For many banks today, the payments business is anything but simple.
Colliding market forces, including fewer checks, more electronic transactions, and a myriad of legislative and regulatory pressures, are resulting in thinner margins in a business that traditionally has produced up to 35% of banks' total profits.
It looks to get worse — Boston Consulting Group estimates that revenue per transaction could drop as much as 25% over a 10-year period that began in 2003.
And yet because the payment business as a whole will continue to grow and consolidate, banks that can manage their operations strategically in this ever-changing landscape will come out on top.
The most critical trends are the increased use of electronic and mobile payments and the decline of paper checks. Global payments are shifting away from checks to electronic methods so quickly that TowerGroup projects 90% of all payments will be processed electronically by 2010. And the market is getting more complicated because of the convergence of payment methods as emerging trends adapt to technology and user preferences.
Financial institutions need to be more ambitious than just streamlining check processing and harness technologies that increase efficiency. They must develop products and services that customers will want in the future, with more transparent processing, reporting, and fees.
Here the industry can learn from its own recent history. When most banks developed online services 15 years ago, the results looked like what they were: ad hoc creations around separate business processes that guaranteed more legacy applications.
Service-oriented architecture, which deploys modular software to implement business processes and make them accessible to people within and outside the company, can provide this flexibility. Banks can incrementally replace and consolidate services from legacy payment systems with a more adaptable, maintainable, and cost-efficient infrastructure.
This sort of infrastructure allows for a timely and holistic analysis of payments, so banks can better prevent fraud, comply with regulations, and, just as importantly, track customer preferences and needs.
In addition, SOA payment systems are an asset to a bank involved in a merger or acquisition, because having one infrastructure in place across the bank facilitates a smoother integration.
Banks that pursue companywide innovation in payments will stand out with customers and investors, as both groups benefit from enterprise efforts. As a result, these banks will find it easier to meet the challenges of constantly changing regulatory requirements.
Product innovation will be crucial to banks that want to get more wallet share from people in the 18-30 age range, whose digital smarts and demanding expectations will drive this and many other industries in the future.
Payment operations don't have to be a commodity — and they don't have to produce commodity-like revenue streams.
