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Should Payments Pay ?

All banks offer payment services but many do so at a loss. For some, this is unsustainable and they need to find innovative ways to cut costs and add value to their basic payment propositions. All banks need to do more, more quickly. Here we consider payments in context and assess services that can add real value. We conclude that new operating models can boost innovation and overall efficiency.

Making payments is a basic banking function, practically as old as banking itself. Few would doubt that payments matter, but it has seldom been seen as a glamorous area of banking. For many banks, the provision of payments has often been viewed as a ‘necessary evil’ or cost of doing business. But, that view is changing. Why?

Curiosity in payments is increasing for several good reasons. The current financial climate favours banking activities that are predictable, transparent and client centric. Payment services meet all three criteria, so if banks wish to focus on providing traditional services, payments certainly fits the bill. Better still, payments is a growth industry: total wholesale payments revenues are forecast to increase from $169 billion in 2010 to $471 billion in 2020. Worldwide payments are growing faster than global GDP, which is an attractive industry dynamic. But there are other factors that are creating an increasing interest in payments.

The payments landscape is changing fast and in many ways. A combination of new technologies, legislation, economic conditions and competitive pressure is transforming the entire payments value chain. The creation and proliferation of new banking channels, such as mobile and internet have enabled the development of innovative payment types, such as real-time and mobile. In parallel cheque usage is in general decline and, in many countries, is likely to be phased out over the coming years. Bank clients are becoming more demanding and want new payment services that meet their commercial needs. Many businesses operate in a global 24/7 environment and need payment services to match their operations. Banks have responded with innovative payment services that serve client needs better and this too has helped bolster interest in payments. However, there is another reason why payments are important.

The provision of payment services is a vital, regular interface between a bank and its clients. In reality there’s a lot more to payments than meets the eye… Payments are an intrinsic component of any bank’s service portfolio and vital client touch-point. Payment is part of a bank’s brand promise: a manifestation that a transaction is complete and that all parties have fulfilled their obligations. This creates challenges as well as opportunities. All banks must provide payment services and these are often bundled with other services, such as treasury and cash management. This can make it difficult for a bank to determine the exact contribution of its payment services and many banks are prepared to cross-subsidise payments to retain accounts and gain access to client liquidity. In practice it is often impossible to define the precise contribution of individual service components. So, although all banks provide payment services, many make no margin out of them. Does this matter?

If payments are maintained as a loss leader and the link to other services is tenuous there is a real threat that competitors will win that profitable business and leave banks with the loss-making payments business. While this may not be an obvious threat, it remains a real possibility. And as the number of payment types continues to grow, costs tend to grow in parallel. Now is a good time for banks to get to grips with their payment services to gain a deeper understanding of the underlying cost structures and business dynamics.

All banks are grappling with the challenge of how to profit from payments. This is no trivial task – providing payment services calls for substantial, regular investment and the margins are continually squeezed by competition and limited by legislation. Over half of bank IT budgets are consumed by legislative compliance projects and this shows no sign of abating.

At a global level, payments are becoming commoditised. Time and distance are no longer reliable measures of payment efficiency, so payment services alone are not a source of competitive advantage. Many payment services are increasingly sourced on the basis of price and availability. So how should banks react to the commoditisation of payments? It will be argued here that banks can profit from payments through prudent cost management, choosing the right mix of suppliers and continual innovation. These three components are considered below, and they are not mutually exclusive; indeed, successful payment providers will be those who pursue all three in parallel.

Payment processing is not cheap. Cost management is a vital ingredient of any successful payments strategy. All banks must scrutinise their operating models to understand exactly where costs occur and how these relate to current and forecast business volumes. Payments processing is a scale business so only banks with the right technology and a scalable infrastructure can meet future industry challenges. Success in payments requires processing scale to justify the continual investment in technology necessary to support new banking channels and payment types. Most banks have recently made great progress in increasing payment efficiency and STP levels are rising continually. However, in reality many banks will be unable to establish sufficient volume to profit from payments processing alone.

In the absence of significant scale, banks must cut costs and streamline infrastructures to remain viable in the payments business. This is challenging in a time of increasing regulatory pressure. Major legislative initiatives, such as Basel III, Anti-Money Laundering (AML) and Anti-Terrorist Financing also consume a lot of management time and require significant investment.

All banks need to build a detailed understanding of their payments cost structures. On closer inspection, many will need to explore new operating models in order to cut costs and reposition for growth. Careful supplier selection should help banks achieve more with less and can accelerate the delivery of business benefits.

As already mentioned, processing payments is a scale business. Only those with sufficient volume can justify the necessary investment to offer new payment services that meet evolving client needs. Collaboration can play an important role in building a successful payments business. Flexible collaboration, based on mutual benefits and sound commercial principles can help banks reduce capital spending and operational costs. How?

