13
Dec
2015
Bank Payments Revenue Streams
Tags: banks, checking account, paymentsI suggested that the checking account is central to a bank’s current economic return profile and is being attacked on an unprecedented scale, read one of my previous post here.
If we consider the checking account also as a payment tool, then payment revenue streams can be divided into two categories: deposit driven and transaction driven.
– By deposit driven, I mean the amount of cash sitting in a demand deposit account – a checking account.
– By transaction driven, I mean any and all transactions that coming out of or into a demand deposit account. These are divided into domestic, international and credit/debit card.
I suspect the breakdown between deposit driven, domestic, international and credit/debit card revenue breakdown differs between retail and commercial clients. For simplicity’s sake, I will assume the breakdown to be similar.
As we have been living in a low interest rate environment for a while, we know revenue from deposits, i..e the net interest margin a bank earns on checking account balances to be low compared to historical norms. I also expect a bank to compensate this earnings loss with a proliferation and/or increase of/in fees on the transaction side.
Although I do not know exactly what the normal breakdown between deposit and transaction driven payment revenue is for a bank I will venture a guess: a) in times of low interest rates, the breakdown is 45% from deposits balances and 55% from transactions, and b) in times of high interest rates, the breakdown is 55% from deposit balances and 45% from transactions. Any banker reading this post please feel free to weigh in and correct my assumptions.
Now, we also know there are downward pressures on transaction margins. I might even say the payments game is a race to the bottom when it comes to transaction revenue what with legislative fiat regulating interchange, p2p payment models promising lower fees or sometimes no fees, remittances experiencing a natural margin decline due to heightened competition. As such operators tend to go for volume and economies of scale to compensate for unit margin declines. This “margin pressure” trend on transactions will not revert itself, especially as new entrants are entering the payment space (Apple, Google, Alibaba, Amazon, Facebook…)
Further, it is not entirely clear to me that higher interest rates would solve current ills as it may have been in the past. Increased competition over the checking account will make sure of that. Remember that the economic value of the deposit balance of a checking account to new entrants (startups or large tech companies) is also very different from that of a bank – think revenue from lending, advertising, monetizing data, cross selling other existing services.
The silver lining for banks on the transaction side of the equation is that our planet is becoming more interconnected which means that cross border trading and payments will grow at a healthy clip – for retail or commercial uses. This means banks have the potential to reposition themselves and think more transaction and data than deposit driven earnings. How would they compete though?
Competing on cost – i.e. going for volume – is a tough strategy when scale may not be a competitive advantage anymore. Inventing new fees to maximize transaction revenue is short sighted. I am left with marketing new services around payment transactions and wrapped around a checking account.
What these new services are, other than they have to be digital and customer centric, I am unsure of. I know many talk about protecting data, identity management, monetizing data. Could these new services be centered around the financial wellness of users and contextually based on their current and future needs. That is certainly what I have noticed a few startups intend on delivering.
Still, my vision is murky when it comes to what types of new services a bank could deploy around a checking account. I guess I am calling on all thought leaders and bankers to educate me and come up with suggestions!
Fish
Posted at 15:22h, 13 Decemberwhen you read in the WSJ that banks don’t want corporate deposits because they can’t “plant” them long term because the corporation might want to pull them out, then you have to believe that banks are moving to the transaction world (and have been for years) on the corporate side and this will be the new change in banks in the future. Look for others standing in for banks on the corporate side only. As far as the consumer goes, I see it as a continuation of what they have always done (help the consumer pay for goods and services). Remember, most banks don’t get involved in credit card transactions as that is concentrated in a few issuers. However, all are engaged in debit card transactions and they are half of consumer transactions for purchases. I see the ‘trusted and regulated’ nature of the banks becoming the mantra and I see them helping their customers efficiently manage their inflows and outflows while keeping the consumer monies safe. I don’t see the consumer stepping away from the regulated safety of the bank and I see the bank charging them to facilitate their day to day needs.
Pascal Bouvier
Posted at 15:50h, 16 Decembertrue, but it will become an awfully hard world for banks once there is ease of flows in and out of a checking account (both money and data). banks will have to do more than facilitate day to day needs.
David Browning
Posted at 22:16h, 29 DecemberThere’s a lot more to banking than meets the eye. It is not so difficult to create a Dwolla type setup and have a single master account for USD at Veridian Credit Union and Compass Bank. You then offer new customers a sub account (they see it as an account) and settle with accounting entries in the master account. Oh yes, the party you are paying or receiving from must have an account with Dwolla. It is the same if you have two accounts at Citi or BofA.
It gets more complicated across two different organizations, and if you introduce going from one currency to another with its 2 day settlement protocol, it gets risky and complicated. This is what blockchain promises to help with, but there’s a problem with scale currently. Bitcoin, even after the 2015 run-up has a market cap of $6.5 billion. Citibank settles between $3 and $5 trillion per day. Yes, that’s a “t”. The largest payment volume is FX settlement. To get a glimpse at some of the “guts” behind this, take a look at the Swiss National Bank description of CLS as a peer-to-peer FX settlement system started in 2002. The piece was written Nov. 2009. http://www.snb.ch/en/mmr/reference/continuous_linked_settlement/source/continuous_linked_settlement.en.pdf It currently handles over 50% of the world’s foreign exchange settlements. Its sort of a jury-rigged central/distributed ledger system.
Checking accounts are a loss leader to get a relationship for cross sell. Schwab doesn’t want you to just have a Schwab One account with sweep to money market and write checks on it either.
Pascal Bouvier
Posted at 09:54h, 04 Januarythanks for pointing me to the pdf. may ping you with further thoughts once i read.