How Changing Payments Impacts Community Bank Strategy

One item that should be on every bank’s strategic horizon is how to adapt to the changing face of payments. If you are one of those bankers that say, “Cash won’t go away in my lifetime,” you could be right. However, we would posit that the sentiment is the wrong way to frame the challenge and the rationalization that you don’t have to worry about cash, checks and the payment channel will likely lead you to disaster. In this article, we highlight the newest data from the Fed and what it might mean for every community bank.

Asking The Right Question

The question shouldn’t be “When will cash go away?” but “When will cash transactions be reduced to the point that it is no longer economical to support?” The answer is likely – less than ten years - which means how to manage payments should be in every bank’s strategic plan. The problem with cash, unlike every other payment method, is that it is the highest risk and the highest cost by a large factor for every counterparty. When you consider theft, counterfeiting, loss, cash counting, cash management, reporting, and transportation, managing cash cost the consumer, the business, and the bank a material portion of their operating cost.

In other words, every party is motivated to do away with cash, and the only thing that is stopping each party is training, education and a little infrastructure. Looking at the just-released Fed data below, it can be seen that cash, as a percentage of consumer transactions, has dropped from 31% to 26%. Cash transactions have been replaced by credit, debit, and electronic transactions. 

Once cash drops to about 15% of all transactions, it may become be too expensive to support. Checks would have gone away a long time ago except for the fact that our industry moved to Check 21 and imaged the check to reduce cost.

Throughout time, cash has been the most common medium for transactions. 2018 marks a demarcation as, driven in part by e-commerce, credit and debit usage increased, cash declined and debit became the most popular transaction method for the first time in history.

Moving To Debit Cards

US debit penetration is around 90% as most banks provide a debit card with the opening of a checking account. The average bank customer uses the debit card some 23 times per month for an average transaction size of approximately $39. While those seem like impressive numbers, community bank customers are well below that as the national bank customers drive the bulk of that usage which is ironic since they stand to make relatively less off the interchange fees.

By pushing more customers to use debit cards, community banks not only save money by not having to process cash or checks but can generate revenue. This is an untapped opportunity for many community banks that also suits long-run strategic objectives in transforming the branch.

Debit Card Marketing and Education

Currently, the bulk of debit card usage comes from general retail purchases, mostly food. This leaves enormous opportunity for community banks. Gifts, transfers, bill pay, and housing-related expenses primarily go to credit, check or cash now but are ripe for debit usage. What is missing is the ability for many merchants such as leasing companies, homeowners associations, and others to take debit payments, which is another area where community banks can help.

Debit Card Product Design

Giving your customer the ability to control their debit card limits, where the pay and how often all fall under debit card controls and is one of the most sought after features by bank customers. Being able to limit charges by geography, by merchant or by transactions (below) gives customers a vast amount of control and not only helps limit fraud but helps reduce misspending by teenage children or elderly parents.

Most community banks spend an excessive amount of time manually managing lost/stolen cards, suspending cards for customers that travel or helping their customer manage their card, all of which can be done online or via mobile should a community bank want to upgrade their technology.

Many community banks dismiss adding on these features on to their mobile platform because of the upfront cost but miss the larger picture of the enhanced customer experience; operational cost saves and the strategic advantage of moving more transactions to the debit card. 

Debit Rewards Program

In addition to more marketing, education, and product placement, some financial institutions have found success in offering a debit rewards program. Debit card reward programs remain uncommon among community banks, but some financial institutions have found instant success offering up to 1% cash back or points for spending in targeted categories. As more community banks develop rewards programs, you will see more promotions, particularly in areas of low debit card share like rent and P2P payments to boost usage and open up new categories. All banks need to do is to go through their check reports and see where the segments that have the most substantial check activity and then target those categories to drive both revenue and cost savings.

Putting This Into Action

The face of payments is rapidly changing, and community banks must be proactive in moving their customers to new payment channels. As banks move to real-time processing, the trend away from cash will accelerate, and electronic transfers will gain significant market share both because of the lower cost and because of the customer experience.

As check and cash usage continue to drop, banks that are not proactive will be hamstrung to reduce their operating cost and will be at a strategic disadvantage. Figuring out and implementing a plan now will help banks better prepare for the future. 

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This commentary on this blog reflects the personal opinions, viewpoints, and analysis of the author and not CenterState Bank. This blog is only intended to provide general education about the banking industry, leadership, risk management, and other related topics and is not intended to provide any specific recommendations. Banks should consult their professionals and fully explore any opportunity and risk referenced herein.

CenterState Bank is a $17B, publicly traded community bank in Florida experimenting our way on a journey to be a $25B top-performing institution. Financial information can be found HERE. CenterState has one of the largest correspondent bank networks in the banking industry and makes its data, policies, vendor analysis, products and thoughts available to any institution that wants to take the journey with us.