The payments business is large, robust and mature. According to McKinsey, in 2008 — during the height of the crisis — revenues from the global payments market topped $1 trillion. In Asia, revenues were $248 billion. The fact that the business has stood up to so much scrutiny, in the face of the liquidity problems the world has seen, shows that the systems and processes underlining the global payments landscape are strong.
And yet it also points to a changing market; the very strength of payments is attracting more and more participants. With more competition, so the theory goes, comes more innovation. “This is a stable business,” said Brian Stevenson, CEO of RBS transaction banking. “Even in a downturn the need to make payments is a consistent factor. But there is now more competition from all sources. People are attracted to the stability of the business.”
Others agree. “Because of the competition we expect to see innovation occur,” said Wiebe Ruttenberg, head of the market integration division at the European Central Bank.
The question is where is this innovation coming from? Is it the banks, which are doing very nicely out of the status quo, or from non-bank providers, who are trying to break into the business? An analysis of recent payments announcements from many of the global banks shows that while there is innovation, it is at the service level as opposed to true game-changing, paradigm-shifting payment products. It is about faster response times. It is about putting more transactions on electronic systems rather than paper. It is about doing more for lower fees. In Asia it is about offering more standard services through mobile devices.
“Treasurers are looking for banks to provide them with service levels that help them do their jobs better,” said Marcus Treacher, head of client experience, global payments and cash management at HSBC. “So we are innovating for the client’s experience. We are not just looking at the innovation of products, but rather we are looking at new ways of bringing together all the products and services we have.”
A look at the new products and services that some of the global banks are offering shows that they really are trying to make life easier for their clients. The three key themes driving most of these new service offerings are: the shift from paper to electronic; increasing global reach; and the shift to mobile product offerings.
Much of this is driven by clients asking the banks to improve their service offerings. “For our clients to be successful they need to align themselves with service providers that remain ahead of the curve and are committed to ongoing investment in systems and product development,” said Richard Brown, head of BNY Mellon Treasury services for Asia Pacific. “As a result there is regular demand to modify, enhance, customise. But client demand can also be mutually beneficial. Most of our new product ideas often originated as a client request which ends up being rolled out to our broader client base.”
And yet there is an array of competing forces at work in the world of payments that could actually be decreasing the amount of innovation available. This will be felt most strongly through the introduction of Sepa, the Single European Payments Area. It is not known when this will be fully adopted and, even though it is a European phenomenon, it will have a global effect. According to Bertrand Lavayssiere, managing director of Capgemini Global Financial Services, banks could lose between 30% and 62% of their global payments revenues due to the introduction of Sepa. This is a huge amount and will have large consequences. Bankers are open about what it might mean. “We believe Sepa will lead to consolidation in Europe,” said Stevenson. “It becomes about processing scale which is a natural reaction to a fall in price.”
The question for banks is whether it makes sense to maintain the expense of a huge global payments network in the face of competition from other banks and regulatory pressures forcing down pricing. Some say there will soon emerge payments hubs, where a number of banks either pool their resources or effectively hand over certain parts of the business to one bank and then sub-contract services from them. This starts to look very similar to the world of custody in securities services, where there is a handful of global banks providing global services and then, at the national level, an array of local banks providing sub-custody services.
In Asia, experts say that this will happen sooner than in other markets, primarily as the local banks have deep local connections but few global ambitions. “There is a wide variation in Asia between the capabilities of the local banks,” said Erin McCune partner at Glenbrook Partners, a global payments consultancy in San Francisco. “At the end of the day all payments are local. And the chance is there in Asia to miss all the legacy stuff and go straight to mobile payments.”
The fact remains that banks still dominate the global payments system, despite all the new non-bank entrants to the market. According to the seventh edition of the World Payments Guide, produced by Capgemini, RBS and the European Financial Marketing Association, non-bank payments only account for 0.6% of global payments, even if they are growing rapidly in emerging markets like Asia in areas such as mobile and electronic payments.
According to McCune, banks still have a long way to go before they are really meeting client demands. Three areas where she says banks could do more are: more collaboration with each other and other non-bank networks; doing more to share receivables data; and auto-enrolling SMEs in their electronic payment networks. But she does acknowledge that the banks have been making a “real push” to find debit and credit solutions for small businesses.
The banks agree that they are not necessarily focusing on new products that might cannibalise their business but rather they are focusing on doing things that their corporate customers want them to do, which mainly means just doing things better.
“Our clients say they want banks to be innovative,” said Treacher. “We spend a lot of time trying to find good incisive solutions that attack real problems, rather than just coming up with new whizz-bang products. Innovation is all about being a really good transaction banking partner.”
Time will tell if that is enough or if the new non-bank payment service providers will be able to achieve a scale that really lets them eat into the banks’ payments business.
This story was first published in the cash management supplement to the November 2010 issue of FinanceAsia.
