Weathering the Storm: Global Payments 2009writing of Weathering the Storm: Global Payments 2009. We define payments revenue as any revenue stemming from the movement of money, including

Weathering the Storm

Report

Global Payments 2009

The Boston Consulting Group (BCG) is a global manage-ment consulting firm and the world’s leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep in-sight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable compet-itive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more infor-mation, please visit www.bcg.com.

Weathering the StormGlobal Payments 2009

bcg.com

Allard Creyghton

Niclas Storz

Carl Rutstein

Stefan Mohr

Alenka Grealish

March 2009

© The Boston Consulting Group, Inc. 2009. All rights reserved.

For information or permission to reprint, please contact BCG at:E-mail: [email protected]: +1 617 850 3901, attention BCG/PermissionsMail: BCG/Permissions The Boston Consulting Group, Inc. One Beacon Street Boston, MA 02108 USA

Weathering the Storm 3

Contents

Note to the Reader 5

Preface 6

Summary of Key Findings 8Retail Payments 8Global Wholesale Transaction Banking 10

Retail Payments: Europe 11What Lies Ahead for SEPA? 11How Can European Banks Safeguard Sustainable Margins? 13The Way Forward for ACHs: A Single-Market-Based Growth Strategy 17

Retail Payments: The Americas 19North America: A Struggle to Maintain Growth 19Latin America: Credit Cards at Center Stage 22

Retail Payments: Asia-Pacific 25

Global Wholesale Transaction Banking 28Revenue and Cost Challenges 28Sustainable Business Models That Meet Customer Requirements 31An Operating Model Aligned with Customer Segments 34

Appendix: Overview of Volumes, Values, and Revenues in the Payments Marketplace, 2008 to 2016 37

For Further Reading 43

4 The Boston Consulting Group


Note to the Reader

About the AuthorsAllard Creyghton is a partner and managing director in the Amsterdam office of The Boston Consulting Group. Niclas Storz is a partner and managing director in BCG’s Düssel-dorf office. Carl Rutstein is a part-ner and managing director in the firm’s Chicago office. Stefan Mohr is a partner and managing director in BCG’s Sydney office. Alenka Greal-ish is a topic specialist in the firm’s Chicago office.

For Further ContactIf you would like to discuss your pay-ments business with The Boston Consulting Group, please contact one of the following leaders of our global payments practice:

EuropeAllard Creyghton Partner and Managing DirectorBCG Amsterdam+31 20 548 [email protected]

Niclas StorzPartner and Managing DirectorBCG Düsseldorf+49 2 11 30 11 [email protected]

The AmericasCarl RutsteinPartner and Managing DirectorBCG Chicago+1 312 993 [email protected]

Asia-PacificStefan MohrPartner and Managing DirectorBCG Sydney+61 2 9323 [email protected]

AcknowledgmentsFirst, we would like to thank all of the executives and institutions that participated in our Global Payments 2009 research effort and helped en-rich this report.

In addition, many senior leaders of BCG’s Financial Institutions practice provided us with valuable insights and helped us conduct our payments research. They include Brent Beards-ley, Jorge Becerra, Kilian Berz, Julio Bezerra, David Bronstein, Michael Clancy, Olavo Cunha, Matt Davis, John Garabedian, Dan Grossman, Brad Henderson, Matthew Krentz, Monish Kumar, John Leroi, Fernando Machedo, Mike Marcus, Stacy McAu-liffe, Jason Meador, Shamit Mehta, Federico Muxi, David Oppenheim, Carrie Perzanowski, Lucy Pilko, David Rhodes, Jürgen Schwarz, Gary Shub, Hal Sirkin, Steven Thogmartin, Andrew Toma, Andy Veitch, and Andre Xavier. Our global project team of Michael Borss, Marlon Gons, Marcel Geurts, Benedikt Kalteier, and Christophe Kosanke deserves special mention. We would also like to thank Nick Viner, the founder and former head of BCG’s payments practice, who continues to provide inspiration.

Finally, we would like to thank Philip Crawford for his editorial direction, as well as other members of the editorial and production teams, in-cluding Katherine Andrews, Gary Callahan, Kim Friedman, and Sara Strassenreiter.


Preface

Amid the tempest of the global financial cri-sis, payments businesses have proved themselves to be reliable revenue genera-tors, sharply raising their importance for banks. Global payments revenues hit

$805.1 billion in 2008, up from $654.3 billion in 2006, and are forecast to reach $1.4 trillion by 2016.

Yet the payments industry also faces ongoing challenges: price erosion, pressure on spreads, heightened deposit-gathering competition, and rising customer demands. In addition to these systemic trends, the current market tur-moil is putting further stress on the industry. The global financial crisis is also creating unique opportunities, how-ever, underscoring the inherent attractiveness of the pay-ments business. Among these opportunities is the chance for banks to reposition themselves to play a more domi-nant and sustainable role in payments in the future. In this, the ninth Global Payments report by The Boston Consulting Group, we discuss the challenges facing pay-ments providers and examine various strategies and tac-tics that they can leverage in order to weather the current storm and emerge as stronger institutions.

The darkest cloud over the payments industry is the per-vasive and steady decline in average revenues per trans-action. For banks, we estimate that these revenues will fall from $0.94 to $0.88 for domestic payments and from $9.33 to $7.50 for cross-border payments from 2008 through 2016. There are a variety of contributing factors. Regulatory forces are playing a prominent role in some regions, such as the Single Euro Payments Area (SEPA) in Europe and potential Congressional pressure on credit card revenues and nonsufficient funds (NSF) fees and policies in the United States. Also, competition is intensi-fying, and infrastructure investments (both obligatory

and discretionary) are leading to higher costs but not to necessarily higher revenues.

Further issues are that payments needs increasingly vary by customer segment and that both retail and cor-porate customers are becoming more sophisticated and demanding. Convenience, price, rewards, security in transaction processing, and accessibility of funds are the key demands for retail customers—defined as individual consumers and small-to-medium-sized enterprises (SMEs). But for corporates—defined as midsize and large companies, as well as multinational enterprises—trans-action-processing services have become a commodity. Their needs are more focused on flexible, highly custom-ized services in cash management—such as real-time monitoring of funds, information about account balances, cross-border cash pooling, and multicurrency netting. These companies are also demanding top-flight financial management (including financial supply-chain integra-tion and automation, as well as billing services) and struc-tured, trade-finance solutions.

Such diversity in customer needs leads to different re-quirements for banks’ business models—consisting of both delivery and operating models—in payments. Whereas delivery models concern the customer segments to be served, regions to be covered, and products and channels needed to serve targeted customers successfully, the underlying operating models concern end-to-end processing procedures, IT infrastructure, sourcing poli-cies, and location decisions aimed at best supporting the delivery model.

Ultimately, banks clearly need a way to combat margin pressure. In our view, the only way that banks can effec-tively do so is by addressing the business models for retail


and wholesale payments separately. On the retail pay-ments side, the key to success will be a lean, end-to-end business model aimed at achieving the highest possible level of efficiency. On the wholesale side, the key to suc-cess will be achieving end-to-end service excellence rather than focusing solely on efficiency and industrialization. In order to satisfy increasingly demanding wholesale cus-tomers, some banks may need to make a tradeoff, com-promising a degree of back-office efficiency in order to provide flexible, customized payment solutions on the front end.

Given these dynamics, we have chosen in this report to discuss the main challenges and ramifications for retail- and wholesale-payments business models in separate sections. In the retail section, the fundamentally different trends in Europe (where the evolution of SEPA is highly relevant to the thinking of payments providers), the Americas, and Asia-Pacific will be considered.

Moreover, although current trends and developments in the payments industry may differ across both segments (retail and wholesale) and regions, they are linked by a common global objective: the quest to serve the needs of customers in a way that makes their personal and their corporate payments easier, reasonably priced, more effi-cient, and more effective. By achieving this goal amid the turbulent waters of today’s volatile financial markets, in-stitutions can not only survive the tempest but also emerge as winners, creating deep relationships that will be highly profitable on a long-term basis. It was with this linkage in mind that we conceived the preparation and writing of Weathering the Storm: Global Payments 2009.

We define payments revenue as any revenue stemming from the movement of money, including fees and spread income earned from funds set aside for payment pur-poses. Thus, demand deposit account (DDA) spreads and NSF fees are considered payments revenue. Given this definition, payments make up approximately one-third to one-half of most banks’ revenues and are often consid-ered the most attractive element of the banking business based on income generation, growth rates, and relatively low capital needs. Leading banks, recognizing the impor-tance of payments amid the current downturn, are in-creasingly attempting to connect the lending elements of their business to the payments elements in order to gain a greater share of customer wallet.

To sum up, as one of our clients said to us, “Payments is the center of the universe; it is the sun that provides all the energy and about which all revolves.”

We hope that this report will serve as a valuable source of information and provide relevant and provocative questions—as well as useful answers—in these trying times for the payments industry and for global financial markets in general.


Retail Payments

The key to success in European retail payments in the coming years will be to design a lean, end-to-end busi-ness model with the goal of achieving the highest possible level of efficiency. Although some of the orig-inal objectives of SEPA have been met—such as equal prices for domestic and cross-border transactions and the introduction of a pan-European payment instru-ment for credit transfers—other SEPA objectives may never materialize. Such objectives include improved payment services, increased competition, and price convergence.

A majority of European banks have followed a ◊ minimum investment strategy to ensure basic SEPA compliance. Yet consumers and retailers have ap-peared relatively disinterested in the purported ben-efits of SEPA, and many corporates are pressing banks to give them good reasons to adopt SEPA instru-ments.

In BCG’s view, the benefits of further implementation ◊ of SEPA are limited, and investments required for achieving full SEPA are prohibitive. European banks should therefore continue to avoid massive SEPA in-vestments and examine the forces that will drive inter-national strategies over the next few years. Policymak-ers should stop driving payments providers into unnecessary expenditures and focus instead on other initiatives. These initiatives should include setting in-dustry standards for electronic- and mobile-payment instruments, as well as for biometric-payment solu-tions (such as fingerprint payment initiations), and improving payment inefficiencies within specific coun-tries through incentives.

With margins under severe pressure and limited op-portunities for revenue growth, cost reduction is a high priority for payments providers in Europe.

Contrary to popular belief, insourcing and outsourcing ◊ are not the Holy Grail for cost reduction. Every sourc-ing possibility must therefore be studied on a case-by-case basis to see whether there are opportunities for true net synergies.

Banks should place the greatest emphasis on optimiz-◊ ing customer-related processes—such as payment ini-tiation and capture, and customer service and interac-tion. These activities offer the best potential for reducing costs and enhancing customer satisfaction.

Large automatic clearing-houses (ACHs) should wait until it is apparent whether full SEPA will actually be achieved before consolidating volumes onto one plat-form. Real scale benefits will come only if all transac-tions can be processed according to the SEPA scheme. ACHs should make strategic acquisitions in order to secure volume, but should take a wait-and-see ap-proach before carrying out full migration.

Smaller ACHs should carefully assess whether they are ◊ able—and want—to play a role in a future SEPA envi-ronment. Those that do and that have a reasonable chance of reaching critical volume should attempt to acquire it now.

Smaller ACHs that do not want to be SEPA partici-◊ pants should either sell or reposition themselves—for example, by moving up the value chain to provide ser-vices related to the transaction processes that banks currently perform in-house.

Summary of Key Findings


The imminent challenge for North American pay-ments providers is how to maintain growth in the face of the credit crisis. Longer-term challenges in-clude how to excel as an integrated, multiproduct provider and how to adapt both to competitors with nontraditional business models and to potential leg-islation capable of disrupting revenue streams.

The economics of the payments busi-◊ ness in North America are under in-creasing pressure. The DDA is suffering from tightening net interest spreads, and noninterest income sources such as overdraft fees and interchange revenues are being threatened. Despite the nar-rowing of spreads, spread income will remain a vital source of revenue growth. Debit cards will be critical to supporting fee-income growth.

