McKinsey on Payments - McKinsey & Company

Number 4April 2009<strong>McKinsey</strong> on PaymentsForewordGlobal perspective on payments: The <strong>McKinsey</strong> Global Payments Map<strong>McKinsey</strong>’s Global Payments Map offers a new comparative framework for understandingconsumer and corporate payments preferences around the world, enhancingbanks’ ability to match product innovations with local market opportunities.The changing European payments landscape: Crucial trends to 2013The payments business generated profits of €60 billion for European banksin 2007, accounting for a quarter of total banking revenues and more than15 percent of banking profits. Given the value at stake, the importance of examininghow the payments landscape will evolve over the next five years is beyond doubt.U.S. payments: Pockets of growth despite a slowdownThe U.S. payments business faces significant challenges, but even under our mostpessimistic scenario, we expect industry revenues will grow over the next five years.Innovative and well-positioned payments providers will gain competitive advantageby exploiting opportunities created in a dramatically changing market.Payments strategies and opportunities for postal operators around the worldAlthough postal operators have traditionally played an important role in payments,strong forces are reshaping industry dynamics and profitability. To defend their paymentsfranchise, postal operators must act quickly. If they do so, they may even beable to leverage payments as the foundation of an exciting new growth strategy.Mobile payments: Ringing louderMobile communication devices have become substantially more popular and sophisticatedas consumers have become remarkably comfortable with their use. Such changescould herald new growth for and a reshaping of the mobile payments industry.U.S. healthcare payments: Remedies for an ailing systemAs American consumers shoulder more of the burden of healthcare costs, newmodels are needed to facilitate payment flows, combat growing bad debt, and improveefficiency across the value chain.131320263440

The <strong>McKinsey</strong> Global Payments Map3Global perspective on payments:The <strong>McKinsey</strong> Global Payments MapPayments services generate worldwide revenues of more than $900 billioneach year. Representing roughly 25 to 30 percent of total bank revenues,payments services provide a steady income stream in these troubled timesas well as daily opportunities for banks to serve consumer and businesscustomers and to reinforce their brand. At the same time, payments systemspose a heavy burden on overall bank operations costs, making them evenmore worthy of focus.Olivier DeneckerGlen SarvadyAnna Yip<strong>McKinsey</strong>’s Global Payments Map marks anew analytical framework for understandingthe payments business, offering a distinctivelycomparative approach inevaluating regional payments dynamics andrevenue trends around the world. In separatearticles in the current edition of <strong>McKinsey</strong>on Payments, we focus on recentdevelopments in the U.S. and Europeanpayments markets; in forthcoming issueswe will examine trends in Asia and LatinAmerica. <strong>McKinsey</strong>’s Global PaymentsMap, built over several years with quantitativedata from a broad range of sources, revealspatterns in the evolution of paymentsbehaviors over time. This market typologybears important implications for bank liquidityand revenue, and the <strong>McKinsey</strong>Global Payments Map will help banks toanticipate local market changes throughcomparison with markets that display similarpatterns of change.As payments is an increasingly globalizedbusiness, banks need to articulate localstrategies to address global competitivethreats, applying lessons from around theworld to enhance the longevity and profitabilityof each customer relationship. Ashighlighted in previous papers, the interdependencyof transactions and liquidities is aglobal characteristic of the payments business.(See “The hidden side of payments:Harnessing the value of liquidity,” <strong>McKinsey</strong>on Payments, November 2008.) Transactionservices attract customer depositsand loans and offer banks a lever to expandtheir franchise into new geographies, marketsegments and product groups. Past ex-

