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Shift to Electronic Payments Threatens Banks Profitability: DiamondCluster

Tuesday 11 November 2003 18:21 CET | News

With $70 billion of industry-wide revenue supported by check processing at risk, banks need to chart a new strategic roadmap to navigate the transition towards a world no longer dominated by traditional paper-based payments.

Writing in the November issue of BAIs Banking Strategies magazine,DiamondCluster financial services partners Jay Norman and Aamer Baig make the case that banks will need to carefully evaluate their capabilities and strategic objectives to develop an effective enterprise-wide payments strategy. The stakes are high: payments currently supply about 40 percent of revenues at the top 25 banks. In addition, powerful market forces are at work. The industry is looking at a 50 percent increase in excess check processing capacity over the next few years. A host of non-bank competitors are offering debit cards and electronic bill payment services that threaten the traditional hold banks have held on the payments process. Tough Decisions Ahead This trend will force bankers to make tough decisions at the enterprise, product and operational levels, the authors say. For example, banks need to consider what to do with their current payments operations. Investing to improve operations, outsourcing the function or exiting the business completely all are options. Banks that outshine the competition might want to set up their payments capabilities as a source of new revenue by merchandizing their capabilities as an answer to the needs of other banks. In many cases, banks will want to reorganize internally around prime customer segments, moving sales, product development and customer service personnel out of their traditional functional silos. With the proper measures and incentives in place, Norman and Baig contend that these customer-segment teams can do a better job of identifying new growth opportunities. The authors also predict that some larger banks and payments processors will decide to make multi-million dollar investments in overhauling their back office payments systems and processes. Norman and Baig recommend that those banks establish a Payments Council, a group responsible for overseeing both development and execution of a new enterprise-wide payments strategy. Making those kinds of decisions will require banks to evaluate their capabilities across four key dimensions: -- Strategic Alignment -- Assessing how current payment initiatives mesh with customer needs, competitive positioning and overall strategy, as well as garnering a clear understanding of the factors that drive revenue and profit. -- Management and Governance -- Reviewing how senior executives oversee payments initiatives that cut across traditional product and functional boundaries in areas such as marketing, partnerships and technology. -- Organization and Skills -- Identifying where the organization can compete effectively and the capability gaps that must be closed to capture market opportunities. For example, an institution may or may not want to invest in imaging to upgrade its check-processing capabilities despite the apparent benefits of imaging technology. -- Technology and Operations -- Analyzing the overall technology infrastructure and the business operations supporting the payments business to ensure the right combination of flexibility, support costs and efficiency. While the situation facing banks over the next few years is challenging, Norman and Baig are optimistic that the current paper-to-electronic transition affords valuable opportunities to optimize current payment operations and improve profitability while gradually implementing a new enterprise payments strategy.


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Categories: Payments & Commerce | Payments General
Countries: World
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Payments & Commerce