Processing payments is inherently a community activity. Banks need to collaborate with each other and with technology suppliers to establish connectivity and maintain payment standards. Payments themselves are not a sustainable source of competitive advantage, so banks with lower processing volumes can achieve economies of scale by working together to develop processing infrastructures that offer economies of scale to all participants. This approach has the potential to generate benefits throughout the payments value chain.

Bank clients can benefit from the economics of scale in the form of reduced pricing. There may be other business benefits achievable, such as improved service availability and improved cut-off times. Bank suppliers may also be able to provide value-added services that enrich a bank’s payments offering. However, potential suppliers must be chosen carefully and all charges carefully scrutinised – it may be the case that attractive, low-priced payment services are accompanied by expensive additional services. Additional services must be carefully evaluated for strategic fit with the bank’s overall payment portfolio and strategy. All additional services must generate quantifiable bank and client benefits.

From a bank perspective, the provision of payments meets a straightforward client need. From a bank client perspective, payment represents the end of a transaction and is always part of a bigger liquidity management picture. The successful banks of the future will be those that find innovative ways to add value to their basic payments proposition. Here we consider some options:

Most corporate treasurers have worked hard to streamline and standardise business processes. This seeks to produce multiple business benefits in terms of reduced costs, improved cash visibility and mitigated risk. However, most corporates still have to manage large numbers of bank accounts over multiple geographies. They also face the daunting challenge of understanding the validity of bank account details, including signatories. Electronic bank account management (eBAM) offers clear visibility over current signatory details and provides an audit trail of all account management activities. At a simple level, eBAM offers a single version of the truth in relation to bank account records. It synchronises bank and corporate records and makes them accessible online. The benefits of eBAM are most apparent to multinational corporates with many bank accounts over disparate geographies. These organisations typically conduct many account management actions each day and could potentially have several thousand signatories across the group.

Many major banks now provide eBAM services and adoption is gaining momentum. Corporate treasurers appreciate the benefits of increased visibility and tighter control of bank accounts and the ability to amend and update information online. They are also embracing the idea of adopting a multi-bank eBAM solution so that banking structures can be changed when necessary. Innovations such as eBAM create client loyalty by adding real value that corporates are willing to pay for.

Payment services are often bundled with other value-added services. This reflects the pivotal position of payments in the bank/client relationship and the fact that, from a bank client perspective, payment is always part of a bigger picture of liquidity management. Many Banks can do more to offer corporates a truly integrated online experience. They can offer corporates access to an integrated range of financial products and tools within a single portal. Treasurers want to view and access cash quickly and easily and need to be able to execute transactions faster and more efficiently. Banks can help treasurers take control of liquidity by offering a range of tools that are available 24/7.

Banks can add value and increase customer convenience by adding an automated FX service. This enables clients to use nominated bank accounts without the need to contact an FX desk to book a rate. Several banks now offer automated FX facilities from existing accounts using existing balances, which removes the need to establish additional FX credit lines. Many of these schemes also guarantee the best rates and some allow clients to manage the entire process online. Automated FX can also help streamline client operations and increase efficiency as payments can be made in a wide range of currencies without managing additional accounts. This is a good example of how banks can quickly add value to payment propositions by increasing customer convenience and flexibility.

All banks must innovate to provide services that add real value. Banks can add value in many ways – by enriching core payment propositions and by delivering existing services in new ways that increase flexibility and customer convenience. The banking industry acknowledges that corporate clients have multiple banking relationships that extend over different domains and geographies Overall, banks can add more value to their core payment propositions by offering services that facilitate interoperability between banks and increase client convenience.

By Paul Taylor
Paul Taylor is head of banks, Europe, Middle East and Africa (EMEA), within Bank of America Merrill Lynch’s global treasury solutions (GTS) group, responsible for sales of cash management, working capital management and treasury services to banks across EMEA. Taylor joined the bank in January 2010 from VocaLink, one of the world’s leading payments providers, where he was managing director for Europe. In this role, Taylor was responsible for the company’s European strategy, as well as sales and industry relations across Europe. Prior to VocaLink, he was a strategy consultant at Deloitte where he worked in the financial services practice.

Bank of America Merrill Lynch
Through offices in 30 countries, Bank of America’s Global Corporate and Investment Banking group provides investment banking, trade finance, treasury management, capital markets, leasing and financial advisory services to domestic and international corporations, financial institutions and government entities. Bank of America has been in Asia for more than 50 years and has more than 2,000 employees based in 12 countries throughout the Asia-Pacific region.

Vendredi 9 Mars 2012