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Banks Face Reduced Payments Profits

Transactions will increase, but margins will decline.

Although global payment revenues within the overall global banking industry are expected to increase, some banks will face a decrease in profit margins because of changing customer behavior, increased regulation and competition from non-banks, according to a recent study. The research, conducted by management consulting firm Boston Consulting Group (BCG; Boston), forecasts that banks will see an increase in payments volume by 2011 but will suffer a dramatic reduction in profits from these payments.

Overall transaction revenue in the banking industry is predicted to increase to nearly $390 million in seven years, but the profit margin for each transaction will decline, according to Carl Rutstein, vice president and director of BCG's Chicago office. BCG forecasts that fees on individual domestic payments will decrease 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 decrease by more than half over the same period, from $12 to $5.20.

Customers are increasingly using different payments methods that often have lower transaction fees - and slimmer margins, Rutstein says. "There is a reduction in [the use of] signature debit and there [is an increase in the use of] PIN pads for debit, which has lower fees than signature debit or credit cards," he explains. "This reduces transaction fees."

Get Your Priorities Straight

In addition to changes in customer behavior, profits from payments may be suffering because banks are preoccupied with spending on compliance issues, rather than focusing on improving their payments business, Rutstein suggests. "Lots of folks are spending on Check 21 compliance, SOX or the PATRIOT Act," he says. "There is a lot on the regulation front that puts pressure on institutions."

Also, competition from non-banks, such as telecom or other service providers that offer customers alternative payment methods, can divert transactions from traditional bank channels. "Other players in the payment space are doing things around the banks," Rutstein says. This contributes to the decline in banks' profits from payments.

To counter the declining margins and profits in their payments businesses, banks need to be proactive in seeking profits from other products and services, according to Rutstein. By leveraging CRM technologies and increasing cross-selling efforts, banks can maintain customer loyalty, he asserts. "The banks that are going to be successful are those that leverage customers to get loans," Rutstein says.

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