Payment czar might not be the term of choice by banks, but ever since Celent analyst Gwenn Bezard coined the term last year banks have increasingly seemed to get hip to the idea-with good reason.
In his report he said banks generate about $4.2 billion in annual fees from consumer checks in checkbook distribution, merchant check deposits, retail lock-boxes, and non-sufficient funds services. Of that, he predicted banks can expect to lose about $900 million in revenues because of an upward spike in electronic payments. At the time of the report, Bezard said that most banks were unprepared to confront this challenge; 60 percent of banks did not have a head of payments who could define a corporate strategy for payment services.
Today, the vast majority of the U.S.'s top 50 banks have appointed payment directors (or directors of a payment council) whose job description looks suspiciously singular and top-down in focus. "The profit margin is very high for banks," says Bezard. "The problem is that billions of paper-based checks are going away and customers are beginning to grow accustomed to using on-line bill payments and debit cards. Historically, banks have charged significant fees-$25 in many cases-for handling paper checks. With that revenue stream going away, banks are looking to replace that revenue stream. That's job one with the new line of bank payment czars."
Official title aside, banks are warming to the idea of putting someone in charge of payment services. "I'm not sure that it's the most accurate term but do banks need a czar? Absolutely," says Don MacLeod, evp for payment strategies at Charlotte, NC-based Wachovia Bank. "I know we needed a czar because of the sheer size of our company. We do a lot of treasury and consumer type of payments and, as our organization is very highly matrixed in terms of geography, product lines, and technology, things can get complex. Since payments represent one-third of our revenues, we need to be highly organized in managing our payment operations."
The need for bank payment directors comes at a time when consumers are opting to choose electronic-based payments over traditional paper-based payments. According to the Washington, D.C.-based American Banking Institute, electronic payments have surpassed cash and checks as consumers' preferred payment method for financial transactions for the first time. The ABA's 2003/2004 Study of Consumer Payment Preferences found that cash and checks now account for 47 percent of consumers' in-store purchases, as compared to 57 percent in 1999 and 51 percent in 2001. Says the report: "This evolution of payment behavior continues to be driven by the increasing popularity of debit cards. Four years ago, debit represented only 21 percent of in-store transactions; today consumers report that nearly one out of three (31 percent) in-store purchases are made with a debit card." The ABA adds that the boom in e-payments "have come at the expense of both cash and checks. "While cash remains the single most frequently used payment method in stores, its share of the transaction mix has fallen from 39 percent in 1999 to 32 percent in 2003. Checks also play a diminishing role at the point-of-sale, accounting for just 15 percent of purchases. Comparatively, consumer use of credit cards for in-store purchases has remained relatively constant at 21 percent. At two percent, the "other" payments category is made up of prepaid cards.
As the banking industry shifts into higher gear in its metamorphosis from paper to electronic-based transactions, the opportunity for more consumer interaction for banks increases, as well. "Both private and public sector treasurers are struggling to come to terms with the on-line channel by introducing new payment types while managing the channels and payment mechanisms already in place," says Breffin McGuire, senior analyst at TowerGroup. "It's not an easy task." TowerGroup reports that on-line bill payments will rise by 33 percent in 2004. At the same time, the emerging practices of electronic bill and invoice presentment are becoming increasingly common on the corporate front.
Era of the Bank Payment Director
Bezard points to the declining value of non-sufficient fund revenues as an example of why banking czars are increasing in importance. "The problem today is the relationship between checks, NSF fees and banks' revenues and profits," he says. "Banks make significant money from NSF fees. And some e-payment alternatives, such PIN-debit and on-line bill payment, are cutting into NSF events. In that context, the move toward e-payments will be a growing challenge for many U.S. banks in the next few years." To manage those challenges, Bezard adds, banks will have to do a much better job of merging their electronic payment operations across a broad swath of often diverse, and sometimes Byzantine-like banking areas.
Perhaps not surprisingly for banks, operational risk comes into play, as well. Paul Kellog, supervisory examiner at the Federal Reserve Bank of Chicago, cites four key areas where direct bank payment management is imperative. What's not clear, he says, is whether that oversight is clear, concise and capable enough given the bank payment chain-of-command status quo these days. "The top concerns for banks engaged in emerging payments: changing delivery channels and safeguards, fraud, vendor oversight, and operational risk measurement and reporting," says Kellog in his Federal Reserve Emerging Issues Series report, "Evolving Operational Risk Management for Retail Payments. "While risk management practices are evolving to meet current and emerging risks, bank management should increase their effort to make sure the overall risk is reported to senior management." Absent clear reporting, adds Kellog, bank directors rely on executive officers to evaluate the overall health of operational risk. "Where reports are provided, they generally require explanation from executive management due to the lack of standardization or clarity in reporting," he writes. "In some cases, a shift in operational risk may be so subtle between periods of time that it might exceed the bank's risk threshold undetected.
