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Alenka Grealish
Stefan Mohr
Carl Rutstein
Jürgen Schwarz
Niclas Storz
Michael Urban
February 2011
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© The Boston Consulting Group, Inc. 2011. All rights reserved.
A Time of Transition 7
T
he Boston Consulting Group’s tenth compre- banking as products and services related to payments, such
hensive study since 1995 of the worldwide as cash management services for corporate clients.
payments landscape appears at a time when
unprecedented changes are sweeping the pay- Despite the fundamental strength of payments-relat-
ments industry. Amid growing competition and ed businesses, some of these businesses have showed
price pressure, increasing regulatory constraints and scruti- weaknesses in recent years. Global transaction vol-
ny, rising macroeconomic volatility, changing demographic umes and revenues have slumped, and checking-
patterns, and shiing customer demands, only those institu- account balances have slipped in certain customer
tions that are able to adapt, transform, and optimally link segments. The relatively cyclical credit-card business,
their business and operating models will prosper and seize a traditionally a powerful revenue engine in certain
greater share of revenues and profits over the next decade. markets, has taken an extraordinary hit—especially
The size of the prize is too large not to take action: we in the U.S., where high losses have been linked to ris-
estimate that the global payments market will be worth ing unemployment.
$782 trillion in noncash transaction value and $492 billion
in transaction revenues by 2020. ◊ Payments businesses are generally recovering today
despite widespread macroeconomic uncertainty. But
In our last report, Weathering the Storm: Global Payments some financial institutions have yet to recoup sizable
2009, we concentrated on the actions that financial institu- chunks of income lost through regulatory disruption.
tions needed to take to withstand the global financial crisis Global payments revenues fell at a compound annual
and emerge from the downturn in a strong position. In this rate of 7 percent from year-end 2008 through 2010. But
report, we focus on developing optimal business models (tar- overall volumes and values (up 5 percent and 3 per-
get customer segments, product portfolios, regions, and chan- cent on a compound annual basis, respectively, over
nels) and operating models (target processes, IT, sourcing, and the same period) are back to precrisis levels in most
organization) that will drive successful and sustainable countries.
growth strategies in payments and transaction banking “aer
the storm.” ◊ Payments players wishing to fully capture the resur-
gence must scrutinize their business and operating
We define payments revenues as direct and indirect reve- models and determine whether current models are
nues generated by a payment service. These include transac- well suited to shiing industry dynamics. In the proc-
tion-specific revenues, card and account maintenance fees, ess, they will face the daunting challenge of meeting
and spread income generated from current accounts—also essential segment, product, and country requirements
known as checking or demand-deposit accounts (DDAs). Fees while minimizing operational complexity.
for overdras and nonsufficient funds are considered trans-
action-specific revenue. (See the Appendix for details.) Given In Europe, average annual retail-payments values and
this definition, payments make up approximately one-third to volumes remained relatively flat from year-end 2008
one-half of most banks’ revenues. We define transaction through 2010 at roughly $10 trillion and 70 billion
◊ Payments market dynamics vary widely among the ◊ As a result, banks and other institutions active in the
northern, central, and southern regions of Western payments industry must rethink their business models
Europe, as well as among the countries of Central and and develop new value propositions. Three specific
Eastern Europe (CEE). In order for European pay- initiatives are most important: transforming credit
ments players to forge clear and far-reaching strate- card businesses, moving beyond the checking account
gies, they must thoroughly understand these structural to deepen client relationships, and staying smart in the
and regional differences. digital financial-services game.
◊ Given Western Europe’s highly evolved infrastructure, In Asia-Pacific, payments and transaction banking
product mix, and bedrock of well-established business are primed for growth. Banks will have to tailor their
models—as well as significant margin pressure—the business and operating models in order to balance
next developmental stage in the region’s payments growth aspirations with efficiency goals. Key success
market will be focused on refining operating models. factors for mature markets in the region will differ
By contrast, in the CEE countries, where infrastructure considerably from those for emerging markets.
is less sophisticated and payments efficiency is still rel-
atively nascent, forging winning business models will ◊ In the mature Asia-Pacific countries, much as in North
be the key success factor. American and Western European markets, growth dis-
cussions focus on existing customers—more specifical-
◊ The Single Euro Payments Area (SEPA) has been a ly, on opportunities to increase share of wallet by
work in progress for many years. Today, although improving the convenience of payment solutions for
acceptance of certain SEPA instruments (such as cred- consumers and merchants.
it transfers) has been steadily increasing, a number
of the original objectives of SEPA—let alone a full ◊ In emerging Asia-Pacific markets, by contrast, growth
replacement of fragmented national payments sys- will be generated by the gradual financial inclusion of
tems—do not seem achievable without further regula- unbanked consumers and the rapidly expanding foot-
tory intervention. print of the electronic-payments infrastructure. Shis
in spending behavior and payment preferences, espe-
In the U.S., the payments industry has undergone cially on the part of the emerging digital generation
considerable disruption. From year-end 2008 through and those consumers moving from rural to urban
2010, total payments revenues fell at a compound an- areas, will also be a prime factor.
nual rate of 4 percent despite steady payments values
and a 3 percent annual rise in volumes driven by The financial crisis has highlighted the attractiveness
steady growth in automated clearing-house (ACH) of wholesale transaction banking. Although business-
and debit card transactions. Total revenues are ex- es such as deposit and payment services, cash man-
pected to grow in 2011 but will remain about 6 per- agement, and trade services were not unscathed by
cent below the 2007 peak level of $162 billion—a lev- the downturn, they fared relatively well. Over the full
el not likely to be surpassed for another few years. economic cycle, these businesses oen provide reli-
able fee and spread revenues, rich deposit volumes,
◊ New financial regulations such as the Credit Card and high profitability. Return on equity is typically
Accountability, Responsibility, and Disclosure (CARD) above 40 percent for best-practice institutions.
