Time Is Now for Banks to Rethink Payment Strategies

By Theresa Carey  |  Posted 2004-12-07 Print this article Print

Institutions are being forced to rethink their business strategies, cost structures and value propositions for providing a competitive payments offering, according to the panelists at OracleWorld's session titled "Fueling Your Payments Revenue with

SAN FRANCISCO—For banks to realize new revenue streams as payment transactions evolve, they need to redefine their value proposition to existing and prospective customers. Panelists here at Oracle Corp.s OpenWorld session titled "Fueling Your Payments Revenue with High Octane Information" said banks must go beyond managing the movement of money and consider managing the information embedded in the payments that come in over multiple payment networks. Preparation for implementing the Check Clearing Act for the 21st Century (Check 21) has prompted many banks to invest in IT. Michael Noble, executive vice president of bank operations at Wells Fargo Bank, said that although there hasnt been a lot of noise surrounding the implementation of Check 21 so far, he expects that to change in 2005. "We have to defend our franchise," Noble said. "There are lots of profits to be had in handling payments of various types." Is Check 21 a door to mass fraud? Find out here.
One challenge banks are dealing with, Noble said, is the gradual phasing out of checks as a way to make payments. "Banks have been predicting the death of checks since the 1960s, but now we see evidence that they really are going away," he said. "The paper volume of transactions is dropping significantly, while the total payment volume is increasing."
Noble estimated that there were 42.5 billion checks processed in 2000, which is dropping to approximately 37.9 billion in 2004. By 2007, he expects checks to drop to 31.1 billion. At the same time, the number of electronic payments is growing—from 30.7 billion in 2000 to 45.1 billion in 2004 to an estimated 60 billion in 2007. Losses in paper check volume are being more than made up by electronic transactions. The shift to electronic transactions is changing how banks process payments. They are moving away from the current hub-and-spoke arrangements, necessary when moving physical checks from bank to bank, to a more distributed mode of processing. "Were capturing payments on the desktop rather than running paper checks through mainframes," Noble said. "Its a sea change in the banking industry." William Randle, CEO of Synoran, a software and services firm that offers Web service technology to deliver payment information across the enterprise, said the next generation of payment processing will go much deeper than Check 21 requires. "The opportunity goes well beyond checks," said Randle, "Its about image capture and transfer. Its an opportunity brought on by legislation that can go much further." Randle cited the $490 billion spent on IT across global financial services firms, and estimated that only 27 percent of that expenditure went toward new development in 2001. Operations and maintenance gobbled up 63 percent, while 10 percent was spent enhancing existing technology. Banks need to move from hard-wired payment processing to distributed processing modes, and they need to adopt strategic IT models that bring them a competitive advantage, Randle said. He strongly recommends that financial institutions rethink their IT spending to support the rapid pace of business change. "Business agility and time-to-market are more important than cost considerations," he said. "An optimal payment strategy can generate additional revenue." Next Page: Knocking down the silos.

Theresa is the Editor of CIOInsight.com's Finance Industry Center. She's been writing about financial technology issues since 1990 for a wide variety of publications, including PC Magazine, Newsweek, Fortune, and Fortune Small Business. She is also a Contributing Editor to Barron's and writes their 'Electronic Investor' column.

Theresa received a B.A. from the University of California, Berkeley, and a M.S. from the University of Santa Clara. She also has a private pilot's license. When she's not at her computer, she coaches a local high school volleyball team, plays softball and volleyball, and takes part in many Cal Alumni Band events. She lives in Northern California.


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