65% of banks ‘struggle with payment profitability’

High costs, low margins and increasingly commoditised business models are eroding payment profits, resulting in some services failing to break even, according to a new report.

Based on a global survey of senior executives at the world’s top-tier banks, commissioned by Icon Solutions and carried out by Aite Group, it found 80 per cent think payments are becoming less profitable, with only 18 per cent able to charge what they want.

Payments is moving from a profit centre to a cost centre, with 65 per cent of those surveyed reporting that services are operating close to (or below) profitability. Current priorities are driven by fear of losing both customers (68 per cent) and transaction volumes (64 per cent).

Total cost of ownership (TCO) is increasing as banks invest in new infrastructure to meet external demands for faster payments, with many seeking to offset this by streamlining back end systems using cloud and open source to create more responsive and, critically, cost-effective platforms.

At the same time, 90 per cent of banks are on the road to low-cost real-time payments, which will boost demand but erode fee margins even further. Facing a pincer of falling returns and rising costs, banks’ payment margins will continue to shrink without a clear payments transformation strategy, the report suggested.

Banks are clearly aware that cutting costs is not enough and that they must also use payments data to deliver more appealing propositions and revenue boosting value-added services, stated the research. Yet only 15 per cent have made the switch from transaction-led to data-led revenue models, even though they could leverage mandatory Open Banking initiatives to generate further data analytics and deliver new customised products to drive new revenue streams.

Just 10 per cent of banks are in the final stages of payment transformation, while 30 per cent are only just starting their journey.

Erika Baumann, senior research analyst for wholesale banking and payments at Aite Group, explained that traditional revenue models of payments are starting to shift, so operating sub-profit is simply not viable long-term.

“There is still a considerable amount of inertia in the market, with banks not knowing how to start or speed up their transition, which could put valuable clients, prospects, and transaction volumes at risk.”

Simon Wilson, director of global payments at Icon Solutions, said: “For banks looking to retain the value payments bring in customer engagement and insight, reversing this trend is a top priority – investing in new transformative technology can simultaneously reduce TCO and provide the tools to drive new sources of revenue growth.”

The report was based on Aite analysts’ insight, as well as data and information from a 2019 survey of 22 leading global banks across the USA, Canada, Asia and Europe.

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