Check 21 is ushering in sweeping transformations to the financial services industry that challenge both long-term structural dynamics and the role banks will play in the payments business.
Banks are already reevaluating their payments programs in light of major transformations that impact revenues and contribution margins, alter product economics, and threaten to unseat banks as the trusted intermediary in the payments value chain.
While Check 21 is a watershed event for operational-side savings, it is also an enormous revenue-generating opportunity for banks that can think as market makers beyond their own silos.
Smart banks are recognizing that the brass ring resides at the earliest point of check presentment for commercial depositors, such as retailers, billers, and other businesses receiving significant numbers of paper checks.
These banks are connecting to the retailer's back office or corporate remittance processing locations, where relatively low-cost equipment can capture and convert paper checks into digital images at the earliest point possible. They realize that connecting to the back office of a retailer today positions them for connecting to the point of sale in the future as the retailer adopts POS-based imaging capabilities.
For instance, Kohner Properties of St. Louis, a treasury management customer of Bank of America, is participating in the nation's first fully operational remote deposit service for electronic check processing. The service is producing cost savings and improving productivity by streamlining operations. It lets customers accelerate settlements, extend processing windows, and reduce float and clearing fees - all without a costly infrastructure investment.
These capabilities can also facilitate acceptance of other forms of electronic payment, such as debit cards (signature- or PIN-less), which further reduces the cost of accepting payments while increasing the level of customer service.
The risks and opportunities around Check 21 offer a cautionary historical analogy to the era when banks controlled the processing of credit card drafts. Whether through shortsightedness or a lack of insight into revenue opportunities, many banks viewed card acquiring as a weak sibling to issuing. This attitude opened the door for third-party processors and smaller institutions, such as First National of Omaha and National City, to compete nationally. This history could repeat itself.
How can banks leverage Check 21 to become market makers? We believe the key is developing revenue-generating strategies targeted at the first point of check presentment. That means connecting to the merchant and corporate cash management customers with remote image capture products.
Developing a processing plan that addresses retail and wholesale payments will bring short- and long-term gains. An effective plan must be based on the following:
Think beyond the bank's silos. Opportunities exist to provide an integrated suite of e-payment products and services, including cards, ACH, and check truncation, to broad segments of the business customer base. To effectively sell and deliver a complete e-payment solution, banks must migrate from their traditional silos to a much more holistic payments approach.
Control processing costs. Seek to move customers from paper to electronic payments in the channels and markets that make the most sense. Offer corporate cash management customers remote check processing products that streamline costs, reduce float, and consolidate accounts.
Redefine branch banking. Adopt products and services that capture images at the earliest point of check presentment and truncate nearest to the collecting bank. Provide localized service without having a physical presence by offering customers a way to consolidate accounts and reduce their processing costs.
Beat out nonbanks in infrastructure investment. Don't let history repeat itself. Invest in remote image technology today, before your competitors do.
Get with the POPP culture. Point of presentment processing (POPP) is the future of payments. Truncating checks is important, but it is only part of the revolution.
Increase the use of electronic payments. Banks are uniquely positioned to help merchants and billers manage the migration from paper to electronic payments by encouraging the use of automated debits, Internet bill presentment and payment, and card-based remittances. Even though cannibalization/substitution may be an issue, being unresponsive to customer needs opens the door for competitors.
Developing and implementing Check 21 product strategies integrated with other payment products will enable banks to create immediate streams of revenue, defend their customer base against smaller, more nimble competitors, and attract new customers. The challenge is to develop a strategy that incorporates a portfolio of alternatives to paper-based payments.
The winners will be those banks that become market makers with new products and services that secure their place in the payments value chain.