Act of 2009, the Durbin Amendment (within the Dodd-
Frank Wall Street Reform and Consumer Protection ◊ In the postcrisis era, transaction banking will remain a
Act of 2010), and modifications to Regulation E will significant opportunity for financial institutions.
have a dramatic effect on U.S. payments businesses. As Wholesale payments volume is expected to grow at a
much as $25 billion in annual retail-transaction reve- compound annual rate of 9 percent globally from year-
S
ince the global financial crisis first unfolded financial institutions have yet to recoup sizable chunks of
several years ago, leading banks have increas- income lost through regulatory disruption. Indeed, global
ingly recognized the importance of their pay- payments revenues fell at a compound annual rate of 7
ments and transaction-banking businesses. In percent from year-end 2008 through 2010. But overall vol-
the short term, these businesses serve as a rela- umes and values (up 5 percent and 3 percent on a com-
tively stable source of revenues; in the long term, they pound annual basis, respectively, over the same period)
provide a solid platform on which to build customer loy- are back to precrisis levels in most countries.1
alty and increase share of wallet. In addition, with the ex-
ception of credit cards, these businesses typically possess Payments players wishing to fully capture this recent
structural advantages that include consistent, predictable resurgence must scrutinize their business and operating
volumes and relatively low (non-capital-intensive) risk models and determine whether present models are well
factors. They also serve as a low-cost source of funding. suited for shiing industry dynamics. In the process, they
will face the daunting challenge of meeting essential seg-
In 2009 and 2010, however, some payments-related busi- ment, product, and country requirements while minimiz-
nesses showed glaring weaknesses. Global transaction ing operational complexity.
volumes and revenues slumped, and balances in demand
deposit accounts (DDAs) slipped in certain customer seg- Indeed, striking the optimal balance between standard-
ments. The relatively more cyclical credit-card business— ization and customization has become a top priority.
traditionally a powerful revenue engine in certain mar- Banks must be more intelligent than ever both in design-
kets—took an extraordinary hit, especially in the U.S., ing the right business models and in identifying which
where high losses were linked to rising unemployment. elements of core operating models can (and cannot) be
Also, structural cracks appeared in the underlying eco- consolidated and used efficiently across different mar-
nomics of credit cards and DDAs in the U.S. market as kets, customer segments, and products. (See Exhibit 1.)
new regulations began to whittle away historically strong
profit levers. The question of how payments players strike this balance
hinges on another critical dimension of the global land-
In Europe, Single Euro Payments Area (SEPA) legislation scape: whether the target market is a mature or transi-
has forced banks to rethink their operating models, espe- tioning one. Broadly speaking, transitioning markets are
cially in regard to their IT architecture. Banks are strug- characterized by a high percentage of unbanked consum-
gling with the key issue of whether—from both a func- ers, above-average real-income growth, and relatively
tionality and a profitability outlook—one IT platform for young and fast-growing populations; mature markets
payments across Europe would be preferable to using tend to have the opposite characteristics. (See Exhibit 2.)
multiple local IT platforms.
Archetype models are the basis ... ... for an intelligent consolidation
Identical
Standardization Cross-country
of local processes consolidation
Homogeneity of markets
Cost reduction
Exhibit 2. Mature and Transitioning Markets Have Fundamental Differences That Affect
Payments Businesses
40
Central and Transition markets
30 Eastern Europe (median age: 28 years)
20 United States
Italy Spain
10 France Mature markets
(median age: 40 years)
GDP
0 United
Japan
Kingdom
–10
0 1 2 3 4 5 6 7 8 9
Average real-income growth (%)
Annual population growth (%)
>1 0–0.9 <0
Sources: Euromonitor International; World Bank, World Development Report 2009; BCG analysis.
Note: Growth rates are calculated for 2008 through 2013.
By contrast, in transitioning markets such as Latin Amer- Overall, the winning financial institutions will be those
ica and most of Asia-Pacific, the infrastructure is expand- that analyze the distinct characteristics and development
ing and products and target customer segments are still paths of their different markets (and customer segments)
in flux. For example, sizable opportunities still exist in and make wise choices about how to approach them over
e-payments and mobile payments as well as in highly the long term. (See the sidebar below.) Accordingly, given
There are a number of characteristics that can affect the ◊ Regulatory Outlook. Rigorous government regulation can
development paths of payments markets in different re- have a dramatic impact on payments economics, some-
gions. times necessitating strategic transformations. Such
regulation is currently having a major effect on the U.S.
Macro/socioeconomic Factors: market and a substantial (but lesser) effect on the
◊ Demographics. A higher proportion of young people in the Western European market. These two markets each
regional or national population could lead to faster adop- accounted for about 25 percent of global payments rev-
tion of new payment methods (such as m-payments). enues in 2010.
◊ “Unbanked” Population. A high proportion of consumers ◊ Infrastructure. Active government involvement in build-
with no formal banking relationship will also lead to a ing payments infrastructure can have large implica-
rapid uptake of new payment methods (such as prepaid tions on the pace of market evolution and potential
cards) and channels. profit pools. Poor, stagnant infrastructure can lead to
faster adoption of next-generation payment vehicles.