On the overall bank-card front, trends are mixed. In ◊ the United States, credit card growth has slowed, espe-cially amid the effects of the subprime crisis, whereas debit cards are realizing relatively rapid revenue growth. In Canada, revenues from credit cards are still increasing, whereas debit card revenues have yet to take off.

Banks in North America need to develop a payments strategy that straddles product silos and leverages payment services in order to build their deposit and lending businesses.

Winners in the Americas will capture a greater share ◊ of consumers’ balance sheets through loyalty strate-gies with flexible rewards tied to overall relationships. With a multiproduct business model, for example, a bank could create a less profitable credit-card offering in return for profitable DDA and other credit business, rendering card-only relationships unprofitable and un-sustainable.

Mobile banking, which can result in higher balances ◊ per end user and attract new accounts, will be part of any successful growth strategy in the Americas. While the jury is still out on a standalone mobile-payments business, the verdict is clearly positive on mobile banking (in which online banking functionality moves to the cell phone). Although this functionality should expand to payments, mobile payments is not likely to

drive additional revenues unless it accelerates the on-going migration away from cash.

Growth opportunities abound in Latin America. First, the credit card business is still in a high growth and return phase, with substantial share up for grabs. Second, there is a vast underserved market for

which banks must develop effective delivery channels and product combi-nations.

The main challenges to sustaining pay-◊ ments growth in Latin America are mi-grating consumer payment preferences from cash to cards and encouraging the

adoption of cards by unbanked and under-banked consumers.

Banks that have been successful at meeting these chal-◊ lenges have also leveraged their credit-card platforms to sell additional credit and insurance products.

As in Latin America, the payments opportunity in the Asia-Pacific region begins with the large number of consumers in many markets who do not have bank accounts.

It is not economically viable to acquire and serve these ◊ consumers through traditional bank-branch networks because the cost to serve is too high relative to revenue potential. Also, a large share of potential customers resides in difficult-to-reach, relatively isolated rural areas.

Yet the cost to serve these consumers through mobile ◊ phones is relatively low. Mobile phones can thus play a game-changing role in emerging Asia-Pacific markets for distributing financial services in general—and pay-ments specifically—through an enhanced customer experience that includes speed, simplicity, flexibility, bundled product offers, constant availability, and over-all convenience.

Banks and telecommunications operators are gener-ally best positioned to play in this market because they have the closest links to customer usage and transaction data. The Asia-Pacific region in particular offers attractive structural opportunities for innova-tion-based solutions in payments.

Banks in North America

need to develop a

payments strategy that

straddles product silos.


Success at mobile payments in emerging markets in ◊ Asia-Pacific will require a deep understanding of local customer needs. Also, payments providers must be able to deal effectively with diverse regulatory climates in different markets. Another key question for banks concerns which exact markets in the region to ap-proach.

Multiple skills are required to succeed in mobile pay-◊ ments. They include customer acquisition, merchant account acquisition, customer-account relationship management, brand management, product develop-ment, and merchant-account relationship manage-ment. Banks cannot succeed in mobile payments on their own. They will need collaborators in the telecom-munications, hardware, and regulatory fields. Another piece of the puzzle is providing merchants with the necessary incentives to invest in the required equip-ment to handle mobile payments.

Global Wholesale Transaction Banking

The key to success in wholesale transaction banking will be to achieve service excellence rather than fo-cusing purely on efficiency and industrialization. In order to satisfy increasingly demanding wholesale customers, banks may need to make a tradeoff, com-promising some degree of back-office efficiency in order to provide flexible, customized payment solu-tions on the front end.

While the performance of other business lines has ◊ suffered in the face of the broadening financial crisis, wholesale transaction banking has proved to be a stable and critical revenue cornerstone, offering banks an opportunity both to deepen share of wallet and to tap unexploited revenue pools through cross-selling.

Still, prices are increasingly under pressure. This is ◊ largely the result of mounting competition in the bat-tle to build scale, as harmonization in the global wholesale-transaction-banking business—along with technological advances—lowers entry barriers for for-eign institutions seeking a presence in local markets. Price pressure will have varying impacts on different countries, depending on their current transaction price structure and level. Banks can increase revenue streams by providing products of higher value and ser-

vices with higher margins, optimizing cross-selling op-portunities, and exploiting untapped revenues—all aimed at increasing share of wallet.

Margins are also under pressure from rising costs, part-◊ ly owing to higher service levels demanded by custom-ers. Cost-to-income ratios will likely worsen over the next five years, accelerating the exit of unsustainable business models. In order to maintain current or at least comparable cost-to-income ratios, payments pro-viders will need to significantly lower their cost bases.

Given the multiple challenges that banks face, the development and implementation of a sustainable business model—made up of both a delivery and an operating model—is critical to success. Banks must define the best delivery model (the customer seg-ments to be served, the regions to be covered, and the products and channels required) adequately, then align their operating model (end-to-end processing procedures, IT infrastructure solutions, and sourcing policies) with the delivery model.

Since most banks serve both wholesale and retail pay-◊ ments customers, one operating model has tradition-ally been used to deliver products to both segments. Yet rising customer demands have put pressure on banks. Transaction banking units thus have to face the dilemma of whether to continue using one comprehen-sive operating model—in order to help achieve scale and cost efficiency—or to split their operating model into wholesale and retail components in order to pro-vide more customized solutions (at the expense of economies of scale and at structurally higher costs).

Global banking giants may end up having a complete-◊ ly separate, end-to-end business model in wholesale transaction banking. The design of the operating mod-el for large regional banks is more complex because they are stuck in the middle in terms of requirements for the customer segments they serve and the volume of transactions they process. For these banks, the deci-sion about focusing on quality and flexibility versus realizing scale and cost efficiencies requires a deeper analysis of their current business model and vision for the future. Ultimately, the strongest institutions in the wholesale-transaction-banking business will be those that are able to monitor the performance of their busi-ness model and adjust it accordingly.


Financial markets throughout Europe have re-cently been in a state of upheaval. This has profoundly affected the way that banks think about their payments businesses. However, regardless of how the global financial crisis

plays out in 2009 and beyond, SEPA will remain high on the agenda of banks, ACHs, card organizations, and regu-lators. SEPA, which kicked off operationally with the launch of the SEPA credit transfer at the beginning of 2008, faces a long and difficult road ahead, especially con-sidering the timing and implementation of the milestones yet to come, such as the eventual introduction of the SEPA direct debit.

In this chapter, we will explore what lies ahead for SEPA. We will also elaborate on how banks can safeguard mar-gins and on what we see as the best way forward for ACHs, given the uncertainty about how SEPA will actu-ally evolve.

Clearly, European banks are waging a major battle just to maintain profitability in their payments activities under current market conditions. In addition to cutbacks in con-sumer spending brought on by the financial crisis and the recessionary forces it has unleashed, the challenges in-clude investments required for SEPA compliance and the elimination of float as a source of revenue owing to the upcoming implementation of the European Payment Ser-vices Directive (PSD). How will banks traverse these choppy waters? First, let’s examine the dilemmas posed by SEPA.

What Lies Ahead for SEPA?

The idea behind SEPA, as the global payments commu-nity has taken note, is to harmonize today’s scattered pay-

ments industry in the euro zone. This means creating a pan-European payments market in which consumers and companies can make cross-border payments at the same level of cost and efficiency as domestic payments—in ef-fect, turning the entire euro zone into one “domestic” market. By also enabling businesses and consumers to carry out all payment activities throughout Europe with just one bank account—despite the fact that many corpo-rates would not opt to do so, preferring to keep local banking relationships for receivables—SEPA would seem to be a decided improvement over the long-fragmented system in which each country has its own payment stan-dards and cross-border payments are relatively costly and complicated.

It was also originally hoped that SEPA would lead to in-creased competition, price convergence to the level of low-cost countries, and more efficient processing—all of which, in theory, would benefit the consumer. Yet while SEPA has made its formal debut with the SEPA credit transfer, the launch of the two other core instruments—the SEPA direct debit and the SEPA cards framework, originally intended to take place at the same time—have been delayed.

In our last report on the global payments industry, Navi-gating to Win: Global Payments 2006, we took clear posi-tions on SEPA’s short- and long-term value. Let’s briefly revisit those views before taking an updated look at SEPA.

As we said in Navigating to Win, SEPA was conceived as having two distinct phases. In the first phase, by January 1, 2008, European banks were to be able to handle—that is, to receive and process—transactions based on the SEPA scheme, which would coexist alongside domestic

Retail Payments: Europe


schemes. The focus was to be on establishing compliance, rather than on mandatory usage of the new standard. By the end of 2010, in the second phase, all domestic schemes were to be eliminated, leaving only the SEPA schemes in operation.

We estimated that being SEPA compliant by 2008 would collectively cost European banks and pay-ments processors roughly €500 million, with banks bearing most of the burden for having to replace or adapt their core proc-essing systems. Still, we felt that the collec-tive investment had a sound rationale, given the intended benefits to consumers and the unifying effect of introducing a set of pan-European products.

We also forecast that full migration to the SEPA standard by the end of 2010 would collectively cost banks, proces-sors, and corporates roughly €5 billion—a level of invest-ment unlikely to be justified by the additional benefits. Indeed, we stated emphatically that forced migration to full SEPA by the end of 2010 would compel banks to in-vest outside their natural investment cycles in order to adopt pan-European products and discard highly efficient domestic ones—actually destroying value in the process. We urged banks to avoid massive spending on SEPA 2008 and to lobby to delay full migration to SEPA by the end of 2010.

Currently, it does appear that a majority of European banks have followed a minimum investment strategy to ensure basic SEPA compliance and that they have tried to make their investments fit into natural investment cycles as much as possible. However, consumers and re-tailers have appeared to be relatively disinterested in the purported benefits of SEPA, and many corporations are pressing banks to give them bona fide reasons to adopt the SEPA instruments. The critical question is whether, at some point in the future, full SEPA will deliver truly tan-gible improvements to the European payments landscape that justify the required effort and investment. Let’s take stock of what has been achieved, what has not, and what it all may mean.

If we look at where the European payments market stands today, we can conclude that some of the original objectives of SEPA and the PSD have already been met. Such objectives include the following:

Equal prices for domestic and cross-border transac-◊ tions (as arranged by EC Regulation 2560/2001)

The introduction of a pan-European payment instru-◊ ment for credit transfers

Compatibility among domestic card ◊ schemes (most national debit cards are already cobranded with schemes run by MasterCard or Visa)

The introduction of a pan-European ◊ ACH to serve as a platform to process pan-European schemes (through the establishment of the Euro Banking As-sociation)

The existence of standard procedures for clearing and ◊ settlement (by allowing for a maximum of one busi-ness day)

Increased transparency through explicit rules regard-◊ ing charges and through the elimination of float

At the same time, it appears that some of the original objectives of SEPA may never materialize, barring aggres-sive regulatory intervention. Such objectives include im-proved payment services, increased competition, and price convergence.

Improved Payment Services. The truth is that current SEPA schemes are similar or inferior to most existing domestic schemes. For example, although the SEPA cred-it transfer has been launched, transaction volumes have been low. The main reason is that the SEPA credit trans-fer does not offer significantly different or better func-tionality than its predecessors.

Moreover, the introduction of the SEPA direct debit has been delayed until November 2009, and many pundits are wondering whether the scheme will ever come to life. As currently defined, it is inferior to existing domestic schemes because cutoff and clearing times are longer and the payer is less protected. Furthermore, the potential market for cross-country direct debit currently is, and will most likely remain, very small. And neither retail custom-ers nor SMEs will benefit significantly from harmoniza-tion across borders because their payments activities are primarily local in nature.

Current SEPA schemes

are similar or inferior

to most existing

payments schemes.


