Banks Seen Falling Behind as Payments Technology Advances
By Jeffrey Kutler
A soon-to-be-published report for an influential trade group urges bankers to make significant investments in payment systems to prevent a further loss of business to nonbanks.
The study describes a trap that commercial banks have fallen into, in consumer and corporate services alike: They have fortified their positions in commodity-type transaction businesses that yield meager returns on investment, while nonbank competitors moved into more profitable value-added services, often by "piggybacking" at little expense on the banks' payments infrastructure.
The answer, according to the report by Furash & Co. of Washington, is individual and collective action by banks to reclaim payments dominance by delivering supplemental information and other services for which customers are willing to pay a premium.
The report is the result of a seven-month study commissioned by the Bankers Roundtable, the Washington association that represents the nation's biggest banks and holding companies.
The written report, including the key section on "Restoring Banks' Role in the Payments System," is due for release by the end of June.
It is meant to be "a wake-up call" to senior bank executives who have historically paid little attention to payments issues, Edward E. Furash, chairman and chief executive officer of the consulting firm that bears his name, said in an interview last week.
On Wednesday, Mr. Furash gave the study its first detailed public airing in a speech at the American Bankers Association's national operations and automation conference in San Francisco.
Mr. Furash called the conclusions "disquieting," in that they describe an industry so tradition-bound in its approach to payment systems that it failed to recognize fundamental changes and business opportunities in electronic services for corporations and individuals.
He cited the AT&T general-purpose credit card, Automatic Data Processing Inc.'s dominance of payroll processing, Electronic Data Systems Corp.'s automated teller network, and Merrill Lynch & Co.'s Cash Management Account as examples of nonbank incursions via the bank-owned payment system.
"It's not too late for banks to restore their franchise, but it has been seriously eroded," Mr. Furash said.
As distilled in his speech, The Bankers Roundtable report calls for banks to "place their bets in the emerging payment system — or be left out of the most profitable businesses.
"Regrettably, there is no central forum for discussing and resolving the issues — and such a forum is urgent," Mr. Furash said. "Until banks treat payment systems as a 'for profit' business, rather than as a sideline activity, the public policy issues will not be resolved and profits will go to nonbank competitors."
The study does not specify what entity might serve as that forum, but The Bankers Roundtable, in its previous incarnation as the Association of Reserve City Bankers, had a long tradition of monitoring payments issues and bringing them to top executives' attention.
Anthony Cluff, the Roundtable's executive director, said he hopes the group will play that role.
"At least it's a good place to start, and then we can see where that takes us," he said. "Our members have major investments in the payment system. As the study points out, it is changing, with a lot of new players," whose voices would also have to be heard.
Two Bankers Roundtable panels supervised the Furash & Co. project: the payment systems committee, of which Citicorp group executive Alan J. Weber is chairman; and a working group headed by Citibank vice president Seymour Rosen. The latter followed the day-to-day progress of the research, which included extensive surveying and interviewing of bankers, consumers, nonbank service providers, payment networks, technology companies, and Federal Reserve representatives.
New Calculations of Value
Mr. Furash said payment services, and much of the overall banking business, are being affected by new calculations of value.
Customers increasingly take "monetary value exchange" for granted, and are increasingly unwilling to pay for what they perceive as a basic entitlement.
"We are seeing widespread protests over checking account fees because [consumers] don't see the value in it," Mr. Furash said in his ABA speech. "But people will pay very high fees for the Merrill Lynch Cash Management Account."
The consultant said he sees banks as victims of their own success in making the check clearing system as efficient as it is. While checking services have become a commodity, subject to price pressures and diminishing profit margins, nonbank competitors focus on "value-added" opportunities where banks have generally fallen short, and have taken the initiative in such areas as electronic data interchange for corporations and home banking services for individuals.
The decline of banks' payment-system hegemony compounds the effects of disintermediation, as consumer and corporate assets and revenues flow into nonbank coffers, Mr. Furash said.
He suggested that bankers "be more cautious" in pursuing a commodity business like check processing, where energies expended to gain market-share points from the Federal Reserve could be channeled more profitably toward value-added services. (For recent trends in check processing, see chart on page 1.)
Nonbanks have the additional advantage of not having to worry about outmoded brick-and-mortar delivery systems as they invest in information-based, value-added products. And with bankers uncertain about where to place their payment-system bets, investments are at a standstill.
"There is no time for delay - we have to make investments now," Mr. Furash said, pointing out that the industry has ample profits at its disposal.
John Shain, an expert in non-credit bank services to corporations, has attributed the problem to banks' continuing tendency to "manage on the margin," failing to recognize that traditional margins are too slim to finance service breakthroughs.
"Innovation in its grandest terms is not yet taking place," Mr. Shain, chief executive officer of Littlewood, Shain & Co. in Exton, Pa., said in a recent interview.
He said bankers must become versed in change management and process reengineering as they cope concurrently with internal consolidations and new competitors. "Keep in mind that nonbank providers have made tremendous inroads into wholesale banking, and at a lower cost of delivery than the banks'."
Mr. Furash said community bankers would be wrong to stay disengaged from payment system debates, assuming they are for big banks only. For example, he said, smaller banks that cannot provide EDI services could lose crucial business accounts to larger regional institutions.
Mr. Furash chided the entire industry for losing sight of the fact that payment systems are integral not just to movements of money but to overall commerce and prosperity. It was slow to react to the fundamental changes in business operations that generated demands for value-added information.
"Bankers tend to view [payment systems] in the abstract, as a device over which they have exclusivity and divine right of ownership. This is no longer the case," Mr. Furash said.
Corrected May 26, 2016 at 3:10PM: This post is part of a recurring series of classics from our archives. The story below appeared on June 13, 1994, about an industry-published report on how to contain the competitive threat from nonbanks in the payments arena.