◊ GDP Growth. Rapidly growing economies generate a
greater number of new market entrants and faster Industry Factors:
adoption of new types of payment methods. ◊ Mix of Payments Instruments. Greater use of cash and
checks can generate high potential to capture new
◊ Average Real-Income Growth. Markets with relatively high payments flows (from the migration away from cash
real-income growth foster increases in average pay- and checks toward card and e-payments), resulting in
ments values and favorable returns on investments in new market entrants and the likelihood of more inno-
payments innovation. vation.
◊ Export-Import Balance. Cross-border trade growth leads ◊ Efficiency Level. In inefficient markets with a low degree
to greater opportunities for high-margin payments prod- of operational excellence, new market entrants are
ucts (but also heightens competition). more likely to excel.
T
his section of the report provides an over- ments values in Western Europe will rise at a CAGR of
view of the European retail-payments mar- about 5 percent, with CAGRs for most countries in the
ket, examines structural differences among 4 to 5 percent range. Such growth would lead to an an-
subregions (as defined in the Appendix), nual payments value of around $155 trillion by 2020. The
addresses the critical question of balancing CEE region should show a significantly higher CAGR—
scale and complexity in operating models, and takes a about 11 percent—which will be somewhat evenly dis-
quick look at the ongoing SEPA initiative. tributed by country. But the driving force of growth will
continue to be Russia, with a CAGR of about 12 percent.
In Europe, average annual retail-payments values and By 2020, the CEE payments market will reach an estimat-
volumes remained relatively flat from year-end 2008 ed annual value of roughly $53 trillion.
through 2010 at roughly $10 trillion and 70 billion trans-
actions, respectively, but with ample variation by mar- On the payments revenue side, we estimate CAGRs of
ket. Western European countries showed fairly similar about 7 percent in Western Europe and 9 percent in the
trends in payments values, with the two-year compound CEE region from year-end 2010 through 2020. We also ex-
annual growth rate (CAGR) in payments values ranging pect the revenue mix to change. Transaction revenues in
from –3 percent to 1 percent in most countries. In Cen- Europe will likely be flat at best, owing to competitive
tral and Eastern Europe (CEE), there was wider variation pressure on prices, the progress of SEPA, and government
by country. Russia, with a two-year CAGR of 8 percent restrictions on float income. Although account (interest
in payments values, showed the strongest growth— spread) revenues in Europe have been hurting for the
followed by Poland with a two-year CAGR of 4 percent. past few years, we expect them to recover once interest
In the Baltic countries, however, the two-year CAGR was rates start rising again—and to post a CAGR of about 10
–11 percent. percent from year-end 2010 through 2020.
Infrastructure
development
5 5 5 9 3 6 9 10
100
80
Retail 60
instrument
mix (%) 40
20
0
Volume Revenues Volume Revenues Volume Revenues Volume Revenues
CAGR 2010–2020
Account revenues Debit card Credit card Check
Direct debit Electronic credit transfer Paper-based credit transfer
The Northern Region: A Highly Mature Payments more varied among countries in the central region, and
Market. The northern region of Western Europe is char- direct debits play a more significant role.
acterized by an affinity for noncash payments, especially
electronic credit transfers and debit cards. This trend is In the future, we expect structural changes in this region
illustrated by the high annual rate of debit card transac- to be minimal. There may, however, be further move-
tions per capita—roughly 170, compared with about 40 ment away from credit cards toward debit cards. With
in the rest of Western Europe—and the fact that value- interest spreads extremely low in the central region
add services such as drawing money from debit cards in owing to the current low-interest policy of the European
supermarkets are routinely offered. Given the northern Central Bank (ECB), account revenues are at a relatively
region’s strong payments infrastructure, we do not expect low level. They should rise again once interest rates pick
mobile payments or other potential innovations to have up, and we expect a CAGR in account revenues of rough-
a great impact in the coming years. ly 12 percent from year-end 2010 through 2020. Transac-
tion revenues, by contrast, will likely fall at a compound
The Central Region: A Mature Market with Legacy annual rate of about 1 percent over this period—and the
Card Issues. Like the northern region, the central part of transaction-revenue share of total revenues could de-
Western Europe is also a mature market characterized by crease from 41 percent to 18 percent.
the high use of electronic credit transfers—although cash
usage is somewhat higher than in the north. The main The Southern Region: Still Maturing Amid High Pric-
difference is on the card side. In the northern region, the es. The southern region is the least mature market in
ratio of debit-card to credit-card payment values is about Western Europe in terms of the use of cash, checks, and
90 to 10, whereas in the central region it is closer to 75 to paper-based credit transfers. There is also more variation
25. Also, the share of debit cards versus credit cards is among countries in terms of product mix. That said, the
Shi of focus from scale effects ... ... toward the cost of complexity
Cost per unit Cost per unit
Driven by Driven by Driven by Driven by
scale complexity scale complexity
SEPA: An Update SEPA credit transfers, following rapid growth over the
previous two years, accounted for 8.8 percent of total
The Single Euro Payments Area has been a work in prog- credit-transfer volume in the euro zone in June 2010. The
ress for many years. Today, although acceptance of cer- number of SEPA direct-debit transactions remained insig-
tain SEPA instruments (such as credit transfers) has been nificant, however, with a 0.05 percent share of total
steadily increasing, a number of SEPA’s original objec- direct-debit volume in the euro zone. Clearly, high con-
tives—let alone a full replacement of fragmented nation- version costs have deterred many financial institutions
al payments systems—do not seem achievable without from committing to total migration to the SEPA scheme.
further regulatory intervention.