What Banking "Czars" Say
Bank payment directors may not be wild about the term "czar" but many agree that having one person managing a bank's vast payment operations makes a great deal of sense.
Wachovia's MacCleod says his role as payments strategist at Wachovia is akin to a traffic cop at a busy intersection. "You want your payment director to wear different hats and have different types of bank experience. They must have the ability to communicate, the ability to be good listeners, and the experience of actually having done some of the jobs that involve bank payment structures." In his role, MacCleod says he deals with up to 12 different banking areas, working with high level executives along myriad lines of business. "Bank payment areas have an arcane language of their own," he adds. "So a payment director has to be able to distill it all down, make sense of it, and influence top levels of leadership about where the director wants to take the bank's payment strategies."
At Wachovia, MacLeod says there is a "culture of facts" that dominates any discussion of payment strategies."We are bankers," he adds. "We deal in facts. So my role is to help develop an accurate and complete picture of the payment business and explain to management how big it is, how profitable it is, and where all the numbers and trends are leading. Payment executives are very passionate people. They don't mind opinions, as long as they are supported by facts."
MacCleod says the most difficult aspect of his job is to simply line managers up and get them on the same page, both literally and figuratively. "The hardest thing to do is to get senior managers on board," he explains. "People are busy and deadlines are a reality. It can really be a distraction." MacCleod advises bank payment directors to be ready. "I make sure that I have good data. That will usually get anyone's attention."
Bank of America is another big bank looking to keep its vast bank payment operations clapping in rhythm. Payments are a big profit center at the San Francisco-based bank, with 40 percent of revenues coming from bank payments. Jonathan Wilk, Bank of America payment and strategy executive, and payment leadership council director estimates that between Bank of America and its Fleet banking arm, payment revenues accounted for about $48 billion in 2003 ($38 billion from Bank of America and $10 billion from Fleet). "Consequently, you can see how significantly our revenue stream is affected by customers' payment choices, and how important it is for us to stay ahead of payment trends," he says.
Wilk says the concept of a single "czar" straddling the Bank of America payment horizon like a latter day Colossus is a stretch-but that doesn't mean the payments doesn't need some streamlining. "At Bank of America, the payment trend is toward a holistic view of payments that encompasses the enterprise a whole. We take a horizontal look across the bank at all businesses affected by payments and make the best business decision for our shareholders-and not for the individuals at various departments in the bank." Wilk says his job is to run the bank's payment council and bring payment executives together on a regular basis. "We use the council to develop a vision for our payment strategies. My team's job is to drive the agenda for the council and make sure that the critical issues that needed to be discussed actually are discussed."
Bank technology spending initiatives are also being driven by changes in bank payment operations and processing. ABA's 2004 bank spending survey (co-sponsored by TowerGroup) says that the bank payment area is among the top five areas that banks are targeting for increased technology spending. "Payments investment drivers include fraud reduction and enhancements to existing systems to support the increasing electronification of all payments processes," says Bob Landry, TowerGroup vp of research and corporate development. "Most notable are investments to support the expanded use of check images enabled by legislation popularly known as "Check 21" (the Check Clearing for the 21st Century Act). In addition to using images in the settlement process, banks are improving customer service by adding image capabilities to their consumer and corporate Web sites."
Just "Good Business"
Industry observers say that bank czars represent a good bet for banks in dealing with both the risks and opportunities presented by the seismic shift from paper-based financial payments to electronic ones. In the process, bank payment czars are no longer a luxury, but a necessity. "Try going into a bank and talking to a knowledgeable person about checks and debit cards and e-payments," Bezard says. "All of these different products and services belong to different bank silos. So having someone in charge with a single viewpoint of a bank's payment operation, and then taking that view and building a meaningful business case out of it, is good business. Right now there is too much of the left hand doing one thing and the right hand doing another in the banking industry."
The downside is having someone with too much control potentially making decisions in a vacuum, or a payment director spread too thin by the myriad and fast-changing demands of the bank payment area these days. "Some good oversight by the bank board should monitor how much responsibility the bank payment director has, and what kind of progress he or she is making," Bezard adds.
Bank boards know that consolidating their bank payment "intellectual property" via bank czars, directors, or whatever term is in vogue down the line is a top priority. What's less clear is how to manage one payment guru who is managing the entire bank payment process. "Running payments systems has often been a thankless task-wherever revenue opportunities exist in payments, they are often subsumed by overwhelming costs," says June Y. Felix, general manager for transactions solutions, IBM financial services sector, which has a product called IBM Wholesale Payment that it markets to bank payment executives. "It is not that banks don't understand what they need to do. Most banks have a clear vision of where they want to be, but they have been unable to overcome the complexity and inflexibility of their payments operations."