When it comes to bank cards, the SEPA cards framework would allow consumers to use their local bank card any-where in Europe. Yet most domestic debit cards (around 90 percent) are already cobranded with MasterCard’s Maestro (except in the United Kingdom), thereby allowing people to withdraw money and make payments at retail-ers abroad that accept Maestro—and to do so at a reason-ably low price level. Thus, from the per-spective of retail customers, SEPA will not prompt dramatic change.1

Moreover, there is a basic flaw in the SEPA cards framework: it may never achieve pan-European coverage, be-cause retailers cannot be forced to ac-cept all card brands. And the more pan-European schemes there are, the more difficult it will be-come to achieve pan-European coverage, because retail-ers will be unlikely to accept all schemes.

Increased Competition. At this juncture, it does not seem that SEPA will be a driver of international expan-sion and competition in Europe. First, neither corporates nor individual consumers have been interested—nor will they likely be in the near future—in switching banks for purely SEPA-related reasons because migration costs are high and the benefits are vague. Second, banks are not likely to extend business activities across Europe as a re-sult of SEPA, because the business case for entering new countries is not influenced by the cost of setting up a new payments infrastructure—which, based on our experi-ence, represents less than 10 percent of total costs. SEPA may indeed remove some previous barriers to entry through standardization, but the real barrier is the viabil-ity of the business case in starting up banking and pay-ments activities abroad.

Price Convergence. The convergence of prices to the level of those in low-cost countries as a result of SEPA is, after all, unlikely to happen. In fact, SEPA will not trigger increased competition—the main driver of price conver-gence. Prices may even increase because SEPA will lead to new investments that banks must offset.

Ultimately, we feel that the benefits of further implemen-tation of SEPA are limited and that the investments re-quired for achieving full SEPA are prohibitive. As a result, we believe that policymakers should stop compelling payments providers to make unnecessary expenditures.

Instead, regulators should start focusing on other areas of inefficiency within the European payments landscape. For example, the rise of innovative electronic-, mobile-, and biometric-payment solutions offers the opportunity for policymakers to step in now and establish industry standards from the outset. There is a clear need for these instruments, and there are programs in multiple coun-

tries aimed at developing them. But without standardization, standalone initiatives do not have a good chance of success, because they lack the ability to achieve critical mass. If regulators were to refocus their efforts on set-ting standards for these products now, differ-ent types of payments providers could move increasingly toward electronic-, mobile-, and biometric-payment solutions, thereby reduc-

ing the use of paper products and cash. Indeed, cash is still the most expensive payment instrument, necessitat-ing between €50 billion and €60 billion in annual han-dling costs in Europe alone, which is not a cash-intensive region relative to others.

Another worthwhile initiative for banks and regulators would be to improve payment inefficiencies within spe-cific countries—especially those in Southern Europe, where paper and cash payments are still very common and card penetration is relatively low. Action from policy-makers is also needed to improve customer-related proc-esses, which account for the majority of banks’ payments-related costs but are currently not addressed by SEPA. (See Exhibit 1.) The potential gain of optimizing these parts of the value chain—which would actually address the needs of retail consumers and corporates—would far outweigh any gains from further addressing processing and clearing, which are the purported benefits of SEPA.

How Can European Banks Safeguard Sustainable Margins?

Retail payments revenues per transaction in Europe are expected to decrease by around 4 percent yearly, from

Action from policymakers

is needed to improve

customer-related

products.

1. It is important to note that there are several efforts under way aimed at getting a third SEPA card scheme up and running. The candidates are EAPS, a joint effort by a number of countries and banks to create interoperability among existing domestic debit-card standards; the Monnet initiative, which is driven by French and German banks; and PayFair, a private initiative. However, it is un-certain whether any of these projects will succeed.


€0.92 in 2008 to €0.66 in 2016. Domestic revenues per transaction will decrease at a slightly slower rate during this period, from €0.85 to €0.61. Cross-border payments will decrease from €3.39 to €2.29, or an estimated 32 percent.

Given these expected price trends, the potential invest-ments required for full SEPA compliance, and higher operating costs during the SEPA migration period, it is clear that safeguarding margins is a critical topic on the payments agenda. We believe that banks must address the margin discussion from an integrated perspective, linking both revenue and cost issues. First, let’s look at revenue.

There are limited opportunities for revenue growth. In essence, revenues from payments are driven by inter-est on current-account balances, transaction and holding fees, and float. But there is limited opportunity to in-crease revenues from any of these three streams. First, the financial crisis has put margins earned on current-account balances under pressure. Second, float is destined for extinction with the implementation of the PSD. Third, trying to lift revenues by increasing fees is unlikely to work because both customers and regulators have been pushing for lower prices and greater transparency.

What is more, playing a volume game—lowering fees in the hope of gaining revenues through attracting new cli-ents—is not a good solution because few customers are likely to switch banks solely on the basis of transaction prices.2 There may be revenue potential through the intro-duction of new and innovative products—but only in the long term, once new offerings have reached critical mass.

Clearly, given relatively isolated opportunities for reve-nue growth, it is evident that reducing costs remains a high priority. This raises the question of sourcing strate-gies. Although insourcing and outsourcing moves can bring benefits if executed well, our work with clients has demonstrated that a host of difficulties can present them-selves.

Insourcing and outsourcing are not the Holy Grail for cutting costs. Payments processing is a scale-sensi-tive business. Increasing transaction volumes through organic growth can thus be an effective way to capture scale and reduce costs because the existing cost base can be leveraged by handling a larger volume of transac-

25%

35%

4% 8% 4% 4%

52%

23%15%

30%

Domestic Cross-border





Addressedby SEPA

Preprocessingand processing Clearing SettlementPayment initiation

and capture

Customerservice and interaction

Exhibit 1. The Majority of Bank Costs Is in Customer-Related Activities, but SEPA Focuses on Processing and Clearing

Source: BCG analysis.

2. It is worth noting that some banks are introducing zero-price ac-count packages and focusing solely on cross-selling opportunities in order to increase share of wallet.


tions—lowering the cost per transaction. Our work with clients has demonstrated that banks, by doubling vol-ume, are able to lower unit costs by 30 to 40 percent in electronic payments and by 5 to 10 percent in paper-based payments.

If organic growth is not a viable option, combining the back-office operations of multiple institutions through insourcing and outsourcing can seem like an attractive alternative. Yet of the many banks that have pursued such initiatives over the past decade, most have failed to see the anticipated benefits materialize. The reasons for that failure can be uncovered by examining the attrac-tiveness and feasibility of insourcing and outsourcing different steps in the payments value chain.

To be sure, most banks are unlikely to outsource com-plete payments value chains because they are hesitant to release processes that involve direct interaction with cus-tomers (for fear of losing hold of the client). Yet banks are also reluctant to outsource single domains (such as transaction processing) because most systems run across multiple domains of the bank and serve customer-relat-ed processes in addition to core transaction processes. Although single domains could technically be out-sourced, the business case is unattractive: the outsourc-

ing bank would have to rebuild interfaces and would not typically be able to shut down legacy IT systems—limit-ing the overall cost benefit. (See Exhibit 2.)

Furthermore, different banks usually operate highly di-verse payments infrastructures in order to meet country-specific requirements and client-specific needs—and also because they have built their in-house systems incremen-tally over long periods. These differences can result in either of the following undesirable situations: the out-sourcing bank has to keep its legacy systems running at considerable cost, or the insourcing bank has to add mul-tiple new interfaces and functionality in order to provide equivalent services for the outsourcing bank—also at sig-nificant cost. Moreover, migration costs for insourcers are substantial, owing to the large number of interfaces with-in payments processing and with other domains of the bank. Our client experience has demonstrated that up to 100 interfaces need to be adapted, leading to one-time costs that outweigh any annual savings by a factor of 10 to 15.

On top of a shaky business case, insourcing can involve a number of risks stemming from the linkage of payments processes to other processes within the bank. This linkage can lead to operational failures and to the deterioration

Customerservice and interaction

Payment initiationand capture Preprocessing Processing Clearing Settlement

xx

x

x

xx

x

Domesticpayments

x Complexity of systems running across multiple domainsComplexity of interfacesPotential outsourcing scope

Systems running across multiple domains cannot be shut down aer outsourcing parts, limiting the overall cost benefit

Cross-border and urgent payments

Multiple interfaces between systems would have to be rebuilt, resulting in high migration costs and increased risk of failure

Exhibit 2. Outsourcing Single Domains Is Not Commercially Viable Because of Technical Complexity



of service levels, which are patently unacceptable to banks—especially amid a financial crisis.

Therefore, contrary to popular belief, it is unlikely that insourcing or outsourcing payments processing will fun-damentally improve most banks’ profitability. This im-plies that every sourcing possibility must be studied on a case-by-case basis to see whether there are opportunities for true net synergies. For example, if a bank has to replace its entire infrastructure, it might be worthwhile to pursue outsourcing instead of making a huge infrastructure investment. Or if a bank’s IT systems can no longer be main-tained by a trusted external IT provider, it might be wise to pursue outsourcing rath-er than to seek a new IT vendor that can provide the same services and expertise.

So, the question remains, If margins cannot usually be safeguarded by increasing revenues or by insourcing or outsourcing, what should European banks do?

In our view, the key to success in retail payments is to design a lean, end-to-end business model with the goal of achieving the highest possible level of efficiency. From a pure payment-transaction-processing perspective—post-initiation through clearing and settlement—there is not much ground to be gained because processes and under-lying infrastructure are standardized, automated, and consolidated.

Banks should therefore place the greatest emphasis on optimizing customer-related processes, such as payment initiation and capture, and customer service and interac-tion. Focusing on these activities offers the best potential for reducing costs—since customer-related processes are where 50 to 70 percent of banks’ overall payments costs reside—and for enhancing the overall customer experience.

For example, in payment initiation and capture, banks should use pricing levers to move away from paper-based workflows and manual data entries as much as possible. Such processes not only are inherently inefficient but also often cause errors that lead to repeated labor-intensive tasks, complaints, and most important, dissatisfied cus-tomers. Positive steps can be made through implement-ing electronic-data capturing and data correction at the

source—by either the bank or the client—and by increas-ing automation and straight-through processing.

In addition, most European banks need to improve their overall level of client service. Problems such as the inaccessibility of basic transaction information, hard-to-navigate Internet banking platforms, and ineffective com-

plaint resolution are continuous sources of customer frustration. Some of these prob-lems can be helped by adjusting the ser-vice process so that customers are handled by an operations service desk. Other pos-sible initiatives include installing tracking capabilities so that customers have 24/7 access to payment status information. Such steps may not necessarily lead to a

higher number of transactions per customer, but they will certainly help retain and attract customers.

Banks also need to concentrate on reducing inefficiencies in the delivery of payment services, particularly by reduc-ing the costs of the distribution network. Indeed, with the emergence of electronic channels, physical distribution channels are less and less critical from a payments per-spective. There is great potential to reduce costs and en-hance the customer experience by improving the func-tionality of electronic channels and enlarging the range of products and services that are offered in the electronic- and mobile-payments space.

Of course, the physical distribution network—mainly bank branches and ATMs—still plays a large role in cash transactions and customer acquisition. Simply reducing the number of branches is not a cure-all. Banks will have to find clever ways to reduce the costs of handling cash—perhaps by decreasing the number of branches that ac-cept cash or by attaching charges to cash transactions—and retain the overall marketing effect of the branch by closing only those branches that are located in low-traffic areas.

In the end, to combat margin pressure amid the ongoing financial crisis and to maintain a steady overall course at this stage in the development of SEPA, we feel that Euro-pean banks should pursue the following steps:

Continue to avoid massive SEPA investments since ◊ benefits stemming from any further implementation of SEPA are limited.

Most European banks

need to improve their

overall level of client

service.


Examine the forces that will drive international strate-◊ gies over the next few years. SEPA itself will not drive international expansion.

