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New DiamondCluster Predicts that Electronic Payments Quietly Eroding Banks Margins

Friday 8 April 2005 10:33 CET | News

To protect their lucrative payments business amidst the acceleration from paper to electronic consumer payments, large U.S. banks must move quickly.

A new report by the global management consulting firm DiamondCluster International predicts that the increase in electronic payments will have major ramifications on the U.S. payments industry, including: A shift in the payments battleground to the retail store and point-of-sale; the realization that the information about the electronic payment transaction may become as valuable to banks and others as the payment transaction itself; and, an understanding that old networks may be used in ways that arent to banks advantage. The report illustrates how information technology has profoundly changed the basis of competition in the U.S. payments industry over the last 30 years and outlines significant new opportunities (and threats) for U.S. banks. Further fueling this trend, the Federal Reserve recently announced that 2003 was the first year in which the number of electronic payment transactions in the U.S. (from credit cards, debit cards, and automated clearinghouse transactions) exceeded the number of check payments (44.5 billion vs. 36.7 billion). Predictions for the Payments Industry In the report, the authors predict that the increase in electronic payments will have major ramifications on the U.S. payments industry. The most significant ones are: -- The retail store and point-of-sale is the new payments battleground. The DiamondCluster report shows how the impact of technology on the bank payments business since the 1980s has shifted from the back end of the payments value chain (creating economies of scale on the acquiring side of payments transactions), to the front end in the 1990s (applying advanced technology to improve issuing of payment instruments such as credit cards), to the middle link: the use of the payment instrument itself in the consumers purchasing process (including the store). -- Information about the electronic payment transaction may become as valuable to banks and others as the payment transaction itself. Banks collect enormous information on consumer habits through their payments businesses. Such information could become a goldmine of data for banks to improve their own cross-sell efforts, and to work with retailers and product manufacturers to improve their marketing programs. For instance, bank payment records show which retailers are frequented by certain consumers. Banks could identify those consumers that go to overlapping retailers and provide joint marketing programs -- all without threatening consumer privacy. -- Old networks are being used in ways that arent to banks advantage. The role of payment networks today is vastly different than it was when they were conceived more than 30 years ago. Todays networks, such as the ACH network and the EFT networks, are now being used to undercut banks more lucrative payment networks. As new payment products such as the PIN debit card gain momentum, networks are being repurposed to garner more efficiency out of the system. Prioritizing Information Technology Investments The report details how the banking industrys stranglehold on the payments business has been loosening since the 1980s, when third-party payments processors such as First Data Corp. made huge inroads into banks back-office processing of payments. The trend continued in the 1990s when new monoline banks such as Capital One, MBNA and First U.S.A. used technology to win major shares of the credit card business from large banks. In the latest round of payments innovation, information technology again is the driving force of change. The rapid replacement of checks and cash with credit and debit cards, gift cards, electronic check conversion, and wirel


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Categories: Payments & Commerce | Payments General
Countries: World
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