Payments: challenges and rewards

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The panel

Michael Imeson - Contributing editor, The Banker

Michel Akkermans - Chairman and CEO, Clear2Pay

Mark Hartley - Vice-president, strategy and marketing, Clear2Pay

Matt Ellis - General manager, Americas, Clear2Pay

Doug Gross - Vice-president, Americas, Clear2Pay

Nancy Atkinson - Senior analyst, Aite Group

Gareth Lodge - Research director, payments, TowerGroup

The pace of change in the global payments market is more rapid than it has ever been. Cheques are being replaced in the retail sector by plastic cards and electronic alternatives such as online and mobile payments. In the wholesale sector, companies and other organisations are also embracing electronic payments, as well as e-invoicing, and in many cases are aiming for straight-through processing along the entire value chain.

Innovation in systems and software is constantly taking place, with banks often struggling to keep up. The flood of new regulation, such as the Single Euro Payments Area and the Payments Services Directive in Europe, is proving difficult to manage. Other countries face similar challenges, such as China with CNAPS and the US with Check21. Finally, when you add to the mix the financial crisis and global economic downturn, it is easy to see why being a payments provider is not an easy option.

In such a difficult yet potentially lucrative market, banks need to be nimble and able to adapt to change. They need to keep costs under control, look for new revenue streams, increase competitiveness and boost profit. Above all, they must have the right payments infrastructure in place.

In starting the round table discussion, Michel Akkermans, co-founder, chief executive and chairman of Clear2Pay, the Brussels-based technology company, said that the intensity and nature of the challenges facing payments providers varied from bank to bank. "It depends on what kind of bank you are, the regions you operate in and what kind of services you are trying to offer your customers," said Mr Akkermans, whose company provides payments solutions to banks, clearing houses and payment service providers. "Just looking at technology, most banks have ageing infrastructures which they need to replace. That in itself will have a very deep impact on how they conduct their business."

Gareth Lodge, a research director in the London office of research and advice company TowerGroup, agreed that technology presented a major challenge. "Despite the credit crunch and recession, payment volumes continue to grow, but IT budgets are not keeping track," he said. "Banks have been putting off investment, and in the very near future there will come a point when they can delay no longer."

There is a strong and basic rationale for banks to be in the payments business. "Banking is about the movement of money, the movement of money is about payments," said Mr Lodge. "[The] payments [business] is therefore the lifeblood of a bank. Getting it right, making sure it is reliable and secure, is absolutely paramount. It is the foundation that everything else is built upon."

"It is a very important part of the business of any bank," added Mr Akkermans. "It is also interesting to note that during those two last difficult years, the payments business has continued to contribute to financial institutions' bottom lines. So, providing the right service to the customers, achieving operational efficiency and complying with regulatory reporting requirements is extremely important."

Broadly speaking, when a bank decides which payments model to follow, it has two choices. It can either be all things to all people, offering everything; or it can offer fewer services to specific markets. "No matter which model a bank chooses, it should not lose sight of the fact that it is providing a service to customers," said Mr Akkermans.

Build, buy or outsource?

A bank can build its own payments infrastructure using software it has developed itself; or it can buy software and expertise from a technology solutions provider, which will assemble the infrastructure on the bank's premises; or it may decide not to have a comprehensive payments infrastructure at all and instead outsource payments to another bank or a payments processing company, which might also be a large IT firm.

"We have experience with banks all over the world in multiple implementations, and many banks use our software in their payments infrastructures," said Mr Akkermans. "Some of these banks also insource payments from other banks, creating new revenue opportunities for themselves. Last but not least, we work with a series of outsourcers who provide payment services to banks. Banks frequently ask us for advice on how to shape their payments infrastructures."

Most banks' payments infrastructures are made up of various components spread around the organisation, but it makes sense to consolidate and standardise them into one centrally managed system - a payment hub. This provides greater efficiency at lower cost, and a future-proof platform that enables the bank to react quickly to market demands.

Mark Hartley, Clear2Pay's vice-president for strategy and marketing, explained that the core principle of a payment hub is to get rid of the disparate systems that have emerged in the past 20 to 25 years, a problem compounded by mergers and acquisitions, especially in an international context.

"It is very rare to go into a bank and find a single owner of the payments business," he said. "What you will find is a siloed infrastructure. You will have one individual looking after low-value payments, another looking after high-value domestic payments, another looking after international payments, one looking after cards, and so forth. It is better to have one payment hub, providing shared services. It will benefit the financial institution by reducing the total cost of ownership."