4 <strong>McKinsey</strong> on Payments April 2009Exhibit 1Payments representone-quarter of totalbanking revenues orU.S.$900 billionTotal 2007 bankingrevenues breakdownPercent100% = U.S.$3,400 billion2007 payments revenuesdecompositionU.S.$ billionsU.S.282Europe2757327AsiaPacific237LatinAmerica*60Non-paymentsPaymentsRest ofWorld60* Latin America data is for 2006Source: <strong>McKinsey</strong> Global Payments MapTotal914perience has shown, however, that “one sizefits all” solutions (e.g., U.S.-style revolvingcard solutions in Europe) face major hurdles.Understanding the differences in theglobal payments landscape, therefore, enablesbankers to rethink enterprise strategiesto compete locally.In order to understand the differencesamong the world’s major payments markets,we return to the basics: how customersmake payments, how they fund these transactionsand how banks charge them for theservices rendered. Determining how to balancethese three aspects of the paymentsbusiness into a profitable mix is the keychallenge for banks entering a new marketor dealing with changing economic fundamentals.A tour of the payments globe,guided by <strong>McKinsey</strong>’s Global PaymentsMap, provides valuable lessons for banksseeking to optimize income from balanceswhile also optimizing the cost and revenueof transaction services.Global perspective on paymentsrevenuesWhen looking at the Global Payments Map,the three largest regional markets by revenueare the U.S., Europe and the Asia-Pacificregion. Together with Latin America,these regions represent more than 90 percentof banks’ global payments revenues(Exhibit 1). Overall, fees and net interest incomeon payments-related accounts representabout 50 percent each of the revenuebase, reinforcing the notion that paymentsis a “hybrid business”: transaction servicesare fundamental to persuading customers eitherto carry loan balances (credit card oroverdraft) or to increase their deposits.Upon closer examination, however, paymentsrevenue models vary significantlyfrom one region to another. In the UnitedStates fees account for more than half oftotal payments revenues. By contrast, in Europeand Asia-Pacific most payments-relatedrevenues are derived from current

The <strong>McKinsey</strong> Global Payments Map5Exhibit 2Revenue driversdiffer stronglyby region2007 revenuesU.S.$ billionsCurrent accountsconsumerU.S. Europe Asia Pacific95.4145.1Fee income69.3Interest incomeCurrent accountscommercial31.786.4114.6Credit card issuing128.629.732.6Card acquiring11.211.413.2Other14.72.27.0Total281.6274.8236.7Source: <strong>McKinsey</strong> Global Payments Map1Electronic payments (debit or credittransfers) move funds directly from oneaccount to another, either as a debit or credittransaction in the batch system or as credittransaction in the real-time gross settlementsystem (RTGS).account balances, with fees amounting toone-third of payments revenue in each region(Exhibit 2). High interest rates in 2007contributed to a significant rise in interestincome to the payments business, particularlyin Europe and Asia-Pacific, where bothconsumers and businesses hold large cashreserves in current accounts. Given the recentshifts in global interest margins amidstthe current economic crisis, it is reasonableto assume that payments revenue growthwill moderate in 2008-09, or perhaps showsome decline, particularly in countries witha heavy reliance on interest as a share ofpayments revenue. Nonetheless, the overallhealth of payments revenues is solid andtheir long-term status as 25 to 30 percent oftotal banking revenues is secure.The contribution of retail versus commercialaccounts also differs markedly by region.In the U.S. more than three-quartersof current account revenue is derived fromconsumers. In Asia-Pacific, however, themajority is generated by business accounts.In Europe the balance tilts toward retail accountsbut not as heavily as in the U.S. Beforeexamining more closely thecomposition of payments revenue in diversemarkets, we discuss the customer paymentspreferences and liquidity practices that distinguishthese markets.Back to basics: Building a globalpayments strategyThe payments business fills three basicneeds: transactions and liquidity for the userand, in return, revenue for the bank. Banksserve these needs with a narrow set of products.They serve customers’ transactionneeds with four main tools: cash, checks,cards and electronic payments. 1 As for liquidity,customers may fund these transactionsimmediately out of existing assets(deposits), defer transaction settlement (aswith a charge card) or spend out of deficit(revolving balances on a line of credit). Cus-