Lobby with regulators for the fast development of ◊ standards for innovative electronic-, mobile-, and bio-metric-payment solutions. Such products could poten-tially become new sources of customer acquisition and retention, and could possibly be enablers of new business models.

Look carefully at the viability of in-◊ sourcing and outsourcing strategies. Benefits from such projects are not eas-ily achieved—from the perspective of either the outsourcer or the insourcer.

Focus on improving inefficient customer-related proc-◊ esses.

Regulators and policymakers should adopt the following practices:

Stop forcing banks and other members of the pay-◊ ments landscape into prohibitive SEPA investments.

Focus on setting standards for new products (such as ◊ electronic-, mobile-, and biometric-payment solutions) so that standards are consistent across Europe. This will give new and innovative products a greater chance of success.

Address inefficiencies in the payments systems of indi-◊ vidual countries.

The Way Forward for ACHs: A Single-Market-Based Growth Strategy

Clearing and settlement is a highly scale-driven business, and growth is an important driver of success for ACHs. Increased merger-and-acquisition activity in the sector over the past few years demonstrates this. But capturing scale is not an easy task.

Whereas banks find it hard to consolidate volume within any given region since legacy systems across different countries cannot be shut down despite similarities in schemes, ACHs face the problem of consolidating differ-

ent schemes across countries. In order to capture scale, the added volume has to be of the same scheme—or at least temporarily converted into a neutral “internal” scheme. This implies that ACHs will be able to truly cap-ture scale only if full SEPA is eventually realized.

Yet regardless of how SEPA ultimately plays out, ACHs still need to prepare for any scenario. They must acquire enough volume now (around 15 billion to 20 billion transactions annu-ally to reach 20 to 30 percent of the under-lying market volume) in order to poten-tially benefit from that volume later because it can be consolidated if full SEPA is actually achieved.

Although it might seem attractive to acquire volume di-rectly from individual banks across different countries, such a strategy is not viable because the services that ACHs offer differ by country. An ACH would thus need to add functionality in order to comply with country-specif-ic services and the varying IT architectures of different banks. ACHs should therefore pursue a single-market-based acquisition strategy, ideally through the acquisition of entire ACHs rather than through the acquisition of in-dividual banks’ volumes.

Of course, if full SEPA is not achieved, multiple schemes will remain running in parallel. The question is whether, in this event, there is some opportunity for ACHs to cap-ture scale. In our view, ACHs could find smart ways to achieve some synergy across schemes in, for example, core processing services—or, in some cases, even in clear-ing. When potential synergies are identified, ACHs must still look carefully at whether they have the right capabil-ities—or can find the right partner—to bring such syner-gies to fruition.

We recommend the following approaches for Euro- pean ACHs:

Large ACHs and their shareholders should explore ◊ strategic acquisitions in order to secure additional vol-ume but should take a wait-and-see approach before consolidating volumes onto one platform. Real scale benefits will come only if all transactions can be proc-essed according to the SEPA scheme (or be temporar-ily converted to a neutral “internal” scheme). Although the acquisition of an ACH with considerable volume

Large ACHs and their

shareholders should

explore strategic

acquisitions.


could be advantageous, large ACHs should be careful about acquiring numerous smaller ACHs because the integration of multiple institutions can lead to over-complexity and may add little value.

Smaller ACHs and their shareholders should carefully ◊ assess whether they can and want to play a role in a future SEPA environment. Those that do and that have a reasonable chance of reaching critical volume should attempt to acquire it now—with the caveat that avail-able volume is divided across many smaller parties and that achieving critical size will not be easy. Small-

er ACHs that do not want to play such a role should either sell or reposition themselves—for example, by moving up the value chain to provide services re-lated to the transaction processes that banks currently perform in-house. However, repositioning is difficult owing to the complexity of IT infrastructures, the high costs of migration, and the necessity of having just the right skill set. Any missing capabilities could be ac-quired through partnering, provided the right partner can be found. Selling might be a more attrac-tive alternative, but the biggest challenge is to get a fair price.


Despite the effect of the subprime crisis on U.S. banks, the Americas accounted for 33 percent of total global-retail-payments revenue of $565.5 billion in 2008. A com-pound annual growth rate (CAGR) of 5

percent is expected through 2016. Yet the Americas—dominated by the United States, Canada, Brazil, and Ar-gentina, which collectively accounted for 91 percent of the region’s total payments revenue pool in 2008—are a highly diverse set of markets in terms of growth and com-petitive dynamics.

For example, the mature U.S. and Canadian markets, where both customer penetration of payment products and the diversity of the products themselves are high, con-trast sharply with developing markets in Latin America, where large swaths of the population are still under-banked or unbanked. Trends in the usage of different pay-ment instruments also vary between the regions. In North America, paper checks are still heavily used, credit cards are reaching a saturation point, and debit cards are on the rise—whereas in Latin America, transactions are still heavily cash based and credit cards have been gaining mo-mentum, a trend that may be weakened by the crisis.

Furthermore, customer needs are at different stages of evolution across the Americas. They are more advanced in North America—where the average customer holds multiple products, some of which are quite sophisticat-ed—than in Latin America, where the emphasis is on ac-cess to basic financial products.

Since all of these differences pose varying challenges for banks operating in these regions, we will address the North American and Latin American payments markets separately in this section.

North America: A Struggle to Maintain Growth

The U.S. payments market, with revenues of $123 billion in 2008, is expected to grow at a CAGR of 2.7 percent through 2016, whereas the Canadian market, with reve-nues of $15.9 billion in 2008, is expected to grow at a CAGR of 3.2 percent over the same period.

As in other global regions, the economics of the payments business in North America are under the strain of increas-ing margin pressure. One factor is that the DDA is suffer-ing from tightening net-interest spreads. This tightening has been a short-term trend in the United States amid a long-term relative shift away from spread income toward fee-based revenue. From 1966 through 2007, spread in-come’s share of total payments revenue fell from 82 per-cent to 59 percent as noninterest income rose faster. Yet noninterest income sources such as overdraft fees and interchange revenues will be under increasing pressure over the next several years. For example, interchange rates and NSF policies are under regulatory scrutiny that could eventually result in government action to reduce them. Recently, U.S. bank regulators established new rules governing credit card issuers, limiting fees and inter-est rate changes.

Credit card revenues represented 58 percent of total pay-ments revenues in the United States in 2008, but growth has slowed as the market has become more saturated and the effectiveness of traditional promotional tools has waned with competition. Moreover, the subprime crisis and the resulting recessionary trends have prompted banks to sharply curtail card offers and reduce credit lines. In Canada, revenues from credit cards are still in-creasing overall and are expected to grow at roughly

Retail Payments: The Americas


double the rate of those in the United States, fueled pri-marily by consumer interest in rewards programs and the introduction of dual issue—banks being able to issue both MasterCard and Visa products.

Debit cards, by contrast, are realizing relatively rapid rev-enue growth in the United States as consumers increas-ingly seek substitutes for checks and cash transactions, at the same time taking ad-vantage of expanding debit-card accep-tance and rewards. As a result, we expect that debit cards will account for 24 percent of U.S. card revenue in 2016. Yet debit card margins are under pressure from the cost of expanding rewards programs and from merchants that are directing volume from signature to PIN transactions, which cost less for mer-chants and provide lower revenues for banks. In Canada, there have recently been attempts to build a more robust debit-card model—one similar to that in the United States. We expect these attempts to succeed over the next few years.

Hurdles to Clear. The most imminent challenge for North American payments providers is how to maintain growth in the face of the credit crisis and the resulting shift in the competitive landscape that has contributed to bank consolidation and the elimination of monolines. Longer-term challenges will include how to prepare for integrated, multiproduct competitors (since monolines no longer exist); additional new entrants with nontraditional business models; and current and potential legislation (such as that concerning interchange) capable of disrupt-ing revenue streams.

The Credit Crisis. The biggest strain on the North Ameri-can payments business has been the credit crisis and the overall market turmoil that has accompanied it—the ef-fects of which will reverberate well into 2009 and beyond. Not only have defaults on housing loans and the increas-ing cost of funds hurt banks deeply, but fading consumer confidence is causing serious cutbacks in household spending, affecting both credit- and debit-card revenues. Overall, volume growth is slowing, and costs are rising.

The crisis has also forced some weaker payments provid-ers into the hands of stronger institutions, altering the competitive landscape and accelerating the weeding-out process that began with the disappearance of monolines.

Other adverse trends—such as the increasing cost of re-wards programs, aimed at attracting and retaining high-transaction customers—will lead to further market con-solidation since competition for affluent consumers will include both deposit and lending products. These dynam-ics will benefit multiproduct institutions with the strong-est capital and funding sources.

The Interchange Problem. U.S. lawmakers are examining current interchange levels with an eye toward lowering the fees that banks receive. The goal, at least in theory, is to benefit consumers and merchants. In our view, however, the ongoing inter-change debate is misplaced and based on an erroneous assumption—that lower in-

terchange rates will lead to reduced costs for merchants, which in turn will result in lower costs for consumers. The core problem, in fact, is simply a lack of pricing transpar-ency. Indeed, putting new limits on interchange will not necessarily achieve lower consumer prices. The fact is that the opposite could occur. For example, when Australian legislators lowered interchange rates several years ago and eliminated a no-surcharge rule, issuers responded swiftly to make up for lost revenue, while merchants took advantage of lower costs to their own advantage. Card-holders were hit with rising card fees and less attractive rewards programs, and consumer prices did not change. The same scenario could occur in the United States.

The Reaction to Nontraditional Payments Providers. New providers from the online world are entering the North American payments market and challenging traditional networks and business models. Google, because of its sheer size and its advertising-revenue rather than trans-action-revenue model, is the most notable threat to tradi-tional providers. PayPal continues to be a scale challeng-er that can disrupt the network business model by moving transactions away from network pathways to ACH-like pathways. Ascendant providers such as Bill Me Later (re-cently acquired by eBay), Tempo Payments, and Revolu-tion Money have yet to prove that they have scalable, sustainable business models.

Google, with its Google Checkout product, has become a front-end payments processor—both a consolidator for cardholders and a quasi-merchant acquirer. Moreover, Google is driven by an entirely different revenue model than that of banks. Card processing is free or at least dis-

How can North American

payments providers

maintain growth amid

the credit crisis?


counted for merchants using Google ad services. Google stands apart still further because it holds an exceptional amount of data about consumer searching and spending behavior—data that it can leverage both to offer person-alized discounts and rewards to Google Checkout users and to provide merchants with detailed information about customer shopping patterns. As Google moves from search engine information to trans-action information, its ability to price its advertising business model will be greatly improved. With its enormous scale, a com-pany such as Google has the ability to change the competitive landscape.

Although challengers to traditional pay-ments providers have the advantage of having no legacy baggage, they also have the disadvan-tage of being relative neophytes when it comes to being able to meet and balance the needs of all stakeholders. For example, they are weak at serving some core card-holder needs, leaving the two segments that generate 75 percent of the card revenue pool—heavy transactors (those who spend a lot) and medium to heavy revolvers (those who borrow)—largely uninterested. Indeed, trans-actors demand rewards, so most nontraditional models do not work for them, whereas revolvers need credit, which most new entrants do not provide.

Actions to Take. Despite market conditions that were already daunting—and that have been exacerbated by the subprime crisis—the North American retail-payments business is also facing a time of unique opportunity stem-ming largely from the increasing importance of deposit-based products and the demise of monolines. Winning institutions will be those that leverage their payment ser-vices to build their deposit and lending businesses, al-though banks will necessarily be more cautious lenders in the near term. As banks’ abilities to generate revenues by raising fees decline, spread income will be needed to fuel revenue growth. Another important source of reve-nue growth will be debit cards. Consequently, banks need to find ways to spur greater usage by increasing their base of deposit customers.

