While the payments processing arena remains a vital strategic asset for financial institutions, most bankers today drastically undervalue its worth and relegate it to the role of an expensive but necessary cost-center.

TowerGroup's "2004 Perspective on Global Payments" finds that the payments franchise is often categorized as a commodity-level service with little competitive potential. This is despite the fact that payments underpins all other lines of banking business and represents the foundation of a bank's relationship with its customers -- whether those customers are consumers or major corporations.

To assist banks in rethinking the value of the payments arena, as well as in facing a daunting array of payments-related challenges, TowerGroup has issued its "Top 10" most critical technology and strategy imperatives for building payment processing businesses in 2004:

1. Manage "payments" as a distinct line of banking business
2. Confront payment-related compliance and regulation head-on
3. Ensure payment system resilience
4. Expunge paper and deal with the migration to electronic payments
5. Aggressively manage payment-related fraud risk
6. Upgrade in-bank payment systems, both domestic and international
7. Build payments capabilities into online banking
8. Support electronic payment standards and electronic commerce
9. Manage payment-related messages and liquidity
10. Contain operational costs

"The reasons for rethinking the value of the payment processing franchise are myriad," said David Medeiros, director of the Global Payments practice at TowerGroup and author of the research. "Payments processing is a key element of customer support and satisfaction. It drives the sale of other banking products and services, it generates an enormous amount of revenue, and it represents a crucial factor for competitive market differentiation."

Medeiros noted that forward-looking banks correctly recognize that this cornerstone business of payment processing is at risk. "The danger comes not only from regulatory/compliance issues or internal perceptions of payments from a fragmented and tactical viewpoint, but also from external threats. External agents that position themselves as 'supplementary' to banks' payment offerings -- from aggregators to payment portals to corporate remittance networks -- can represent threats as much as complimentary services," he said.

TowerGroup is a research and consulting firm focused on the global financial services industry.