The pressures on banks to outsource elements of their payment systems have been growing in recent years. Increased competition, more stringent regulations and the need to reduce costs as margins have tightened all added to the urgency. Yet for many customers of banks, both on the consumer side and for corporates, who actually performs its payment services is of negligible consequence.
For many banks, payment systems have come to be regarded as a ‘non-core’ activity, despite their centrality to banking practices in general. They are concerned with transaction cost reduction and liquidity management, and seek to optimise both. Outsourcing payment systems can help to achieve these aims: transferring the function to a specialist provider has freed banks to concentrate on activities such as customer service, which have a far higher visibility, helping them to help win and retain clients.
Some banking leaders might fear that payment outsourcing will signal a lack of commitment to the area, risking corporate client annoyance. Yet feedback has shown that clients typically approve of the practice, recognising that it means banks can better serve their own needs.
Another criterion for banks to consider regarding payment outsourcing is current and projected volumes. If a specific type of payment is infrequently used – such as cheques for example – or if payment cards are just a necessary by-product as they are for investment banks, it may make more sense for this function to be outsourced. High-volume payment channels are certainly more likely to be productive for banks to maintain the necessary systems and linkages.
Increasing competition in local European markets from global banks, offering low prices and high service levels, means that some local banks are struggling to maintain margins on payment services. Regulatory events such as Basel II, obliging banks to have higher capital holdings, add to these pressures.
The European Commission (EC) has sought to equalise domestic and cross-border transaction costs, meaning that across Europe, €1bn will be taken out of the payment system each year as global payment system charges and caps converge. Of course, in the short term at least, this impacts parties along the payment chain and unsurprisingly it is the smaller, local banks that are the hardest hit.
Questions to ask
For some of Europe’s traditional local banks, the march of technological change has progressed more swiftly than their internal payment systems can manage. Too many still rely on outdated, cumbersome transaction processes, together with error-prone telephone communication and needless repetition, adding costs to operations that are in acute need of efficiency and cost reduction measures.
For banks in this position, or approaching it, outsourcing could prove a hugely effective means of accessing new technology. This could have the added benefit to the bank’s bottom line and to its customer service levels.
Having taken the decision to outsource payment systems, here are some important issues to consider when selecting a technology partner:
- What is the bank’s and the technology partner’s mobile strategy?
The relentless migration of today’s economy onto mobile platforms means that mobile will form an increasingly important part of the payment environment on the long run. Banks need to be prepared and invest accordingly.
For example, does the technology partner have a well-established near field communication (NFC) solution, for card products to be used at retailers’ point of sale (POS)? Can the technology partner integrate payment systems with national wallets or mobile-based payment solutions such as Apple, Samsung and their peers?
- How far is the technology partner able to support business growth?
Payment systems are expanding sources of commercial diversification, customer acquisition and cross-selling. They can provide analytic services to banks, detailing customer spending patterns, currency flows and much else. As an example, some partners are designed to support new product roll outs and create loyalty programmes – thereby helping to increase customer engagement and build a stronger, wider network for the banks.
A good technology partner will collaborate to maximise the commercial potential of any payment system.
- What assurances over compliance and security can they offer?
Payment systems could be vulnerable to unscrupulous actions, engaging in money laundering for example. This places the technology partner in a position of responsibility, so maximum attention must be paid to such issues. Are there stringent measures in place to halt any security breaches? Will the required know- your-customer (KYC) procedure be followed? Do they fully comply with the PCI regulations – the Payment Card Industry Data Security Standard, dealing with security for companies that accept, process and store or transmit credit card information? As with many forms of outsourcing, the commissioning company may be liable for breaches of regulations committed by its outsourcing partner.
At best, the technology partner will have such high levels of security and compliance that will match or exceed those of the bank, providing improved assurance to both the bank and its customers. These security criteria may in turn improve the banks’ own standards.
- What cost advantages can they provide?
These may range from the basic and self-explanatory economies of scale that a technology service provider can achieve – with the advanced infrastructure facilitating low cost per transaction – to the more complex cost savings of local geographic expertise, such as well-established relationships with regulators and other financial services companies. A good service provider should also be in a position to offer access to the latest cost-saving technology and able to provide it in a streamlined manner – rather than needing to start again with existing infrastructure.
- What specific payment technologies could be of benefit?
This is a very fast-moving and constantly innovative area, where new devices, platforms and applications emerge every month. Banks are typically reluctant to invest heavily in young and barely-proven technologies. Outsourcing payment services to a technology partner allows them to benefit from such advances – which are the natural domain of the partner – without devoting disproportionate resources to assimilating them.
Biometrics
Among the other new technologies that a partner can help banks to adopt – or to dismiss – is biometric identification, where recent developments include gait analysis, ear and cheek identification and multi-finger pattern recognition. One of the latest ideas being developed is linking a consumer’s biometric information on their smart phone, with their location services and then sharing this data with local automated teller machines (ATMs), enabling consumers to withdraw cash without the need to enter their personal identification number (PIN).
Implementing such technologies could previously have resulted in widespread infrastructure upheaval, but can be more easily brought into play when this technology is effectively outsourced. Such offerings are also likely to appeal to the next generation when they are selecting a bank.
As the global financial system continues to evolve, challenges are likely to multiply. The spread of blockchain technologies for example, the rise of peer to peer (P2P) lending through online channels, advances in cloud technology, the emergence of the Internet of Things (IoT) and wearable technology capable of facilitating payments… these are all technology rather than banking issues, which are best dealt with by an experienced and specialised technology partner, rather than by an internal department of a bank. Having a technology partner which fully understands them – and can advise on whether the bank should adopt them – is a highly valuable asset.
Selecting the right partner is a decision upon which an enormous amount rests. It could determine the future health of the enterprise.