Specialist financial institutions and retailers are in a strong position to displace banks in the provision of payment services to business and personal customers, says a new report from the Boston Consulting Group.
Demanding customers, poor organisation, and high costs mean that banks must act now to fend off a growing threat from leaner, fitter nonbank groups already muscling in on one of the most important businesses in financial services, says the BCG.
The BCG points to competition from retailers such as Tesco and Wal-Mart for traditional banking business in the global payments market. Office supplier Staples is even offering small-business banking services.
BCG says the current challenge to banks' historical dominance in payments is just the tip of the iceberg if banks fail to review pricing strategies, product ranges, infrastructure, and customer needs.
Nick Viner, principal author of the report and head of BCG's global payments practice, comments: "With interest rates at a 48-year low, the warning to banks over payments is stark: reform your strategy or watch your revenues walk."
If banks are to face up to the threat they need to get the right people together to meet customer needs, and they must cooperate more closely with other banks to cut their costs, he says.
In its sixth report on the payments sector, BCG surveyed 20 financial institutions, including nine of the top ten global banks. Some 75 percent of bankers interviewed said refocusing on revenues was a top priority for 2003.
One large US financial institution that was interviewed by BCG expects to extract $1 billion of value from seizing opportunities created by the recent reorganization of its payments business. A major European bank anticipates improving its cost-to-income ratio by several percentage points by restructuring its payments business, with each percentage point worth more than $100 million of extra annual profit.
After axing branches during the Internet boom, banks realise that rethinking payments can help them get closer to their customers. Many, particularly in Europe, are seeking ways to make more money from their ATMs (automated teller machines). In Spain, ATMs can be used to buy football tickets; in Portugal they can be used to pay taxes; and in Ireland they can be used to top up prepaid mobile-phone cards. In the United Kingdom, British Airways has advertised on ATM screens.
BCG estimates that the market for payments transactions will grow from $1800 trillion in 2000 to $3000 trillion by 2010 - an increase of 66 percent. But growth in electronic payments methods means that over the same period, average revenue per transaction will actually decline by almost a third.