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The Credit Crunch Will Hurt Payments, But Commercial Business May Offer a Silver Lining

TowerGroup says the payments business is headed for some rough times, but that commercial payments could prove most lucrative.

To make a buck in the current economic environment, banks must ramp up their wholesale payments businesses, which offer a better opportunity for gains than the consumer side, according to Ted Iacobuzio, managing director of payments at TowerGroup (Needham, Mass.). During a teleconference at the end of October on payments trends for 2009, Iacobuzio outlined 10 factors that will drive the payments space in the coming year (see table, below). First and foremost, of course, is the credit crisis.

"There is no aspect in payments that the tentacles of the credit crisis monster are not touching," he said. The crisis's effects, however, may be paradoxical in nature, actually leading banks to spend more on payments technologies, especially around risk management, decisioning, customer information management and fraud/AML models, Iacobuzio pointed out.

But banks will have to overcome further grief in lending, including on the credit card side, Iacobuzio continued. "There will be a deterioration in credit card lending," he said. "The emphasis will be on the health of the existing portfolio."

Ultimately, Iacobuzio explained, it will be a question of funding. "The engine that let the card business take all this on was asset-backed securities," he noted. "Now we're seeing accounting changes to repatriate this money back to banks' balance sheets." Companies can either fund card lending from deposits or freeze lending, Iacobuzio added.

The fallout from the crisis, however, goes beyond credit cards. For instance, Iacobuzio said, some of the things people would normally pay for with revolving credit might now go on their debit cards, which may expose debit cards to credit risk. "Banks need to watch this," he stressed. "Are they putting their NSF [not sufficient funds] protection in jeopardy?"

A Silver Lining

Despite the economic challenges, according to Iacobuzio, there is a silver lining: commercial banking. "Commercial loans outstanding are showing gains in the U.S. and Eurozone," he reported. "[Commercial] lending will pick up in the fourth quarter [of 2008]." Iacobuzio reported that the global transaction services area accounts for 18 percent of banks' revenues. "For a large, vertically integrated bank, this adds up. So there is growth in banking, but it's on the wholesale/commercial side," he said.

Within transaction services, Iacobuzio noted, checks add a wrinkle. Although research shows a reduction in check volume in the U.S., the decline is primarily on the consumer side, Iacobuzio said. "There is still a tremendous infrastructure in the [corporate] back office for business checks," he observed. "There is also a menu of business practices that are tied to the paper check." Banks must show their commercial clients the value of electronic payments, Iacobuzio advised.

Those banks that invest in technology such as an enterprise payments architecture will come out ahead, he said. "An integrated payments solution is necessary to please customers," Iacobuzio asserted. "The most important aspect is customer information management and decisioning — who are your customers, what do they want and how do you get to them?"

Top 10 Drivers in the Payments Space for 2009:
1. Credit crisis
2. Regulation and litigation
3. Consolidation
4. New threats, new forms of risk
5. Convergence of payment types
6. Globalization will be "put on ice"
7. Transparency
8. Fragmentation of payment networks
9. Customer demands
10. Developing new products based on customer demands
Source: TowerGroup

This article was updated on 11/19/08 to include additional information.

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