Payments Exchange


Measuring and Monitoring

By Karen Epper Hoffman

Peter Drucker, the forefather of management consulting, was fond of saying, “you cannot manage what you don’t measure.” If that’s indeed the case, many community banks may find themselves wondering how to make the most of their disparate payments products and programs.

While the various payments products and services offered by a community bank may generate as much as one-third of the bank’s overall revenue, it’s not out of the ordinary to find that payments programs are not measured in any sort of systematic and overarching way, according to Bob Roth, managing director for the payment solutions group at Cornerstone Advisors Inc., a technology and management consulting firm in Scottsdale, Ariz. “Despite the fact that so much of their income comes from payments, most community bankers think of themselves primarily as lenders,” he says.

Sam Kilmer, senior director at Cornerstone Advisors, adds, “If you ask bankers, they can rattle off a half a dozen ways they make money around lending. … The discipline there is pretty impressive. It’s much more fragmented around payments.”

According to Roth, himself a former community bank chief information officer, there are three major reasons community banks should do better to track their payments programs regularly and comprehensively. First and foremost, payments is clearly important to the bottom line—and its relevance is only likely to grow as consumers and businesses alike increasingly turn from cash and checks to electronic payments. Secondly, he points out, community banks, like their larger counterparts, need to get out in front of the payments industry “disruptors” like PayPal and Square Inc., which are making greater inroads offering high-value services that threaten to undercut community banks’ payments profits with retail and business customers alike.

Finally, Roth says, since not all payments lines offer banks the same level of profitability, banks need to get their arms around which offerings will give them the biggest boost to their bottom line to focus their efforts on marketing those products and services.

Larger community banks may want to establish a “chief payments officer” position to oversee the management as well as the tracking of the bank’s payments portfolio. “For banks with $1.5 billion or more in assets, the best practice is really to have a chief payments executive and put all the payments under that person … from bill payment to debit and credit,” Roth says.

For smaller community banks, for which hiring an experienced payments executive may be prohibitive or unrealistic, he recommends creating more of a “payments matrix” through the organization, with a top executive, such as the retail chief, the chief financial officer or the chief operating officer, ultimately responsible for measuring the volume and profitability of payments. “What we have found is creating payments products are often done by happenstance at smaller banks,” says Kilmer. “There needs to be someone responsible to the corner office for the reporting of the payments portfolio.”

“For banks with $1.5 billion or more in assets, the best practice is really to have a chief payments executive and put all the payments under that person … from bill payment to debit and credit.”
—Bob Roth, Cornerstone Advisors Managing Director

Roth says when it comes to the “macro level or the general ledger level,” community banks should create a monthly profit-and-loss statement for all five major payments categories, including checking, ACH and wires, bill payment and peer-to-peer payments, debit cards and credit cards. How a bank divides these categories is less important than measuring them, he adds. At an operational level, banks should be tracking the “levers” that influence customers’ receptivity and usage of certain products and how they affect payments profits. Those drivers could include debit rewards, ATM surcharges and fraud losses.

Other than a monthly profit-and-loss statement and a scorecard showing trends in payments volumes, Roth and Kilmer underscore the importance of producing a major reporting package once per quarter. In the quarterly reporting, banks can compare their growth to the main payments metrics that are released industry-wide from the likes of Visa and MasterCard. “What issuers should want to see is whether they are doing better or worse than that [card brand] curve,” Roth says. This in turn can then influence marketing of products back at the bank. “We encourage [banks] to measure themselves against the industry to see where they are at.”

Says Kilmer: “Think about how lenders talk. They know the P&L and the levers of success of all their products. We just want banks to bring that same discipline to payments.”

Karen Epper Hoffman is a financial writer currently working in Europe.