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Banks must wake up to payments challenge - BCG

03 March 2009  |  11867 views  |  1 US note back

Banks around the world must take forceful steps to protect their payments businesses or risk a further dent in their profits as the financial crisis continues, according to a new report by the Boston Consulting Group.

The report, 'Weathering the Storm: Global Payments 2009', says that although payments businesses have proved to be reliable revenue generators - global payments revenues hit $805.1 billion in 2008, up from $654.3 billion in 2006, and are forecast to reach $1.4 trillion by 2016 - their momentum is slowing. The darkest cloud over the industry is the steady decline in average revenues per transaction. For banks, BCG estimates that these revenues will fall from $0.94 to $0.88 for domestic payments and from $9.33 to $7.50 for cross-border payments from 2008 through 2016.

According to the report, a variety of factors are contributing to price erosion and margin pressure, including regulatory pressure, intensifying competition, and infrastructure investments. The net result is higher costs, but not necessarily higher revenues.

Niclas Storz, a BCG partner and co-author of the report, says banks could address the business models for retail and corporate payments separately.

"On the retail payments side, the key to success will be a lean, end-to-end business model aimed at achieving the highest possible level of efficiency," he says. "On the corporate side, the key will be end-to-end service excellence rather than focusing solely on efficiency."

According to the report, banks in Europe should continue to avoid massive Sepa-related investments and policymakers should stop driving payments providers into unnecessary expenditures and focus instead on other initiatives - such as setting industry standards for electronic and mobile payment instruments and improving payments inefficiencies within specific countries through incentives.

Large automated clearing-houses (ACHs) in Europe are also advised to wait until it is apparent whether full Sepa will actually be achieved before consolidating volumes onto one platform. ACHs should make strategic acquisitions in order to secure volume, says BCG, but should take a wait-and-see approach before carrying out full migration.

In North America, the imminent challenge for payments providers is maintaining growth amid the credit crunch. The winners, the report says, will be those banks that capture a greater share of consumers' balance sheets through loyalty strategies that offer flexible rewards tied to overall relationships. In Latin America, the main challenges are migrating consumer payment preferences from cash to cards and encouraging the adoption of cards by both unbanked and underbanked consumers.

The payments opportunity in the Asia-Pacific region, as in Latin America, begins with the large number of financially excluded consumers - those who do not have bank accounts. Mobile phones can thus play a game-changing role in emerging Asia-Pacific markets for distributing financial services in general - and payments specifically, says BCG.

Comments: (1)

Jeremy Kidd
Jeremy Kidd - Cargill, Incorporated - Minneapolis 04 March, 2009, 16:50

One thing I was surprised not to see in the BCG executive summary as a way for banks to differentiate in the wholesale payments space was around the end-to-end financial supply chain. I think banks that start providing ways for corporate customers to provide rich data along with payment transactions, and tie incoming payments to invoices will get a lot of interest from MNC's looking to better manage customer credit and cash visibility. That's the kind of value-add banks need to start doing as the transaction-processing side of payments becomes more commoditized.

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