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Celent and Icon Solutions research released on the first day of Sibos 2022 has revealed that payments processing will soon no longer be perceived as a commodity, but instead as a business opportunity.
Commercial pressures and changing regulatory requirements will lead to this shift. It is evident that the current payments processing model for account-to-account (A2A) payments is unsustainable, with 86% of Tier 1 banks finding margins on payments challenging to maintain – up from 59% in 2021.
Today, banks are turning to third party providers to support their existing payments processing models. The report also mentions that 57% of tier 2 and 3 banks have partnered with vendors in order to dedicate internal resources on business innovation initiatives.
This paves the way for banks to adopt what is being to referred to as Payments Processing as a Business (PPaaB) strategies. While banks may already provide payment and banking services to other banks through correspondent banking models, the research shows that there is potential to expand these opportunities.
22% of tier 2 and 3 banks would now consider another bank as their full strategic payments sourcing partner. Further, 87% of tier 1 banks have actively considered spinning out payments as a separate business.
Kieran Hines, principal analyst at Celent, says: “The payment processing landscape is highly dynamic, but any bank wishing to enter this space has the potential to bring new value to the market. As regulated entities, banks are uniquely positioned to offer something closer to an end-to-end service to other banks, potentially including services around compliance, customer care, liquidity, and settlement. This would be a compelling proposition for mid-sized banks to consume and represents a clear opportunity for larger institutions to grow revenue, increase processing scale, and accelerate the pace of their own payment systems modernisation plans.”
To succeed, PPaaB strategies must be focused on supporting the delivery of value-added services that deliver innovative offerings to customers, which will require a different approach than has historically been used. Alongside this, banks must also adopt a cloud-based, elastic and connectivity-focused approach.
Toine van Beusekom, strategy director at Icon Solutions, adds: “Emerging requirements are creating new value opportunities. For example, open banking regulation is driving significant increases in the adoption of A2A payments as a cheaper, faster alternative to card-based payments. But as competition around A2A payments intensifies, banks will come under pressure from fintech players and big tech. This affords banks the opportunity to leverage their unique technological and regulatory assets to deliver the value-added services, such as credit, dispute handling and insurance, needed for A2A payments to truly match card products and not cede ground to new market entrants.”
Beusekom continues: “Bringing a competitive PPaaB offering to market and running payments as a profit centre is not straightforward. It demands a clear strategy that is built on sustainability, resilience and independence, underpinned by technology solutions that put banks back in control and allow them to grow their offering at their own pace to meet new requirements. And for banks on the journey to choosing a PPaaB provider, it is imperative the demand side is effectively planned and prepared to ensure a smooth vendor selection process.”
To download the full report, ‘The Payments Processing Opportunity for Banks: Moving Account-Based Payments From Cost Centre to Revenue Stream’, click here.
Financial Services
