The real cost of payments

The real cost of payments

I’ve always wondered, from both a consumer’s and a payment professional’s perspective, what the true cost of providing payment services is to a bank. Of course, I cannot ask banks themselves for various reasons. That would not stop me from getting to the bottom of this. In this article, I am going to create a bank and define the parameters that would contribute to the cost based on my experience and some inputs from colleagues. This is at best a “Guesstimate” so kindly take it with a pinch of salt.

As a side quest, I am also going to answer the real question that matters the most. Do banks actually make money from offering this service ?? Do they make “illions” that start with a “M” or a “B” ?

Straight to the math ( Thinking cap on)

“Payland” with a population of 10 million, has a bank called ‘Deer and Lion Chase’ (or DLC) with 5 million customers. It offers domestic and cross-border payments. In the domestic front, it offers credit transfers, direct debits, instant payments, and high-value payments via RTGS. Cross-border payment is offered for several currencies.

For the sake of simplicity, let us assume the charges for domestic and cross-border payments are as follows. This would be the average for all payment sub-categories under the main caterory. eg. Credit transfers might be 40 cents, but direct debits might be 20.

Let us also assume the FX commission per cross-border transaction would be USD 10. This includes cross-border payments worth millions processed by corporates. We are not calculating fees for special payment offerings like bulk or special reporting fees. We will include them as miscellaneous. These numbers will include both incoming and outgoing.

Let the calculation begin

That looks like a big number, right? It is to me. This is only half the story. The second half, like a Quintin Tarantino movie, is much more interesting. Costs.

You can clearly see that there are some decent profits for banks offering payment services. It is also worth noting that FX and cross-border payments are more lucrative to banks than domestic payments.

In this example, the bank makes 280 mill in profits let us have an error margin of 50%. For a banks this is nothing. It wouldn’t be in the top 5 areas where banks make money. Banks of this size regularly pots profits of 3-5 billions.

This is in a year where there was no big transformation projects. If there was a payment transformation project involved, that would be an additional 50-100 million in costs.

Then why do banks offer payments ?? Is it just a revenue stream ?? We will explore it in the next posts