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Measuring and communicating the value of a bank’s payments business
This paper explores the following paradox: the payments business offers tremendous opportunities, yet most bank payments executives struggle to obtain strategic levels of funding. A framework is presented for valuing the payments business, evaluating key drivers of shareholder value: scale dynamics; ancillary revenues generated by payments transactions — primarily balances and FX; stability and diversity of cash flows; and strong return on capital resulting from the bank acting as an agent, not a principal. An analysis is then provided of the reasons why bank executives and institutional investors fail to understand the value of the payments business. (i) With some notable exceptions, banks fail to organise their payments activities into material business units and do not publish financials for their payments activities. Payments businesses, such as treasury services, are often zeroed-out at the general ledger level, showing up as net fees and non-interest expense. (ii) Most equity investors and even some senior banking executives are unfamiliar with the payments business and its profitability dynamics. (iii) Confusing and improper cost allocation and valuation methodologies distort the profitability of payments businesses. (iv) Payments businesses may be strategically subordinate to lower return on equity (ROE) businesses such as credit. The paper closes with a suggested course of action for bank executives: (i) ensure the business is valued correctly; (ii) improve the visibility of the business, both within the bank and with external investors; and (iii) ensure the payments business takes greater importance in the overall strategic direction of the bank.
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David Robertson is a Partner with Treasury Strategies, Inc. and helps financial services providers improve competitive position, client satisfaction and financial returns. He has led the development of many of the firm’s proprietary methodologies in deposit engineering, pricing strategies and new product development and is the co-author of Treasury Strategies’ groundbreaking white paper, ‘The Next Generation of Treasury Services’. Prior to joining Treasury Strategies in 2002, Mr Robertson spent 18 years in banking, consulting and the public sector. He holds an MA in English Literature from Northwestern University, and a BS in Finance from Indiana University. He is the former Chair and President of the Chicago Jaycees. His interests include education, literary theory and music. He is a former high school teacher and has published three papers and a book chapter on the topic of special education and systems of care.