A key question is how banks can make the DDA an effec-tive platform for selling debit and credit cards as well as other credit products, and inversely, how they can forge a DDA relationship with a credit-card-only customer. We believe that next-generation loyalty programs are the an-

swer. Moreover, in such programs lies a further opportu-nity: bridging product and channel silos to offer relation-ship-based programs.

The Next Generation of Loyalty Programs. The winners in the North American payments game will capture a great-er share of consumers’ balance sheets by implementing

loyalty strategies that feature flexible re-wards tied to overall relationships. Indeed, with a multiproduct business model, a bank could create a less profitable (or even loss-making) credit-card offering in return for having the customer’s DDA and other credit business. In addition, banks need to better mine their DDA customers for the most active transactors and revolvers.

Of course, innovative loyalty programs come in a variety of forms, depending on the target market segment. For revolvers, the most valuable rewards will be those tied to credit terms, such as the amount of the credit line, flexi-bility of payment, size of potential interest-rate increases, and suspension of universal default clauses. Rewards could also be a function of the card’s share of an indi-vidual’s total borrowing. For transactors, loyalty programs will take a comprehensive view of the customer relation-ship based on relative usage—such as a card’s share of an individual’s total spending or total balances (both credit and deposit). The key is to design not a program that re-wards existing behavior but one that provides incentives that lead to a higher share of wallet for the bank. Exam-ples include making loans contingent on also having the DDA and providing richer rewards on cobranded credit cards if the customer adds other products from the bank.

The Untapped Opportunity of Debit Cards. In contrast to the mature credit-card business, debit card transactions are still growing at double-digit rates in North America. Ex-ploiting this opportunity in spite of the financial crisis will be critical to maximizing payments-related revenues and counteracting overall margin pressure. Banks must continue to grow not only debit card issuance, with the goal of a “card in every wallet,” but also usage, with the goal of card use enabled at every point of sale (POS). We expect to see creative offerings launched in order to grow DDA business as debit cards move from being a commod-ity to being a differentiator for market leaders. The win-ners will set themselves apart on the basis of effective usage campaigns and selective rewards programs.

The North American

retail-payments business

is facing a time of unique

opportunity.


What is more, not all winners will even “own” the DDA. Some will benefit by offering unique and attractive debit-card products—offline cards provided by a financial insti-tution other than the one providing the DDA. We expect to see such cards issued as companion cards to the large cobranded offerings under the “for those occasions when you prefer to use debit, you can also earn rewards” con-cept. The long-term winners will excel not only at driving POS volume but also at migrating online-bill-payment volume away from ACHs toward the debit card.

The Potential of Mobile Banking. There are various models of mobile financial services relevant to the North Ameri-can market. They include the following:

Mobile cash: the mobile phone is used for person-to-◊ person transactions

Mobile cards: a chip-embedded mobile phone replaces ◊ the plastic card

Mobile networks: a phone network replaces ACHs and ◊ card networks

Mobile downloads: the mobile phone is used to pur-◊ chase ring tones, games, and products, and to access various forms of content

Mobile credit: mobile-phone carriers become issuers, ◊ leveraging the phone bill as a credit instrument with a limited line

Mobile banking: the mobile phone becomes an exten-◊ sion of online banking

Of these models, mobile banking shows the most poten-tial in North America, whereas mobile-payments models currently have a limited value proposition and revenue potential. Mobile banking is viable from the perspective of both consumers and financial institutions. As BCG has discussed in previous Global Payments reports, online-banking customers in the United States are more profit-able than offline customers, even after adjusting for dem-ographics and selection bias—generating an increase in household profitability of 10 to 20 percent in the first year after adoption. Banks that can take customer usage of innovative products such as mobile banking to the next level can create not only a new profit lever but also a new account-acquisition vehicle.

In conclusion, banks in North America need to develop a holistic payments strategy that straddles product silos and embraces a comprehensive revenue and cost analy-sis. Only then will they be able to maximize payments revenue streams and provide multiproduct DDA offer-ings, including not only a debit card but also a credit card and mobile payments, effectively becoming a one-stop payment provider. Banks should also adopt the following measures:

Explore the acquisition opportunities that the credit ◊ crisis has presented.

Develop multiproduct and multiperk loyalty pro-◊ grams.

Drive debit card usage through selective rewards and ◊ incentives, and determine how to migrate online bill payment to the debit card.

Consider entering the debit card arena without the ◊ DDA relationship (if you excel at cobranding). If not, work to protect your debit business from new entrants possessing strong value propositions.

Keep a watchful competitive eye on alternative ◊ payments providers that have disruptive business models.

Explore mobile-banking initiatives, which are capable ◊ of generating new accounts.

Latin America: Credit Cards at Center Stage

Latin America represents a highly diverse set of more than 20 payments markets in which large swaths of the population are either underbanked or unbanked. All of these markets, however, share a heavy reliance on cash transactions.

In growth terms, total retail-payments volume will rise from 17.2 billion transactions in 2008 to an estimated 44.2 billion transactions in 2016. Payments revenues will grow from $47.7 billion in 2008 to an estimated $107.3 billion in 2016, a CAGR of roughly 11 percent. The region is dominated by Brazil, with Argentina a distant second. Respectively, these two countries control 48 per-cent and 8 percent of total regional transaction volume,


and 44 percent and 23 percent of total regional payments revenue.

The driver of payments growth in the region is credit cards. In contrast to North America, the leading markets in Latin America are still in a high growth and return phase, with substantial share up for grabs. In Brazil, spending volume has grown 21 percent annually since 2001, nearly twice the rate of the world average of around 11 percent. Credit-card return on equity is more than one-third greater in Brazil (around 35 per-cent) than the world average of roughly 21 percent. Moreover, the economics are at-tractive for all stakeholders. Brazilian issu-ers enjoy a 20 to 30 percent after-tax profit margin compared with 16 percent for U.S. issuers.

In Mexico, credit card growth is accelerating and will likely be the most important factor both in payments rev-enue generation and in moving the country away from cash-based transactions in the coming years. Debit cards have also managed to penetrate consumer payments, but card ownership and acceptance are still very limited. All payments providers are looking to the less affluent social classes for profitable growth opportunities. Up to now, retailers have been best positioned to serve these custom-ers—owning rich transaction information and having strong brands in this segment—but we see telecommuni-cations operators and incumbent banks also fighting to capture the opportunity.

Another leading market, Chile, has also experienced dou-ble-digit growth in bank cards across the board. Receiv-ables showed a CAGR of 23 percent from 2004 through 2007, the number of active cards increased at a CAGR of 26 percent over the same period, and spending grew at a CAGR of 19 percent from 2005 through 2007.

In Brazil, the increase in spending volume is being fueled by strong growth in the number of cards issued, which in turn has been driven by the rise of successful bank-retail-er partnerships and deeper penetration of the low-in-come market. The environment in Brazil—as well as in Mexico—is proving ideal for migrating private-label cards to cobranded cards. On the demand side, consumers, par-ticularly those with low incomes, have few if any sources of credit and typically are not comfortable interacting with traditional banks. Yet they are receptive to applying

for the relatively fast and easy credit services offered by retailers. On the supply side, retailers benefit from the credit expertise of their bank partners and the ability to build customer loyalty through a credit card. Banks ben-efit by being able to grow outside of their historical cus-tomer base. Bank-retailer partnerships have not flour-ished throughout Latin America, however. In Chile, the

leading retailer, Falabella, aggressively en-tered the market alone, targeting low-in-come customers, and has succeeded at having almost as many active cards as the entire banking sector.

Growth in Chile has been spurred by suc-cessful targeting of the mid-to-low-income consumer. Yet in the process, bank credit

cards have taken some share away from retailer cards, which dominate the market with 58 percent of total card spending. Retailers are challenging these incursions by strengthening their value propositions—adding personal loans, revolving credit, and increasing acceptance of their cards outside their own stores.

Overall, the main challenges to sustaining payments growth in Latin America reside in two basic questions: How can banks migrate consumer payment preferences away from cash to cards? And how can banks encourage the adoption of cards by the underbanked and unbanked? Indeed, in most Latin American countries, more than 70 percent of the population does not have a bank ac-count. Banks must structure their delivery model to reach and effectively serve the underbanked and unbanked.

Today, noncard credit has by far the highest penetration in the region, whereas other traditional products have low penetration. For example, in Brazil, only 21 percent of the population earning between $100 and $700 per month has a checking account, and just 14 percent of this group uses debit cards. Even individuals who have check-ing accounts write relatively few checks.

Ultimately, innovative banks in Latin America are trans-forming the consumer delivery model by leveraging their credit-card platform and consumer-finance arms to deep-sell (extending credit limits, for instance) and cross-sell a variety of credit products, insurance, and current accounts to cardholders. Moreover, banks are enabling and encour-aging customers to use their cards to pay bills. In the process, they are finding retailers to be key partners.

The driver of payments

growth in Latin

America is credit cards.


We conclude, however, that focusing solely on the core card business in such a high-growth market will not be sufficient. Opportunities for issuers to expand are numerous. They include issuing credit cards as cash with-drawal cards; adding retailers as private-label partners; moving into consigned (payroll-based) loans; offering loans for specific products and services (such as those related to automobiles); and issuing cards tied to specific networks (and hence to more merchants). In addition, as banks’ overall credit business grows, superior risk-man-agement skills will be paramount to building a sustain-able business model.

As in North America, card-based loyalty programs should prove fruitful in customer retention and acquisition. Moreover, beyond credit, there are opportunities for banks to sell various types of insurance. Aspiring issuers are not only developing attractive product extensions but also offering comprehensive value propositions: no fees, preapproved credit, emergency withdrawals, and multiple withdrawal channels.


The possibilities for mobile phones as dis-tributors of financial services in emerging markets is not a new story: many banks, telecommunications operators, and hard-ware providers have tested the waters both

globally and in developing markets, where the potential is greatest. But few institutions have maximized the op-portunity. In this chapter, we will focus on the potential of the mobile phone as a payment instrument in the Asia-Pacific region.

As in Latin America, the opportunity in the Asia-Pacific region begins with the basics—the large percentage of the population in many markets that does not have a bank account. We refer to this segment as part of the next billion financial consumers, or people who are still ex-cluded from mainstream banking. There are 263 million such households in China, 135 million in India, and 162 million throughout the rest of Asia-Pacific. For the most part, it is not economically viable to acquire and serve these consumers through traditional bank-branch networks because the cost to serve them is too high rela-tive to the revenue potential and because a large share of potential customers resides in isolated rural areas.

Yet the cost to serve these consumers through mobile phones is relatively low. Indeed, mobile phones can play a game-changing role in emerging markets for distribut-ing financial services in general—and payments specifi-cally—through an enhanced customer experience that includes speed, simplicity, flexibility, bundled product of-fers, constant availability, and overall convenience.

In fact, the mobile phone could very well be the bank branch or personal computer of the developing world because it is so ubiquitous and relatively easy to use.

What is more, since many accounts attached to mobile phones are based on prepayment and stored value, risks are limited for financial institutions.

Currently, there are an estimated 444.5 million mobile-phone subscribers in China, compared with 158.6 million Internet subscribers. In India, the numbers are 136 mil-lion and 25.1 million, respectively. Moreover, penetration rates for mobile-phone subscriptions are growing rapidly. In China, the current CAGR is 31 percent, whereas in In-dia, it is 87 percent. Penetration rates are expected to continue their rapid rise because mobile handsets can be acquired at relatively low cost.

There are already several examples of innovative pay-ment offerings through mobile phones in emerging Asia-Pacific markets, but these offerings are still nascent. They include Globe Telecom’s GCASH and Smart Communica-tions’ Smart Money in the Philippines, and Obopay in India. Merchants in more developed Asia-Pacific coun-tries are setting the pace for the acceptance of mobile payments. In South Korea, for example, more than 80 per-cent of merchants have contactless POS terminals.