6 <strong>McKinsey</strong> on Payments April 2009Regional scope of <strong>McKinsey</strong> payment pools<strong>McKinsey</strong>’s European Payment Pools reflect activities of the European Union countries (EU27) excluding Luxembourg, Latvia,Lithuania, Estonia, Malta and Cyprus, but including Norway and Switzerland.The Asian Payment Pools comprise the entirety of the Asia-Pacific region, with detailed analysis of the following ten leading economies (in descendingorder of payments revenue): China,Australia, Japan, South Korea, India,Thailand, Hong Kong, Malaysia, Indonesia and Singapore.Latin America is the most recent addition to <strong>McKinsey</strong>’s regional payment pool initiative, consisting of economics for Brazil,Mexico, Argentina, Chile, Colombia and Peru. A further discussion of this region’s dynamics will be provided in a forthcoming issue of<strong>McKinsey</strong> on Payments.The prominent components of the Rest of World category include Russia, Turkey, Canada and the Middle East and Africa. Further analysesof these geographies are under way.Currency translations are an unavoidable factor in determining regional shares and overall growth rates. We employ the U.S. dollaras the common denominator, using average annual exchange rates.Due to the central banks’ varied release schedules for key supporting data, we continue to refine our 2007 metrics. As a result,subsequent versions of <strong>McKinsey</strong>’s regional profit pools may differ nominally from these figures.For more information on <strong>McKinsey</strong>’s Global Payment Pools initiative, please contact paymentspractice@mckinsey.com.Victor Ban, a consultant in the Taipei office, Ryan Cope, a senior analyst in <strong>McKinsey</strong>’s Global Concepts office, Reynaldo Sandoval, a consultant in the Mexico City office,and Edmond Vrancken, a senior analyst in the Paris office, contributed research for this article.tomers compensate banks for these serviceswith either fees or interest, or a combinationof the two. Whatever a given market’s fundamentalrevenue model may be, banks inall regions operate certain services at a loss(in many cases, cash and check processing),others at a profit (usually deposits and lending).Banks therefore require complex toolsto manage profitability across a diverse setof accounts and services.How customers make paymentsGeneral payment preferences by regionIn the U.S., credit cards and checks – despitethe latter’s steady decline among consumers– stand out as particularly important forconsumers and businesses alike. The situationin Europe and Asia-Pacific is more diverse,as countries differ strongly in theirpreference of cash versus cards for point-ofsale(POS) transactions and checks versuselectronic payments for bill payments. Somemarkets, such as France, Canada and HongKong, show a preference pattern not unlikethat of the U.S., with relatively high usageof checks and cards and less use of electronictransfers.In Europe, a major gap separates countriesthat are highly electronified, both in transfersand card usage, such as the Nordic andBenelux countries, and those with an enduringstrong preference for cash, such as Italy,Spain and Germany. Similarly, Japan andIndonesia show no attachment to checks,relatively high usage of electronic payments,but also a clear bias towards cashrather than cards. Thus, as Exhibit 3shows, countries that are geographicallyand culturally close often follow diversetrajectories toward full payments electronification,due not only to varying customerpreferences but also to differences in governmentregulation, the distribution of paymentstechnology and the pricing of cashversus cards. (For more on this, see “ATMs:Complex weapons in the war on cash,”<strong>McKinsey</strong> on Payments, November 2008.)

