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Thursday, June 4, 2015

Grow Revenues with Focus on “Transactions” Not Just “Accounts”

Service Charge revenues are continuing to fall for community banks, as shown by the FDIC data in the chart below for banks under $10 Billion in assets. In contrast, PayPal, which cannot offer a single service that does not settle to a bank, now does more revenue than all the Service Charge income for banks under $10 Billion in assets. Why are revenues continuing to fall even as banks re-price service charges?

Service Charge Revenue for Banks < $10 Billion in Millions

                                 Source: FDIC

The reason for the revenue loss is not that banks are losing accounts, but because they are losing revenue-generating transactions within accounts they have, and specifically transactions related to liquidity revenues. Twenty years ago nearly all the payment and purchase transactions for a consumer or small business were checks and cash from their checking account. Service charge revenues associated with payments and purchases were captured by the checking account because virtually all transactions were captured by the account.  The debit card won the transaction marketplace for banks in the first decade of this century, and drove the highest revenues ever earned in 2008 by bank checking accounts with this transaction activity.

                                      Source: FDIC Payments Study
Today, however, consumers and small businesses have a multitude of methods to pay rather than paper checks, which are less than one-fifth of payments.  These alternatives include PayPal, Amazon Pay, AliPay, prepaid cards transactions which are now exceeding check volume, the Target Red Card, mobile wallets, ApplePay, and biller ACH payments among others.  The checking account may be the final settlement for these payments, but they are neutered of revenue by the time they reach the bank.  Each payment provider captures their service revenue, liquidity or loan service revenue and even bank interchange before the transaction settles to the bank account.  Revenues from “accounts” that used to earn for interchange, NSF and other revenues now are captured upstream by the growing payment alternatives.  In fact, 20% of banked consumer transactions that typically have the highest revenue, overdraft fees and interchange, settle to the bank checking account with little revenue. 

The Area in Blue Highlights Transactions Settling to Bank Accounts Neutered of Revenue.

As accounts generate less revenue each year, growing accounts alone to grow revenue is like trying to catch a falling knife.  The revenues your customers used to pay you did not disappear, but have been simply shifted to competitors transactions upstream from you. Banks can grow revenues most quickly by winning back the most profitable transactions from their existing customer accounts, without cannibalizing any existing fees. They can do this by targeting high value transactions with specific digital payments and lending accounts, like the PaySound Checking Plan for consumers and CashFlow Checking for businesses. 

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