Indeed, mobile phones are capable of a host of payment functions: paying for merchandise in stores, transferring money, paying and collecting bills and remittances, man-aging prepaid functions, and redeeming coupons and loyalty program credits. In addition, the economics of of-fering payment-related services through mobile phones are advantageous because revenues can be generated through float and potentially through transaction fees.

Banks and telecommunications operators are best posi-tioned to play in this market since they have the closest links to the customer and to usage and transaction data.

Retail Payments: Asia-Pacific


But success will require rethinking traditional roles in the payments ecosystem, made up of both key and support-ing institutions. Opportunities abound, as do risks. (See Exhibit 3.)

For example, a critical mass of merchants will need to accept mobile payments and possess terminals capable of capturing the required information. Also, handsets must be advanced enough to support the necessary soft-ware, and a robust hardware-distribution strategy will be necessary to ensure that handset penetration continues to increase. End-customers will expect the same conven-ience level as cash payments, especially when it comes to speed of initiation. What is more, telecommunications operators must be cooperative partners that will not block certain services on their networks. They will there-fore need sufficient incentives.

Success at mobile payments in Asia-Pacific emerging markets will also require a deep understanding of cus-tomer needs, which can be of a different nature from those in, say, New York, London, or Tokyo. Furthermore, payments providers will need to be able to deal effec-

tively with diverse regulatory climates in different mar-kets. In China, for example, authorities compel foreign banks to develop new business through alliances with lo-cal banks. There are already several examples of strategic alliances in the credit card arena.

In addition, there is a crucial role for regulators in making sure that common standards are set early for mobile pay-ments. The reason is that innovation works only if there is a critical mass in the market adopting the new pay-ment instrument or channel. This can be achieved only with a common standard. A certain dominance is re-quired to be able to set implicit standards (as some com-panies have done for mobile-phone hardware), but stan-dard setting by individual companies is not generally desirable from the viewpoint of competition and open markets. For payments providers, the point is to move early and move big, and to push for standard setting by a local regulator—which will be difficult to change as the market grows.

Of course, a key question for banks attempting to stake out a mobile-payments position in emerging Asia-Pacific

Consumers

Mobile-payments platform High

Low

Key player Support player

PaymentnetworksCarriers

Issuingbanks

Retailbanks

Merchants

Third-partyservices

Risk

Merchantacquirers

Carriers◊ Opportunity to diversify revenue streams◊ Will require payment for access and investment◊ Multiple carriers needed to reach critical mass

Merchants◊ Opportunity to build loyalty and increase spending◊ POS upgrade is a major hurdle to critical mass

Issuing and retail banks◊ Opportunity to protect and deepen relationships◊ Want to maintain ownership of customers

Payment networks◊ Opportunity for revenue growth◊ Provide contactless “rails” to build

mobile payments

Third-party services◊ Opportunity to exploit new channel◊ Will join aer critical mass is achieved

Acquirers and manufacturers◊ Opportunity for growth with limited risk◊ Will join ecosystem willingly

POSmanu-

facturers

Handsetmanufac-

turers

Chipmanufac-

turers

Exhibit 3. There Are Multiple Opportunities for Players in the Mobile-Payments Ecosystem



markets concerns which exact markets to approach. The answer will depend on whether the bank has already es-tablished a presence in other product areas in the target countries. It is far easier to expand a market presence than to create one from scratch. Other issues to consider when targeting specific markets is the friendliness and accessibility of regulators and potential partners such as hardware providers and local telecommunications op-erators.

Successful mobile-payments solutions will require a broad set of skills and requirements. These include customer acquisition, merchant account acquisition, customer-ac-count relationship management, brand management, product development, and merchant-account relation-ship management. Nonetheless, by 2016, the total trans-action-related revenues of mobile payments may reach up to $40 billion on a global basis, not including any ac-count-related revenue streams.

In the long run, the jury is still out on the extent to which mobile payments will take off in emerging Asia-Pacific markets. Various types of companies are trying to estab-lish a presence not only in certain countries but also with potential partners. Banks cannot succeed on their own. They will need collaborators in the telecommunications, hardware, and regulatory fields. Furthermore, there is an ongoing debate about who will really “own” the custom-er—the bank, the telecommunications operator, or the hardware manufacturer. Another piece of the puzzle is how to provide merchants with incentives to buy the equipment required to handle mobile payments. Which-ever way you slice it, however, the potential pie for mo-bile payments in emerging Asia-Pacific markets is enor-mous. Now is the time for banks to explore ways to get themselves into position.


The wholesale-transaction-banking busi-ness—defined here as wholesale payments, including treasury services, cash manage-ment services, and the commercial cards business—has become something of a star

in wholesale banking. As the performance of other busi-ness lines has suffered in the face of the broadening fi-nancial crisis, transaction banking has proved itself to be a stable and critical cornerstone of revenue—with shares of up to 40 percent for leading players within corporate banking segments. At most global banks and leading do-mestic banks, the business continues to generate increas-ing revenue streams and a growing list of clients—offer-ing banks an opportunity both to deepen share of wallet and to tap unexploited revenue pools through cross- selling.

Transaction banking revenues in the wholesale segment are expected to grow at a CAGR of around 7.4 percent through 2016. Although revenues from cross-border trans-actions will grow gradually—with those from domestic transactions exhibiting relatively slow growth—account-related revenues (chiefly earnings from interest spread) should fuel most of the expansion. (See Exhibit 4.)

In addition to providing sound overall growth, transac-tion banking is a very attractive business from a risk viewpoint. One example from our database, concerning two mid-cap corporate-banking units, demonstrates that both revenue per risk-weighted assets and return on eco-nomic capital for a company whose business is roughly 50 percent transaction related is about twice that of a bank whose business is just 30 percent transaction relat-ed. This advantage becomes even more evident in two credit-crunch scenarios, in which the loss in economic profit for a credit-focused provider is nearly five times

greater than that of a transaction-focused one. (See Ex-hibit 5.) Clearly, transaction-banking revenues should help banks dampen overall revenue volatility going for-ward and should provide some level of protection from the overall financial crisis and the credit crunch.

Revenue and Cost Challenges

Transaction banking may provide stable and growing revenues, but prices are still under increasing pressure. Revenues per transaction from both domestic wholesale transactions and cross-border wholesale trans-actions are expected to decrease by approximately 24 percent from 2008 through 2016. These dynamics un-derscore the need for banks to adjust their business models in order to be competitive in both the medium and the long term. (See Exhibit 6.)

The price pressure stems largely from increasing competi-tion among banks in the battle to build scale, as harmo-nization in the global transaction-banking business—along with technological advancements—lowers entry barriers for foreign companies seeking a presence in local markets. Standards such as ISO 20022 are a factor, help-ing banks to extend their geographic reach without needing a physical presence or partner in a foreign coun-try. In addition, the availability of open communications platforms (such as SCORE, which enables bank-to-corpo-rate connectivity via SWIFT), along with the steady mi-gration toward open architecture, are contributing to lower switching costs for corporates. Multinationals and large caps, as well as mid caps with high international aspirations, will benefit from these developments be-cause the integration of cash-management and transac-tion services into their proprietary systems will become easier.

Global Wholesale Transaction Banking


18.765.6

155.3

239.6

20080

100

200

300

400

500

31.0

85.5

308.9 Account revenues, wholesale

Revenues ($billions)

9.0

3.4

6.5

x

425.4

= CAGR (%)

Transaction revenues, wholesale domesticTransaction revenues, wholesale cross-border

2016

7.4

Exhibit 4. Account-Related Revenues Should Drive Growth in Global Wholesale Transaction Banking

Source: BCG Global Payments database, 2008.

18

41

100

497

252

494

Economic profit (%)

Scenario 2

Economic profit (%)

Scenario 1

–961 –47

–19 –11

Revenue mix(%)

Credit

Revenues/risk-weighted assets (basis

points)

Return oneconomic

capital(%)

Economicprofit

(indexed)

◊ 25-basis-point margin squeeze owing to higher funding costs

◊ 50 percent increase in loan losses

◊ 10 percent drop in lending volume owing to capital constraints

◊ 50 percent increase in loan losses

4852

2971Credit-focusedprovider

Transaction-focusedprovider

Transaction/deposits/other

Before the credit crunch Impact of the credit crunch

Example: The potential impact of the credit crunch on two mid-cap corporate-banking units

Exhibit 5. The Impact of the Credit Crunch Will Vary Among Different Types of Providers

Source: BCG global corporate-banking benchmarking database.Note: Based on average credit-focused provider and transaction-focused provider in the database, using peer average costs and loan losses for both.1Economic profit is completely wiped out from a regulatory capital viewpoint.


Yet price pressure will have a different impact on differ-ent countries, depending on their current transaction price structure and level. For example, markets such as Germany and the Netherlands are characterized by rela-tively low prices but also by low costs. These markets can be four to five times more efficient in terms of cost per transaction than markets such as Spain, Portugal, and Italy, where prices are relatively high. We estimate that revenues per payment transaction in high-price (and thus high-revenue) markets will decline by up to 45 percent over the next five years, whereas those in low-price (and low-revenue) countries will slide by up to 15 percent.

Banks are not facing challenges just on the pricing side, however. Overall margins are also under pressure from rising costs, partly owing to customer demands that have increased significantly with regard to expected service levels. For example, multinational corporations are deep-ening their international footprints and seeking reliable banking partners on both the global and the local level. Their needs are extensive. Even tasks that many corpo-rates assume are simple and easily executed, such as opening international accounts, still require considerable

time and effort as a result of scattered IT processes and unclear responsibilities. (See the sidebar “Streamlining the Opening of International Accounts.”) In addition, achieving seamless integration with accounting processes, general-ledger systems, and ERP systems is becoming an expectation of large wholesale-banking clients. Such ser-vices are being demanded not just by multinationals but also, to an increasing extent, by mid- and large-cap cus-tomers. Mandates such as these have an enormous im-pact on the requirements for banks’ IT infrastructures and processes. As a result, leading wholesale banks are planning to invest between $500 million and $1 billion each over the next few years to upgrade their IT systems and align their interfaces.

Clearly, the outlook for cost-to-income ratios is relatively dismal. They will likely worsen over the next five years, accelerating the exit of unsustainable business models. Such ratios in low-revenue countries are expected to in-crease by about 5 percent from 2007 through 2012, whereas in high-revenue countries they will likely rise by between 30 and 35 percent—in some cases potential-ly exceeding 100 percent given the expected pricing pressure.

In order to maintain current or at least comparable cost-to-income ratios, payments providers in low-revenue countries will need to lower their cost base by about 10 percent by 2012, whereas those in high-revenue countries will be confronted with a much more difficult challenge: lowering their cost bases by 30 to 35 percent (or 7 to 8 percent per year).

But cost-reduction initiatives on their own will not be suf-ficient to stabilize cost-to-income ratios. Banks will also need to put more effort into enhancing revenue streams. They can do so by providing products of higher value and services with higher margins, optimizing cross-selling op-portunities, and exploiting other untapped revenue sources—all aimed at increasing share of wallet. For ex-ample, by improving core transaction-banking services—including overall accuracy, better customer service, and higher straight-through processing rates—banks can strengthen the loyalty and cross-selling potential of cli-ents. (See Exhibit 7.)

In addition, although the transaction-banking revenue model continues to be driven by “price times volume,” account-related products and services are capable of add-

0.87

Transaction revenue,wholesale domestic

Transaction revenue,wholesale cross-border

0.66

12.60

9.63

Revenues per transaction ($)13

12

11

10

2008 2016

0

–24.3%

–23.5%

Exhibit 6. Revenues from Both Domestic and Cross-Border Wholesale Transactions Are Expected to Plummet

Source: BCG Global Payments database, 2008.Note: Any discrepancies in percentages are the result of rounding.


ing substantial revenue over the next decade. We expect these revenues to be driven increasingly by liquidity-management, financing, and risk-management services. Pure payment services will diminish in terms of share of revenue but will continue to play a critical role in attract-ing business to banks that deliver secure, reliable, and increasingly automated payments processing. Yet the shift toward value-added services will pose increasing challenges to banks’ IT infrastructures and processes, ne-cessitating a remodeling of transaction-banking operat-ing models.