Overall, it is becoming increasingly clear that SEPA
The slow pace of SEPA’s progress led the European Com- should not be the key principle for banks in designing
mission and the ECB to call for the first meeting (held in their end-to-end operating models. The first priority
June 2010) of the recently created SEPA Council. This should be country-specific customer demands, with SEPA
meeting brought together the demand and supply sides compliance a second priority.
of the European payments market. The main issues dis-
cussed were the conditions necessary both for establish-
ing SEPA migration deadlines and for planning a SEPA
for payment cards.
I
n analyzing the Americas, we will dedicate most sale (POS) and ATM overdra protection on their
of our discussion to the U.S. market. It is the demand-deposit accounts.
world’s largest, with an annual payments value of
$87 trillion in 2010 (representing 26 percent of ◊ The Durbin Amendment (within the Dodd-Frank Wall
the global total and 75 percent of the Americas Street Reform and Consumer Protection Act of 2010),
total). The second-largest market in the region is Brazil, which authorizes the U.S. Federal Reserve to set limits
with an annual payments value of $11 trillion in 2010. on debit-card interchange rates and eliminate network
exclusivity. This act also creates an independent
The U.S. market has undergone considerable disruption in Bureau of Consumer Financial Protection, whose wide
recent years. From year-end 2008 through 2010, payments mandate can directly affect how payments products
revenues fell at a compound annual rate of 4 percent, are created, priced, and managed.
despite steady payments values and a 3 percent annual
rise in volumes driven by growth in automated clearing- According to our estimates, as much as $25 billion in
house (ACH) and debit card transactions. Total revenues annual retail-transaction revenues—about 29 percent of
are expected to grow in 2011 but will remain about 6 per- total retail-transaction revenues—will be “regulated
cent below the 2007 peak level of $162 billion—a level away” from U.S. financial institutions as the new guide-
they are not likely to surpass for another few years. Retail lines take effect. As a result, banks and other institutions
yields (revenues relative to transaction values) will likely active in the payments industry must rethink their busi-
remain below the 2008 level of 54 basis points until 2016. ness models and develop new value propositions. In our
view, three specific initiatives are most important: trans-
In the longer term, we expect a general recovery. From forming credit card businesses, moving beyond the check-
year-end 2010 through 2020, payments revenues are ex- ing account to deepen client relationships, and staying
pected to post a CAGR of 5 percent—with payments val- smart in the digital financial-services game.
ues and volumes posting CAGRs of 4 percent and 6 per-
cent, respectively. Moreover, the stability of the U.S.
payments industry has been tested not only by the Great Transforming the Credit Card Business
Recession but also by significant regulatory develop-
ments—which we refer to as the “Great Regulations.” The credit card business continues to be plagued by
Among these new regulations are the following: above-average charge-offs, the effects of the CARD Act,
and shis in consumer behavior. Income before loss pro-
◊ The Credit Card Accountability, Responsibility, and visions was down by an estimated 18 percent in 2010.
Disclosure (CARD) Act of 2009, which was aimed at
curbing excessive interest-rate hikes and hidden fees. Unfortunately, better days do not seem to be near. Al-
though the level of charge-offs is declining slowly, persis-
◊ Regulation E: older legislation that was recently modi- tently high unemployment—which is not expected to fall
fied to require customers to “opt in” for debit point-of- from its current levels until 2013 at the earliest—will
Product Bundling and Pricing. Retail banks have a Channel Management. Better channel management
wealth of insight into the transaction behavior and pref- will be increasingly important to support product innova-
erences of their checking-account customers that can be tion, new customer-acquisition strategies, and low-cost
leveraged to develop attractive product combinations. operations. As the direct-mail universe shrinks, card issu-
Institutions with large retail-customer bases have the ers need to develop effective e-mail, Internet, and branch-
potential to become leaders in the new environment if acquisition approaches—including multichannel promo-
they can successfully use this knowledge to develop prod- tions (such as a credit card invitation that, if fulfilled
uct bundles that include flexible pricing and payment op- online, offers larger sign-up rewards). Banks will also
tions. need to ensure a superior customer experience across all
channels, and efficiently serve low-value, single-product
Bundling will be particularly important given the signifi- accounts through low-cost channels. Regardless of the
cant decline in overdra and interchange fees. Many cus- channel, however, the highest-value customers should
Cost Management. Given fundamental changes in In order to rebuild revenue streams, banks will need to
revenue drivers, issuers will have to lower their costs undertake both tactical and strategic initiatives. We are
in order to improve their return on assets. Operating likely to see more-sophisticated product bundling, true
models will have to be reexamined and restructured. relationship-based pricing, next-generation data analytics
Many banks will discover that they need to right-size and segmentation, a greater focus on targeting profitable
through some degree of outsourcing, offshoring, and segments, and a drive to better understand fully allocat-
forging new partnerships. ed and marginal costs by segment. Competition for high-
income, high-balance customers will intensify, with banks
Ultimately, over the next decade, issuers will differentiate offering generous incentives for customers to consolidate
themselves by their performance on the above initiatives. their banking relationships. At the other end of the spec-
The winners will be those that move beyond the product- trum, single-product, low-balance customers will see less-
silo and mass-market approach toward building profit- favorable pricing and reduced service levels. Such cus-
able, multiproduct relationships. Some institutions are tomers may eventually lose their access to traditional
already merging their credit-card business with their accounts.
deposit and debit-card businesses, gaining an advantage
over slower-moving rivals. Clearly, if fixed costs are fully allocated, a relatively high
percentage of customers will be classified as unprofitable,
causing banks to rationalize them through pricing or ser-
Beyond the Checking Account: vice restrictions (such as Internet-only accounts). More
Deepening Client Relationships specifically, most banks are reinstituting monthly mainte-
nance fees, even at the risk of some customer attrition, in
Similar to the credit card business, the checking-account order to improve profitability.
domain is also undergoing a major upheaval in the U.S.
