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Banks' Global Payments Business Increasingly Under Pressure as Internet Transforms Sector, According to New Report From the Boston Consulting Group
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Updated 10:22 AM ET September 8, 1999
Competition and Commoditization Present Biggest Threat to Crucial Banking Profit Center
NEW YORK (BUSINESS WIRE) - BCG Outlines Strategic Imperatives for How Banks Can Defend and Extend
Global Payments Business in Information Economy
The global payments business, a range of transaction, clearing and settlement services traditionally handled by Money Center and Super Regional Banks, is increasingly under competitive and commoditization pressures as interconnectivity and the Internet transform the industry, according to a new report by The Boston Consulting Group (BCG), the global management consulting firm.
The $1.7 trillion global payments industry--including wire transfers, correspondent services and lockbox services--is the chief facilitator of commercial transactions around the world. Banks have traditionally maintained a central role in the industry because of two sources of competitive advantage: their unique access to closed systems that allow them to clear and settle transactions, and their ability leverage the information they collect to develop value-added services.
Internet Unleashes Information, Spawns New Competitors
However, according to the BCG report Global Payments 1999, the rapid evolution of the information age and the Internet impinges on banks' traditional strengths in the sector. The information economy has spawned a much wider set of commercial players--including telephone companies, cable providers, package delivery companies, Web portals and supermarkets among many others--that now also capture "rich" transaction and customer information. Importantly, many of these organizations are already leveraging this knowledge and creating their own information-based, value-added services.
Said Nick Viner, a vice president at BCG and one of the report's authors: "The great risk for banks is that the payments business is quickly becoming commoditized, leaving them with the meager competitive advantage of clearing and settlement. Furthermore, if businesses choose to aggregate payments, replacing them with internal transfers, banks may start to lose not only `payments' revenues, but also rich information--which is increasingly more valuable than payment transactions themselves."
According to Global Payments 1999, while volume of (non-cash) payments worldwide grew by 18 percent in the three years since 1994, price per payment continued to fall. The price per payment averaged $1.11 in 1997 for a domestic transaction, as compared to $1.17 in 1994. For cross-border transactions, the price fell even more significantly: from $20.55 per payment to $13.52 during the same three-year period.
"As price per transaction continues to fall, banks will feel increased pricing and competitive pressures," said Mr. Viner. "This is the first step toward the commoditization of the global payments business."
Migration to Electronic Channels Well Underway
In addition to price pressures, the ongoing--and rapid--transition away from high profit, paper-based transactions to lower margin electronic transactions puts banks at a competitive disadvantage and eats into profitability.
Between 1994 and 1997, more than $180 trillion of payments value--12 percent of the 1994 global total--migrated to electronic channels. BCG estimates that by 2003, U.S. E-commerce will more than triple, and that Internet-transacted or -enabled commerce will account for more than 50 percent of total domestic U.S. commercial transactions.
According to Mr. Viner: "Money Center and Super Regional Banks actually make more money on paper-based `payment' transactions. Therefore, as more and more of the global payments business migrates into electronic channels, the profit potential for this segment of a bank's business dwindles. Yet, many banks have ignored this fact and prefer to reap the short-term profits still available in moving money, as opposed to the long-term potential of deploying `rich' information."
Strategic Imperatives for Banks
The BCG report offers in-depth, strategic recommendations for how banks can extend or defend their payments business. In abbreviated form, these include:
Establish Trading Platforms--Electronic exchanges that bring together multiple buyers and sellers are growing rapidly. Banks are well positioned to partner with companies offering intermediary services and can potentially share in this new source of revenue. One example is the purchasing card, which allows banks to leverage customer information to create value-added services, thereby increasing payments revenues.
Assume Role of Internet "Certifier"--Because of concerns about network security, as well as about identity, reliability and solvency of unknown parties, banks could profit from offering security, identity validation and payment guarantee services for transactions on the Internet.
Share in the Benefits of Electronic Billing--Since electronic bill presentment and payment (EBPP) offers benefits solely for the biller (not the bank), banks need to develop a means to share in these benefits. Leverage Customer Relationships--Problems with Internet payments are common, and are restricting the growth of E-commerce. If electronic banking becomes mainstream, banks would benefit because they would already have an electronic relationship with the consumer, positioning them as the natural provider of a secure Internet payments solution, as well as other services.
Focus on Trade Services--Businesses spend more than $420 billion per year on administrative costs--primarily document handling and transmission--related to trade transportation. While companies expect lower costs, they are also willing to pay for enhanced speed, transparency, reliability and security. Banks have a real opportunity to provide a central trade documentation repository serving importers, exporters, banks, freight forwarders, carriers and export agencies.
The Boston Consulting Group, a global management consulting firm founded in 1963, works with leading international companies and organizations on issues of strategy, operations and performance. BCG is privately held by its officers and has 46 offices in 32 countries around the world.
Contact: Media Contact: Linda Butler 312/715-2216 butler.linda@bcg.com
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