Sustainable Business Models That Meet Customer Requirements

Given the multiple challenges that banks face, the development and implementation of a sustainable busi-ness model—made up of both a delivery mode and an operating model—is critical to success. Yet all business models in transaction banking should be centered on cus-tomer segments and demands. Banks must define the best delivery model (the customer segments to be served, the regions to be covered, and the products and channels

From a client perspective, the opening of an international account is a core service. More than 70 percent of clients ex-pect an international account to be opened within two weeks of their original request, and 50 percent of clients allow just one week. Yet opening such an account is a complex and cumbersome process that can take banks up to 80 days to complete. One factor is that more than ten employees from the bank often need to be involved. Also, the client must sometimes complete up to 20 forms of around 100 pages each.

Moreover, within the different steps of the account opening process (the start-up and offer process, information re-quests, contract finalization, and account opening and notification), there are often five to ten parties involved within the bank, yet no one person has an overview of the entire process and full accountability.

To improve quality and meet client expectations, process times need to be shortened significantly. Within the overall process, the following issues often cause delays:

Data collection and usage are not efficient ◊

There is no stringent process monitoring ◊

There is no optimal process workflow ◊

To achieve shorter throughput times, a transition must be made from current processes to a new approach that in-cludes the following:

One overall process owner who tightly monitors progress ◊

Clearly defined individual responsibilities ◊

A maximum of three to four different internal parties involved ◊

Only one form for clients to complete ◊

Digital forms and documents ◊

“First time right” processes ◊

Steps such as these will help increase the efficiency of this process and align it with customer expectations.

Streamlining the Opening of International Accounts


required) adequately, then align their operating model (organization and governance, end-to-end process-ing procedures, IT infrastructure solutions, sourcing policies, and locations) with the delivery model. (See Ex-hibit 8.)

Obviously, customer needs vary significantly, depending on the size of the company, the nature of its business, and its global footprint. As a consequence, each customer seg-ment must be analyzed separately in order to meet its payments needs optimally. In our view, the following ele-ments will be required to serve the needs of the different wholesale-banking segments.

Multinational Corporations and Large Caps. Multina-tional corporations and large caps that serve internation-al markets—and that possess facilities and suppliers in

multiple countries—pose the greatest challenges. When it comes to the delivery model, the requirements for serv-ing the payments needs of these companies are product depth and breadth, combined with value-added services such as the following:

Multicountry, multicurrency, real-time (or near real-◊ time) netting systems

Front-end tools such as online applications for real-◊ time reporting and information management

Straight-through processing through seamless integra-◊ tion with clients’ back office, ERP, or general-ledger system

The enabling of multichannel integration ◊

Otherbundles

6 7 8 17 2 195 54225

30.0

1.0x 1.0x 2.5x

6.4x

2.3x

6.3x8.9x

14.3x

19.7x

29.2x

24.2x

20.0

10.0

0Transaction

banking

Transactionbanking,

trade finance,treasury

Transactionbanking, deposits

Transactionbanking,

loans

Transactionbanking, treasury

Transaction banking,

trade finance, treasury,deposits


trade finance, treasury,

loans


trade finance, treasury,

loans, depositsTransaction banking,

trade finance,treasury, loans,

deposits,structured finance

Treasury

Share ofall clients (%)

1product

2products

3 products

4products

5 products

6 products

An average

of 3.2 products

Average revenues per client(indexed)

High cross-selling revenue effects are possible

Exhibit 7. The Cross-Selling of Existing Products and Services Leads to Significantly Higher Revenues per Client



Working-capital management (such as receivables and ◊ supply-chain financing)

Real-time liquidity monitoring◊

When it comes to the operating model, the requirements are as follows:

A design that addresses end-to-end service excellence◊

Operational efficiency and global scale (strong plat-◊ forms for core transaction-banking products), provided there is no conflict with service excellence

Ultimately, for multinational corporations and large caps, quality and flexibility are more important than pure pro-ductivity and industrialization. Logically enough, these companies are served primarily by large global banks that have the required capabilities. Smaller banks gener-ally lack product depth and scale, and are not able to provide a broad range of innovative value-added services. They also lack global reach and typically are not present in all markets where multinationals are active.

Mid Caps. Mid caps are midsized corporates with strong positioning in a few countries—often with a strong focus on one region. Their requirements are partly similar to those of multinationals, but on a lower volume level.

When it comes to the delivery model, the requirements for serving the payments needs of mid caps will be the following:

Strong transaction-banking skills and a full range of ◊ core transaction-banking products

Some large-cap services◊

A dedicated wholesale delivery model◊

Increasing focus on cross-border business ◊

International presence and regional partner net-◊ works

When it comes to the operating model, the requirements are as follows:

A customized model that can be aligned with retail ◊ when complexity is limited and when customers are more focused on “plain vanilla” payments and trade finance products

A model that can function separately when complex ◊ wholesale products and services, notably with regard to integration into customer systems, have to be proc-essed, and when a critical mass of volume is available

Deliverymodel

Operatingmodel

Feasibility/solutions

Inputs/needs

Products and servicesChannelsRegions

Organization and governance

Processes

IT infrastructure

Location Sourcing

Customersegment

The requirements of customer segments are the key todefining the delivery model and the subsequent operating model

Exhibit 8. The Delivery Model and the Operating Model Must Be Well Defined and Aligned



In most cases, mid caps are served by global banks and large regional banks. The latter group is the most chal-lenged in the shifting competitive environment. They must “out-local” domestic leaders, while ensuring that they are on a par with global leaders in select areas. In order to succeed, they must manage a delivery and operating model that is fine-tuned to expedite expansion effectively. Large regional banks that have excelled at the cross-border consolidation game continue to face critical decisions. Should we build or buy next-generation technology? How should we follow our multinational customers into new regions? The directions that these banks take will be driven largely by their domestic market position and by the customer seg-ment mix with which their operating model must be aligned. They must decide whether to put their main focus on quality and flexibility—or on productivity and the mitigation of operational risks—on a case-by-case basis.

On the product side, banks have opportunities to raise revenues from mid caps by enhancing their offerings in areas such as merchant acquiring, payroll services, corpo-rate cards, payroll cards, purchase cards, and business debit. These are all high-growth, high-margin, low-pen-etration products that are highly relevant in today’s climate.

Small Caps and SMEs. The delivery model to serve the payments needs of small caps and SMEs could be merged with the model serving the retail segment since the sales and relationship characteristics are quite similar. Basi-cally, banks should run the same platforms and incre-mentally add wholesale components such as collection systems to the core banking application. For small caps and SMEs, productivity and industrialization are critical in order to efficiently handle mostly industrialized pay-ment products.

An Operating Model Aligned with Customer Segments

Different customer segments require different products and services from their transaction-banking partners, so a deep knowledge of customer needs is indispensable. Since a dedicated wholesale delivery model will be the most effective way to serve larger customers—multina-

tional corporations, large caps, and mid caps—the more critical question is how to find the right operating model that makes that delivery model work.

In recent years, customer demands for complex value-added products and services—and for their integration into client systems in multiple regions—have steadily ex-

panded. This has been notably true for multinationals and large caps, but it is also true for mid caps with high aspirations.

Given that most banks serve both whole-sale and retail payments customers, one operating model has traditionally been used to deliver products to both segments.

(See Exhibit 9.) Yet higher demands have put pressure on banks. Transaction banking units thus must face the di-lemma of whether to continue using one comprehensive operating model—in order to help achieve scale and cost efficiency—or to split their operating model into whole-sale and retail components in order to provide more cus-tomized solutions (at the expense of economies of scale and at structurally higher costs).

In order to decide how to approach this fundamental tradeoff, the requirements of the respective customer seg-ments can again serve as a guideline. Multinationals and large caps value flexibility and quality of service to a much greater degree than small caps and SMEs, for which productivity and efficiency are the key. Therefore, multi-nationals and large caps would likely be best served by a separate operating model dedicated to handling complex wholesale products and processes. Small caps and SMEs should be served with a comprehensive whole-sale-retail operating model that exploits economies of scale in order to achieve operational excellence and cost efficiency.

Ultimately, global banking giants may evolve into having completely separate, end-to-end business models in trans-action banking for retail and wholesale customers. (See Exhibit 10.)

The design of the operating model for large regional banks is much more complex since they are somewhat stuck in the middle in terms of requirements for the cus-tomer segments they serve and their transaction volume. For these banks, the decision about the tradeoff between

Customer demands for

complex value-added

products and services

have steadily expanded.


Deliverymodel

Operatingmodel

Products and services

Channels

Regions

Location

Products and services

Channels

Regions

Organization and governance

Processes

IT infrastructure

Sourcing

Majortradeoffs

Client needsand wants

Currentoperating

model

Retail Wholesale

Numerous forces are separating the operating model

Customersegment

Customersegment

Exhibit 9. Traditionally, Banks Have Used One Operating Model to Serve Both Wholesale and Retail Payments Customers


Location

Products andservices

Channels

Regions

Organizationand governance

Processes

IT infrastructure

Sourcing Location Sourcing

Retail Wholesale

Customersegment

Products andservices

Customersegment

Channels

Regions

Organizationand governance

Processes

IT infrastructure

Exhibit 10. Global Banks Could Develop Separate Delivery and Operating Models for the Retail and Wholesale Segments



focusing on quality and flexibility versus realizing scale and cost efficiencies requires a much deeper analysis of their current business model and vision for the future.

Key questions to be answered include the following:

Which customer segments are we currently serving, ◊ and which do we want to serve in the future?

What are the specific requirements and needs of the ◊ customer segments to be served?

What is the most suitable delivery model (products, ◊ channels, and regional coverage) to meet each seg-ment’s requirements?

How is our current operating model (organization and ◊ governance, processes, IT systems, sourcing, and loca-tions) covering these requirements?

What are the best practices both in the overall indus-◊ try and among our peer group, and what are the key success factors?

What are the levers to improve operational excellence ◊ internally, and what level of excellence do we as- pire to?

The Boston Consulting Group has developed a business-model health check that can uncover the strengths and weaknesses of banks’ delivery and operating models re-garding their payments businesses. (See Exhibit 11.) In the end, the strongest institutions in the transaction bank-ing business will be those players that are able to monitor the performance of their business model and adjust it accordingly.

Operationalflexibility

Systemarchitecture

Portfolioapproach

Standardsystem

Proprietarysystem

Productdevelopment

model

Pricingphilosophy and

mechanism

Systemarchitecture

Geographiccoverage

Fastfollower

Firstmover

Integratedpricing

SeparateIT systems

Local Global

Customization

= Client example

Key success factorsfor the delivery model

Key success factorsfor the operating model

Service andproduct

approach

Transactionbased

Embedded ITsolutions (ERP based)

Economiesof scale

Fragmented

Cost-efficiencypriority

Unit costtransaction

Economiesof scope

Integrated

Time-to-marketpriority

Operationalrationale and

principles

OperationalIT-platform

setup

Operationalcontrol

capabilities

Standardization

Exhibit 11. A Business-Model Health Check Can Reveal the Strengths and Weaknesses of Your Current Delivery and Operating Models

Source: BCG project experience.


Worldwide Domestic Payments, 2008

In contrast to previous Global Payments reports, we have excluded all interbank transfers from our calculations in this report, leading to significantly lower overall transac-

tion values and slightly lower transaction volumes. Any discrepancies in totals and percentages are the result of rounding. All averages are weighted.