The <strong>McKinsey</strong> Global Payments Map7Exhibit 3Basic typology ofpayments markets2007 transactions dataElectronicPolandJapanNetherlandsFinlandIndonesiaChinaGermanyItalyBrazilSpainSouthKoreaU.K.AustraliaShare ofelectronictransactionsrelative tocheck*RussiaColombiaFranceCanadaMexicoMalaysiaHong KongU.S.* Electronic consists of credit transfersand direct (ACH) debits; for thispurpose it excludes card transactions** Excluding ePurse and prepaidSource: <strong>McKinsey</strong> Global Payments MapCheckIndiaArgentina0 185Debit & credit card transactions per capita**2“Volume” throughout this article refers tothe total number, not value, of transactions.Cash: Important everywhereAlthough cash usage is shrinking across theworld, it remains the most frequently usedpayment instrument in most countries and isparticularly strong in some of the world’slargest developing markets: China, India,Brazil and Russia. Cash is also prevalent inseveral mature economies such as Japan andGermany. In the United States, cash accountsfor an estimated 57 percent of totalpayments volume 2 and, in Europe, rangesfrom 47 percent (Finland) to almost 95 percent(Poland). The variation in cash usagebetween “cash economies” and “electronifyingeconomies” in Asia-Pacific is similarlywide, from 61 percent in Hong Kong andAustralia to 99 percent in India (Exhibit 4on page 10). Banks in diverse markets canadvance the “war on cash” (and reduce thecosts of cash processing) by promoting electronicand card payments and alternativepayment channels, such as Globe’s GCash, amobile payments initiative in the Philippines.(For more on mobile payments, see“Mobile payments: Ringing louder” onpage 34 of this issue.)Cards: Extending their reachRapid improvements in national telecommunicationsinfrastructures reduce the costof extending card acceptance technology tomerchants of various sizes, even in remotelocations. Thus, card growth is strong inemerging markets, particularly in cash-intensiveIndia and China, but usage continuesto grow at close to double-digit rateseven in highly developed markets, e.g.,Scandinavia. Expanding acceptance to publicand semi-public agencies (e.g., hospitals)and other high-volume locations can spurcard growth significantly, as is happening inJapan, where the growth rate of card transactionshas increased more than threefoldsince 2005.While levels of card usage and the resultingrevenue each depend on a variety of factors(including interchange rates, mix ofdebit/credit and annual maintenance fees),

8 <strong>McKinsey</strong> on Payments April 2009those countries where card usage is relativelylow may see the greatest opportunityfor growth in both card transactions andrevenue. For example, Germany’s 36 cardtransactions per capita per year is low byEuropean standards, and China’s one transactionper capita is distorted by a high unbankedpopulation. Card transactionrevenue in these countries (i.e., debit andcredit, excluding interest) accounts for 6percent and 10 percent of total paymentsrevenue, respectively, suggesting an untappedreserve of revenue from transactionvolume. By contrast, in markets like theU.S., with 177 card transactions per capitaper year, and South Korea, with 63, (a relativelyhigh figure compared to the Asian peergroups) cards contribute 33 percent and 44percent of total payments revenue, respectively,and the prospects for further revenuegrowth from cards are more measured.Checks: Declining but impossibleto ignoreWhile checks have long provided the mainalternative to cash in certain countries, theirrelative importance globally is declining rapidly.In countries such as Finland or theNetherlands, checks have actually ceased toexist, which is expected to happen soon inmost of northwest Europe as well. As a resultof these trends, check usage is now increasinglyconcentrated in North America, afew European countries (e.g., France andthe U.K.) and Latin America, where theproduct proves difficult to replace, due pri-International glossary of paymentsWhile the core offerings of a payments franchise are consistent from one region to another, different markets use a variety of English-languageterms to identify the same services. Bankers, therefore, need not only to understand the distinct behaviors and conventions of local marketsbut also regional differences in the payments lexicon. The glossary below lists the alternative names for the products discussed in this article.ServiceCard acquirerCharge cardCredit cardCredit card issuerCredit transferAlternative namesMerchant acquirerDeferred debit card,credit cardRevolving credit cardACH credit (in the U.S.);also (in Europe) giro paymentand direct creditDescriptionThe bank that provides merchants and billers with technology for accepting card transactionsand processes card payments on their behalf. Acquirer revenue is based on technologyimplementation and taking a small portion of the “discount rate” on each transaction.Card allowing holder to charge purchases to a card account up to an authorized limit.Card does not offer extended credit and the full amount of the debt incurred is settledat the end of a specified period. Most cards referred to as “credit cards” in continentalEurope are actually “charge cards.”Card allowing holder to charge purchases against a line of credit up to an authorizedamount, with the option to pay a portion of the balance at the end of a specified periodand “revolve” the remaining balance indefinitely. Customer pays interest on the revolvedbalance. In countries where deficit spending is prevalent, credit card holders tend to be“revolvers”; in countries where consumers maintain high current account balances, theytend to be “transactors,” using credit cards as a form of “deferred debit.”The bank that issues the credit card and associated credit line to the customer. Card issuerrevenue comes from interchange (merchant discount rate), and interest on revolvingbalances (in some countries) or membership fees (in other countries), as well as incidentalfees (for late payment and transactions that exceed the credit limit).Electronic payment where both payment instructions and funds move from payor bank topayee bank via batch-transfer system. Traditionally low-value.

