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

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