AppendixOverview of Volumes, Values, and Revenuesin the Payments Marketplace, 2008 to 2016

Americas Europe Asia-Pacific Total

Volume (millions) 136,824.22 88,074.63 47,577.87 272,476.72Value ($millions) 104,547,425.08 101,230,632.47 107,869,354.38 313,647,411.93Revenues ($millions) 132,307.49 79,230.18 44,445.54 255,983.21

Worldwide Domestic Payments, 2016

Americas Europe Asia-Pacific Total

Volume (millions) 248,073.93 161,054.50 107,067.39 516,195.82Value ($millions) 149,330,936.36 185,576,522.32 262,271,515.39 597,178,974.06Revenues ($millions) 213,272.00 99,036.75 140,165.79 452,474.53




Volume of Domestic Payments

Region/Country 2008 2016 CAGR, 2008–2016 (%)

Units: millions of transactions

Americas 136,824.22 248,073.93 8North America 109,584.21 187,413.59 7 United States 100,357.68 171,215.48 7 Canada 9,226.54 16,198.12 7

Latin America 27,240.01 60,660.33 11 Mexico 1,333.17 2,559.45 8 Brazil 13,713.94 28,206.89 9 Other Latin America 12,192.90 29,894.00 12

Europe 88,074.63 161,054.50 8EU 15 77,246.31 129,924.55 7 Belgium 2,094.33 3,248.44 6 France 15,820.05 21,657.51 4 Germany 20,049.24 32,528.38 6 Italy 3,816.26 9,351.89 12 Netherlands 4,415.93 7,149.40 6 United Kingdom 15,189.88 22,501.48 5 Rest of EU 15 15,860.61 33,487.46 10

Rest of Western Europe 4,587.90 8,198.54 8

Eastern Europe 6,240 22,931 18 Russia 328 775 11 Hungary 1,065 5,417 23 Czech Republic 1,364 3,041 11 Poland 1,669 6,923 19 Other Eastern Europe 1,815 6,774 18

Asia-Pacific 47,578 107,067 11 Japan 6,569 10,971 7 ANZ 7,713 13,458 7 Australia 5,627 10,126 8 New Zealand 2,086 3,332 6 Old Tigers 14,823 28,617 9 Hong Kong 667 1,069 6 South Korea 12,081 24,700 9 Singapore 2,075 2,848 4 New Tigers 7,341 21,871 15 Indonesia 1,815 10,376 24 Malaysia 1,216 2,538 10 Philippines 2,463 4,564 8 Thailand 1,847 4,393 11 China 8,661 23,569 13 India 2,472 8,581 17

World 272,476.72 516,195.82 8



Value of Domestic Payments

Region/country 2008 2016 CAGR, 2008–2016 (%)

Units: $millions

Americas 104,547,425.08 149,330,936.36 5North America 94,649,060.46 133,135,949.35 4 United States 84,678,099.78 118,570,364.56 4 Canada 9,970,960.68 14,565,584.80 5

Latin America 9,898,364.61 16,194,987.01 6 Mexico 1,586,779.73 2,592,292.85 6 Brazil 4,298,836.48 5,882,204.51 4 Other Latin America 4,012,748.41 7,720,489.64 9

Europe 101,230,632.47 185,576,522.32 8EU 15 84,829,186.31 139,171,520.24 6 Belgium 2,450,186.81 6,367,974.53 13 France 16,663,040.81 33,586,528.07 9 Germany 27,366,925.72 40,558,826.58 5 Italy 5,352,635.44 5,677,630.51 1 Netherlands 3,077,089.70 3,549,822.28 2 United Kingdom 12,220,595.27 14,641,079.07 2 Rest of EU 15 17,698,712.56 34,789,659.20 9

Rest of Western Europe 1,967,848.05 3,078,550.26 6

Eastern Europe 14,433,598.11 43,326,451.81 15 Russia 5,905,740.44 14,290,360.11 12 Hungary 1,152,363.44 4,885,267.55 20 Czech Republic 1,539,390.93 4,606,624.79 15 Poland 375,426.72 851,033.96 11 Other Eastern Europe 5,460,676.58 18,693,165.40 17

Asia-Pacific 107,869,354 262,271,515 12 Japan 24,903,968 28,460,243 2 ANZ 11,131,564 20,282,148 8 Australia 9,754,601 17,861,303 8 New Zealand 1,376,963 2,420,845 7 Old Tigers 18,495,040 34,287,009 8 Hong Kong 5,756,673 12,357,574 10 South Korea 12,262,266 21,162,228 7 Singapore 476,100 767,207 6 New Tigers 3,014,642 9,215,317 15 Indonesia 542,835 4,489,851 30 Malaysia 477,728 635,819 4 Philippines 741,876 1,659,692 11 Thailand 1,252,202 2,429,954 9 China 46,965,171 156,214,507 16 India 3,358,970 13,812,291 19

World 313,647,411.93 597,178,974.06 8



Volume of Retail and Wholesale Domestic Payments

Region/payment type 2008 2016 CAGR, 2008–2016 (%)


Americas 136,824.22 248,073.93 8 Retail 98,439.19 187,384.61 8 Wholesale 38,385.03 60,689.32 6

Europe 88,074.63 161,054.50 8 Retail 65,056.39 120,807.29 8 Wholesale 23,018.25 40,247.21 7

Asia-Pacific 47,577.87 107,067.39 11 Retail 33,780.91 78,536.05 11 Wholesale 13,796.96 28,531.34 10

World 272,476.72 516,195.82 8


Average Revenue per Domestic Payment


Units: $

Americas 0.97 0.86 –1 Retail 1.08 0.98 –1 Wholesale 0.67 0.49 –4

Europe 0.90 0.61 –5 Retail 0.85 0.61 –4 Wholesale 1.04 0.63 –6

Asia-Pacific 0.93 1.31 4 Retail 0.84 1.40 7 Wholesale 1.16 1.06 –1

World 0.94 0.88 –1



Volume of Retail and Wholesale Cross-Border Payments

Payment type 2008 2016 CAGR, 2008–2016 (%)


Retail 5,512.47 11,287.99 9 Wholesale 1,481.20 3,221.09 10

Total 6,993.67 14,509.09 10


Value of Retail and Wholesale Cross-Border Payments


Units: $millions

Retail 979,817.99 1,903,240.92 9 Wholesale 26,140,196.83 51,154,842.86 9

Total 27,120,014.82 53,058,083.78 9


Average Revenue per Cross-Border Payment


Units: $

Americas 12.61 9.34 –4 Retail 12.02 8.93 –4 Wholesale 14.68 10.72 –4

Europe 3.69 2.41 –5 Retail 3.39 2.29 –5 Wholesale 4.86 2.87 –6

Asia-Pacific 10.61 11.18 1 Retail 8.16 9.39 2 Wholesale 20.44 17.70 –2

World 9.33 7.50 –3



Transaction Revenue Summary Table, 2016

Payment type Americas Europe Asia-Pacific Total

Units: $millions

Domestic 213,272.00 99,036.75 140,165.79 452,474.53 Retail 183,530.57 73,625.25 109,850.74 367,006.56 Wholesale 29,741.43 25,411.50 30,315.05 85,467.97

Cross-border 65,910.10 11,109.42 31,812.98 108,832.50 Retail 48,555.29 8,268.50 20,982.57 77,806.36 Wholesale 17,354.81 2,840.92 10,830.41 31,026.14

Retail 232,085.86 81,893.75 130,833.31 444,812.92 Domestic 183,530.57 73,625.25 109,850.74 367,006.56 Cross-border 48,555.29 8,268.50 20,982.57 77,806.36

Wholesale 47,096.24 28,252.42 41,145.46 116,494.11 Domestic 29,741.43 25,411.50 30,315.05 85,467.97 Cross-border 17,354.81 2,840.92 10,830.41 31,026.14

Total 279,182.10 110,146.17 171,978.76 561,307.03


Transaction Revenue Summary Table, 2008

Payment type Americas Europe Asia-Pacific Total

Units: $millions

Domestic 132,307.49 79,230.18 44,445.54 255,983.21 Retail 106,735.90 55,270.50 28,404.69 190,411.10 Wholesale 25,571.58 23,959.67 16,040.85 65,572.11

Cross-border 42,906.69 8,395.74 13,961.29 65,263.72 Retail 31,878.82 6,121.69 8,603.64 46,604.14 Wholesale 11,027.87 2,274.06 5,357.66 18,659.58

Retail 138,614.72 61,392.19 37,008.33 237,015.24 Domestic 106,735.90 55,270.50 28,404.69 190,411.10 Cross-border 31,878.82 6,121.69 8,603.64 46,604.14

Wholesale 36,599.45 26,233.73 21,398.51 84,231.69 Domestic 25,571.58 23,959.67 16,040.85 65,572.11 Cross-border 11,027.87 2,274.06 5,357.66 18,659.58

Total 175,214.17 87,625.92 58,406.84 321,246.93



For Further ReadingFor Further Reading

The Boston Consulting Group publishes other reports and articles that may be of interest to senior financial executives. Recent exam-ples include:

Collateral Damage (Editions 1 through 4)A series of White Papers by The Boston Consulting Group addressing the global financial crisis, Autumn 2008

Thriving in the New Normal: Corporate Banking 2008/2009A report by The Boston Consulting Group, December 2008

Winning Strategies in Uncertain Times: Global Asset Management 2008A report by The Boston Consulting Group, November 2008

A Wealth of Opportunities in Turbulent Times: Global Wealth 2008A report by The Boston Consulting Group, September 2008

A Principled Look at Cost CuttingOpportunities for Action in Financial Institutions, June 2008

The Return of the Strategist: Creating Value with M&A in DownturnsA report by The Boston Consulting Group, May 2008

Islamic Banking: Can You Afford to Ignore It?Opportunities for Action in Financial Institutions and Strategy, April 2008

Managing Shareholder Value in Turbulent Times: Creating Value in Banking 2008A report by The Boston Consulting Group, March 2008

Arming for the Second Web WarOpportunities for Action in Financial Institutions, March 2008

Banking on Lean AdvantageOpportunities for Action in Financial Services, January 2008

The Growth Dilemma: Global Asset Management 2007A report by The Boston Consulting Group, November 2007

Tapping Human Assets to Sustain Growth: Global Wealth 2007A report by The Boston Consulting Group, September 2007

The Next Billion Banking ConsumersOpportunities for Action in Financial Services, June 2007

The Demographic Time Bomb: Human Resources Challenges in BankingOpportunities for Action in Financial Services, May 2007

Marrying Risk and Strategy to Create ValueOpportunities for Action in Financial Services, April 2007

Bigger, Better Banking: Emerging Titans, Soaring Profitability, and Continued Growth: Creating Value in Banking 2007A report by The Boston Consulting Group, March 2007

Capturing the Personal Side of Small-Business BankingOpportunities for Action in Financial Services, January 2007

Taking the Client’s Perspective: Global Wealth 2006A report by The Boston Consulting Group, September 2006

For a complete list of BCG publications and information about how to obtain copies, please visit our Web site at www.bcg.com/publications.

To receive future publications in electronic form about this topic or others, please visit our subscription Web site at www.bcg.com/subscribe.

3/09

Abu DhabiAmsterdamAthensAtlantaAucklandBangkokBarcelonaBeijingBerlinBostonBrusselsBudapestBuenos AiresChicago

CologneCopenhagenDallasDetroitDubaiDüsseldorfFrankfurtHamburgHelsinkiHong KongHoustonJakartaKievKuala Lumpur

LisbonLondonLos AngelesMadridMelbourneMexico CityMiamiMilanMinneapolisMonterreyMoscowMumbaiMunichNagoya

New DelhiNew JerseyNew YorkOsloParisPhiladelphiaPragueRomeSan FranciscoSantiagoSão PauloSeoulShanghaiSingapore

StockholmStuttgartSydneyTaipeiTokyoTorontoViennaWarsawWashingtonZurich

bcg.com

Documents

Weathering the Storm: Global Payments 2009writing of Weathering the Storm: Global Payments 2009. We define payments revenue as any revenue stemming from the movement of money, including