Electronic Payments Are Poised To Ride Out Economic Storms

The electronic-payments industry can expect the well-established consumer shift away from credit cards and toward debit and prepaid cards to continue in today's turbulent economic climate, but other changes are afoot as the financial landscape rapidly changes, according to Maynard, Mass-based Mercator Advisory Group Inc. Some of the most significant could be the re-evaluation by banks of their ATM strategies and emergence of merchant-funded discount networks that retailers hope would help them keep customers, and credit card issuers bet would get consumers to boost spending on their cards. With a seemingly endless stream of reports about slowing retail sales and other bleak economic news coming out this fall, merchants have a vested interest in retaining customers, an interest that aligns with the interest of card issuers to keep transaction volumes up. Thus, Elizabeth Rowe, group director of banking advisory services, said in a Mercator Webinar on Friday that her firm expects merchants to entice buyers with what could be new perks offered by card issuers. “We think there's going to be a real push toward merchant-funded discounts,” she said during the Webinar, which dealt with the effects of the changing economy and recent bank mergers on payments. While not offering any examples yet, she predicted such merchant-funded networks would feature strong national and regional brands offering a “Chinese menu of discount options.” Such discount networks are likely to be offered by the largest credit card issuers in a consolidating market, Mercator predicts. Merchant resistance to funding discounts probably will fall as merchants struggle to retain market share and customer loyalty. “You want to do anything you can” to build repeat business, Rowe said. Should their larger brethren roll out such networks with big merchants, smaller financial institutions will try to compete by sweetening rewards on both credit and debit cards, and possibly even graft rewards onto prepaid cards, Mercator predicts. Some issuers may try to cast themselves as environmentally friendly, a strategy “that doesn't generate profits but is a strong marketing message,” said Rowe. The possibility of credit card issuers creating new transaction-generating perks with merchants, however, probably won't change the secular trend of consumers putting more transactions onto debit cards, a trend noticeable in recent Visa Inc. and MasterCard Inc. operating data (Digital Transactions News, Nov. 4). That trend could even spill over into cash, which still would benefit payments players because it could spur more ATM usage, according to Mercator. David Fish, a senior analyst in Mercator's credit advisory service who called the ATM “somewhat of the forgotten channel for dealing with customers of payment products,” predicted big banks seeking more revenues might try to capitalize on this development by increasing or reinstating ATM surcharges. They also might link ATM transactions to non-sufficient funds (NSF) fees or provide debit card holders with so-called “negative-balance” loans. Mid-sized and small bank and credit unions could try to compete by joining surcharge-free networks in order to increase their ATM footprints. On the other side, financial institutions are looking to enhance the functionality of their ATMs by retrofitting them to dispense prepaid cards and stamps, and offer prepaid card reloads, cell-hone top-ups, and other new services. Mercator said recent bank mergers?JPMorgan Chase & Co. taking over Washington Mutual Inc., Wells Fargo & Co. absorbing Wachovia Corp., and PNC Financial Services Group Inc. buying National City Corp.?would result in banks with overlapping ATM networks. The merged banks will “begin the process of selectively eliminating the number of off-premise ATMs due to saturation,” Mercator said. After the recent acquisition deals are completed, Bank of America Corp., which bought Chicago-based LaSalle Bank last year, will have 18,753 ATMs; Chase, 13,112; Wells Fargo, 12,208; and PNC, 6,017. Despite the recent volatility, the underlying shift toward electronic payments will continue even with changes in the types of transactions, Mercator predicts. That's good news for issuers, processors, and merchant acquirers alike. “Payments still provide no small measure of insulation against market and economic volatility,” said Fish.