Marion King discusses the key forces for change in the European payments arena and outlines how Europe offers banks and infrastructure companies a series of important opportunities.
The payments industry is confronting fundamental change. Advances in technology are lowering the entry barriers for new competitors; regional cross border and domestic regulation are creating additional complexity and cost; and consumers are expecting to receive more and pay less. Industry players are responding to these challenges by searching for new and leaner business models.
And then there is the European dimension. The further expansion and deepening of the eurozone is arguably one of the most powerful long-term forces shaping the size and nature of Europe’s financial markets. Players in the UK need to be positioned for the continued strengthening of these forces, whatever the timing and outcome of entry. There are wide variations in the levels of development of payments infrastructures among EU accession and applicant countries. In this wider eurozone there are also distinct clearing models, some based on automated clearing houses (ACHs), others on permutations of bilateral settlement or local clearing processes.
Wealth of potential
This presents a host of opportunities for ACHs and their member banks. Accustomed to applying their capabilities for a purely domestic service, ACHs now have the opportunity to break down the components of their product set to identify ways of delivering generically similar services in other markets. The recent success of Societŕ Interbancaria per l’Automazione (SIA) in winning the mandate to develop the Romanian interbank payment system is a good example of this.
In time, volumes in cross-border payments, though still only around 1% of total payments (see graph 1) can be expected to climb steadily, with comparable growth in the usage of automated payments (see graph 2, overleaf). This growth will be given greater impetus by the European Commission’s Regulation on Cross Border Payments and Euro, requiring equivalence of cross-border and domestic payments pricing from July 2002 for cards and ATMs and from this July for credit transfers.
The long-term significance of this regulation cannot be denied, and a number of scenarios could emerge as the industry rises to meet the cost challenge that it presents.
One such response has been the European Banking Association’s (EBA) development of an automated clearing house for euro cross-border payments. The new pan-European ACH will provide a solution – known as Step 2 – for processing bulk payments and will offer direct access to a wide banking community whose payment instructions will be distributed to any bank operating in the EU.
It is likely that Step 2 payment volumes will initially be low and the range of functionality available limited by comparison with that of most domestic clearing companies. However, the EBA model is to add capability in a modular fashion – the next additional capability may be the processing of direct debits – rather than any large-scale transformations.
This is another area in which payments providers can extend their core capabilities into value propositions for a wider market. For example, the next phase of the EBA’s development could include corporate access – a facility that is more developed in some countries that are familiar with enabling companies to send files direct than in others, where a purely bank-to-bank model operates.
There is an important lesson to be drawn from the way the EBA’s pan-European ACH model has emerged. The European Union (EU) approach to large-scale change is often carried forward more by vision, supported by political will, than by a purely financial and technical business case. But there is a world of difference between business change projects as happened with the launch of the euro, which was widely regarded as a technically improbable undertaking. But the euro came into being and the missing bits were filled in later. For UK institutions to realise the opportunities in Europe, a mindset change is needed.
Cross-border restructuring
A different approach to addressing the cross-border challenge – but by no means necessarily a competing one – is the move towards consolidation. Traditionally, this has been labelled as merger and acquisition (M&A) space. But M&A activity among banks has been modest compared with the confident predictions of wholesale cross-border restructuring of a few years ago. Language, cultural, legal and product differentiation all still conspire to frustrate the predicted revenue growth and economies of scale.
A more likely change scenario in the payments industry is that of technical and processing consolidation. This is more than just outsourcing activity, although that is one model. Beyond that, payments providers, enabled in many cases by recent technological advances, can achieve cost efficiencies through importing processing volumes, sharing infrastructure and resources and developing shared platforms, possibly through joint venture structures. This is one of a number of areas that BACS sees as a great opportunity as it leverages the greatly enriched capability of its NewBACS infrastructure to realise benefits for its member banks and potential venture partners.
Imagine what the European payments world of the future might look like? What could emerge are a number of complementary models. Examples could include national providers supporting the local leg of cross-border processing; national players aligning/consolidating; and specialist cross-border players alongside diversified infrastructure service providers offering domestic solutions outside their home market.
The rate at which these scenarios will unfold will be heavily influenced by the extent to which the Single Euro Payments Area (SEPA) concept, which emerged in response to the cross-border pricing regulations, is converted into reality. At the heart of SEPA is a vision that will make of the phrase “European cross-border” an oxymoron because borders will not exist for payments services and their delivery in the eurozone. The European Payments Council (EPC), which was created to take forward the practical groundwork in support of SEPA, is focussing a great deal of its work on establishing common European standards, for example in terms of direct debit schemes.
Widening reach
This is yet a further opportunity to widen product and geographic reach. A common criticism of national ACHs – not without justification – is that they do what they do well but they all do it differently. Common product standards offer the possibility of pan-European capability. And that in turn creates the potential to enrich the domestic offering. I believe, for example, that when the EPC’s supported Credeuro standard for a three-day cross-border payment cycle (from remitter to beneficiary) is implemented, domestic clearing cycles will gradually adjust, which in turn will enable a wider range of value-added services in our core market. Market opportunities will be created by new and innovative payment offerings, such as same day clearing. The key question is: which payment provider will be the first to seize and exploit opportunities such as this?
On the reverse side of all these opportunities are the potential threats if the opportunities are not pursued. The risk facing those who do not develop appropriate strategies for Europe is of long-term atrophy: progressive disinter- mediation, core franchises eroded, declining volumes, burning platforms and rising (and in the end unsustainably high) unit costs.
The successful payment providers of the future will be those with a focussed strategy, robust against the dominant scenarios of change. This would position them to develop, enable or deliver the low cost, high volume, high efficiency payments services across Europe that will meet the interests not only of politicians, regulators and – most importantly – consumers, but also of their members and shareholders.
Marion King is chief executive of BACS
