Crisis gives national banks an upper hand in payments

I have been thinking a lot about how the crisis is having a different impact on the world’s national banks, which don’t seem to be suffering as badly as the big international players. In the cards and payments business at least, national banks may be able to take advantage of the crisis to get ahead while big international players struggle to survive. Welcome’s customers tend in large part to be national banks, so this is an area that I have been following heavily.

Here are a few comments I pulled out of an interview Friday with Dennis Gartman, producer of The Gartman Letter, a daily commentary on the global capital markets subscribed to by banks, broking firms, hedge funds and mutual funds.

DG: "There will be more consolidations; there has to be. But look at the yield curve—what a year to be a bank! The overnight Fed funds rate, the rate banks are going to pay depositors for their demand deposits or checking accounts is zero. And you’re going to be able to lend that out to hungry borrowers at 7%, 8%, 9%, 10% and 12%. The next three years will be the greatest three years banks have ever seen. Banks will just make money hand over bloody fist in the next three years."

TGR: "Are you talking about the big boys?"

DG: "No, I’m talking about the regionals. The big boys have problems in toxic assets. I am not even sure there is a Peoples Bank & Trust in Rocky Mount, North Carolina, but a bank like that—or the First National Bank of Keokuk, Iowa or the First National, or the Peoples Bank & Trust of Park City, Utah—those are the banks that are going to make lots of money."

TGR: "Do you see an explosion in regional banks? Will move of them come into the marketplace?"

DG: "I think we’ve probably got all we need. It’s just that they’re very cheap."

TGR: "What will the role of the international banks be?"

DG: "Mopping up the disasters that they’ve created for themselves for the past decade, trying to survive, being envious of the decent regional banks that are going to be earning enormous yields on this positively sloped yield curve and wishing they were they."

TGR: "Do you see a role long term for international banks?"

DG: "Oh, sure, of course. How could there not be? It’s a smaller world; it’s an international world; it’s a global world. International banks will be back in full force a decade from now. They’ve got some wound-licking to do, and they’ll do it."

The same thinking appears to apply to national banks in the rest of the world, organizations that somewhat resemble regionals in the US, especially in the way they compete with the international banks. I have been watching how Welcome’s customers have continued moving forward with their credit card loyalty programs and in some cases have even accelerated those programs.

Many of Welcome's bank customers have another distinct advantage over the large international banks. They are both major card issuers and at the same time major acquirers, having kept acquiring as part of their banking activities while the international players have gotten out. Consumer shifts from credit cards to debit cards and prepaid will have less of an impact on a bank that is still active in acquiring. More importantly, owning the full end-to-end payment experience makes it much easier for local banks to innovate and provide greater value to customers and merchants.

Keeping issuing and acquiring under one roof suddenly seems much less risky than focusing single mindedly on credit card issuing alone.