Even a small payments portfolio can be lucrative for your community bank if it’s managed correctly. The key is building a sustainable, targeted strategy
By Elizabeth Judd
Waiting for customers to come to your community bank, asking for a particular payments product, isn’t the best way to determine a need for that product, says Tina Giorgio, president and CEO of ICBA Bancard.
Take person-to-person (P2P) payments, which probably aren’t high on most customers’ wish lists. “If you ask your customers, I bet they’re already using a person-to-person payments solution,” says Giorgio. “They’re just using PayPal or Venmo but would prefer a product from their bank.”
Giorgio points out that millennials rely on mobile devices to exchange money among themselves so regularly that “Venmo me” has become slang for “Pay me back online.” For a savvy community bank, venturing into the P2P payments space might therefore be a way to reel in an appealingly younger demographic.
Offering a wider array of new payments products can do more than attract new customers; it can also close gaps in a community bank’s offerings and furnish untapped sources of revenue in tough economic times. Ideally, a high-performing bank, says Giorgio, should derive 35 percent or more of noninterest income from payments.
That said, many community banks have yet to jump on the bandwagon. “Smaller institutions have not historically thought about developing a payments strategy, which is where there’s tremendous opportunity to improve revenue,” Giorgio maintains.
Take a moment to assess
There’s no question that payments are evolving. Total ACH payments are estimated to have grown by number at an annual rate of 4.9 percent from 2012 to 2015, according to the 2016 Federal Reserve Payments Study. While check payments plummeted in this three-year period, debit card usage grew at an annual rate of
Beyond staying on top of industry trends, community bankers need to take time to know their customers and their payment preferences. Giorgio emphasizes that the clients you have today may not be the clients you target in the future.
Millennials, who are embarking on careers and therefore accumulating wealth, are a case in point. Giorgio notes that community banks that want to attract younger customers should consider mobile payments.
According to the Federal Reserve’s Consumer and Mobile Financial Services 2015 study, one-third of millennials and Gen-Xers are conducting payment transactions online.
“The more self-service, ease of use and convenience you can deliver to millennials and Gen-Xers, the more apt they are to do business with you,” Giorgio says.
Consider small-business credit cards and prepaid cards
Beyond P2P payments, Giorgio has identified two other common gaps in community banks’ payments offerings: credit cards for small businesses and prepaid debit cards.
She would like to see more community banks reinvent themselves to target the small-business community, because this community is poorly served by large, commercial banks. In addition, small businesses are often willing to pay for the same products and services that consumers expect free of charge.
That said, community banks have shied away from small-business credit cards out of a “misconception that you need a big portfolio to make money,” says Giorgio. She notes that interchange rates are higher on business credit cards than consumer cards, and that it’s now possible for banks that don’t want to build the infrastructure or to manage these programs to deploy business credit cards through third parties.
Giorgio points out that some customers of ICBA Bancard and TCM Bank are profitable offering as few as a couple hundred small-business credit cards.
Finally, prepaid cards are a market worth investigating. “Prepaid is growing, particularly with millennials, the under-banked and the unbanked,” says Giorgio.
Ensure the plan is a strategic fit
Offering an exhaustive number of products isn’t how to create a successful payments strategy, though. Community bankers need to consider current revenues and costs for existing products and services to determine which are profitable before expanding their offerings. Here, vendor invoices can be very useful, especially for banks without general ledger accounts.
Before deciding which payment products are right for your community bank, says Giorgio, consider your risk tolerance. Ask yourself where your bank sits on the continuum from early adopter to laggard.
“As a community bank, you don’t want to be an early adopter, but you probably want to be early or late majority, depending on your market,” advises Giorgio. “And where you definitely don’t want to be is with the laggards.”
Creating an effective payments strategy rests on having a written plan and tapping a senior manager or executive sponsor committed to its success. Giorgio emphasizes that your plan should align with your bank’s overall strategic plan.
Next, she recommends assembling a formal payments committee that includes “all of the stakeholders invested in what you’re trying to do from a payments perspective.” This committee should be tasked with making sure all payments products and services that come to market are compatible with other lines in your banking business.
Tap your vendors’ knowledge
Giorgio recommends that bankers stay up to speed by keeping in close contact with trusted vendors.
“Talk to your payment processors,” she says. “Understanding the various vendors’ roadmaps and their product direction is important for your strategy. If you develop a strategy with solutions you can’t deliver because your vendors can’t support them, you’re setting yourself up for failure.”
While any stellar payments plan requires diligence and careful consideration, community bankers must also remain flexible, concludes Giorgio. “Remember, new payments solutions are emerging every day, so you want a plan, but you also want to be constantly reviewing that plan.”
Read ICBA Bancard president and CEO Tina Giorgio’s action plan for developing a successful payments strategy at www.icba.org/bancard/news-events
Elizabeth Judd is a financial writer in Maryland.