Is every bank still supposed to have its own payments processing infrastructure?

Chris Skinner reminded me again of an idea I was tackling about a year ago: why are banks investing in a payments infrastructure and will they still be doing this in about 20 years?

His blog wasn’t really on that topic, but more a pitch for SIBOS where he will be leading a discussion on banks going from ‘transporters of messages to safe keepers of information’, which is definitely going to be interesting, and I’m looking forward to the summary of that discussion as well (so please Chris, give us an update on that ;)). No the title of his writing was ‘if payments are free, who pays?’ If you want to read more about that, he has some very bright and visionary ideas on that, you can do it here.

What I will write on is whether banks should or should not keep investing in a payments infrastructure. Again this will not be a topic of one blog post. I do not know where it will end yet, but I am sure it will be an eye opener for some and definitely worth to discuss.

There are a couple of recent trends and events that made it less taboo to discuss this subject. There was the financial crisis, in Europe there is SEPA, there is the upcoming of Payment Service Providers, and maybe the best element is the upcoming of new innovations that seem to jump up like mushrooms. Probably I am still forgetting some reasons why, at least some banks could be reconsidering their payments strategy.

The financial crisis really shook up the banking world. Banks didn’t seem to be so safe after all, apparently they could even go bankrupt, an idea that only occurred maybe in Eastern Europe and Japan in the later ’90. Then there was 2007, the year where also the Western banking scene started a rebirth. After huge losses, several bankruptcies, and lots of new debts bank started to redraw their strategy. Banks started to reconsider their ‘core business’, which rarely happened the years before. Until 2007 all was good to make profits for most banks, but now every single element in the organisation had to be reviewed, also payments...

Payments has always been considered core in most banks, how else would they be able to make any business, right? Now it is not ‘has always been’ anymore. No, now many banks start to rethink this idea of payments being core. It has become more a necessary evil in some banks that must be tackled in order to do business, to make transfers, to buy and sell funds and deposits...

I mean, don’t get me wrong, payments is still to be considered core in many banks, as it is a method to chain your customer, by offering him all he needs in the financial landscape of bill payments, cash management, account management... Big banks, corporate banks etc. will definitely still need payments, and the more payment traffic they get, the better. Payments for corporates can be seen as a niche market which needs a lot of care and specialisation. It is there where payments also become a relevant profit centre. There the question is not who will process my payments, but how?

Now let us take the smaller banks where processing of payments cost more than they produce profits, and thus become a negative bookkeeping entry the question whether or not keeping payments in-house becomes more relevant. Payments require, even in these smaller banks, with less payment products and less options, a big expertise and as they cannot afford a specialist for every product, payment can even become dangerous if one of their experts resigns for example. This means it is not only a matter of profit and loss, but also a real risk issue! Unlike in the past, when there was the idea that critical processes must be kept in house, people might start thinking to move it ‘out house’. This way a critical process like payments isn’t their responsibility anymore, their investment costs should go down (due to advantages of scale in their partnering payment factory) and they can focus on their core activities.

In Europe there is SEPA... these are in fact 2 arguments in one word to reconsider the payments process as core. On the one hand is SEPA creating a unified payments space across Europe, on the other hand it is demanding transformations in the payments system every year again (until now at least). Every year there have been a couple of Europe-wide updates for a standardised product, so every year updates must be installing in order to stay SEPA-compliant. This argument is in fact a discouragement for keeping payments processing in house. The other thing is SEPA as a unified payments landscape.

A unified payments landscape sounds more relevant for corporates than for banks. And maybe it is, as banks get more competitions this way: they do not only need to focus on a national level but maybe also at a later stage on a European level. And of course this is completely right. It does create a more competitive payments landscape, where smaller retail banks do not want to compete on payments level. And that is where I say: they don’t have to. Let them look for a partner to make their payments! This search becomes much more interesting in a competitive landscape. Unlike the standardisation ivestiments this should be an encouragement for small bank to at least investigate the possibility of outsourcing their payments process.
 

Next time I will go through the other argument, followed with a post of how it might look like. Every comment is welcome of course... could be a source of inspiration for even more writing ;)