Payments SSC - The Remedy to Cost Pressure?
The European Commission aims to enhance the European economy by creating the conditions for increased competition in payment services across Europe through the harmonisation and standardisation of euro-based payment products for all citizens and companies. The introduction of the single euro payments area (SEPA) has shaped, and will continue to, the evolution of the European payments landscape. With the Payments Service Directive (PSD) coming into force in November 2009, shared service centres (SSCs) become an even more prominent remedy to the increasing pressure on transactional cost price.
When combining SEPA and the PSD into one macro-impact, I would qualify standardisation as the most important effect of both regulatory initiatives. Banks have to comply, and such standardisation and harmonisation bares a significant cost. Market studies estimate that investment required by the payments industry, as a result of today’s regulatory pressures, represents 70% of their annual spend. As a result, investment into payments as a transactional back-office activity makes economic sense only if costs are reduced and spread over a significant numbers of transactions.
Today, 30 out of the 7000 banks in Europe process 60 of the 75 billion of transactions. According to CapGemini, in 2010, a volume of approximately 100 billion annual transactions will be reached and 30 banks will actively insource these payments volumes over 2012/2017. Hence, smaller banks will seek to outsource payments processing and, instead, concentrate on the distribution of services towards their own client base.
Although there are several types of SSCs, the main steps towards creation are always the same. The two most common actions are the physical centralisation of activity in one operational centre (the US way) and the sharing of processes and capabilities across borders (often referred to as the European way).
A first step is certainly the analysis of processes (and their differences) in the various initial locations. Payments processing in Europe, in particular, is still very fragmented and this initial step will uncover incredible differences within a multinational banking group. The subsequent logical step, then, is the identification of the most similar process steps and their rigorous harmonisation and standardisation, alongside process improvements by applying best practices. As a result, the pre-conditions for the centralisation of processes and application assets are met and hence the first benefits from decommissioning redundant systems may be realised: multiple operational centres can access remotely the central infrastructures. But why stop there?
Fully standardised processes can be centralised or even off-shored into talent rich, low-salary and fiscally interesting regions. A silent consequence is that FTE reductions are required to make the business case, and adequate measures and sufficient provision for departure plans are equally important in order to keep the social peace and achieve the business case. And last, but not least, the remaining people must feel at home working in a SSC. A new culture must be outlined and truly lived in order to make human resources perform at their best in the new environment.
With all of the above nicely wrapped into contractual and service level agreements (SLAs), the accomplishment of these steps naturally leads to the pooling of activity and/or transactional volumes on shared assets – the SSC is born.
If the above steps seem like a generic guide to the creation of a SSC (and it is not as easy as that), then there are a number of aspects that greatly challenge the average payments engineer and can be major pitfalls, such as legal, compliance, tax and invoicing schemes.
As a SSC you have to fulfil legal obligations of all countries that you aim to serve. The challenge is to set up efficient regulatory watchtowers and legal advice functions that allow you to trace the evolution of regulation – a complicated task these days. Compliance rules mainly draw on two aspects: data protection and compliance filtering. Iinternational rules or rules by the country of the customer, e.g. the UK Data Protection Act or FATF VII rules, must be respected and well anchored into contractual and SLA stipulations in order to establish crystal clear accountability between parties.
Fiscal rules, not typically the home base of payments engineers, are often cumbersome but they do offer smart solutions for reducing overall costs for the outsourcer and hence allow for competitive pricing by the service provider. This is true on the condition that the payments factory is flexible as to which country intakes flows and then several tax exemptions on services are possible. SSCs where the sharing of processes and assets are dominant are required to have invoicing schemes set up that cater for mark-ups and VAT rules according to the combination of locations of service provision and beneficiary of services. The level of mark-ups often determines the choice of countries embedded in a SSC.
Needless to say, the quality of services rendered out of a payment factory/SSC must be of a high standard. But two very simple questions may lead to some silent moments in prospective discussions between the service provider and recipient: what is the depth of service that you offer and what is the range of products you have in your portfolio?
The first question immediately leads to the business case, when a request for offering full business processing outsourcing opportunities leads to the requirement of full integration between the payments factory and account management systems, for example capabilities and static data repositories. It is a costly undertaking to link up those systems to allow significant outsourcing of processes by the service taker, and often the expected business volume does not justify the considerable upfront investments. An open and honest discussion is required in order to avoid raising expectations of the potential outsourcer that the insourcer is not able to fulfil in an economically viable setting.
A second source of potential frustration is the range of products that is expected from an outsourcing deal. Whereas the SSC is mainly interested in STP cross-border flows, a financial institution that has taken the decision to outsource its payments processing wants to get rid of it all through a one-stop shop. Depending on the country, local domestic payments and dying products such as cheques may constitute a major hurdle for multinational payment SSCs. But the requirement to take onboard unattractive payment flows alongside electronic STP payments is strong, and a successful payment factory will have such offerings in its portfolio.
We will see the increasing pooling of payments processing into SSCs and payment factories, as increasing standardisation imposed by the regulators pushes further consolidation of the payments market. Medium to smaller banks will seek to outsource their payments processing but this will require high levels of service across a full range of products. Successful payments SSCs will be able to master costs by having the critical mass to justify the investment required. The key question will be to what extend the payments factory will be able, and willing, to match its potential customer’s real demand.