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Back to Basic Banking (U.S.)

By Kevin Mellyn

It is a simple—if insufficiently acknowledged—truth that banks make money primarily from their balance sheets. Their core business is deposit-taking, the ability to hold and lend out “other people’s money.”

Initiating and receiving payments for customers is a substitute for paying them interest for the use of their money—payment in kind instead of in cash. Deposit-taking as the basis for lending is the historic foundation of banking. Even today, individuals and businesses will forego interest on deposit accounts and pay higher rates of interest on credit accounts because these accounts offer payment functionality.

Such price differentials are substantial and represent a payments liquidity premium. That premium is the largest number in the payments cost/value equation in most banking systems, although its size varies considerably with national banking industry structure and the market alternatives available to bank depositors.

Banks that understand and have internalized this insight will focus on developing and executing programs and value propositions that align the interests of payers and payees in ways that maximize the liquidity premium on both deposits (debit cards) and revolving lines (credit cards). However, these banks are relatively rare; there is a sizable opportunity for most banks to shift the transaction patterns of defined customer segments in ways that maximize the liquidity premium while delivering real value.

1. FDIC, Statistics on Depository Institutions, 2007; MasterCard Advisors analysis.

The liquidity premium accounts for 66 percent of u.s. payments revenue
U.S. Banks with Assets Greater Than $1 Billion
All Figures in Billions

Source: FDIC, Statistics on Depository Institutions, 2007
Analysis: MasterCard Advisors