Banks must adapt to the sweeping changes in
the payments industry and weather the interchange storm if they are
to reverse payments-based revenue fortunes, said a new report by
management consulting firm The Boston Consulting Group (BCG).

The report, Global Payments 2011: Winning
After the Storm,
believes strong payments businesses have
shown severe weaknesses in previous years. Banks must determine
whether their current business and operating models are suited for
today’s shifting industry dynamics. It claims that 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 $782trn in non-cash transaction values and
$492bn in transaction revenues.”

Global payments revenues, which typically
constitute up to a half of most banks’ total revenues, fell at a
compound annual rate (CAR) of 7% from the end of 2008 through to
2010, according to the report.

BCG also said that European retail payment
revenues fell from $173bn in 2008 to $136bn in 2010. In order to
foster a rebound, banks are advised by the consulting firm to
exploit the structural 
differences in payments markets
throughout Europe. The report predicts the focus in Western Europe
is likely to be on refining operating models and by contrast
Central and Eastern European financial institutions will be
concentrating on forging ‘winning’ business models.

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By GlobalData

From the end of 2008 through to 2010, total
payments revenues in the US fell at a CAR of 4%, despite steady
payments values and a 3% annual rise in volumes. Although BCG has
said total revenues are expected to grow in 2011, they are likely
to remain about 6% below the 2007 peak level of $162bn – a level
that is not expected to be surpassed for another few years, said
the report.

The payment industry in the US has gone
through “considerable disruption” over the last two years and new
financial regulations such as the Credit Card Accountability,
Responsibility and Disclosure (CARD) Act of 2009, modifications to
Regulation E and the Durbin Amendment are viewed by BCG to only
compound this disruption and have a “dramatic effect” on the US
payment businesses for years to come.

“As much as $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 checking
account to deepen client relationships and make sure they stay
smart and nimble in the digital financial services game.”

The situation in Asia-Pacific is a different
one. The report claims retail payments in the region are primed for
growth but it warns that 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, BCG says
growth discussions should focus on existing customers and
opportunities to increase share of wallet by improving the
convenience of payment solutions for consumers and merchants.
However the picture is different in emerging markets throughout the
region, where the goal must be on banking the unbanked and
expanding the acceptance infrastructure.

“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.”