By Scott Hodgins
My clients often wonder if they are driving the payments train or if that whoosh sound they hear is the train passing them by. We’ve heard about the massive changes in the payments world that are either here already or rapidly approaching: mobile wallets, prepaid debit, real time P2P payments, Durbin, etc.
Cornerstone Advisors estimates that the credit union industry makes between $6 billion and $8 billion annually in non-interest income from payments services alone, and regulatory pressure is pushing these numbers down. According to the National Credit Union Administration, annualized first quarter 2013 net income for the CU industry was also about $8 billion. So we need to look no further than NCUA’s data to find a big reason to be concerned about payments. What’s at stake? Only the profit margin for an entire industry.
Yet most credit unions do not even take a stab at measuring the performance and profitability of their payments channels.
Cornerstone is a huge proponent of developing a detailed, quarterly review of the profitability of all payments channels: debit, ATM, checking, online bill payment, credit cards, etc. We call this the “Payments P&L.” A P&L for the credit card channel might look like this:
Understanding the profitability of payments channels allows payments planning to start from an educated, fact-based perspective. The next logical step is to track payments benchmarks in what we call the payments scorecard–a way to track performance vs. industry standards, trends, acceptable performance levels, etc. For example, part of a payments scorecard to address debit cards might look something like this:
Implementing a disciplined approach to payments benchmarking and profitability serves two purposes:
- It allows the credit union to draw fact-based conclusions and make plans for its payments strategy with solid numbers to back up its thinking, reducing “hormonal” or “I heard…” decision-making.
- The mere presence and regular discussion of a payments P&L and payments scorecard underscore to all employees and managers just how crucial the topic is to the financial well-being of the credit union.
The truth is, no one really knows what will happen to the payments industry over the next five years. We do know, however, that only credit unions that understand their existing payments performance will be able to make fast, educated decisions as payments standards become established and require credit unions to react.
Scott Hodgins is research director for Cornerstone Advisors, Inc., a Scottsdale, Ariz., consulting firm, CUES Supplier Member and CUES strategic partner.
Learn how to get the most from your payments channels by attending “The Future of Payments,” presented by Cornerstone Principal Terence Roche on Nov. 4 during CUES' CEO/Executive Team Network in San Diego.
