According to the study banks face a fierce squeeze on their payments business, which could undermine their overall profitability. The report, Preparing for the Endgame: Global Payments 2004, predicts a dramatic reduction in the profitability of the payments business at many banks. Although global payments revenues for the overall banking industry are predicted to increase to nearly $390 billion by 2011 - one-third higher than ten years earlier - changing customer behavior, increased regulation, and more competition from nonbanks will significantly erode profit margins. There is a two-pronged threat, according to Viner. First, banks risk being forced out of the payments business unless they make significant investments to upgrade systems and improve the service they offer customers. Second, they risk seeing their core banking business suffer. That is because a successful loans and deposit business relies on payments. Viner believes that small, local banks are most at risk because they will not be able to afford the heavy investment required to maintain a state-of-the-art payments business. They will be forced to forge partnerships and outsource much of their payments business, retaining customer relationships only with “white label†payments products. Large regional players may also find the capital investment required daunting, and BCG says they should enter into partnerships selectively. Big global banks have the size and scale to afford the investment needed to stay competitive. BCG forecasts that revenues on domestic payments will fall from $1.16 per transaction in 2001 to $0.86 by 2011 - a compound annual decline of 5 percent in real terms. On cross-border payments, revenues per transaction will more than halve over the same period from $12 to $5.20. New regulations, such as the Patriot Act and the Sarbanes-Oxley Act, growing competition from nonbanks, and more standardization are also putting pressure on the business and contributing to the need for massive investment. According to BCG, European banks expect to invest on average $80 million to $120 million in their payments businesses over the next five years. For the top 75 banks in Europe alone, this amount would total $6 billion to $9 billion by the end of the period. For retail customers, the changes sweeping the industry promise new ways of paying for goods and services. In Hong Kong, the Octopus card for buying tickets on the mass-transit system can now be used to buy fast food, pay for swimming pool entrance fees, and check school attendance. Elsewhere, customers will soon be able to pay for airline tickets and make international money transfers using their mobile phones. Contopronto in Norway already allows customers to make payments by sending messages from their mobile phones.
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