McKinsey on Payments - McKinsey & Company

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