However, a hub cannot be built overnight. Matt Ellis, Clear2Pay's general manager for the Americas, said it takes time and it is important to "act tactically and think strategically". There also has to be a solid business case for building one. "You have got to deliver new revenue, or take cost out, or both - and in a manageable period of time," said Mr Ellis. "The technology is only one piece of it. People and processes also come into play, because if you put in a hub, and the products and marketing are still in silos, you're not going to get the required return."

"Technology is the enabler, though," said Nancy Atkinson, senior analyst at Aite, a Boston, Massachusetts-based research and consultancy company. "I spoke to a banker recently who admitted that his bank had, at one point, 32 different payment systems. That gives you some idea of what can happen through mergers and acquisitions."

Only about 30 banks process 80% of the 60 billion payments that take place in Europe every year, and nearly 7000 process the remaining 20%. "The payments business is about economies of scale, so you need as much volume as possible to be competitive," said Mr Lodge. "How can small banks ever compete? They can't, so they outsource to somebody they trust: a big bank."

However, Mr Akkermans pointed out that some banks, while they want to outsource, will not outsource to another bank but only use a non-bank payment services provider. "They want to make sure that whoever runs their payments is not a potential competitor," he said. "Some banks don't mind one of their competitors handling their transactions business. Others do mind."

Focus on the US

Electronic person-to-person (P2P) payments are proving increasingly popular in some parts of the world. The payer uses a mobile phone or e-mail account to instruct the P2P payments provider to transfer funds to the payee's mobile phone number or e-mail address. The funds can then be collected by the payee in a number of ways, for example by requesting a cheque, the funds to be transferred to a bank account, or the funds to be re-transmitted to someone else. P2P payments are offered by banks and credit card companies, as well as by non-bank payment providers such as PayPal.

The US lags behind many other countries in the development of this payment mechanism. "What it really comes down to, I believe, is that in the US we haven't yet agreed how to designate the person to whom we are sending the money," said Mr Ellis. "Should it be their bank account information? Can I pay them at their cell phone number? Can I pay them at their e-mail address? Or should I go out of the banking network and use their PayPal account?

"So banks are faced with all of these challenges, some of which are new product issues, some are regulatory issues, some are to do with risk and security. They are struggling with the question of how to let one person pay another person, and what information is needed to do so. To compound the problem is the question of what the role of the mobile phone is in this person-to-person payment challenge."

US consumers are more reluctant to divulge their bank or credit account details than consumers in other countries because they have long been told not to do so to prevent fraud, and this is another cultural factor holding back the development of P2P payments, added Mr Ellis. "For these hurdles to be overcome, a clearing house or another central organisation that banks trust will have to do the P2P processing, and customers will need just one payment ID."

Mr Lodge agreed, pointing out that in India the tax authorities are creating a universal unique number for every citizen which will be the basis of a portable bank account number. "So that will be a central organisation that is trusted to deliver that customer identity, and all other services will be built on top of it," he said.

Doug Gross, vice-president for the Americas at Clear2Pay, said the company has had discussions with a number of US banks on the P2P issue. "The challenge they face is either they concede the market to a non-bank competitor such as PayPal, or they outsource to someone who will charge the bank for each transaction," he said. "But banks will find it difficult to pass those charges on to customers, which will spoil the business case."

Mobile phone banking

Consumers have faced a lot of hype over the years about 'mobile' and the banking and payments this is supposed to offer. There have been many false dawns and as many crushed dreams. But now the medium seems to have taken off - or has it?

Mr Lodge said he thought that the mobile phone's day had definitely dawned as a way of making payments. However, it is sometimes difficult to define exactly what is meant by a mobile payment. "If I receive an alert from my bank saying I've used my credit card as a security check, is that mobile banking?" he asked. "If I use a virtual credit card on my BlackBerry over the internet, is that a mobile payment, an internet payment or a credit card payment? It is important to ensure that we are designing services built for the mobile rather than using it to replicate other payment methods."

One of the fundamental problems about mobile payments is that they are typically low value and several companies are involved - the telecommunications network provider, the bank, the merchant, the credit card company - so it is hard to determine who owns the customer and how the revenue should be divided. "The telco may think it owns the company, and the bank may think it owns the customer, but the reality is the customer is not owned by anyone, the customer will make his or her own choice," said Mr Hartley.

