is a leading credit card issuer he said, but he added that most U.S. banks derive upward of 40% of their revenue from payments.
However, the market is transforming. This year electronic payments should make up 44% of noncash payments in the United States, eclipsing for the first time the paper check, which should represent 41.5% of the payments, Mr. Adams said.
Driving this change are advances in technology and growing consumer preference for digital transactions.
Mr. McElhatton said this transition will ultimately mean lower costs in the payments segment, but he agreed that it will test banks.
"You can't just rip out half of the equipment," he said. "As payment trends move from paper to electronics, the banks must deal with the economics of that shift."
And though both executives see the shift as an opportunity, Mr. Adams said companies that fail to adjust will struggle.
"I think you'll be seeing some banks - some larger than you might expect - exit from the payments business in the next 18 months."