In recent years, fee revenues for overdras and nonsuffi- However, banks will have to be watchful to avoid losing
cient funds have topped $35 billion annually, enabling customers who are incrementally profitable—those who
0 0
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Customer DDA balances Customer DDA balances
(deciles) (deciles)
would become attractive if, for example, they added an- getting the best of the deal” construct. Overall trust can
other product or increased their card-transaction volume. be improved, for example, by helping customers achieve
To be sure, competition for these “near profitable” cus- prudent financial planning. Creating this new spirit, along
tomers will intensify as low-cost providers (possessing dif- with a broader value proposition, will require working
ferent cost structures) take advantage of pricing disrup- across product silos—not an easy task, but one that is
tions and customer churn to capture share. attainable if a bank grasps the following key success
factors:
Generally speaking, different approaches for different
customer segments will be critical. For mass-market ◊ Understand total-household profitability, not just
customers (average DDA balances of $500 to $3,000), tru- account profitability.
ly free checking is essentially dead—although qualified
free checking will still encourage profitable relationship ◊ Leverage all internal (transaction-level) and external
building. Simply put, banks will move to a new revenue (credit bureau) customer data.
model that includes “free” checking provided other
revenue-generating or cost-to-serve qualifications are ◊ Stay in frequent touch with customers and develop a
met. Potential requirements will include minimum thorough understanding of their financial needs.
DDA balances combined with online bill payment or an
active credit card (or other potential product combina- ◊ Ensure early and active internal cross-silo engagement.
tions).
◊ Innovate and try new approaches (even if they may
Beyond qualified free checking, many banks will try to have short-term negative aspects).
develop products and services that help shi the relation-
ship dynamic toward more of a partnership than a “who’s ◊ Monitor competitor moves.
For low-balance customers, banks can provide alternative For high-balance customers, banks need to be creative in
products that generate sustainable profits. Potential pro- promoting cross-selling and increasing product stickiness.
grams include the following: Online bill payment, for example, has been highly success-
ful for many institutions in achieving both aims. Other
◊ Low-Line Credit Card. Credit card competition in the possibilities include relationship rewards that provide in-
subprime space has understandably declined. None- centives for customer use, selective fee waivers (based on
theless, some providers will profitably serve this seg- total balances), and reward points or cash-back programs.
ment by enhancing their pricing capabilities, risk ana-
lytics, and ability to determine optimal credit lines. In addition, accounts with bundled, nontraditional ser-
Banks that provide DDAs to the subprime segment vices (such as ID the protection, roadside assistance,
have income and transaction data to incorporate into travel insurance, and special call-center support) can be
the analytics but may prefer to focus their resources on offered with fees waived in return for a greater share of
prime customers. the customer’s wallet. Credit products (such as auto loans,
mortgages, and home equity loans) can be incorporated
◊ Delayed-Debit or Charge Card. Another means of into the bundle. Banks can also leverage their ability to
improving the profit of DDA customers is to offer a analyze customers’ transaction flows in order to refine
delayed-debit card or charge card that is paid off interest-rate levels on the basis of better credit-risk in-
(either automatically or by the customer) on a bi- sight. Successful banks will continue to innovate with re-
monthly or monthly basis (as is commonly offered in gard to how various products interact so that the custom-
Europe). Such cards emphasize the control aspect of er will benefit from both a price and a functionality
debit cards but can provide the issuer with interchange standpoint.
rates that are higher than those on debit cards. The in-
terchange gap, if not eventually regulated away, is suf-
ficiently large to warrant product innovation and to Staying Smart in the Digital Financial-
offer DDA customers incentives to use this type of Services Game
vehicle. Furthermore, there are tools that provide con-
trol features on traditional credit cards through which As banks and other payments institutions react to the
customers can choose which charges must be paid out challenges caused by the new regulatory environment,
of their DDA immediately following the transaction they must also look ahead to the next wave of digital
(such as all charges under $25). innovation. The online channel is already the preferred
U.S. banking channel (based on the number of transac-
◊ Prepaid Card. With this type of card, fees would be a tions), and people are using a growing number of fea-
function of average balances and transaction volume tures. Moreover, mobile banking should come increasing-
(to maximize spread and interchange revenue) and ly to the fore, playing a vital role in building transaction
could include an option to migrate to a limited DDA volumes, lowering cost-to-serve, and opening new oppor-
(such as an Internet-only account with only a debit tunities to win market share.
capability and no checks). Such a card, combined with
online bill payment, could provide a transaction-like Mobile banking is not merely about transferring online
account without the branch costs while earning higher banking to a small, smartphone screen. It is about linking
than debit-card interchange revenues. banking services with everything that mobile-phone ap-
plications and location-based technology have to offer.
