Aite Group, a global research and advisory firm in financial services, today launches a new report “The Payments Transformation Race: Criteria for Success”, commissioned by Icon Solutions. Based on a global survey of senior executives at the world’s top-tier banks, it reveals that high costs, low margins and increasingly commoditised business models are eroding payment profits, resulting in some services failing to break even. 

On the upside, it shows a clear link between payment transformation priority and profit, with those banks committed to investment demonstrating higher margins and more positive returns. To help banks ensure their payment transformation strategies are on the right track, the report also provides a practical ‘scorecard’ that lets them benchmark their own performance and priorities against key success criteria.

Banks must invest in new infrastructure to cut the cost of delivering payment services.

Four out of five banks surveyed (80%) agree that payments are becoming less profitable, with only 18% able to charge what they want for payments. Total Cost of Ownership (TCO) is increasing as banks invest in new infrastructure to meet external demands for faster payments. Many are 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% of banks are on the road to low-cost Real-Time Payments (RTP), 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. 

Findings show payment models need to shift from transaction to data-led if revenues are to increase.

Payments is moving from a profit centre to a cost centre with more than two thirds (65%) reporting that services are operating close to (or below) profitability. Current priorities are driven by fear of losing both customers (68%) and transaction volumes (64%). 

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. Yet only 15% 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.

Transformation strategies should address cost and revenue challenges to ensure payment profitability.

It’s evident from the research that those banks with an organisational commitment to transforming payments will be more successful at responding to change. In fact, the research has highlighted that those banks undertaking transformation are strongly correlated with those that are able to charge more and thus drive improved profitability. For many banks, however, undertaking transformation has been slow. Just 10% of banks are in the final stages of payment transformation while 30% are only just starting their journey. 

To deliver profitable payments services, it is vital that banks have a single strategy to improve cost and revenue sides of the equation. The report argues that banks should collaborate with partners, not just to facilitate foundational systems but also to create the strategic roadmaps that will guide their long-term payment transformation.

Erika Baumann, Senior Research Analyst, Wholesale Banking & Payments at Aite Group, explains: “Evidence indicates that traditional revenue models of payments are starting to shift – operating sub-profit is simply not viable long-term. Fifteen percent of top tier banks around the globe have already moved to data-driven models and others are following suit. 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. Diving deep into these issues, this new report may be a wake-up call from some institutions, encouraging an acceleration of their payment transformation strategy.”

Simon Wilson, Director of Global Payments at Icon Solutions, adds: “It’s clear that profitability from payments is on the decline. 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.”

However, Wilson recognises the challenge faced by banks, “Feedback highlights a lack of information around strategic considerations, best practice and risk minimisation. This report aims to assist banks in tackling transformation initiatives. The good news is that, as the report shows, those who succeed are those that will reap the greatest rewards.”

The report is based on Aite analysts’ expert insight as well as data and information from a 2019 Survey of 22 leading global banks across the USA, Canada, Asia, and Europe. Interviews were conducted with key decision makers whose titles include Head of Payments, Head of Innovation, Head of Treasury, Senior Product Manager, Director, and Managing Director.