The <strong>McKinsey</strong> Global Payments Map9marily to existing corporate billing systems.Two countries, France and the UnitedStates, account for nearly two-thirds ofworldwide check volumes.In some developing markets checks neverreally took hold due to limited negotiabilityand expense. Checks in China, for example,are only valid in the region of the drawer’sbank rather than nationwide. As checks arenow becoming obsolete, emergingeconomies can safely avoid investing in newcheck infrastructure.Electronic transfers: Strong in mostdeveloped economiesElectronic payments are an operationally efficientsolution and have become a fixturein many developed markets, both for consumerand corporate payments. Although inthe U.S., France and Canada migration hasbeen less successful. Reasons can be foundin systemic restrictions on consumer-initiatedtransfers or the reluctance of consumersto share account numbers, theprocess layout for batch-transfer electronicpayments, and higher fees. In the U.S. andFrance banks make around $1.00 per electronicpayment versus just below $0.40 inGermany or Brazil.Electronic payments processed throughbatch-transfer systems (e.g., ACH) poseboth challenges and opportunities forbanks. As more people in emerging marketsare integrated into the banking system, electronicpayments are often the best alterna-ServiceCurrent accountDebit cardDirect debitOverdraftRTGS (real timegross settlement)paymentVolumeAlternative namesDemand deposit account(DDA) is morecommon in the U.S.ACH debitNSF/OD(Non-sufficientfunds/overdraft)Wire transfer(in the U.S.)DescriptionFully liquid deposit account allowing, without systematic limits for transactions, payments to allother endpoints. In some cases, current account balances earn interest.A card linked to a deposit account (usually a current account, in some cases a savings account)and used for POS purchases and ATM cash withdrawals. Transactions are funded immediately(with PIN-based authorization) or at the end-of-day (with signature-based authorization).Pre-authorized batch-transfer electronic payment where payment instructions move from payeebank to payor bank and funds move in the opposite direction. Traditionally low-value.A debit transaction that exceeds the amount of funds in the account. The bank may either rejectthe transaction or pay it by extending credit to the customer (whether by previous arrangementwith the customer or as a “courtesy”). Bank may charge a fee and/or interest (e.g., in the U.S.there is a higher tolerance of “incident” fees than in other regions). Typically overdraft refers tothe incident in the U.S. and to the resulting balance in Europe.Real time transfer of funds, executed individually on an order-by-order basis. Mostlyhigh-value, business-to-business transactions and often executed through SWIFT system(except in the U.S.).Refers to the total number of transactions (e.g., check items processed). This differs fromvalue, which for the purposes of the Payments Map refers to the dollar (or other currency) flowrepresented by those transactions.