◊ No-Frills Account. This is a no-minimum-balance, Possibilities for customers include receiving real-time text
online-only account with multiple aspects (such as alerts about bills that are due, being able to snap a pic-
prepaid or debit cards as well as a savings-account ture of a check for remote deposit, and receiving direc-
Credicard, a wholly owned subsidiary of Citigroup, and Beyond the card business, Brazilian banks are cooperat-
Elavon, a wholly owned subsidiary of U.S. Bancorp and a ing and innovating in e-payments. In October 2009, Bra-
leading global payments provider, have also announced zil’s Interbank Payment Clearing-house (CIP), which is
their entry into the acquiring business. They have signed owned by 42 banks, launched the direct-debit account—
a binding agreement to establish a joint-venture mer- a full electronic bill presentation and payment (EBPP)
chant-services company that will offer a full suite of pay- service. Unlike the U.S. market, in which there are com-
ment solutions in the Brazilian market. peting third-party EBPP networks, Brazil is forming a sin-
gle utility that enables banks to accelerate the network
New entrants will have to compete with two strong in- effect and scale benefits. The direct-debit account system
cumbents, Cielo and Redecard. These established players already has 3 million payees registered, out of a potential
were started by—and are still closely associated with— 34 million Internet-banking clients.
the leading Brazilian banks. They have become publicly
listed companies and are among the largest acquirers Another highly useful (and differentiating) feature is that
globally in terms of market capitalization. the system has no preferences with regard to the particu-
lar bank. Payers register using a taxpayer identification
Despite the increased competition, however, payment number and are then able to access the service from any
margins in Brazil are attractive and are likely to remain account at any participating bank. (In Brazil, consumers
that way compared with those in other countries—en- oen have checking accounts at multiple banks.) Current-
abling local payments players to continue investing in ly, payers are not charged to use the direct-debit account.
marketing, distribution, infrastructure, operating efficien- Instead, banks charge payees for registration and then for
cies, and, above all, innovation. Indeed, the Brazilian pay- clearing and settlement.
ments market has some distinct characteristics that make
it ripe for innovation-driven strategies: Developments in Brazil demonstrate how established
players and new entrants can respond to market disrup-
◊ High cash use (some 50 percent of transaction volume) tion with innovations aimed at securing share in a rap-
idly growing region. Payments providers in other transi-
◊ A relatively young, steadily growing population tioning markets in which the government is a key player
(such as India and China) should monitor Brazil’s evolu-
◊ Relatively strong household-income growth tion over the next five years.
A
sia-Pacific remains a growth area for pay- In Hong Kong, for example, the Octopus card—a “con-
ments and transaction banking. In 2010, tactless” smart card that was first introduced in 1997 as
both total volume (up 11 percent from a simple prepaid card for public transport—has now
2009) and the total value of transactions been enhanced with top-up facilities and links to credit
(up 13 percent) grew significantly. More- card accounts. Now widely accepted at convenience
over, this growth is expected to continue as large pools stores, food shops, and retailers, Octopus has become a
of unbanked consumers gradually enter the market— market leader in terms of consumer and merchant adop-
and as some of the largest economies in the region, in- tion. What’s more, it offers additional utility to consum-
cluding China and India, invest heavily in their national ers by functioning as a means of entry into secured
payments infrastructures. buildings.
Overall, Asia-Pacific is a highly diverse region that pre- Similarly, in Australia, contactless cards are seen as one
sents a unique set of challenges for financial institutions. of the next frontiers in electronic payments, having the
Banks will have to tailor their business and operating potential to displace cash for small purchases at the point
models in order to balance growth aspirations with effi- of sale. The market potential is significant, with more
ciency goals. Generally speaking, there are two sets of than 60 percent of purchases in some categories (such
markets: as takeout food) still paid for in cash. Some banks have
begun to invest in contactless-card and terminal solutions
◊ Mature markets, such as Japan, Australia, Singapore, and are promoting their use through consumer educa-
and Hong Kong, which are characterized by well- tion campaigns. Such banks could potentially gain ground
developed payments infrastructures and regulatory by targeting consumers and merchants of financial insti-
environments tutions that do not offer contactless solutions. Such a
strategy is not without its challenges, however. To be
◊ Emerging markets, such as China and India (as well as successful, contactless solutions must provide benefits
some Southeast Asian countries), where consumers across the value chain from merchant to consumer. In
still make payments primarily in cash but where the particular, consumers must have incentives to use these
reach of electronic payments systems is dramatically cards.
increasing and mobile-payment models are beginning
to gain traction In emerging Asia-Pacific markets, by contrast, growth will
be generated by the gradual financial inclusion of un-
In the mature Asia-Pacific countries, much as in the North banked consumers and the rapidly expanding footprint
American and Western European markets, growth discus- of the electronic-payments infrastructure. Shis in spend-
sions focus on existing customers—more specifically, on ing behaviors and payment preferences, especially on the
opportunities to increase share of wallet by improving part of the emerging digital generation and those con-
the convenience of payment solutions for consumers and sumers moving from rural to urban areas, will also be a
merchants. prime factor.
T
he global financial crisis has highlighted the despite adverse trends such as narrowing deposit spreads
attractiveness of transaction banking. Al- and lower volumes. The reason is a relatively resilient
though businesses such as deposit and pay- revenue mix consisting of spreads earned on deposit bal-
ment services, cash management, and trade ances and fee income earned on transaction and value-
services were not unscathed by the down- added services. In 2009, among banks focused on serving
turn, they fared relatively well. Over the full economic midsize corporations (those with between $25 million
cycle, these businesses oen provide reliable fee and and $250 million in annual sales revenues), transaction
spread revenues, rich deposit volumes, and high profit- champions posted revenues per risk-weighted assets of
ability. Return on equity is typically above 40 percent for 600 basis points, compared with only 250 basis points for
best-practice institutions. Moreover, BCG’s Corporate credit-heavy corporate banks—and their return on regu-
Banking Benchmarking Survey has shown that “transac- latory capital was 31 percent, versus 8 percent for credit-
tion champion” business models—those that generate a heavy banks.2 Since 2007, return on equity has risen for
diversified mix of credit, treasury, cash-management, and most transaction champions and has fallen for all credit-
payment revenues as opposed to those dominated by heavy banks in our benchmarking survey.
