Banks have realized for some time that payments are becoming something of a commodity. Technology, in large part, has made the space more accessible to players of all sizes, both banks and nonbanks, and the increased competition is cutting into profit margins. Further, the introduction of regulations (think: Single Euro Payments Area) threatens to squeeze more money from financial institutions' coffers as they race to implement compliant technologies and procedures.
Consequently, banks are faced with a dilemma around the extent to which they should remain in the payments business. Is it worth all the hassle of revamping their long-lived payments systems that have worked quite well for so many years? The quandary is especially evident in the corporate payments area, where clients' dealings cross the borders of nations and continents. Multinational companies are growing tired of being locked into the proprietary payments processing systems of their banks and have become vocal about their desires to simplify things.
Clearly, standards will assist the industry in meeting the growing demands of their corporate clients while also helping to streamline banks' operations. However, there is a fear among some financial institutions that standards will commoditize payments further, leaving individual banks with few options to differentiate themselves. Additionally, the debate about the best approach to standardizing global payments processes continues.
"Standards are the conversation," says George Doolittle, managing director, head of global financial institution payment services, for Charlotte, N.C.-based Wachovia ($553.6 billion in assets). "This is ultimately the most important issue in the industry today," adds Doolittle, who sits on several global banking committees, including SWIFT and CHIPS.
Banking standards are not new, notes Arthur Brieske, director and head, global ACH and db-worldPAS, with Frankfurt-based Deutsche Bank (US$1.3 trillion in assets). But, "The recent discussions have been around the globalization of standards -- a standard payments kernel across the world for all industries," he points out. "Standards will help us in terms of scale, automation and STP [straight-through processing]."
Robert Blair, a board alternate and member of the payments committee at Washington, D.C.-based standards body X9 and a VP in the treasury services, global client access area, with New York-based JPMorgan Chase ($1.3 trillion in assets), says the next iteration of standards discussions is related to the evolution of technology and world markets. "Since the introduction of computing into banking, standards have had a role," he says. "This is the next go-round for the next generation of payments systems to better support security, efficiency and interoperability in the development of global payments. It's the promise of efficiency and interoperability on a cross-border basis."
Interoperability is the key in the standards discussion, according to Nancy Atkinson, a senior analyst with Boston-based Aite Group. Banks now are starting to understand that the proprietary communication channels they maintain with their corporate clients are counterproductive to their activities, she asserts. "There is a loyalty component to [proprietary payments systems], but it's more like banks are trapping their corporate clients," Atkinson says. "As the market and technology evolve, you'll see far less tolerance by corporates toward being trapped. There will be more of a demand for a standard approach to payments." After all, she adds, "Banks' value propositions are in the value-added services they provide -- not the communication channel."
This sentiment is echoed by Lázaro Campos, head of banking with SWIFT (Brussels). "Understanding the corporates' needs is what gives banks an edge. It's not the messaging system used to offer services," he says.
The days of differentiating with proprietary systems are over, asserts June Felix, general manager, global banking solutions, IBM (Armonk, N.Y.). Now, banks have to create more-innovative ways to make money and stand out. "It takes a transformation and reinvention of how you look at payments," Felix states. "I don't think payments are a commodity. They can be differentiated. ... But banks have to be more thoughtful and systematic in their approach," she adds.
"It's about creating value around the information and showing that you understand the clients' business," Felix continues. "Once you move to standards, you're able to create deeper relationships with clients because there's more seamlessness in the process. A lot of money can be made from services."
And standards definitely will help banks improve their bottom lines, according to Wachovia's Doolittle, since they will help banks achieve an STP environment. "Through STP, you can rationalize the number of connections and applications you have," he says. "There's tremendous cost savings here, and it will give you the ability to roll out new products and services more quickly."
Dan Dopp, managing director for international operations with information controls solutions provider Infogix (Naperville, Ill.), also thinks STP and standards go hand in hand. After all, it is only through creating more-uniform processes and by unifying payments silos that banks can offer a new array of payments-related services, he says. "Operational efficiency and achieving STP will protect part of those margins that will be lost from commoditization," Dopp contends. "Interoperability is key -- how do you make the payments process seamless from start to finish?"
SEPA Spurs Reevaluation
In some cases, banks have little choice but to streamline operations. The Single Euro Payments Area (SEPA), for example, is forcing financial institutions that do business in Europe to rethink how they conduct their cross-border payments business since they will be compelled to charge a standard rate on transactions. While that impending change has been cause for nail-biting at some banks, there are others that view SEPA as an opportunity to reevaluate their payments businesses and the supporting technology.
"The changes that SEPA represents in Europe are a once-in-a-payments-generation change," remarks Alan Koenigsberg, VP for global in-country and ACH treasury services with JPMorgan Chase. "For a bank like [JPMorgan Chase], SEPA represents an opportunity. We don't have the heritage infrastructure in the local markets that the local European banks do, so we can leverage our existing infrastructure. You have to think creatively about SEPA. There's not much of a cost benefit to it, but it presents an opportunity for banks that are payments leaders."
When it comes to SEPA, size matters, says Deutsche Bank's Brieske. "The very large banks that see this as a core business objective are ahead of the game," he relates. "They've created project management teams and have completed the business components around this. The midtier and small banks might be lagging or looking to outsource to larger banks."
X9's Blair also sees the bright side of SEPA. He says he views it as a means for streamlining a complex process. "It's hard to argue with what the EU [European Union] wants -- better efficiency, reduced risk and predictable use across the community," Blair remarks. In fact, he contends, the fundamentals of SEPA perhaps can be implemented on a universal basis. "The standard the EU is focusing on is not just European in nature," Blair says. "The backbone standard can be used globally in certain ways. Overall, there is always value in having common standards."
