65% of banks are not making money from payments – but they can’t divest
Senior banking professionals met at an Icon Solution’s hosted breakfast briefing last week to discuss Icon’s recent research with Aite Group, “The Payments Transformation Race: Criteria for Success”.
Simon Wilson, Icon’s Global Director Payments, opened up the session by reminding everyone that although payments transformation isn’t new, the current landscape is undoubtedly different. Today transformation involves multiple stakeholders, does not just involve one scheme at a time and highlights existential questions as to whether the bank should even be playing in the payments space at all.
Some stark statistics
Icon Solution’s recent report with Aite Group aims to ascertain what payments transformation really means, what is driving it and what top tier global banks need to consider for success. The key takeaways are not necessarily surprising but are vividly brought to life by some quite stark statistics. 80% of banks are feeling the squeeze when it comes to payments profitability, with only 18% being able to charge what they would like for payments. 65% of banks stated in the report that they were not making money from payments anymore – making payments a fertile ground for transformation.
However, banks present at the briefing all agreed that divestment of their payments business was not an option. As a key touchpoint with customers, banks are not willing to dissolve that relationship and are keen to keep, build and develop business lines to better serve their customers. One bank even went as far as to say that “we have to be in payments, if you’re not then you’re not a bank”.
The challenge is how to reconcile the potentially long journey of payments transformation with the immediate requirements of customers and regulation and do this in a cost-effective way. All participants agreed that there is a shift away from ‘monolithic technology’ to help reduce costs. This may involve outsourcing certain parts of the business. However, one bank noted that “it would be difficult to imagine a third party being responsible for putting volume through the system and owning that process” but there is room for ‘new architectural models’.
A change of mindset
It is not just the technology that needs to adapt but also the mindset within banks. They all agreed that banks are not good at accepting projects might fail. But in the age of agility, institutions need to become better at this. By decreasing the cost to market, if a project fails it shouldn’t be seen as ruinous. Banks need to be ready to respond to demand at speed and this may lead to a few failures along the way. The recent adage of ‘rent it’ versus ‘build it’ is still a discussion that many banks are having. The increase in reliable, secure cloud technology has meant that it is considered a viable piece of the payments transformation journey.
The bigger picture
Payments transformation should not just be considered through the lens of an individual bank. Banks agreed that transformation also needs to happen at the infrastructure level so that institutions can serve their customers in the best possible way. One bank described the UK as being ‘behind’ in the payments space – the market has not adopted ISO 20022 and the technology supporting the infrastructure is old. With the UK’s New Payments Architecture still a way from being delivered, it is hard to see that changing in the near future.
The group agreed that the value of payments is now in the data they generate. There is a need to drive API enablement to generate more data that can be leveraged to develop new products and services that customers don’t even know they need. One successful example of this is Stripe, which now has a greater market valuation than Deutsche Bank. However, according to Icon’s report only 15% of respondents have made the switch from transaction-led to data-led revenue models for payments– even though they could leverage mandatory Open Banking initiatives to generate further data analytics and deliver new customised products to drive new revenue streams. One bank present said that “understanding the value from data is in its infancy, banking is a heavily regulated industry where the data belongs to the customer. We are still understanding what we can do with it”. Whilst it was noted that data driven revenue will no doubt be important, there are still ongoing questions as to how value can be generated from the transaction itself, e.g. fraud analytics.
The transformation of payments is in some ways a reflection of the industry in general – a balance between the ‘public good’ aspect of banking and the commercial model. The winners will be those that furrow the middle ground.