"It is an extremely fascinating and complex ecosystem where there are a lot of players," said Mr Akkermans. "It's important for banks to start looking at this market more intently, because the technology is not a problem. Mobile payments in places such as Africa make a lot of sense. I think if they play their cards right, financial institutions will be the winners in this area."

Mr Ellis said that although the technology is available to process mobile payments, there are not many large banks that have entered the market in a big way because they cannot see how to make money out of it.

"The banks have got the upper hand over the telecommunications companies, but the handset providers often get ignored," he said. "I can take my iPhone into a wi-fi enabled café and do all my banking and payments on my phone, so what role does the telecommunications provider play in that scenario? The same applies when using near-field communications devices - the telecommunications company has no role."

"It's not only the handset providers, but the sim card makers," said Mr Akkermans. "I had the pleasure of serving on the board of a company that specialised in smart cards and sim cards, and it was developing its own mobile payments strategy."

Some countries have advanced further down the mobile route than others, and certain developing countries have gone further than many developed countries. "The main reason is that they don't have the conventional payments infrastructure that we have," said Mr Hartley. "They don't have many land lines or merchant terminals in every store for credit card swipes, so they can go straight to mobile."

"Exactly right," said Mr Akkermans. "We have deployed our solution in 16 African countries. If your nearest branch is 18 miles away and you don't have any fast transport, the mobile phone becomes very attractive as a way of conducting business."

Unbanked and underbanked

People who do not have a bank account, or only a basic bank account, need to make and receive payments, but they are by definition not served, or only partly served, by banks. They use cash, cheque-cashing bureaux, money-transfer operators, post offices and other means. They are generally seen by banks as commercially unviable for payments or any other kind of financial service, but Mr Akkermans believed there was a lot more potential in this market than there might seem.

"There is between $300bn and $500bn transacting in this space, and that's only what we know of - the real amount may be double that," he said. "There is also the matter of social responsibility that banks should consider. They have a role to play, because with their infrastructure they could help migrants send their money back home safer, faster and less expensively than other methods. The banks would benefit, because they would be turning unbanked people into semi-banked people and eventually into fully banked people, hence making them part of the economic system to everyone's benefit."

Aite has done studies showing that a sizeable proportion of the population in the US have bank accounts, but do not use them as their primary financial mechanism, said Ms Atkinson. "They may not use their bank for a number of reasons, including lack of convenience - such as if there is no branch or ATM nearby, or the branch is only open from 9am to 3pm, Monday to Friday."

Mr Ellis thought that some banks in the US are better at implementing financially inclusive strategies than others, especially if they are in states with a high proportion of immigrants, such as Texas, Florida and California. "Banks in those states recognise that these people need banking services, and so reach out much more aggressively to that market segment," he said.

International remittances - migrant workers sending money back home to family and friends - is a huge growth area, but again it is a market that banks, with some major exceptions, have generally been content to leave to money transfer operators such as Western Union. Apart from the fact that many of the remitters are unbanked, and that the payments are generally low value, banks have been reluctant to get involved because of what they perceive to be a higher risk of money laundering.

Mr Akkermans, however, said that the situation is changing, with more banks exploring the opportunities that workers' remittances could bring for them. "With the new technologies we have, and with the internet, more solutions are available," he said. "Concerns about money laundering can be addressed by technology. If someone goes into a branch to send €100 to a family in north Africa, the teller can run a whole series of checks on a system that uses anti-money laundering software, ensure the transaction is legitimate, and quickly process it."

To end the discussion, the panellists were asked if they thought that providing payment services to the unbanked and underbanked, on a large scale, was a long-term viable proposition.

Ms Atkinson believed that, by and large, the unbanked would remain unbanked and be frozen out of mainstream payment services. She said that while it is important for governments to try to get the unbanked into the banking system, in the US at least "the federal government has done nothing to make it appetising for the banks". She added: "The government continues to introduce more rules, and make support for the unbanked and underbanked more expensive, without allowing the banks some way of recouping their investment over time."

Mr Gross took the opposite view and thought that banks around the world, working with governments, would succeed in getting more people into the banking system. Mr Ellis thought that global remittances in particular would prove to be fertile ground. "Whether the bank is acting as a sending agent, or a receiving agent, it's a fantastic opportunity for them to win customers, get their deposits and grow with the life cycle of those consumers," he said.

The issues

- Latest trends in global payments

- Payments infrastructures: build, buy or outsource?

- Focus on the US: P2P payments

- Mobile payments

- Payment for the unbanked and underbanked

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