McKinsey study compares different approaches to banks’ making money, and found three broad approaches.

The McKinsey Quarterly: How Europe’s banks should prepare for payments reform

1. Institutions in the United Kingdom and France are “balance earners.” UK banks earn revenue largely from the interest on credit card balances, while their French counterparts generate income from interest rate margins3 on current accounts.2. “fee-oriented” banks, including institutions in Italy, Poland, and Spain—charge their customers for everything from transactions to account maintenance. Such activities are largely profitable for institutions in Italy and Spain (2002 profits totaled €3.9 billion and €1.5 billion, respectively) but not for those in Poland. Indeed, the higher costs associated with handling cash (still a substantial part of Poland’s developing economy) contributed to a loss of €700 million on payments activities there.

3.Belgian, Dutch, German, and Swedish banks are “efficiency focused.” They charge lower fees and earn a lower income from account balances but also keep processing costs down—by automating credit transfers, for example.

Their context is the Single European Payments Area (SEPA). singleeuropaymentsarea200602en.pdf

“Within the SEPA, customers will be able to make payments throughout the whole euro area as efficiently and safely as in the national context today. If they so wish, they will be able to do so using a single payment account and a single payment card”

This seems to imply that all Banks will have to connect to a common network in order to participate as a Bank. The McKinsey article makes the point that understanding and controlling costs is critical to thrive in this new environment.

But to thrive in a single-payments area, European banks need to grasp the fundamental economics of their operations. By subsidizing loss-making activities (such as check processing) with profitable ones (such as merchant fees from credit card transactions), banks leave themselves vulnerable to new entrants.Attackers, including banks that operate solely over the telephone and the Internet, can process large volumes of payments electronically, without the burden of expensive branches. In advance of harmonization, such banks are beginning to offer high-yield savings accounts to attract customers.

Relevance to Bankwatch:
This is a new and important evolving space, that we will watch. New category for SEPA.
There are opportunities for new entrants, unburdened with old cost and branch structures to make inroads.