The pressures being felt in the payments industry are set to continue as banks prepare for fees to go even lower. And, as Brian Caplen writes, it is mid-sized banks that are under the biggest threat.

Banks have been living with the squeeze on their payments business for a while. The move towards digital requires huge investment, while compliance costs are rising. Fees, however – driven by new competition – continue to fall.  

The good news is that the payments business is growing. The bad news is that the downward pressure on fees is set to continue and banks should probably plan on the basis that they will be making international payments at somewhere near ​domestic prices.

A new report from Boston Consulting Group (BCG) and Swift notes that international payments make up 5% of transactions but 12% of the revenues banks derive from payments. The trend has been for prices to fall as tech giants and digital challengers enter the space. “Hypothetically, an alignment of revenues from international payments [at] domestic payments levels could generate a 60% revenue loss,” says the report.

The global transaction banks that have made huge investments in new technology will have sufficient scale to survive at these prices. Equally, smaller banks will rely on their special customer relationships and outsource the actual processing of the payments to the larger banks.

Caught in the middle are a group of banks struggling to keep up with compliance, operating legacy technology and still carrying the costs of branch networks. These banks must reinvent themselves if they want to stay in the game, and the BCG/Swift report advocates four different strategies, including consolidation and turning themselves into infrastructure factories.

The problem for all banks lies in putting together a medium-term business plan for when the key variable – the fees they can charge for services – continues to fall.  ​

Brian Caplen is the editor of The BankerFollow him on Twitter @BrianCaplen

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