credit-related revenues—can be pivotal in gaining com-
petitive advantage across customer segments. What are the dynamics behind these trends? Generally
speaking, transaction champions exhibit a comprehen-
In the postcrisis era, transaction banking will remain a sig- sive approach to building their franchises along dimen-
nificant opportunity for financial institutions. Wholesale- sions such as the following:
payments volume is expected to post a CAGR of
9 percent globally from year-end 2010 through 2020, and ◊ Organization. Commercial-, corporate-, and investment-
total wholesale payments revenues are expected to in- banking businesses are fully aligned and have transac-
crease from $169 billion to $471 billion. Moreover, leading tion-banking objectives. Cross-silo product develop-
global institutions are elevating transaction banking from ment, pricing, and bundling (such as FX risk hedging)
an organizational perspective. They are refocusing sales are encouraged and supported. In addition, a collab-
efforts and making significant investments in improving orative model exists between the front office (the busi-
overall capabilities, client coverage, and regional scope. ness units) and the back office (IT and operations).
They are taking these steps in the belief that an increasing
emphasis on transaction banking will bring long-term ◊ Relationship Management. A distinct coverage model
benefits. Let’s explore some of the reasons for this belief. exists, including appropriate incentives, that enables
effective teaming between relationship managers and
specialists in treasury and other product areas. Strong
Why Transaction Champions Outperform emphasis is placed on fully understanding customers’
Our benchmarking demonstrates that transaction cham- 2. Based on the worst three-year average of actual or expected loan
pions have continued to outperform other types of banks losses.
50
0
0.0 0.5 1.0 1.5 2.0 4.0 7.5
Deposits per client group ($millions)
Western Europe Central and Eastern Europe Size = transaction-banking
Americas Asia-Pacific revenue/deposit volume
Sources: BCG Corporate Banking Benchmarking Database, mid-cap segment (data are from 2009); BCG analysis.
for small to midsize corporations (as opposed to large- banking as an increasingly important part of their
caps or MNCs) should focus on getting product breadth, growth strategy.
distribution, and customer support right, as well as assur-
ing that sufficient credit capacity is available. Regarding distribution, most banks have room for im-
provement in achieving a collaborative organization
As for product breadth, many banks have pursued an structure between relationship managers and transac-
“everything to everybody” strategy. As a result, they are tion-product specialists, with a commensurate opportu-
supporting an unwieldy range of products, some of which nity to increase their share of customer wallet. A useful
are subscale, negative- to low-profit products. Yet our place to start is to undertake a “wallet sizing” exercise.
benchmarking shows that banks can achieve above- Such an initiative should be aimed at understanding each
average cross-selling (measured by revenues per client) client’s revenue composition, current product use, and
without a full product set—and that other factors are im- future potential with regard to client segment, region,
portant drivers. (See Exhibit 7.) product, and relationship manager. Wallet-sizing method-
ologies tend to vary by segment.
In our view, banks should home in on core, profitable
products, ensuring that their offering remains competi- Customer service and support is another critical area. In-
tive, while jettisoning or “white labeling” (using generic deed, poor customer service is the root of most attrition.
versions of ) noncore, low-profit products. White labeling If a bank is to maximize the lifetime value of its custom-
has become an increasingly viable proposition as top- ers, sharp distribution infrastructure must be coupled
tier banks build multibank product platforms and offer with customer service excellence. Best-practice players
interesting terms. Our recent discussions with banks re- are developing centers of excellence to support specific
veal that many see partnering in global transaction products and services and ensure that service-level agree-
For major payments players, making the most of transac- When it comes to serving leading Asian MNCs, banks
tion-banking growth opportunities in Asia is largely a mat- must be especially thoughtful in choosing target compa-
ter of focusing on three segments: Western multinational nies and countries. They must also establish regional
corporations (MNCs) that are evolving in the region, Asian coverage teams to serve their targets, as many Asian
MNCs with expanding cross-border needs, and midsize MNCs have significant transaction-banking and credit
Asian corporations (which tend to be underserved). needs outside their home markets. Initial attention
should be placed on Asian MNCs’ divisions in rapidly
In building up a competitive overall offering, a new en- growing economies such as China and India. Oen, a
trant can oen use tailored trade solutions as a door banking relationship can be built up by offering credit
opener, with a heavy focus on structuring, cross-selling, lines in non-home markets, which can then enable the
and differentiating the bank’s offering from those of pure- bank to win cash management mandates. Such man-
ly local banks. Product capabilities can be advanced grad- dates, in turn, can enable the bank to provide lucrative
ually to capture new flow businesses. Regional e-banking treasury services.
can be used to enhance visibility, with progressive expan-
sion into full regional cash-management offerings. As for midsize Asian corporations, which tend to be un-
derserved, vast potential exists for meeting their transac-
More specifically, in order to excel at serving Western tion-banking needs. This opportunity can bring signifi-
MNCs, banks need to understand how an MNC is organ- cant rewards. As with the other two segments, however,
ized globally and have a strong relationship with its head- winning requires a high level of local knowledge and an
quarters—be it in Europe or the Americas—as well as ability to provide sufficient credit facilities. In addition,
with its regional divisions in Asia. Although regional divi- banks that can offer differentiated trade services in rap-
sions may take their lead from the home office in seeking idly developing economies will capture market share.
out transaction-banking products and credit facilities, the Trading companies, in particular, are an attractive seg-
bank’s relationship with the MNC’s Asian division or af- ment to serve, but they require relatively large credit fa-
filiate needs to be managed locally—“on the ground”—in cilities and a corresponding risk appetite. Banks with lim-
order to truly capture and meet the full range of local ited risk tolerances can target Asian companies that have
needs. Moreover, in order to sell transaction-banking ser- a multicountry presence by offering regional and interre-
vices, credit lines must be available at the local level. gional cash-management services.