10 <strong>McKinsey</strong> on Payments April 2009Exhibit 4Cash remainsimportant everywhere* 2006 data for Brazil, Colombiaand MexicoSource: <strong>McKinsey</strong> Global Payments Map2007* share of cash transactionsPercentIndonesiaIndiaColombiaRussiaChinaMexicoPolandBrazilMalaysiaItalyJapanGermanySouth KoreaCanadaAustraliaU.K.Hong KongNetherlandsU.S.FranceSwedenFinland47616161605755546675759493918988999999989898CasheconomiesElectronifyingtive to cash for bill payment. Furthermore,in many countries, consumers can initiateone-time credit transfers to both businessesand individuals alike. In India, the governmentis promoting electronic payments as away to reduce the number of cash paymentsand extend control and transparency to theinformal economy. The fast growth of electronicvolumes in the emerging markets ofChina and India has important implicationsfor fee revenue in the Asian payments business,as electronic payments are already amajor source of fee revenue.How customers fund transactionsEach payments instrument is linked to asource of liquidity – cash on hand or debt financingthrough a credit line. Funding canbe attached to different instruments: a currentaccount, a credit line or a sock drawer.General funding preferences by regionThe way customers of a given region fundtransactions and manage their liquidity parallelsin a very general way each region’strade balance. The success of credit cards inthe U.S. payments system is unquestionablylinked with the dependence of the U.S. economyon deficit spending. Year after year,credit cards have added steam to the U.S.economy by allowing consumers to buynow, pay later. In Europe and Asia-Pacific,however, consumers are net lenders to thebanking system, saving up more than theyborrow and managing their spendingthrough current accounts, where they tendto hold relatively large balances.Different funding preference also determinesmarket preference for either debit orcredit cards. In the United States, Ireland,and the U.K., as well as Asia-Pacific countriessuch as Australia, Hong Kong andSouth Korea, where credit card use isstrong, customers frequently finance purchasesby revolving balances. ContinentalEuropean markets including Germany, theBenelux and Nordic countries, as well as

The <strong>McKinsey</strong> Global Payments Map11major Asian countries including China,show a preference for debit, paying for purchasesout of their current accounts. Consumersin France, Spain and Japan,meanwhile, prefer to use credit cards as a“deferred debit” instrument. That is, theydefer settlement of the transaction to theend of the billing cycle, often with an automaticdebit out of their current account.In many European and Asia-Pacific markets,current account balances exceed theamount needed to fund routine transactionseven in peak spending months. The abilityof banks to retain excess balances in highmarginaccounts helps sustain their profitability,and signs of erosion of suchsurpluses amid the current financial crisisare emerging in some markets. Non-transactionalfees (account maintenance fees plusinterest income) on current accounts rangefrom more than $600 per capita for muchof Western Europe, to $400 to $500 percapita in developed markets of Asia-Pacificand Latin America, to less than $200 percapita in the U.S.Changes in corporate liquiditymanagementAs debt is often an integral part of corporateliquidity structure, treasurers may seekto offset interest expense with higher returnson liquid reserves. Poor current performanceof alternative investments and reducedcredit are, however, forcing corporations tohold more on liquid reserve. Indeed, the currentfinancial crisis is changing corporatebehavior rapidly, especially in Asia-Pacific.Commenting on new challenges to long-establishedpractices in corporate cash management,one Asian bank executive told us,“The changes of the past three months [4thquarter of 2008] are greater than those ofthe previous ten years.” Corporations,whose large current account balances havebeen the single largest source of cash managementrevenue for Asia-Pacific banks, areincreasingly eager to optimize their use offunds. This could signal an important shiftin the revenue stream for the Asia-Pacificpayments business, as treasurers look forhigher returns, minimizing balances in currentaccounts, using netting systems andworking capital optimization tools to reacha higher return.Such a change in corporate behavior couldresult in a loss of interest income to a bank’spayments business, but banks that offer newliquidity management options may still beable to retain corporate deposits and evenattract new deposits. For example, somebanks in Asia-Pacific have recently beenpromoting working capital management accountsfor small businesses, offering smalland medium-size enterprises (SMEs) moreflexibility in funds management and providinghigher returns