Demanding customers, poor organization and high costs mean that banks must act now to fend off a growing threat from leaner, fitter non-bank groups already muscling in on one of the most important businesses in financial services.

The Boston Consulting Group says that the global payments market — the whole range of non-cash transactions from debit cards to electronic transfers — is under assault from nimble competitors. Companies such as Tesco in the United Kingdom and Wal-Mart in the United States are ready to serve customers demanding choice, convenience, lower costs and better service.

BCG says the current challenge to banks’ historical dominance in payments is just the tip of the iceberg if banks fail to review pricing strategies, product ranges, infrastructure and customer needs.

“With interest rates at a 48 year low, the warning to banks over payments is stark: reform your strategy or watch your revenues walk,” says Nick Viner, principal author of the report and head of BCG’s Global Payments Practice.

BCG estimates that the market for payments transactions will grow from US$1,800 trillion in 2000 to US$3,000 trillion by 2010, an increase of 66%. But growth in electronic payments methods means that over the same period, average revenue per transaction will actually decline by almost a third.

Shrinking revenues from investment banking and corporate lending this year, with lower interest rates piling on the woe, mean it is crunch time for banks. In its sixth report on the payments sector, BCG surveyed 20 financial institutions, including nine of the top 19 global banks. Some 75% of bankers interviewed said refocussing on revenues was a top priority for 2003.

After axing branches during the Internet boom, banks realize that rethinking payments can help them get closer to their customers. Many banks, particularly in Europe, are seeking to make more money from their ATMs: the Spanish use them to buy football tickets, the Portuguese to pay taxes, while in Ireland they can be used to top up prepaid mobile phone cards. In the UK, British Airways has advertised on ATM screens.