09 Mar 2009
The Australian Financial Review, Andrew Cornell, 9th March 2009.
Future fund chairman and former Commonwealth Bank of Australia chief executive David Murray, points out that one of the less appreciated consequences of the economic crisis, will be a 75 per cent decline in global capital flows. It's an obvious phenomenon, with hindsight, but also one whose impact is far from obvious.
While the financial system, historically, made money on the spread between borrowing and lending, in modern systems fee income has become much more important. There are fees to be earned from setting up, running, and simply clipping the ticket on financial flows. Some of these systems, notably the monstrous shadow banking system which created the crisis, were only fee-generating mechanisms. Their enduring value was illusionary.
Other systems, such as payments, though, are critical and institutions gain fee revenue from these, in keeping with volumes. The slowdown wll hit this value chain as well.
After a break of a few years, The Boston Consulting Group, has produced a new payments system report, Weathering the Storm: Global Payments 2009. The firm notes payments businesses have proved to be reliable revenue generators- global payments revenues reached $US805.1 billion in 2008, up from $US654.3 billion in 2006, and are forecast to reach $US1.4 trillion, by 2016. But momentum is slowing.
The darkest cloud over the industry is the steady decline in average revenues per transaction, BCG says.
For banks, it estimates these revenues will fall from $US94 cents to $US88 cents for domestic payments and from $US9.33 to $US7.50 for cross-border payments from 2008 through 2016. These trends are not just volume related, there is margin pressure and, increasingly, regulatory restrictions on fees, such as the Reserve Bank reforms of wholesale credit and debit card fees in Australia.
BCG focuses on the margin challenge but for all that transaction banking remains a very attractive business- low risk, low capital- which is why competition will increase. The performance of payments tollway operators such as Visa and MasterCard during this crisis shows the attraction of running payments infrastructure.
As Qantas forces its frequent flyer members to choose between direct earn credit cards, which it controls, and indirect earn, which will no longer be able to convert points to flights, payments analyst, Edgar Dunn & Co, has summarised the business case.
There are several key benefits to Qantas in taking this direct- earn approach, EDC says. The financial benefits include the time value of money: that is indirect earn cardholders generally accumulate their points for a long period of time (the average lifetime of a point in one indirect program analysed by EDC was around 9 months) before transferring points, and Qantas only receives payment for the points from the issuer at the time of transfer.
For the direct-earn program, Qantas also gains more control over of the customer's loyalty and can attempt to influence their behaviour.
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