BOSTON, Oct. 12 /PRNewswire/ -- Banks face a fierce squeeze on their
lucrative payments business, which could undermine their overall
profitability, according to a new global study by The Boston Consulting Group
(BCG).
The report, Preparing for the Endgame: Global Payments 2004, predicts a
dramatic reduction in the profitability of the payments business at many
banks. Although global payments revenues for the overall banking industry are
predicted to increase to nearly $390 billion by 2011 -- one-third higher than
ten years earlier -- changing customer behavior, increased regulation, and
more competition from nonbanks will significantly erode profit margins.
Nick Viner, a senior vice president and director in the London office of
The Boston Consulting Group, said, "Typically, banks draw more than one-third
of their revenues and a material share of their profits from payments. If this
core source of earnings is eroded, it will have a severe impact on the overall
profitability of many banks."
There is a two-pronged threat, according to Viner. First, banks risk being
forced out of the payments business unless they make significant investments
to upgrade systems and improve the service they offer customers. Second, they
risk seeing their core banking business suffer. That is because a successful
loans and deposit business relies on payments.
"Banks that fail to come to grips with their payments businesses and make
the necessary investment will start to lose the loans and deposit products
that payments support," said Viner.
Viner, who leads BCG's global payments practice, believes that small,
local banks are most at risk because they will not be able to afford the heavy
investment required to maintain a state-of-the-art payments business. They
will be forced to forge partnerships and outsource much of their payments
business, retaining customer relationships only with "white label" payments
products.
Large regional players may also find the capital investment required
daunting, and BCG says they should enter into partnerships selectively. Big
global banks have the size and scale to afford the investment needed to stay
competitive.
BCG forecasts that revenues on domestic payments will fall from $1.16 per
transaction in 2001 to $0.86 by 2011 -- a compound annual decline of 5 percent
in real terms. On cross-border payments, revenues per transaction will more
than halve over the same period from $12 to $5.20.
The biggest catalyst for change is the banks' corporate customer. "Big
corporate clients have become much more demanding. They want to be in control
of their payments activity, and this is putting huge pressure on the banks,"
said Viner.
"To keep their corporate clients happy, banks need to offer a much wider
range of services and higher standards of operational excellence," Viner
added.
New regulations, such as the Patriot Act and the Sarbanes-Oxley Act,
growing competition from nonbanks, and more standardization are also putting
pressure on the business and contributing to the need for massive investment.
"The challenge for banks is how to leverage transaction information from
their customers' demand deposit accounts and credit cards to grow their
deposits and loans," said Carl Rutstein, vice president and director in BCG's
Chicago office, who leads the firm's Americas Payments practice. "Banks know
their customers better than other financial services providers. But banks have
relatively low share of their checking-account customers' loans, cards, and
time deposits -- let alone their insurance and brokerage business. The prize
for banks is to gain share and cross-sell."
According to BCG, European banks expect to invest on average $80 million
to $120 million in their payments businesses over the next five years. For the
top 75 banks in Europe alone, this amount would total $6 billion to $9 billion
by the end of the period.
For retail customers, the changes sweeping the industry promise new ways
of paying for goods and services. In Hong Kong, the Octopus card for buying
tickets on the mass-transit system can now be used to buy fast food, pay for
swimming pool entrance fees, and check school attendance.
Elsewhere, customers will soon be able to pay for airline tickets and make
international money transfers using their mobile phones. Contopronto in Norway
already allows customers to make payments by sending messages from their
mobile phones.
The Boston Consulting Group is a management consulting firm. It was
founded in 1963 and now has 60 offices in 37 countries. Its primary focus is
corporate and business strategy, including operational and systems strategy.
Please visit its website at http://www.bcg.com, which contains a subscription
service for its publications.
SOURCE The Boston Consulting Group (BCG)
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Related links:
http://www.bcg.com
CONTACT:
Hilary Morrissey of The Boston Consulting
Group - London office, +44 207 753-3998,
morrissey.hilary@bcg.com, or K. C. Munuz The Boston Consulting
Group - Boston office, +1-617-973-1382, munuz.erol@bcg.com; or
Peter Truell of The Boston Consulting Group - New York office,
+1-212-446-3267, truell.peter@bcg.com
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