Monday, December 8, 2008
David Fish, Senior Analyst, Credit Advisory Service at Mercator, said that in order to maintain market dominance, consolidation was inevitable in the top-tier financial institutions.
"Yes, the economy is a driver, and key indicators of merger activity and consumer payment trends point to a recession in its beginning stages, but really it's more of a backdrop," Fish said. "More importantly, I think consumer and merchant sentiment in the U.S. regarding financial services is shifting. They are asking more of their banks. Clients now want a better relationship, to have an element of partnership."
Mercator believes the recent mega-mergers originated – aside from the obvious financial turmoil those acquired banks suffered – from a simple need to compete.
"With Bank of America and Wells Fargo now truly national banks – and the top four banks holding $7.5 trillion of the banking industry's $13.7 trillion in assets – there are opposing needs affecting trends in bank marketing," said Elizabeth Rowe, Group Director of Mercator's Banking Advisory Services division. "The largest banks need to gather more core deposits and reenter the retail lending market.
"For smaller banks, there is a need to protect market share against large banks, since many are entering new geographical markets with their acquisitions and subsequent expanding branch and ATM networks."
Additionally, Fish feels smaller ISOs, regional banks and credit unions may have the upper hand when it comes to merchant and consumer stickiness. Overdraft charges, ATM surcharges and other fee-based revenue inflate the profits of larger financial institutions, but those cardholder costs are also the very thing that causes consumer discontent.
"I think that the level of satisfaction with smaller financial institutions is somewhat higher than with the larger ones," Fish said. "I think the more indispensible you are as a partner to your clients than the less likely they are to seek a new relationship. That kind of value add is something I've been talking about for years. Develop a package with the most effective number of services that makes the most sense for your organization and the merchant.
"It may take some fine tuning, but certainly anything related to cash-based payments is fair game, including ACH processing, certainly electronic checks. If it's an e-commerce merchant, there are myriad alternative payment platforms. And gift cards in this space are still big, even though they've been getting a lot of bad press lately."
Fish noted a significant shift toward debit payments and away from credit. This shift, coupled with the tightening credit environment, will accelerate consumer adoption of prepaid and debit payment types, including cards and checks. Cash, holding a low profile the past few years, will likely also see a resurgence.
Fish said Mercator recognizes the value inherent in all types of prepaid instruments. The firm believes private label cards (merchant-branded, closed loop gift cards) are an important value add for ISOs to bring to the market as expeditiously as possible. Gift cards are an excellent retention strategy because the nature of the integration of gift card processing helps in the overall support of payment acceptance at the POS.
"It really boosts that merchant and consumer sticky factor exponentially," Fish said. "And like I said, the more dependent the merchant is on their provider, the less likely they are to attrit.
"What it boils down to is that smaller institutions, in order to compete against these big guys, have been moving toward this banking model for a number of years now. I think we're going to see more innovative strategies being used at community and regional levels. And those small institutions are going to try to develop as much value for their customers as they possibly can."
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