A study conducted by the Boston Consulting Group (BCG) has found that despite soaring transaction volumes, banks will see payments revenue decline sharply over the next few years.
BCG forecasts that by 2013 payments will be a $703 billion industry, up from $467 billion in 2003. But at the same time banks will see average revenues per transaction decline to $1.58 for domestic payments and to $7.27 for cross-border payments by 2013 - down from $2.08 and $9.33, respectively, in 2003 - as shifting regulatory constraints and changing customer demands eat into profits.
In Europe the introduction of the Single Euro Payments Area (Sepa) in 2008 will have a negative impact on banks' payments revenues.
BSG says full migration to the Sepa standard by 2010 will decrease efficiency and possibly reduce functionality by forcing banks, payments processors and corporations to adopt pan-European products and to discard highly-efficient domestic ones.
"The bottom line is that pushing for the full Sepa concept to be achieved by the end of 2010 will actually destroy value," says Nick Viner, a senior vice president in BCG's London office and lead author of the report.
Viner says a far more workable solution would be to allow payments firms to invest in the full SEPA requirements in line with their natural investment cycles for IT infrastructure, cards, terminals, account engines, merchant contracts, etc.
According to the report, banks in North America will also be hit by falling payments revenues due to slowing growth in credit card usage owing to a saturated market. Furthermore, interchange revenues may also decline following a series of lawsuits brought by retailers claiming that interchange rates are unfairly high. BCG says that if interchange income - which represents about a third of risk-adjusted revenues for US card issuers - were to be slashed, banks would need to review their core business models.
However the report found that the Asia-Pacific payments market was burgeoning, with opportunities greatest in China - where payments revenues are estimated to grow at nearly 13% per year through 2013 - and in India. Other countries, such as Indonesia, the Philippines and Thailand also offer significant growth possibilities, says BSG.