than traditional currentaccounts. As SMEs account for two-thirdsof cash management revenue worldwide,banks should be careful to retain their deposits,even if this means shifting revenueaway from the transactional business.Banks’ ability to offer transaction servicesrepresents a means for them to attract additionalliquidity, provided banks are seen assafe havens.How customers compensate banksAs shown in Exhibit 2 on page 5, paymentsrevenue in Europe and the Asia-Pacific regionconsists mainly of interest income,while in the U.S., fees contribute the largerportion. Within Europe, fee levels varystrongly, and sensitivities to different typesof fees are apparent. Asia-Pacific customers,both consumers and businesses, tend tocompensate banks with high balances, andfees represent a substantial portion of revenuesonly on corporate accounts.While at first glance, Exhibit 2 suggests thatU.S. consumers are more tolerant of feesthan their peers in Europe and Asia-Pacific,they have, in fact, essentially rejected periodic“maintenance” and “membership”fees, which have become rare both for currentaccounts and credit cards. On the otherhand French and German customers generallyavoid transaction fees, but are comfortablepaying account “maintenance” or card

12 <strong>McKinsey</strong> on Payments April 2009“membership” fees upfront. In turn, U.S.consumers pay out higher credit card interest,receive lower returns on current accountbalances, and pay higher incident fees forthe convenience of using ATMs, overdrawinga current account, exceeding a creditlimit or making a late payment. In otherwords, U.S. consumers compensate banksmore readily for the debt financing aspect ofliquidity management than for transactionsfunded with cash reserves. A similar structureholds in the U.K. Consequently, intereston revolving credit card balances accountsfor approximately 25 percent of total paymentsrevenues in the U.S., Mexico andHong Kong but less than 2.5 percent in “deposit-oriented”countries like Germany, theNetherlands and Japan.Some markets resist fees more strongly thanothers, and the balance of fee and interestincome that works in one country maywork poorly in another. However, countriesthat look extremely different in paymentsSuccessful innovations in Japan maywork better in Germanythan in the U.S.; Mexico may learn morefrom Malaysia than from Brazil.behavior and revenue models can actuallybe very close in total revenue relative to operationaloutput. For example, whereas thetotal payments revenue per non-cash transactionranges from $1.50 to over $15.00across all markets, markets as different asBrazil, the U.S., South Korea, the U.K. andFrance fall within a 10 percent range ofeach other.Comparative market analysis of customerbehaviors and their ways of compensatingbanks can provide crucial lessons to banksas they seek to optimize the return fromeach relationship while also strengtheningcustomer loyalty. This is the only way forglobal banks to protect their payments franchisefrom specialists that seek to “cherrypick” the profitable products and servicesand threaten to reduce full-service banks toloss-making payments “utilities.”* * *The payments market is changing in fast,dramatic ways, and the forces of globalization,combined with the current restructuringof the financial services sector, demand amore structured approach to balancingprofit across multiple accounts and services.Transaction services serve both to tie customersto the bank and to encourage themto leave more on deposit with the bank, andthis link between payments and liquidity isvital in any market. The key challenge forany payments franchise is striking the optimalbalance of interest income and fee incomefor a specific market.When rethinking the strategy for paymentsaccounts and services or introducing a newtechnology to a local market, a comparisonwith behaviors observed in other marketscan be instructive. It is crucially important,however, to base a search for useful comparisonson market similarities in payments behavior,rather than less pertinent factorssuch as mere size or geographical proximity.Successful innovations in Japan, for example,may work better in Germany than inthe U.S.; Mexico may learn more fromMalaysia than from Brazil. Each market isunique, and the course it will follow towardelectronification will vary according to cultural,economic and regulatory factors.Bankers who take a global view of paymentscan chart the various possible trajectoriesa given market may follow as cardsand electronic volumes grow and cash graduallydeclines. Think globally, act locally.Olivier Denecker is a Payments Practice seniorknowledge expert in the Brussels office; Glen Sarvadyis a senior expert in payments in the Atlanta officeof Global Concepts, a wholly-owned subsidiary of<strong>McKinsey</strong> & Company; and Anna Yip is a principalin the Hong Kong office.