As much as 40% of banking industry revenues comes from payment services, and banks command 71% of that market, consultants from McKinsey & Co. have estimated.

But the fortress is under siege, which explains the recent flurry of trade association activity aiming to shore up the industry's defenses, said bankers at a payments symposium last week in Arlington, Va.

McKinsey experts delved into details that are not obvious on conventional financial statements. They said payment businesses accounted for $17 billion of 1995's $245 billion in revenues.

In the payments sector, banks are said to be losing ground to nonbanks that are skimming the cream - targeting the highly profitable electronic transactions and leaving the more costly cash and check processing burdens to banks.

Speaking at the symposium, sponsored by Bank Administration Institute, McKinsey officials said only 3% of the 650 billion payment transactions last year originated electronically, including cards and wire transfers.

But because they account for half of all payment revenues, "nonbank attackers are squarely focused on this portion of the payments game," said Toos N. Daruvala, director at McKinsey.

Nonbank competitors "are not interested in paper-based systems," William McDonough, president of the Federal Reserve Bank of New York, said in the conference's keynote address.

"Banks could end up saddled permanently with the high fixed cost of the check collection system," which he called "an enormous anachronism."

Because the payments business is "fairly fragmented," bankers don't even notice that the Merrill Lynches of the world are "stealing market share," said McKinsey principal Jack Stephenson. "All you would notice is that mutual funds are growing at 17% a year, while demand deposits are growing at 2%," he said.

McKinsey derived its revenue projections from the Federal Deposit Insurance Corp. and other data sources, including the New York-based consulting firm's work with individual banks.

It has not been alone in sounding this alarm.

A Furash & Co. report for the Bankers Roundtable in 1994 put the potential payment-system erosion in the context of other market-share declines and set the stage for a recently announced Roundtable initiative, the Banking Industry Technology Secretariat. To be known by its acronym, Bits, the secretariat will have a board of bank chief executives and chief operating officers.

The American Bankers Association, which this month issued its report, "The Role of Banks in the Payments System of the Future," and the Independent Bankers Association of America will each control a Bits board seat.

The leaders are intent on coordinating appropriate collective actions so that the industry can keep control of its electronic future, said Edward D. Miller, senior vice chairman of Chase Manhattan Corp. and vice chairman of the Bankers Roundtable task force that created Bits.

He made a presentation with Siddarth Mehta, vice president of Boston Consulting Group and a consultant to the Bankers Roundtable.

Bits wants to make sure that many payment associations and organizations are operating in concert, including the Electronic Check Clearing House Organization, Financial Services Technology Consortium, National Automated Clearing House Association, CommerceNet, MasterCard, and Visa.

But, one banker asked Mr. Miller, how will turf wars be avoided?

Having awakened to the competitive threat, the industry leaders are resolved to enforce unity, Mr. Miller suggested. "I think that we have the ability to use 'continuity of employment' as a vehicle to ensure that we are moving in that direction," he said.

Offstage, there was some skepticism about the Bits project. Some bankers were grumbling about its heavy focus on technology instead of addressing "business economics 101."

One banker, who requested anonymity, said the "build it and they will come" mentality associated with such initiatives is flawed, as shown in the experiences of some collective approaches to check imaging and electronic check presentment.

Furash managing director James Wells agreed, calling "expedited check collection systems a Band-Aid. It's fixing a broken system."

He recommended greater commitments to electronic data interchange and, more specifically, the banking component known as financial EDI. These technologies eliminate paper "from the start" instead of "eliminating paper somewhere along the check collection process.

But the Bank Adminsitration Institute put a postitive spin on the collective approaches, billing its conference as a helpful "path through the minefield for banks."

"We feel the payments industry is the most exciting thing going on in banking," said Raymond F. Hodgdon, executive vice president of the Chicago- based institute. "It is somewhat amazing that there's no sort of common focus on all of this. Payments have the biggest opportunities, and the most at stake."

Microsoft Corp. chairman Bill Gates helped raise bankers' awareness of their payment assets by suggesting that new technology could bypass them.

"Everybody wants a penny in the transaction," said P. Sue Perrotty, chief information and technology officer at CoreStates Financial Corp., invoking the "toll collection" idea that Mr. Gates was once believed to be pushing.

"Who controls the payments system is really about who is going to control the revenue streams," Ms. Perrotty said. "How much can this proliferation support itself?"

Elliott McEntee, president of the National Automated Clearing House Association, said bankers have good reasons to be concerned: Mutual fund companies and brokerage firms are taking the initiative by building bill payment and PC-based financial services for their customers.

He noted that such companies are not saddled with the 65 billion paper checks the banking system has to deal with each year.

Peter Kight, chief executive officer of Checkfree Corp., was optimistic about new payment modes. He predicted that up to a third of all bank customers will transfer "some important personal finance function to electronics by the end of the decade."

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