How can banks maintain payments profitability?

Whilst reducing costs through consolidating systems and processes is one way, as you point out it is difficult. It also consumes scarce IT and project resource. For many FIs, the business case is at best doubtful; or at least inevitably low down the priority list.

Are there other approaches?  A third party service which optimises only the initiation, capture and pre-processing of cross-border payments is targeting the bulk of the transaction processing cost, according to Boston Consulting Group’s 2009 paper ‘Weathering the Storm’, in which they highlighted pre-processing as a potential area in scope for outsourcing.

Maximising component income may be another. FX fee income is typically substantially more than half of the total fee earned from a wholesale x-border transaction. Whilst a bank’s own correspondent banking and card services provide routes to market for its FX services, can others be leveraged? Can liquidity be generated in other ways, such as partnering with payments service providers, and the use of virtual-account based models?

Can transaction volumes be increased? According to the Boston Consulting Group report to which you refer, there were about 1bn  wholesale x-border trns, and 6.8bn retail x-borders transactions, in 2010. According to the World Bank, remittances amounted to $440bn by value; if the average remittance is $220, it equates to 2bn trns. And that data is derived only from officially recorded remittances; it does not include many which today take place through ‘informal’ channels.

Is revenue per payments transaction the only key metric? Whilst some banks see the ‘remittance’ market as unattractive; others (especially those from emerging economies) see it as potential customers abroad. Perhaps a remittance service may best be measured in terms of new customers onboarded, rather than profit.

Recent regulation, notably the Payments Services Directive in Europe, has brought new players and models onto the market. Some work through banks, to banking standards. Outsourcing to a cross-border payments services provider to grow FX margin, liquidity and to re-intermediate into the international retail payments market requires relatively little investment, IT and project resource.