The report, Preparing for the Endgame: Global Payments 2004, predicts a dramatic reduction in the profitability of the payments business at many banks.

Although global payments revenues for the overall banking industry are predicted to increase to nearly $390 billion by 2011 — one-third higher than ten years earlier — changing customer behavior, increased regulation, and more competition from nonbanks will significantly erode profit margins.

Nick Viner, a senior vice president and director in the London office of The Boston Consulting Group, says: "Typically, banks draw more than one-third of their revenues and a material share of their profits from payments. If this core source of earnings is eroded, it will have a severe impact on the overall profitability of many banks."

According to BCG, European banks expect to invest on average $80 million to $120 million in their payments businesses over the next five years. For the top 75 banks in Europe alone, this amount would total $6 billion to $9 billion by the end of the period.

"Banks that fail to come to grips with their payments businesses and make the necessary investment will start to lose the loans and deposit products that payments support," says Viner.

Viner, who leads BCG’s global payments practice, believes that small, local banks are most at risk because they will not be able to afford the heavy investment required to maintain a state-of-the-art payments business. They will be forced to forge partnerships and outsource much of their payments business, retaining customer relationships only with white label payments products.

Large regional players may also find the capital investment required daunting, and BCG says they should enter into partnerships selectively. Big global banks have the size and scale to afford the investment needed to stay competitive.

BCG forecasts that revenues on domestic payments will fall from $1.16 per transaction in 2001 to $0.86 by 2011 — a compound annual decline of 5 percent in real terms. On cross-border payments, revenues per transaction will more than halve over the same period from $12 to $5.20.

The biggest catalyst for change is the banks’ corporate customer. "Big corporate clients have become much more demanding. They want to be in control of their payments activity, and this is putting huge pressure on the banks," says Viner. "To keep their corporate clients happy, banks need to offer a much wider range of services and higher standards of operational excellence."

New regulations, such as the Patriot Act and the Sarbanes-Oxley Act, growing competition from nonbanks, and more standardisation are also putting pressure on the business and contributing to the need for massive investment.