Report by The Boston Consulting Group Tells Banks Around the World to Overcome Significant Threats to Payments Business or Risk Further Dent in Profits as Financial Crisis Continues
Against Backdrop of the Credit Crunch, Banks Must Renew Both Retail and Corporate Payments Strategies to Cope With Tighter Margin Pressure, Increasing Customer Demands, and Shifting Regulatory Constraints
| Source: The Boston Consulting Group
BOSTON, MA--(Marketwire - March 3, 2009) - Banks must take forceful steps to overcome major
challenges to their payments businesses if they are to bolster their
overall profitability amid the ongoing financial crisis, according to a new
report released today by The Boston Consulting Group (BCG).
The report, "Weathering the Storm: Global Payments 2009," BCG's ninth major
study of the payments industry, 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. Regulatory forces are playing a prominent role
in some regions, such as the Single Euro Payments Area (SEPA) in Europe and
congressional pressure on credit card revenues in the United States. Also,
competition is intensifying, and infrastructure investments (both
obligatory and discretionary) are leading to higher costs but not
necessarily higher revenues. Furthermore, the payments needs of different
customer segments vary increasingly, while all customers are becoming more
sophisticated and demanding.
"The best way for banks to combat margin pressure is to address the
business models for retail and corporate payments separately," said Niclas
Storz, a BCG partner and coauthor of the report. "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. On the corporate side,
the key will be end-to-end service excellence rather than focusing solely
on efficiency."
The report says that convenience, price, security in transaction
processing, and accessibility of funds are most critical for retail
customers -- defined as individual consumers and small-to-medium-sized
enterprises. But for corporates -- defined as midsize and large companies,
as well as multinational enterprises -- transaction processing services
have become a commodity. Their needs are more focused on flexible, highly
customized services in cash management.
The report offers an analysis of the retail payments market by region,
while examining the corporate (wholesale) side of the market as a single
entity.
According to the report, banks in Europe should continue to avoid massive
SEPA-related investments and should examine the forces that will drive
international strategies over the next few years. 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. Moreover, since insourcing and
outsourcing are not cure-alls for cost reduction, every sourcing
possibility should be studied on a case-by-case basis to see whether there
are opportunities for true net synergies.
Large automated clearing-houses (ACHs) in Europe, for their part, should
wait until it is apparent whether full SEPA will actually be achieved
before consolidating volumes onto one platform. True scale benefits will
come only if all transactions can be processed according to the SEPA
scheme. Also, ACHs should make strategic acquisitions in order to secure
volume, 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 demand deposit account is
suffering from tightening net interest spreads. Noninterest income sources
such as overdraft fees and interchange revenues are being squeezed. Banks
in North America need to develop a payments strategy that both straddles
product silos and leverages payment services to build deposit and lending
businesses. 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. Although it is not economically viable to
acquire and serve these consumers through traditional bank-branch networks,
the cost to serve them through mobile phones is relatively low. Mobile
phones can thus play a game-changing role in emerging Asia-Pacific markets
for distributing financial services in general -- and payments specifically
-- through an enhanced customer experience that includes speed, simplicity,
flexibility, bundled product offers, constant availability, and overall
convenience.
On the corporate payments side, given the multiple challenges facing banks,
the development and implementation of a sustainable business model -- made
up of both a delivery and an operating model -- is critical to success, the
report says. Banks must define the best delivery model (the customer
segments to be served, regions to be covered, and the products and channels
required) adequately, then align their operating model (end-to-end
processing procedures, IT infrastructure solutions, and sourcing policies)
with the delivery model.
Since most banks serve both wholesale and retail payments customers, one
operating model has traditionally been used to deliver products to both
segments. Yet rising customer demands have put pressure on banks.
Transaction banking units must thus confront the dilemma of whether to
continue using one comprehensive operating model -- in order to help
achieve scale and cost efficiency -- or to split their operating model into
wholesale and retail components in order to provide more customized
solutions (at the expense of economies of scale and at structurally higher
costs). Global banking giants may end up having to forge a completely
separate, end-to-end business model for their wholesale transaction banking
activities, according to BCG.
Ultimately, the report concludes, the strongest institutions in the
wholesale transaction banking business will be those that are able to
meticulously monitor the performance of their chosen business model and
adjust it accordingly.
To receive a copy of the report or arrange an interview with one of the
authors, please contact Eric Gregoire at +1 617 850 3783 or
gregoire.eric@bcg.com.
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