Magazine article Independent Banker

Teeter-Totter Effect

Magazine article Independent Banker

Teeter-Totter Effect

Article excerpt

Rise with Internet billing today or fall in keeping tomorrow's customers

Bankers are right to be concerned that the Internet could be a mixed blessing. To be sure, they should gain revenue advantages on the retail side by charging for services such as electronic bill payment and presentment systems and by improving their cross selling. But what about the commercial side of the bank? There the effects of the Internet are much more complicated.

Already cash managers are trying to figure what to do about potential revenue decreases as the processing of paper bills declines and third parties lure bank customers with competing services. Indeed, some bankers fear that the Internet represents the first step on a downward spiral in commercial banking that begins with losses in cash management and lock box services and ends with banks slowly and silently dropping out of the payments loop.

This extreme scenario sees many banks forced into such low-margin services as settlement and frozen out of potential profits from future services.

Yet the advance of electronic banking is inevitable. The fate of commercial banking could depend on actions taken-or ignored-in the coming months. Research suggests there will be widespread market acceptance of electronic bill presentment and payment. According to industry estimates, consumers access about eight million bills online each month. By 2002, this may grow to 2.2 billion, representing 19 percent of all bills paid.

This trend is worth examining because it will affect at least five areas of commercial banking.

1. Customer Relations. The early success of nonbank-owned, thirdparty bill providers could result in their building significant direct relationships with merchant billers. This would effectively disintermediate the banks, reducing their chances to cross sell their customers to more profitable commercial banking products.

2. Remittance Information. Money and information travel together. Firms that process payments electronically will not only be paid for their services, but will be positioned to mine consumer data to cross sell new products and services.

3. Lockbox Services. How rapidly will revenues disappear for collecting and processing payment and remittance information on behalf of billers? In the near term, probably not much will happen.

Demand for electronic payments remains low and investments in existing systems remain high. Billers have invested substantial time and money on legacy systems for receivables and payables. Similarly, banks have invested heavily in paper check processing systems and technology. For both, the costs of moving away from paper processing will be considerable. However, over the longer term, the shift from paper to electronic billing will have a significant impact.

4. Float Revenue. Who among customer groups, from small consumers to large businesses, will make payments before the due date once remittances are electronically dispatched and immediately posted? …

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