What Merger Mania Means for the Payment System

The world is in upheaval. People, institutions, and even entire nations are facing enormous changes - painful, but exhilarating.

At the center of this upheaval are two major trends: movement toward political independence and toward economic interdependence.

These trends may seem completely contradictory, but in fact they are connected.

Around the world there is increasing momentum toward autonomy. The disintegration of the Soviet Union arrests our attention. What we once knew as one Goliath of a nation could become as many as 15 independent entities. And this phenomenon isn't limited to the Soviet Union. In fact, since World War II more than 70 new nations have come into being.

Markets Coalesce

Yet, while some nations are breaking up, business markets around the world are uniting at an uprecedented rate.

* The 12-nation European Community is gearing up for unity in 1992 and for additional members.

* The United States, Canada, and Mexico are on the verge of turning North America into a free-trade zone with more than 350 million people.

* Argentina, Brazil, Paraguay, and Uruguay are forming their own common market - the Southern Crescent - which will contain nearly 200 million people.

* In the Asia-Pacific region, some form of common market is inevitable.

The brightest business opportunities now lie in the larger markets beyond national or regional borders. No single nation - not even the mighty United States - can afford to remain economically self-contained. Perhaps no industry knows this better than banking.

The Urge to Merge

In fact, we are right in the middle of this swirling change. Deregulation has become the order of the day; capital flows more freely around the world; foreign banks and nonbanks invade our markets with increasing momentum.

More and more, U.S. bankers see mergers as the way to be successful in the world of the future. Rather than waiting for government to act, many are moving ahead full throttle, counting on mergers to streamline operations and boost the bottom line.

In recent months, much attention has been directed toward megamergers like BankAmerica/Security Pacific and Chemical/Manufacturers Hanover. But there has been activity at all levels.

In addition to the proposed merger with Security Pacific, for example, BankAmerica alone has acquired more than a dozen properties in less than two years.

Consolidation Poses Challenges

In most cases, these mergers are positive developments. But along with the traditional benefits of mergers come enormous challenges.

Mergers open several opportunities for the newly merged institutions and the communities they serve.

With more resources, banks will be able to do more of what they have traditionally done -- lend to their communities, spurring business growth, enabling people to buy homes, and enhancing the quality of local life.

For the emerging superregional "megabanks," there will be several additional opportunities. One is the chance to create unparalleled distribution systems that are ideal for selling and servicing consumer products such as credit loans and debit deposit cards. This will enable them to attract more consumer deposits.

Another is the opportunity to develop a formidable front line in the battle against the nonbanks and foreign competition.

In fact, the sheer size of megabanks will position them to expand into new geographic markets now considered too costly - new markets not only throughout the U.S. but also in Canada, Mexico, Europe, the Far East, and elsewhere.

The smaller "community banks" will also be winners after the shakeout. Consumers will see these banks as the ones to go to because of their personalized service and intimate understanding of their communities.

In fact, many of these community banks are positioned to do well. While some larger banks did some pretty adventurous things during the 1980s, local banks generally stuck to their knitting. They focused on the basics and stayed good at them.

More Choice for Consumers

In turn, clear differentiation between the megabanks and the small community banks will have a positive affect on payment systems, consumers, and merchants.

Two distinct groups of card issuers will emerge. One will be able to offer greater economies of scale. The other will focus on personalized service.

Finally, and perhaps most important, mergers are sending a positive message to investors and consumers who recognize that the industry is acting to preserve and protect itself.

Although mergers will probably make bankers' lives better, they will not -- in the short term -- make them easier. In any business, mergers are tough. But in the banking business, there are also some unique challenges.

Defining Your Role

One of these challenges is to clearly define why banks are in business. In recent years, some of the most successful institutions have done so by narrowing their focus.

They've turned away from Third World loans and other adventurous commitments and returned to what they have traditionally done best - serving retailers and consumers in their markets.

Another challenge-especially with the so-called mergers of equals-is to be clear about who is in charge. Unfortunately, newly merged entities often try to keep everyone happy by sharing titles and operating by consensus.

The result is often a lack of decisiveness at a time when strong leadership is imperative. In a merger, some people simply have to step aside.

Still another challenge is restructuring to better accommodate market realities. An excellent place to begin is in payment systems operations.

For years, banks have divided these operations into assets and liabilities. One side supported credit cards and the other supported depository products, including checking and savings accounts and automated teller machine services. For years this arrangement has worked.

Shifting Products

But now the roles of some of these products are changing. Many Visa members, for example, are quickly moving into the debit arena. Many regional networks that support ATMs want to move to the point of sale.

As more overlap has occurred between these products and services, so has the need to coordinate the asset and liability sides of banks.

Today the goal should be to work as players on the same payment system team. A coherent, comprehensive payment system structure within each bank would be a big step in this direction.

And last is the challenge to fully exploit inherent bank advantages over nonbanks, such as the retail deposit relationship.

Debit Card Options

Perhaps there is no better way to meet this challenge than to automate the liability side of the deposit access business.

A one-card-fits-all approach won't do with debit cards. Banks offer depositors different kinds of checking accounts to accommodate specific needs; banks should have the same freedom with debit cards.

Thus, we need debit card options; an on-line product for higher-risk customers and an off-line product for the balance of a bank's deposit base.

As comprehensive debit programs evolve, another broader challenge must be addressed - the need to develop not only a national, but an international debit system. Some feel this isn't necessary because most debit transactions take place close to home.

But globalization is bound to occur, because consumers will eventually demand global utility, just as they did with credit cards, and because national and international systems have significant processing advantages.

In addition, a debit solution must not threaten profits generated by current credit card programs. To tamper with a healthy credit card business -- especially in these times - would be fool-hardy.

Mr. Russell is president and chief executive officer of Visa International, San Mateo, Calif.

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