|Payments Under Pressure|
|Tuesday, 08 November 2011 3:40am|
Debit interchange concerns lead payment challenges at community banks, according to the 2011 ICBA payments survey
By Kelly Pike
When it comes to payments revenue, community banks are understandably feeling squeezed. Compliance costs are rising and new interchange pricing regulations are poised to cut debit card income. As a result many community banks are re-examining their approach to payments revenue, considering new ways to increase profitability and efficiency while looking for additional revenue streams.
These are the findings of the 2011 ICBA Community Bank Payments Survey, a biennial nationwide survey of community bank payment operations. While in past years the survey has shown community bankers looking ahead to new payments technologies, this year’s survey shows many are mostly concerned about one core area: debit revenue.
Executive summary results of the 2011 ICBA Community Bank Payments Survey:
■ Community banks are threatened by reduced interchange, regulatory compliance costs.
■ Community banks report decline in payment revenue, expect trend to accelerate.
■ Community banks remain committed to payments, seek new revenue sources.
■ Mobile payments, P2P payments and consumer RDC are beginning to gain traction among community banks.
■ Debit cards remain the dominant consumer-payments vehicle for community banks.
■ Debit card and check fraud pose the greatest amount of fraud for community banks.
■ Check image deployment is in its final phase of community bank adoption.
■ More community banks offer business debit cards, nearing critical mass.
With check use dropping, debit cards are now the most important payment product or service offered by community banks, the survey shows. They have also been profitable: Debit interchange income represents 23 percent of demand deposit account revenues and makes money for 78 percent of community banks.
But with the Durbin interchange price control amendment just beginning to take effect, many worry that’s about to change, even though the amendment exempts banks with less than $10 billion in assets. The majority of community banks expect decreases in consumer payments-related revenue in the coming year—and 22 percent expect the decrease to be significant.
“With steering [to PIN debit transactions] and changes in interchange pricing, we’re expecting an interchange decline of around 20 percent,” estimates John Buhrmaster, president of $375 million-asset 1st National Bank of Scotia in Scotia, N.Y. “That’s just in the first year.”
Finding a solution
That’s not the only threat to payments revenue streams. The survey found that 40 percent of community banks saw payments revenue decline over the past year—and 10 percent call the decrease significant. This is largely the result of Regulation E and its overdraft regulations.
Meanwhile payments-related spending remains steady or has risen at most institutions, creating a situation that Cary Whaley, ICBA vice president of payments and technology policy, likens to the pressure inside a water balloon. “When you regulate revenue streams such as interchange and overdraft, it’s like pressing down on a water balloon—the water just goes to the other side,” he says. “Our banks have to rethink payments revenue and decide what part of the balloon it’s going to come from.”
ICBA’s survey shows that’s exactly what community banks are planning to do—adopt payment strategies aimed at increasing profitability (70 percent), become more efficient (56 percent), create new revenue streams (54 percent) and improve customer service (47 percent). Many community banks are making hard decisions about the benefits offered to customers and what they charge for them. At $510 million-asset Mountain National Bank in Sevierville, Tenn., executives are examining the community bank’s offerings with an eye toward enacting new fees in 2012.
“It may be we have to stop offering free checking or add fees to replace debit cards,” says Mike Brown, Mountain National’s executive vice president and chief operating officer, who is still waiting to see how new interchange rules impact his community bank. “We have to evaluate each product on a case-by-case basis.”
ICBA conducted its fourth biennial Community Banks Payments Survey during the second quarter of 2011. The survey, designed to track community bank trends and strategies in payments, was sent to 7,957 community banks and yielded an 11 percent response rate.
Click on the link above for the full results of the survey, including an executive summary.
Decreased revenue from interchange isn’t the only cost facing debit programs. Debit card fraud is also taking a bite out of payment revenue, with 95 percent of community banks reporting loss from fraud—an increase of 28 percentage points from 2009. Overall, 61 percent of community banks noted that they increased their spending to address payments fraud.
Community banks are also re-evaluating debit card rewards program. While just 19 percent offer debit rewards programs, three-quarters are considering scrapping the programs by 2013. “It’s the first thing that will have to go” if debit interchange income falls, says Bob Steen of the $64 million-asset Bridge Community Bank in Mechanicsville, Iowa. Since his community bank first offered its program in 2005, it has paid out 15 percent of its interchange revenue in rewards.
Mobile a must
Despite worries over revenue, many community banks are looking to add mobile payments. Currently, 14 percent offer mobile payment services—more than double the percentage in 2009—and another 47 percent plan to offer it within the next two years. Many of these are community banks with $250 million in assets or more. A quarter of larger community banks offer mobile banking compared with 10 percent of community banks with assets between $101 million and $250 million and only 6 percent of community banks with less than $100 million in assets.
Check 21 Adoption
Everyone who plans on adopting Check 21 seems to be on board, with almost 90 percent of community banks sending and receiving their cash letters electronically and 75 percent able to send and receive electronic return checks. The holdouts that don’t plan to adopt image cash letter deposit (8 percent) or receipt (8 percent) generally have less than $250 million in assets.
The holdout community banks can expect higher costs and lower service levels going forward as the Fed discourages all banks from processing paper items, warns Cary Whaley, ICBA vice president of payments and technology policy.
One of those community banks will be $950 million-asset East Carolina Bank in Engelhard, N.C., which plans to roll out its mobile banking platform during the first quarter of 2012. Features of the platform will include mobile Web payments and robust text functionality, common features at 85 percent and 40 percent, respectively, of community banks with mobile payments. East Carolina Bank will also have a downloadable app for more secure and encrypted banking.
While bank president and CEO Dwight Utz doesn’t expect the enhancements to reduce phone calls or teller visits, he’s hoping they will help attract new customers—and the revenue they generate. “I’m spending the money to build a mobile infrastructure because I think that is tomorrow,” he says. “My kids care less about going to the branch, but they do want mobile banking. I’ve got to be prepared.”
Like all community banks responding to the survey, Utz’s plan doesn’t currently include near-field communication payments, which allow consumers to use their phones to make point-of-sale payments. But he does plan to offer person-to-person payments (currently offered by 27 percent of community banks and planned for by 33 percent) and consumer remote deposit (25 percent offer and 20 percent planned).
This slower growth of these two payments technologies may come down to efficiency. While Bridge Community Bank was an early adopter of Check 21, Steen isn’t sure these technologies will improve the customer experience. Consumer remote deposit, Steen says, “is not a perfect system, and when it’s imperfect, that’s a drag on the payment system.” He’s also wary of passing the cost onto customers when he anticipates just a few of them will use it.
That’s not the only holdup. Revenue funds innovation, notes Whaley. While some community banks are “motivated by the loss of revenue to find new products to charge for,” others pull back to control costs.
“We’ve always prided ourselves on offering the absolute latest in banking products and have thus far, but [declining payment revenues] can certainly impact that going forward,” says Brown, who is moving forward with mobile payments but doesn’t see enough demand for consumer remote deposit to justify its cost.
Sometimes adding a new payment product isn’t just about the potential profit. For 1st National Bank of Scotia, it’s about offering a complete package that lures more profitable customers. “Payments is a revenue source, but it’s also an anchor,” explains Buhrmaster, who keeps payments spending in check by renegotiating contracts with vendors rather than letting them automatically renew.
Anchor or income stream, payments revenue will remain a critical area for community banks to work through—a challenging one.
Kelly Pike is a freelance writer in Annandale, Va.