But nonlocal banks will have to beef up their local knowl- Even though the investment required to be a winner in
edge and capabilities if they hope to succeed with Asian Asia is large, it can be made incrementally—and either di-
operations of Western MNCs. They must be able to devel- rectly or through partnerships. But there is no time to
op—either directly or through partnerships—a complete lose, as many leading global banks have been ramping up
and sophisticated set of local offerings, backed by prod- their Asian investments during the downturn.
ucts and services tailored to specific Asian markets.
Banks that offer more products tend ...but strong cross-selling is also driven
to attract relatively more deposits... by other factors
Revenues per client group
Deposits/loans (%) ($thousands)
120 150 Strong cross-selling can
be achieved without
a full product suite
100
80 100
60
40 50
20
0 0
20 40 60 80 100 20 40 60 80 100
Product offering index1 Product offering index1
human resources, the investment will likely result in a sus- size segments with a “service excellence” perspective for
tainable business model and profitable growth. Not only large corporations and MNCs. A bank must have a flexi-
do transaction champions increase customer retention ble operating model that allows it to achieve scale and
through superior service and credit offerings but they also low costs within an infrastructure that supports all client
tend to attract the best customers of other banks as well. segments. At the same time, the model must support the
separate platforms required to deliver customized servic-
Finally, a transaction champion must be able to design es to MNCs. Banks that achieve this balance will have not
and implement appropriate business and operating mod- only a sustainable cost (and pricing) advantage but also
els for its target segments. This task oen involves balanc- a service advantage. These benefits will be the growth
ing a “design to cost” perspective for the small and mid- drivers of the future.
The vitality of the global payments marketplace is meas- counts (DDAs). Fees for overdrafts and nonsufficient
ured by volume (the number of noncash transactions), funds are considered transaction-specific revenue. We de-
value (the monetary amount of noncash transactions), fine transaction banking as payments-related products and
and revenue (the amount of income generated for banks services, such as cash management services for corporate
and other market participants by noncash transactions). clients. All numbers in the Appendix are for noncash pay-
This Appendix provides a detailed forecast of the pay- ments. In the tables that follow, total revenues are the
ments marketplace evolution from 2010 through 2020. sum of account revenues and transaction revenues. Num-
bers may not add exactly to totals because of rounding.
We define payments revenues as direct and indirect reve- In 2010, BCG updated its global payments model to incor-
nues generated by a payment service. These include porate additional data, add new countries (now 55), ad-
transaction-specific revenues, card and account mainte- just the forecast models to account for the global reces-
nance fees, and spread income generated from current sion, and extend the forecasts to 2020. Data from previous
accounts—also known as checking or demand-deposit ac- BCG reports may have been revised accordingly.
2010
Central and Middle East
North Latin Western Eastern Asia- and North Rest of
America America Europe Europe Pacific Africa world Total
Volume (millions) 116,700 29,000 78,000 11,900 65,400 4,000 1,200 306,300
Value ($millions) 95,595,100 20,841,600 98,739,100 18,647,000 90,913,100 5,314,600 1,323,200 331,373,700
Total revenues 159,900 71,200 146,600 40,300 140,400 29,200 2,400 589,900
($millions)
2020
Central and Middle East
North Latin Western Eastern Asia- and North Rest of
America America Europe Europe Pacific Africa world Total
Volume (millions) 206,700 109,000 125,200 30,400 212,500 37,500 28,500 749,800
Value ($millions) 137,480,600 71,254,100 154,780,000 52,909,400 301,147,200 34,751,600 29,682,800 782,005,700
Total revenues 284,500 195,200 276,200 97,400 533,800 132,300 60,000 1,579,400
($millions)
Units: $millions/$ Total Per transaction Total Per transaction Total Per transaction
North America 96,400 0.84 142,200 0.70 4 –2
Latin America 28,900 1.01 79,800 0.74 11 –3
Western Europe 39,400 0.52 27,600 0.23 –3 –8
Central and Eastern Europe 8,700 0.75 12,700 0.43 4 –5
Asia-Pacific 45,500 0.73 98,600 0.50 8 –4
Middle East and North Africa 4,900 1.28 38,100 1.03 23 –2
World (includes rest of world) 224,700 0.75 414,700 0.57 6 –3
Units: $millions/$ Total Per transaction Total Per transaction Total Per transaction
North America 6,700 3.48 12,200 2.79 6 –2
Latin America 1,300 2.67 3,900 2.92 12 1
Western Europe 5,600 3.23 8,600 2.93 4 –1
Central and Eastern Europe 1,100 3.96 2,500 3.29 9 –2
Asia-Pacific 12,400 3.97 44,300 2.88 14 –3
Middle East and North Africa 600 5.65 2,900 5.23 17 –1
World (includes rest of world) 27,800 3.62 77,400 2.93 11 –2
Niclas Storz
Partner and Managing Director
BCG Munich
+49 89 231 740
storz.niclas@bcg.com
Michael Urban
Principal
BCG Düsseldorf
+49 2 11 30 11 30
urban.michael@bcg.com
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