AndyB

A post relating to this item from Finextra:

08 February, 2011 Banks must retool payments businesses as revenues dip - BCG Global payments revenues - which typically constitute a third to a half of most banks' total revenues - fell at a compound annual rate of seven per cent from the end of 2008 through 2010, according to figures from the Boston Consulting Group (BCG).

How can banks maintain payments profitability?

09 Feb, 2011 14:41

The report from Boston Consulting Group reinforces the anecdotal evidence that we are hearing from banks all around the world – payments are an essential service, but revenue per transaction is decreasing. In order to maintain overall profitability, financial institutions must take a two-pronged approach – growing transaction volumes and reducing their processing cost per transaction.

It seems from the BCG report that transactions volumes are set to increase all around the world, with some areas experiencing just a moderate growth over the next 10 years, and some areas seeing a massive increase in the number of transactions. Banks now need to plan for these changes – ensuring that their payment systems can process transactions efficiently, as well as being scalable to handle the predicted growth levels.

Efficiency and scalability also impact the bank’s cost per transaction. Out dated, siloed legacy systems are simply going to fall further and further behind, and as each month and year passes, with transaction volumes growing around them and transaction revenue decreasing, old payment systems are going to become more and more untenable for financial institutions to maintain.

We have seen many organisations start to replace or update old payment systems in the past five years, and more and more are getting on the band wagon, but there are still some who are reluctant to take the first step. I can’t deny it is difficult – the analogy that, to me, best sums up replacing a legacy payment system is of a surgeon performing a heart bypass while the patient is walking around. But it’s clear to see that it won’t be long before those institutions left behind risk being held back by systems that simply can’t keep up with the changing needs of their customers.

Comments

Added: 11 February, 2011 - 08:09 | Neil Burton - Earthport - London

Whilst reducing costs through consolidating systems and processes is one way, as you point out it is difficult. It also consumes scarce IT and project resource. For many FIs, the business case is at best doubtful; or at least inevitably low down the priority list.

Are there other approaches? A third party service which optimises only the initiation, capture and pre-processing of cross-border payments is targeting the bulk of the transaction processing cost, according to Boston Consulting Group’s 2009 paper ‘Weathering the Storm’, in which they highlighted pre-processing as a potential area in scope for outsourcing.

Maximising component income may be another. FX fee income is typically substantially more than half of the total fee earned from a wholesale x-border transaction. Whilst a bank’s own correspondent banking and card services provide routes to market for its FX services, can others be leveraged? Can liquidity be generated in other ways, such as partnering with payments service providers, and the use of virtual-account based models?

Can transaction volumes be increased? According to the Boston Consulting Group report to which you refer, there were about 1bn wholesale x-border trns, and 6.8bn retail x-borders transactions, in 2010. According to the World Bank, remittances amounted to $440bn by value; if the average remittance is $220, it equates to 2bn trns. And that data is derived only from officially recorded remittances; it does not include many which today take place through ‘informal’ channels.

Is revenue per payments transaction the only key metric? Whilst some banks see the ‘remittance’ market as unattractive; others (especially those from emerging economies) see it as potential customers abroad. Perhaps a remittance service may best be measured in terms of new customers onboarded, rather than profit.

Recent regulation, notably the Payments Services Directive in Europe, has brought new players and models onto the market. Some work through banks, to banking standards. Outsourcing to a cross-border payments services provider to grow FX margin, liquidity and to re-intermediate into the international retail payments market requires relatively little investment, IT and project resource.