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Chris Zagorski Archive for May, 2010
Fees are not the answer to profitability
Nothing annoys consumers more than paying for things that used to be free or feeling that they are being nickel and dimed. As the banking industry struggles with how to recoup money lost to overdraft fee income, they are wise to take some lessons from the airline industry.
The airline industry attempted to stem huge financial losses by charging a wide variety of fees. Flyers now pay to book the ticket, redeem frequent flyer miles, make a particular seat choice, change a ticket, check bags, obtain a pillow or blanket, and for food and drinks.
Unfortunately, added fees haven’t propelled the travel industry into profitability. AMR, parent of American Airlines, posted a $1.5 billion loss. US Air, Continental, United and Delta also posted losses. Combined, the industry lost $3.4 billion in 2009.
Southwest, however, was one airline to post a sizeable profit. The company heavily advertised “Bags Fly Free,” and that strategy may have paid off. The company’s Chairman and Chief Executive Gary Kelly attributes the success, in part, to the fees that its competitors are assessing. In a January conference call with Wall Street analysts, he was quoted as saying, “I hope they charge $100 a bag. That would be terrific. We’ll have 100 percent load factors.”
Going beyond the fee
With customer satisfaction, loyalty, and brand image on the decline over the past few years, banks can hardly afford to alienate customers. Rather than focusing on what fees to charge, the industry should focus instead on innovating services and products that give people confidence. It’s not that fees are never justified – it just might not be wise to assess fees on previously free services. In fact, a recent JD Power study indicates that high customer satisfaction rates are possible to maintain as long as consumers perceive that they are receiving sufficient value in exchange.
At the end of the day, customers know that it’s their deposits that fund the banks other, more profitable, activities. So while consumers need a place to bank, the banks need consumers just as much. Shouldn’t there be recognition of the mutual need from both parties?
Innovation and apps in the payment industry
I just attended my second Federal Reserve conference of the month – this one was all about payments. If there is anything remotely close to innovation happening in banking right now, this is where it is. There were a number of good speakers, including Dave Evans of pymnts.com, who addressed the significant amount of innovation going on in the payments industry.
To summarize, innovation in payments has traditionally happened slowly, but the pace has accelerated substantially in the last year or two, and it will accelerate even more with the advent of cloud computing. This is because changes will no longer need to be made to lots and lots of individual terminals but can be made all at once in the “cloud” and loaded onto all of the separate devices. Payments will also eventually be bundled with other things such as advertising.
Apps for payments are also appearing, such as Square for iPhone. Paypal already has about 25,000 apps. Lots of apps means more users, and everyone is racing to develop the most successful platform because they will, in effect, own the app store. Basically there will be a small number of software platforms that “runs the rails” (i.e. use the existing payments networks), and those will support all of the apps.
Ultimately, payment apps will dramatically reduce the cost of innovation, and the innovation will move from the incumbent players out to the edges of the competitive landscape, or to the smaller players. It will be difficult to take payments “off the rails” because there are compliance and security issues, but that will ultimately happen as well. Look to companies like Apple and Paypal for interesting developments in the near future.
If you’d like to know more about what Mintel Comperemedia is seeing in direct mail and email regarding payment apps and innovation, please contact info@comperemedia.com or visit www.comperemedia.com.
It’s all about P2P (person-to-person payments)
Person-to-person (P2P) payments was one of the key themes of last week’s Card Forum gathering in Orlando, Florida. In a session called “The Maturing of Alternative Payments: Friends or Foes?” Rene Pelegero, Senior Director, Industry Relations and Strategy at PayPal pitched his company as a partner to the banks. Jason Hills, General Manager, Major Financial Institutions at CashEdge and Howie Wu, VP, Virtual Banking at BECU followed with a separate session presenting the benefits of Popmoney, the new P2P payments solution from CashEdge.
PayPal was launched in 1999. It now has 10,000 employees and 84 million active customers (out of 212 million accounts) and its size makes it difficult to ignore. Rene was keen to dispel the myth that PayPal is taking away business from financial institutions. Approximately 90% of PayPal transactions run through the ACH system or via bankcards and PayPal’s strategy is to work together with the financial services industry by providing a range of services.
Jason Hills at CashEdge quoted some interesting statistics from the company’s fourth annual survey of online banking consumers. According to the survey, 22% of consumers would switch banks for a P2P service and 60% of the unbanked would open an account if it had a P2P capability. Like PayPal, CashEdge has been in operation since 1999 and now boasts 650 banks who are using its Transfer Now “me-to-me” technology.
According to the CashEdge survey, 77% of online banking consumers would prefer to use their own bank rather than an outside service such as PayPal or Google Checkout for P2P payments. The resulting solution from CashEdge is Popmoney, an email and mobile P2P service which was launched in December. Six banks have already signed up for the service with 175 slated for launch by the end of the summer. Howie Wu spoke of the recent success of Popmoney at BECU where P2P transactions are up and the average transaction is $450. This is well above the norm for Popmoney users indicating that customers are taking advantage of the service for larger ticket transactions and not just for splitting the bill after dinner.
Last year Wells Fargo launched customer-to-customer mobile transfers and has been actively promoting the service via email, according to Mintel Comperemedia. In March we saw the launch of Buxter, ClickandBuy’s P2P Facebook application. In April Apple’s patent applications indicated that the company is considering the mobile payments business and could shake things up by facilitating payments from an iTunes account.
It appears that the race is on to develop the most effective approach for P2P which will go hand-in-hand with the evolution of mobile payments at the point-of-sale. Many different types of companies are looking to get a piece of the action, ranging from traditional banks, to associations, to alternative payment providers. All of this innovation is good for the industry and will ultimately be good for the consumer but, at the end of the day, the key to success will be simplicity and ease of use.
Card Forum wound down on Tuesday leaving attendees with plenty of food for thought as we enter a new era for the payments industry.