Banks Must Retool Payments in Wake of Financial Crisis, Says BCG

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), ‘Global Payments 2011: Winning After the Storm’.

Traditionally strong payments businesses have shown severe weakness in recent years, the report says. 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 organisation) 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 minimise organisational complexity.

“The size of the prize is too large not to take action,” said Niclas Storz, a BCG partner and a co-author of the report. “We estimate that by 2020, the global payments market will be worth US$782 trillion in noncash transaction values and US$492bn 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% 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 chequing or demand-deposit accounts). Fees for overdrafts and nonsufficient funds are considered transaction-specific revenue.

The report examines global retail payments markets on a regional basis, while exploring the wholesale transaction banking market through a single, global lens.

Retail Payments in Europe

European retail-payments revenues fell from US$173bn in 2008 to US$136bn in 2010, according to the report. To help foster a rebound, banks must exploit the structural differences in payments markets throughout Europe. In western Europe, given its highly evolved payments infrastructure, the focus will be on refining operating models. By contrast, in central and eastern Europe (CEE), the key will be forging winning business models.

Retail Payments in the Americas

In the US, the payments industry has undergone considerable disruption, the report says. From the end of 2008 through 2010, total payments revenues fell at a compound annual rate of 4%, despite steady payments values and a 3% annual rise in volumes. Total revenues are expected to grow in 2011 but will remain about 6 percent below the 2007 peak level of US$162bn – a level not likely to be surpassed for another few years given the adverse effect of regulatory changes on payments revenues (such as debit card revenues).

Moreover, new financial regulations such as the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, modifications to Regulation E, and the Durbin Amendment (within the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010) will have a dramatic effect on US payments businesses for years to come. Banks in the US will have to rethink their business models and develop new value propositions, the report says.

“As much as US$25bn in annual retail-transaction revenues will be regulated away from US financial institutions as the new guidelines take effect,” said Carl Rutstein, a BCG senior partner and a co-author of the report. “To get back on track, banks in the US need to transform their credit card businesses, move beyond the chequing account to deepen client relationships, and make sure they stay smart and nimble in the digital financial services game.”

Retail Payments in Asia-Pacific

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 co-author of the report. “Shifts in spending behaviour 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 post-crisis 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% globally from year-end 2010 through 2020, and total wholesale transaction revenues are expected to increase from US$64bn to US$119bn.

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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