Obviously, experts agree that those banks with an eye toward innovation will prevail in a standards-based world, such as the one that SEPA will create. And such innovation can go well beyond banks offering new services around their payments business, according to Aaron McPherson, research director, payments, with Framingham, Mass.-based Financial Insights. "There is a lot of technology expense around implementing SEPA. But what that ignores is thinking of your payments system as a platform for new products," he relates. "Payments systems are actually high-speed, robust transaction systems. When you build a data transformation system, you can do any process on it. Banks could wind up in business areas they've never been in. Those with versatile payments engines will succeed."
Standards Breed Efficiency
While it remains to be seen if banks actually are looking at their payments engines in such a manner, there is no doubt about the benefits that banks can reap from operating in a more-standardized payments environment. "A lot of change is taking place today as the market begins to see the efficiencies that standards offer," observes X9's Blair.
"Banks can reduce their infrastructure and gain overall efficiency in their systems," says Annette Hazapis, SVP and product management team leader with KeyBank ( Cleveland; $95 billion in assets), of the use of standards. "Standards help you break down silos and leverage your brainpower and technology across paper and electronic payments. It's about making it easier for our clients to do business with us."
Joe Mazzetti, EVP, corporate development, with payments solutions provider Fundtech (Jersey City, N.J.), says he is seeing some progress with the evolution of the payments infrastructure into a more agile, transparent vehicle. "Internationally and in the U.S., we're seeing the removal of silos and the consolidation of payments systems," he offers. "This is very important because legacy systems have been an impediment here. If it's a payment, it's a commodity, so you should be able to handle it through one system. Banks are reducing the number of payments models they're working with and their infrastructure is being reengineered down." These, Mazzetti says, are vital first steps toward operating in a more standardized fashion.
Looking at the U.S. alone, Bert Harkins, VP, global marketing, with electronic payments solution provider CheckFree (Atlanta), says he sees improved reliability and agility in the payments systems. "There's a focus to improve the infrastructure to give more visibility on the transaction itself," he relates. "This has been enhanced by SOX and other regulations." Harkins adds that he also sees banks beginning to leverage existing infrastructure. "The ACH infrastructure, for example, has been around for a while and it works well. So banks are seeing how to better leverage it."
Ultimately, standards can help banks better satisfy their clients' requirements, says X9's Blair. "Standards have broad strategic implications and require thinking on the part of financial institutions to see what fits their needs best," he remarks. But there are infrastructure issues to keep in mind. "Banks have to worry about how their payment infrastructures front-end with SWIFT, increased message traffic, and the increased number of corporate members in SWIFT and how to serve them," Blair adds.
Already, the industry is looking at XML as the standard format in payments that will enable all parties to more dynamically view transactions as they occur, Blair continues. Creating standards "is a community event where all parties have to be involved," he says. "This is no trivial problem. The enthusiasm by which a standard is embraced by all parties will determine how widely adopted it becomes."
SWIFT's Campos notes that while payments already are fairly standardized, there is work to be done. "The next step is to examine low-value and corporate payments end-to-end," he says. "We're seeing a blurring of the differences between high- and low-value payments. Domestic, regional and global payments are not easy to define anymore, either. If you take all that change into account, there will [need to] be new standards, and they will need to be in XML. ... However, there still is a lot of legacy infrastructure in place, and banks will have to update their back-office applications [before they can use the new formats]. Things will get worse before they get better. But the end of the process looks appealing."
Aite's Atkinson says the industry is making steady progress. "The most significant development is that there's a lot of work toward developing standard business practices," she says. "People usually think first of the technology. But what's equally important are the business practices -- what each player is responsible for, who does what."
Leading the Standards Charge
Of course, the crux of the matter is building a business case and getting everyone to want to change the way they operate, according to KeyBank's Hazapis. "It comes down to leadership, cost and a change in mind-set," she says. "There is a great deal of work required to make these changes happen, and a lot of people are afraid of change. What they have works, and anything to do with the payments infrastructure is expensive," Hazapis continues. "Nonbanks in the payments space have the advantages of not having as much legacy infrastructure or a legacy mind-set. Banks need to be in the leadership position here."
JPMorgan Chase's Koenigsberg says somebody needs to take charge of the standards-making process. "Standards are important," he says. "There should be a body like a SWIFT to control the standards to provide transactions to banks and corporates. I think of NACHA as a keeper of rules and standards. The European Payments Council could also become another good example of a standards body. Governance is at the top of [both groups'] agendas."
Control is perhaps one of the top issues in standards discussions. "Any standard involves sacrifice because there will always be features it leaves out. You can't accommodate all parties completely," explains Financial Insight's McPherson. "Who controls the standard? Various groups will try to get their standard adopted, and, sometimes, the standard becomes controlled by one particular private company," he continues. "No one will want to adopt it under those circumstances. So who decides what gets in and stays out? Banks and vendors need to focus on a multistandard environment where the data can interface with each other."
The technology already is available for operating in a standards-based payments environment, says Infogix's Dopp. However, "It's the typical situation of having so many entities with different perspectives making it more of a challenge."
So, does it all come down to politics in the end? Only as it relates to the cost of implementation, says SWIFT's Campos. "We're trying to create global standards. It's the economics of change," he explains. "Everyone would like to have the least possible change to their back office."
Be that as it may, Deutsche Bank's Brieske says that not all the blame for lack of more-unified standards should be placed on banks. "Corporates have developed standards regarding the payment details they send to beneficiaries, but they haven't created a global standard across industries," he comments. "So corporates across industries have work to do on creating standards as well."