Major Banks Urged to Retool Their Payments Businesses

Major banks must adapt to sweeping changes in the payments industry in order to reverse revenue and profit declines and chart a course to sustainable growth, according to a new report by The Boston Consulting Group (BCG).

 

The report, Global Payments 2011: Winning After the Storm, notes that traditionally strong payments businesses have shown severe weakness in recent years. Although many of these businesses are beginning to recover, banks must determine whether current business models (target customer segments, product portfolios, regions, and channels) and operating models (target processes, IT, sourcing, and organization) are well suited for shifting industry dynamics. Winning strategies will vary, depending partly on whether target markets are mature in terms of overall payments infrastructure and sophistication, or still developing, because the two types of markets will evolve differently going forward. In either case, banks seeking to expand their payments businesses must strive to minimize organizational complexity.

 

“The size of the prize is too large not to take action,” says Niclas Storz, a BCG partner and a coauthor of the report. “We estimate that by 2020, the global payments market will be worth $782 trillion in noncash transaction values and $492 billion in transaction revenues.”

 

Global payments revenues, which typically constitute one-third to one-half of most banks’ total revenues, fell at a compound annual rate of 7 percent from the end of 2008 through 2010, according to the report. BCG defines payments revenues as direct and indirect income generated by any payment service, including transaction-specific revenues as well as card and account maintenance fees and spread income generated from current accounts (also known as checking or demand-deposit accounts). Fees for overdrafts and nonsufficient funds are considered transaction-specific revenue.

 

In Asia-Pacific, retail payments are primed for growth, the report says. But banks will have to tailor their business and operating models in order to balance growth aspirations with efficiency goals. In the mature Asia-Pacific countries, growth discussions must focus on existing customers and opportunities to increase share of wallet by improving the convenience of payment solutions for consumers and merchants. Yet the picture is different in emerging markets.

 

“Growth in emerging Asia-Pacific markets will be generated by the gradual financial inclusion of unbanked consumers and the rapidly expanding footprint of the electronic-payments infrastructure,” said Stefan Mohr, a BCG partner and a coauthor of the report. “Shifts in spending behavior and payment preferences, especially on the part of the emerging digital generation and those consumers moving from rural to urban areas, will also be a prime factor.”

 

Global Wholesale Transaction Banking

 

In the postcrisis era, transaction banking will remain a significant opportunity for financial institutions, according to the report. Wholesale payments volume is expected to grow at a compound annual rate of 9 percent globally from year-end 2010 through 2020, and total wholesale transaction revenues are expected to increase from $64 billion to $119 billion. But despite the strengths of transaction-banking businesses, there are hurdles to overcome. Getting different silos within the bank—such as the corporate-banking sales force, cash-management and trade-service specialists, and operations and IT groups—to align around making transaction banking a top priority can be a tall order. Banks need to better define their core target markets (from both a segment and a regional perspective) and smooth out uneven customer experiences across channels and regions.

 

 

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