Crisis gives national banks an upper hand in payments

I have been thinking a lot about how the crisis is having a different impact on the world’s national banks, which don’t seem to be suffering as badly as the big international players. In the cards and payments business at least, national banks may be able to take advantage of the crisis to get ahead while big international players struggle to survive. Welcome’s customers tend in large part to be national banks, so this is an area that I have been following heavily.

Here are a few comments I pulled out of an interview Friday with Dennis Gartman, producer of The Gartman Letter, a daily commentary on the global capital markets subscribed to by banks, broking firms, hedge funds and mutual funds.

DG: There will be more consolidations; there has to be. But look at the yield curve—what a year to be a bank! The overnight Fed funds rate, the rate banks are going to pay depositors for their demand deposits or checking accounts is zero. And you’re going to be able to lend that out to hungry borrowers at 7%, 8%, 9%, 10% and 12%. The next three years will be the greatest three years banks have ever seen. Banks will just make money hand over bloody fist in the next three years.

TGR: Are you talking about the big boys?

DG: No, I’m talking about the regionals. The big boys have problems in toxic assets. I am not even sure there is a Peoples Bank & Trust in Rocky Mount, North Carolina, but a bank like that—or the First National Bank of Keokuk, Iowa or the First National, or the Peoples Bank & Trust of Park City, Utah—those are the banks that are going to make lots of money.

TGR: Do you see an explosion in regional banks? Will move of them come into the marketplace?

DG: I think we’ve probably got all we need. It’s just that they’re very cheap.

TGR: What will the role of the international banks be?

DG: Mopping up the disasters that they’ve created for themselves for the past decade, trying to survive, being envious of the decent regional banks that are going to be earning enormous yields on this positively sloped yield curve and wishing they were they.

TGR: Do you see a role long term for international banks?

DG: Oh, sure, of course. How could there not be? It’s a smaller world; it’s an international world; it’s a global world. International banks will be back in full force a decade from now. They’ve got some wound-licking to do, and they’ll do it.

The same thinking appears to apply to national banks in the rest of the world, organizations that somewhat resemble regionals in the US, especially in the way they compete with the international banks. I have been watching how Welcome’s customers have continued moving forward with their credit card loyalty programs and in some cases have even accelerated those programs.

Many of Welcome's bank customers have another distinct advantage over the large international banks. They are both major card issuers and at the same time major acquirers, having kept acquiring as part of their banking activities while the international players have gotten out. Consumer shifts from credit cards to debit cards and prepaid will have less of an impact on a bank that is still active in acquiring. More importantly, owning the full end-to-end payment experience makes it much easier for local banks to innovate and provide greater value to customers and merchants.

Keeping issuing and acquiring under one roof suddenly seems much less risky than focusing single mindedly on credit card issuing alone.

Q&A with Shawn Miles, MasterCard: "The continued availability of credit is helping retailers drive transactions"

MasterCard recently published a report, “Benefits of Open Payments Systems and the Role of Interchange.” (direct link, background). I interviewed MasterCard’s Shawn Miles, Group Head, Global Public Policy and Regulatory Strategy Counsel.

Aneace: One of the benefits of interchange is that it helps fund innovation, and we have definitely seen in Australia that lower interchange means lower innovation in the card industry. However, much innovation seems to be focused on benefits for card issuers. Since interchange is paid by merchants, what kind of interchange funded innovation focuses on merchant benefits instead?

Shawn: We think that our payments network itself is a huge innovation that benefits merchants every day considering the complexities and costs merchants would have to undertake to run their own card programs. But one very good specific example of an innovation that benefits merchants tremendously is PayPass, the "touch and go" technology that provides merchants who benefit from improved speed of transactions, like fast food restaurants, transit systems, vending machines or taxis. Our Time and Motion study indicated a 52% increase in speed over cash payments. Not only do merchants benefit from the increased speed of people moving through their stores, but research shows people spend more when they use PayPass - and even New York City taxicab drivers are admitting they're getting higher tips when people use PayPass.

Aneace: Given the credit crisis today, and given the loss of revenues that many retailers are now facing, one could imagine two very different scenarios regarding interchange. One would be that merchants will now fight even harder to reduce their costs and cut interchange fees. But another opposite scenario might be that merchants will be more open to paying interchange fees for transactions which they might not have made if cards were not available. Which scenario do you see playing out?

Shawn: Some merchants may only want to focus on cost, rather than benefits. We certainly recognize that, particularly in this environment, everyone wants to lower their costs of doing business. But you're absolutely right that the continued availability of credit is one of the things that is helping drive transactions, even more so in this environment than in general, and we would hope that some merchants will recognize the benefits they're receiving from accepting payment cards. One of the reasons we produced this brochure is to remind people, including merchants, of the enormous benefits that open, four-party payments systems bring to the economy and society.

Aneace: Retailers seem to understand that there are costs involved in offering card payment services, and say that they are willing to cover a certain level of interchange for those costs. However they don’t like the idea of card issuers using their interchange revenues to fund their own loyalty and rewards programs. How do you see this trend evolving, especially given the current financial climate?

Shawn: Merchants are the ultimate beneficiaries of so-called "premium" cards, as there's ample evidence that people who use them spend more, so merchants’ revenues are higher. According to Nilson Report issue #898 from March 2008, as part of a report/article on “Merchant-Funded Rewards Programs”, “the average monthly spending on a credit card with no rewards program is $465. That figure increases to $890 for a rewards card.” So the Nilson data shows that the affluent shoppers who use these cards spend, on average, double what people using standard cards spend. That's a pretty big benefit for the relatively low cost of acceptance.

The interchange wars are over … for now

Many people have been after me for not keeping up with my blog. When the crisis hit everything changed. Things I was writing about suddenly seemed less relevant. Today, I can see more clearly that there are still many topics that are relevant, and even more so now, while there is at least one really big thing that is much less relevant. Interchange wars.

One could imagine that some retailers might fight even harder now to reduce interchange, but I don’t believe that this will be the case. Instead, retailers are happier than ever to have a customer come in and buy something, even if they must pay interchange, which now seems like a pittance in comparison to the huge discounts that they are giving. I’ve heard recently that stores all over the UK are offering 70% discounts.

In a sense, we are going back to the original benefit of credit cards for retailers a few decades ago, where retailers were happy to pay 5% or more for facilitating a fully paid purchase. Now that credit is harder to come by, a credit card customer suddenly becomes much more valuable than a few months ago. And a premium card customer even more so, justifying the even higher interchange fees on premium cards.

I also explored this topic in an interview with MasterCard’s Shawn Miles, Group Head, Global Public Policy and Regulatory Strategy Counsel. Watch this space.

I am a very stubborn man. Those who know me will tell you so. But hey, I'll change every once in a while when something big comes along. It's my blog, right?