Re-invent the Business: Collaboration is Key for PSPs
The recent financial crisis had direct and devastating consequences across all economic sectors. The financial industry was no exception, suffering wide-ranging consequences in many areas including traditional payment systems. In addition, the timing of the crisis coincided with the introduction and implementation of the single euro payments area (SEPA) and the Payment Services Directive (PSD). As a result, banks – already in the process of rethinking their business – were forced to face and overcome more demanding challenges.
SEPA called for investments in standardisation, while at the same time creating a new European market that paved the way for stronger competition from abroad. This in turn has led to a downward trend in average revenues per transaction.
On the other hand, the PSD requires increased investment in compliance, and it too puts a strain on revenues and margins by allowing new players to enter the market. And if that wasn’t enough, the regulators have introduced new laws for the PSD that are causing the reduction, if not the disappearance, of margins related to interchange fees and float days.
The introduction of PSD in certain countries, and the delay in PSD implementation in other countries, implied a further extension of the ramp-up period. Even the harmonisation process, one of the main targets of PSD, can be effectively achieved only when all the requirements have been applied homogeneously at the domestic level in every single country. The European legislator is well aware of the harmonisation issue and has highlighted the need for a PSD revision in 2012, in concurrence with the new E-money Directive (EMD 2009/110/EC).
In this scenario, banks were forced to react fast by trying to cut costs, finding new potential sources of revenues and preparing to react promptly to further system or business requirements.
The most dynamic banks took the opportunity to review their systems, and started to build new competitive payment infrastructure capable of processing high numbers of transactions at very low costs. Some banks decided to join forces with other financial institutions in order to combine volumes and share investment costs for compliance or new services. Smaller institutions chose to concentrate their efforts on core business services and their customers, while they outsourced payment services to other institutions or service providers. Indeed, outsourcing is destined to become a strategic solution for both small players, who cannot reach the economies of scale required to gain a competitive edge, and large institutions, who may prefer to focus their attention on added-value services, while entrusting the processing of those services that can be now considered as commodities to third parties.
The corporate industry, which is the main beneficiary, together with retail customers, of the advantages brought about by SEPA and PSD, has been simply waiting and watching from the window so far. Most companies have welcomed the benefits of the new laws and directives, but so far only a small percentage have really invested in the implementation of SEPA. This is understandable, since the traditional national payment services are covering most of their needs and in some cases, such as SEPA Direct Debits (SDDs), the old legacy direct debit tools offer higher levels of service.
Regrettably, the upshot of the slow adoption of the new SEPA instruments is a longer migration period, which forces all financial institutions to keep two systems working in parallel with the related higher running costs. And, once more, it is the banks themselves that have to foot the bill.
Against this rather bleak backdrop, any payment service provider (PSP), including banks, that wants to survive and succeed in the payments arena must rethink or enhance its strategy in order to remain competitive – in a nutshell, it must transform challenges into opportunities. Of course SEPA and PSD can also introduce some opportunities that can be leveraged by all players in order to find new sources of revenue or to retain existing customers.
So what guidelines should a PSP follow when identifying its best strategy? Obviously there is no ‘magic’ formula, but some indications can be given:
So, why should an existing PSP, such as a bank, choose to partner with a new PI? SIA-SSB is convinced that there is room for co-operation between old and new PSPs. Here are just a few of the reasons:
SIA-SSB and Capgemini are currently working to promote this type of co-operation, for example through the Research Centre on Technology, Innovation, and the Financial Industry (CeTIF) research group, with the aim of encouraging banks and potential PIs to sit down at the same table. They are working on a three-year research observatory concerning SEPA, the PSD and payments.
Furthermore, SIA-SSB itself can be seen as a sample of collaboration between PIs and banks. In fact, as a predominantly bank-owned company, SIA-SSB is providing some of its services to these new players. This will allow:
Of course new PIs will attract some customers that are now using traditional banking services and therefore they will be responsible for detracting a portion of the banks’ current revenues. But on the other hand they will also stimulate the market, create new services and favour the proliferation of electronic instruments as a replacement for present-day cash transactions.
Ultimately this will not be a zero-sum game, but rather there will be more payment transactions, customers and revenues for the payment industry as a whole. Likewise, the potential partnerships between banks and PIs will be able to play a leading role in the new game ruled by SEPA and the PSD.