Creating a Payments Experience that Meets Customer Needs
A (Mark Garvin, chairman, JPMorgan Treasury & Securities Services International): Customers continue to ask for better, faster and cheaper means to manage their critical business processes and optimise their working capital management. They expect real-time payments and information transparency, and even global transaction tracking. To achieve this we, as banks, imagine a payments industry based on common utilities with a single set of global standards. This will allow our corporate customers to work through a single common interface to different banks and infrastructures, centralising cash management and saving costs.
A (Garvin): In Europe, progress in payments to support of a single European market has been good, at least in the inter-bank space. The single euro payments area (SEPA) programme has positioned Europe as the leader in the development of common standards, adopting ISO 20022 XML. This creates a model that will progressively benefit our customers in the harmonised European legal environment promised by the Payment Services Directive (PSD). Investments in new services based on a single set of standards are not, however, entirely altruistic. European payments service providers have recognised potential threats from non-financial institutions picking off the traditional payments business through new payment services such as the mobile phone.
A (Garvin): Governments may imply that economic prosperity is dependent on an efficient and modern financial system. But this is only part of the story. In reality, a disjointed and frictional market threatens the success of the euro. But is that threat enough to unite a fragmented market where national prerogatives sustain multiple processing engines and a diverse multi-bank community? Consolidation both in infrastructure and payment service providers is inevitable as national differences disappear. The sooner this becomes a reality, the faster banks and our customers will benefit from the advantages of a single market. The end game is to remain competitive and preserve the value of banking services, responding positively and concretely to emerging payment instruments. Failure to do so could drive us out of the payments business.
A (Garvin): Changes in European payments processing are crucial and decisive for the promotion of the European single currency. JPMorgan fully supports the EU member states’ commitment to the single market to encourage economic growth. While we can equate the size of the European market to the US, it is more complex and not necessarily on the fast track to unity. Our revenue, in part, comes from resolving this complexity. We need to envisage a drop in incremental revenue from payments as we make the tactical investments that will enable the market to consolidate. Reaping the benefits of this rationalisation should be sufficient motivation for decommissioning national processing services. Changes are happening faster in Europe than we experienced in the US, but true integration may be limited while differentiation in tax regimes persists.
While progress has been good with SEPA, it is too limited, as banks invest primarily in harmonising the inter-bank space. But, the world will not wait if end-to-end straight-through processing solutions do not ensue. Work is ongoing on global solutions, as internationally minded financial institutions work on an International Payments Framework (IPF), although major European banks remain divided on priorities and the way forward. The IPF aims to provide rules, standards, operating procedures and guidelines to interlink automated clearing houses (ACHs) for non-urgent cross-border payments. Leveraging existing technology, the rules should enable system interoperability and multi-currency exchanges.
A (Garvin): The payments industry is a highly regulated business, and as recent market events have demonstrated, rightly so. Regulation should be aimed at minimising risk. It is not necessarily the best driver for change. While it may encourage a move to more economical payment services in countries that are traditionally paper-based to reduce costs and provide earlier finality, the practical reality is that bank investments are tied up in regulatory compliance rather than innovative developments. Innovation in the controlled and secure banking environment, such as the Faster Payment Service (FPS) developments in the UK, will do more to improve the customer experience than automated information checking mechanisms. Ensuring regulatory compliance with payer information accompanying a transfer of funds, however essential this may be from an anti-money laundering perspective, does not improve customer service.
The PSD highlights the difficulties in introducing cross-border legislation, where each country has a degree of opportunity to integrate the legislation in line with its own assessment of regulatory requirements. Potentially the attempt to harmonise European legislation could increase the opportunities for country arbitrage. It is also likely to increase costs as payment service providers will need to be familiar with national variances impacting our service offerings. Increased cost could cause industry failure to meet the speed requirements and demands for more integrated systems. Regulators and banks have managed this trade-off so far, but changing market conditions will make this a greater challenge. Another example of regulatory intervention is DG Competitions ruling on MasterCard cross border interchange fees. While the intent is clear and has the valid intention of consumer protection, the impact may be to reduce the business opportunities of providing card services reducing rather than stimulating competitive customer service offerings.
We [JPMorgan] are fully supportive of the intent of regulatory improvements to limit risk and improve customer services. Care needs to be taken that the right effects are produced. Inclusion of corporate activity under the PSD will be challenging to manage, particularly with the corporate derogations possibilities. Encouragement for the inclusion of one leg out transactions at a national level will require detailed implication assessment and may further the risk of regulatory arbitrages.
A (Garvin): Much is made at an industry level on the failure to take into consideration stakeholder positions. Industry developments will only be successful if they meet customer expectations. It is still a challenge for banks to demonstrate the value of the new SEPA schemes. But let us not be mistaken, banks continuously listen to their customers. Failure to do so would rapidly put us out of business. This does not mean that everything is perfect, but considerable resources and efforts aim to improve customer service on a daily basis. Quality service is dependent on efficient two-way communications. Increased participation of stakeholders in industry decisions can only be beneficial. Both the European Payments Council (EPC) and the UK financial industry are moving in this direction. The EPC holds regular stakeholder forums and has introduced non-bank representation and chairperson in the Scheme Management Committee. The Payments Council in the UK has non-bank representation in its governance. Increasing the level of representation will be beneficial, but is not simple as companies tend to be more interested in their own widely diverse business propositions and have limited time to participate in industry discussions.
A (Garvin): As recently demonstrated the financial industry is strong enough to withstand a financial market crisis. While the current credit market crunch may soon be over, the US economy could still face a deep and extended recession. Major challenges in mortgage markets and throughout financial institutions are likely, although the slump in mortgage and corporate loan markets in particular may bottom out this year. Several other sectors of the US economy continue to grow robustly including medical technology and pharmaceuticals, which means there are some bright spots. However, the weakening economy could have an impact into next year and will certainly continue to negatively impact the European economy.
The consequent flight to quality and increasing compliance obligations may push financial institutions that do not have the volumes to review their core business strategy and their participation in an increasingly commoditised European/global payments market. Larger banks, like JPMorgan, are well positioned to play an increasingly important role as smaller institutions look for alternative payment processing solutions that will reduce their costs. If consumer depression extends to the EU, there could be a reigning in of investments in innovative payment solutions. Conversely, consolidation is likely to accelerate, with banks less directly involve in payments processing freeing up investments to innovate and improve the extent and quality of their services.
1This Q&A article is based on an informal panel session at EBAday in Helsinki June 2008 with Werner Steinmüller of Deutsche Bank.