Study: Credit crunch opening doors for FIs

BOSTON, Mass. (5/30/08)--Market volatility and the credit crunch are opening doors for financial institutions in two areas, according to studies presented Thursday at the 2008 TowerGroup Financial Services Business & Technology Conference and Exhibition in Boston.

The areas are payments--especially related to the demise of paper checks--and securities and investments.

The credit crunch is indirectly helping accelerate the decline of paper checks, noted Theodore Iacobuzio, managing director and practice leader of TowerGroup's payments.

"The absolute decline in the use of paper checks is one of the great banking headlines of the current decade, and the current credit crunch is playing a key role in driving financial institutions to try to accelerate this trend toward corporate clients," said Iacobuzio.

"With consumers still in trouble on the credit front, credit card issuers are ready to move on getting more B2B (business to business) payments off of checks and onto commercial cards," he said, adding the cards are attractive given typically large dollar purchases and 50% lower loss rates than consumer cards.

Card issuers naturally will migrate to less risky instruments that derive income from transactions and fees, rather than interest, he said. "Yet a key question will be how long lower loss rates and higher fee income can last, Iacobuzio added.

In the securities and investments arena, the securitization of consumer financial products has forever linked Wall Street and Main Street, eliminating "silos" that once defined the financial services landscape, said Rob Hegarty, managing director of TowerGroup's securities and investments).

"The financial system has become completely interdependent, and if there is risk to be taken, there is 'insurance' to be sold in the form of structured products," Hegarty said. This means that market contractions will come faster and sharper, as will subsequent rebounds, he said.

Opportunities for financial institutions exist in the increasing role of Sovereign Wealth Funds and the rise of trading volumes. Hegarty said TowerGroup predicted 2007's hike in trading volumes and expects to see transaction spikes become debilitating to some market players in 2008. Those who invest in the "industrial strength" infrastructure needed for the new "norm" of trading volumes will see strong pay-off during the next year, Hegarty said.

The conference, themed "Charting Your Course for Success," ends today.