At its recent ‘Charting Your Course for
Success’ event in the US, payment research and strategy firm
TowerGroup outlined how the current credit crunch is playing a key
role in driving card issuers to migrate more payment volumes away
from cheques and onto plastic.

US paym ents convergenceDespite the
troubles caused in the financial industry by the ongoing credit
crunch, there are some opportunities that card issuers can
capitalise on, according to US payment research and strategy
consultancy TowerGroup, which recently held its ‘Financial Services
Business & Technology’ conference and exhibition in Boston, US.
One of the key sessions of the conference, ‘Wholesale and Consumer
Payments Convergence’, was presented by Theodore Iacobuzio,
managing director and practice leader of the firm’s payments
division, in which he outlined how the credit crunch is indirectly
helping to accelerate a notable payments industry trend – the
decline of paper cheques.

“The absolute decline in the use of paper
cheques is one of the great banking headlines of this decade, and
the current credit crunch is playing a key role in driving
financial institutions to try to accelerate this trend among
corporate clients,” says Iacobuzio. “With consumers still in
trouble on the credit front, credit card issuers are ready to move
on getting more business-to-business payments off of cheques and
onto commercial cards.”
Iacobuzio outlined the various factors that are
driving more and more corporations to use cards for payments and
what is driving issuers to offer such solutions. The sources of
cheque usage decline are many, and according to Iacobuzio, “the
middle market holds the key” to continuing cheque usage

US paym ents convergenceConsumers
and corporate clients wield increasing levels of market power with
financial institutions and payment services providers, and
increasing standardisation, regulation and competition are
“commoditising payment processing”, he noted. There is also a
growing momentum in electronic funds transfers (EFT), driven by a
new breed of corporate treasurers who require enhanced cash
management functionality from financial services institutions and
greater levels of information integration and
straight-through-processing. Iacobuzio stated that “EFT tipping
point has been passed for consumers, and will most likely be
reached in two to five years for corporations”.

“Cheque imaging and truncation increase
clearing efficiency but do not in themselves reduce the volume of
cheques issued,” he said. “Mid-market corporations hold the key to
future ACH/EFT volume – if they can be induced to move to an
all-electronic payments infrastructure, the banks will supply
it…and the rest of the industry will follow.”
In relation to card payments, Iacobuzio stated
that issuers are now placing more emphasis on commercial cards
because consumer confidence is waning, with a decline in consumer
credit card spending already being felt in the US.
The focus is now moving to “less risky”
instruments such as commercial cards, which have lower loss rates
and rely on fees rather than interest, Iacobuzio said. “In such an
environment, commercial cards remain extraordinarily attractive.”
He pointed out that 64 percent of US corporates stated in recent
research that cards will be a more important part of their overall
payment strategy in future, and that loss rates are typically 50
percent of consumer cards.
Iacobuzio commented that it is natural for card
issuers to migrate to less risky instruments that derive income
from transactions and fees, rather than interest. “Yet a key
question will be how long lower loss rates and higher fee income
can last,” Iacobuzio noted. He concluded that greater
standardisation and payment integration initiatives will be
enablers for global interoperability of payment processes, and that
corporate cards “will continue to take share from cheques”.

US paym ents convergence

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