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).
The Banks’ Response
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.
Best Strategy for a PSP
So what guidelines should a PSP follow when identifying its best strategy? Obviously there is no ‘magic’ formula, but some indications can be given:
- Clearly define your strategic position in the arena: identify your target customers; select the services that you want to deliver; define your markets; and concentrate on providing sufficient geographical coverage.
- Eliminate non-strategic assets and concentrate on your most relevant and competitive resources. Merging with other players, sharing or complementing strategic goals, creating consortia in order to combine forces, and co-operating with other smaller, non-competing players could be ways of doing this.
- Sign partnerships with trusted solution providers that are able to enrich your overall business proposition and create synergies on volumes. Re-evaluate outsourcing options for profitable but commoditised activities in order to reduce operational costs through a structured programme that also covers organisational aspects. This prepares the basis for future new services to be delivered when required in a short time frame.
- Gain market share through innovation: leverage SEPA standards to fulfil customers’ expectations on existing services, find extra sources of revenues by launching brand new services in the electronic/mobile-space, or explore fields currently covered by other players, for example by being proactive in addressing public authorities’ needs.
- Even though the new payment institutions (PIs) that have entered the market as a direct result of the PSD are arguably one of the biggest threats to traditional banks, in our opinion they may also hold the key to some of the greatest opportunities, as they may become strategic partners of the most dynamic and far-sighted banks.
- New PIs will provide citizens and companies with payment services that are in direct competition with banks and they will be able to capitalise on their most important assets:
- Some will be able to leverage large numbers of customers, such as utilities, media companies and public administrations, as they can easily access their customers and gain their trust.
- Others will be able to benefit from their marketing capabilities: some companies are used to working in very competitive environments and have refined their communication strategies and tools to the highest level.
- Many companies will base their services on very simple and flexible IT systems. They will therefore be able to keep their costs to a minimum and introduce new services in less time.
- Some players are already able to manage cash-based financial services or other payment transactions. For example large retailers throughout Europe have already started to provide their customers with financial services. Therefore, it will be easy for them to extend their portfolio with new basic banking services.
- Finally, there are companies that can provide their customers with very high-tech services, such as telco operators. These companies can easily introduce new payment services on a large scale at a very low cost per user and per transaction.
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:
- PIs need a partner bank for settlement services, since they cannot access settlement institutions directly.
- PIs need to comply with all national laws and rules. A bank can therefore provide support and expertise as an added value.
- Banks can provide new PI with financial services and share their new customers and a portion of the related revenues.
- PIs can accelerate innovation processes by leveraging their experience and infrastructure. Banks will then be able to offer these new solutions to their own customers.
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:
- PIs to provide payment services avoiding initial high investments.
- Processing costs for PIs to be in line with market standards.
- Banks to share costs related to common services, not only between themselves but also with these new players.
- PIs to be sure that all services are delivered accordingly to laws, rules and compliance directives ruling the banking industry.
- Banks to benefit from the link created through SIA-SSB with the PIs so they are able to sell financial services to new types of SIA-SSB customers.
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.
Conclusion
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.