The ongoing debate over banks ability to maintain control of the payments system is generating decidedly different views of the threat posed by telecommunications companies and other new entrants.
In its fourth annual report on the payments business, one extreme scenario from Boston Consulting Group has banks losing as much as $150 billion of revenues, or almost half of global payment revenues, by 2008 unless they come up with a secure and convenient online solution. But other observers say the outlook is not that gloomy, and that the telecommunications industry will be an amiable partner to banks rather than one of their biggest threats, as Boston Consulting hypothetically presents the sector.
No one disputes that electronic payment is growing. Between 1994 and 1998 nearly 22 billion payments worth $316 trillion switched from paper to e-channels. By 2008, electronic payments will reach 377 billion and generate revenues of about $310 billion, against 201 billion and $233 billion in 1998.
Online payment companies and telecommunications firms developing mobile-phone systems are the No. 1 threat to banks hegemony in payments, according to Boston Consulting.
For the first time, customers will be able to exploit the option of using payments services that completely bypass the banking system, threatening banks with relegation to commoditized clearing and settlement services, says the firms report, which was released in late November.
In one Boston Consulting projection for banks, online providers such as Palo Alto, Calif.-based PayPal, ProPay of Orem, Utah, and the BillPoint joint venture of Wells Fargo & Co. and eBay could capture as much as 60%, or $50 billion worth, of the online payments business, leaving banks with a portion worth about $35 billion.
The consulting firm depicts another scenario in which telecommunications companies such as mobile technology and network providers could grab substantial market share of online and offline payments, as consumers increasingly view cell phones and the like as tools for commerce.
You can imagine simply pointing the phone at the point of sale and your account has been debited, said Nick Viner, a Boston Consulting vice president. You have a device with multipurpose usage, which theoretically is more exciting than a bank card.
If telecomm companies dive in headfirst and become aggregators, payment costs could plummet, and that would shrink the total revenue pie to $259 billion, Boston Consulting says. If they make further inroads into micro- and mobile-commerce payments, they could get $47 billion of that market, leaving banks with total revenues of only $212 billion.
Jeetu Patel, vice president of research with Doculabs, of Chicago, said these assertions are ridiculous. Telecommunications firms will not build payments systems to compete with banks but instead will help financial institutions by partnering with them, he said.
But companies like PayPal are huge competition to banks and could chew up more than 15% of payments revenue in eight years, Mr. Patel continued. Banks are in danger of not being able to get their acts together in time to head off these new competitors, he said.
Banks need to act, think, and behave more like high-technology companies rather than traditional banks to compete with the high-technology sector, which is their largest threat, he said. Banks dont seem to be able to focus and execute on the same goal in the same amount of time that software companies do.
Lou Anne Alexander, senior vice president of e-channels at First Union Bank, said she is convinced that banks will always be crucial to payment processing. There are a lot of new entrants that can gain access to initiating payments, but you still have to have banks in the background, she said.
And she agreed that banks should see the telecommunications industry as friend, not foe.
Banks have been very methodical in plotting their Internet strategies and will likely outsource some payment processes to nonbanks, Ms. Alexander said.
Banks are willing to concede some functions as an industry, where it makes sense, she said. But banks want to make sure they do not give away valuable customer information, or compromise that information in any way. Customers expect privacy and expect banks to protect their information.
Mr. Viner stressed that he does not expect either extreme scenario to come true. He sees a massive variation of players and payment options, differing by market and country. The extreme cases should serve as a warning to banks that they need to put up a fight against banks and nonbanks to defend their payments franchise.
The risk is not that all banks will be disenfranchised, but that only a small number of forward-thinking banks will be up there competing, he said.
Boston Consulting advises banks to make smart card technology the basis for a secure and convenient bank-owned payment system.
They would need to subsidize part or even all the development costs, but would reap about $72 billion of online revenue, the report says.
Smart cards let customers make credit or debit payments online and offline in a similar fashion, and give banks the opportunity to add services such as loyalty points or frequent-flier miles, Mr. Viner said.
Build up the functionality and make smart cards much more akin to all the things we do every day, he said. Give the customers more options in such a way that allows you to control the core business payments.
From Our Archive: