How to Make Payments Pay

As margins in payment services continue to decline, many banks are focused on costs. But the real challenge is to develop new payment products that offer their customers added value.

Naturally, it is always necessary to examine the possibilities for minimising costs. But it is at least as important, and also far more satisfying, to increase margins with services that address the issue of convenience and bring added value to customers. This requires an external focus from payment departments, as well as innovative investments.

Given the current climate, this goal sounds almost utopian. However this is not the case, as outsourcing core payment processing activities will reduce costs and complexity, and at the same time free up resources for client focus and product development.

Cost-cutting Only Brings Temporary Benefits

Despite growing transaction volumes, payment margins continue to drop. This is due to several factors. Customers are increasingly demanding, and banks face the challenge of increasing regulation and standardisation, and have to invest in ever-advancing technologies. Furthermore, competition is increasing, particularly from non-banks. When it comes to the traditional sources that yield the margins, the picture is also fairly bleak.

Currently, payment margins consist of a combination of unprecedented low interest rates, spot dates only one business day from the trade date, and fees which have shrunk due to increasing price competition. Many banks seek relief by restructuring their core payment processing activities and building their own payment hub. However, this requires investments which are only feasible with sufficient volume and few banks can play the volume game. Moreover, cost-cutting will only bring temporary and limited benefits.

Resources for Improved Customer Focus

For banks, the future does not lie in core payment processing activities. Given the many concerns about advancing technology and standardisation requirements, this raises the question of whether they should continue to focus on this area of payment. In addition, there are many advantages and economies of scale that can be achieved by outsourcing core payment processes, entirely or partly, to a party that is able to offer low prices due to its high processing volumes. This, in turn, frees up resources for improving customer focus and developing new products and services that immediately benefit the customer.

The future lies in new products that create and reinforce relationships with customers. This is the most important condition for growth and improved margins, as customers seem willing to pay more for innovative services that bring them convenience and added value.

Initiatives are Blossoming

The challenge for banks is to find out which services offer the most added value. Worldwide there are many blossoming initiatives, including the many kinds of payment apps for smartphones, such as Bill Pal, which ensures that users pay their bills on time. Another example is Mint, which helps users with their monthly budgeting. Blueprint, from Chase Card Services, helps users manage their debts more effectively.

A useful tool in the current economic climate is GasBuddy, which enables North American users to find the cheapest petrol station. For consumers in the US, there is ING Compare Me, which enables them to compare their savings and debts against those of similar consumers.

A pure payment tool, on the other hand, is MoneySend by MasterCard, which enables private users to send money to each other via their smartphones. Another success is the Pizza Express app, which allows you to pay the bill at your table with your mobile without hailing a waitress. Then there are the tremendous possibilities that mobile banking presents among the unbanked populations in developing countries, based on prepaid instruments.

Many payment instruments have been available for a number of years in some developing countries. Examples include SMART Money and GCash in the Philippines, WIZZIT South Africa, and the economy-changing M-Pesa in Kenya. These are interesting and inspiring examples, directly or indirectly linked with payment services. Naturally, some ideas turn out to be no more than hype, but this is inherent in creative processes.

Two Main Challenges

Initiatives also show that banks all over the world are looking for new strategies. It would be better if this development were quicker and the approach more comprehensive, as brand new banking concepts are necessary in order for future demand to be met. The challenge is twofold:

  • Creating conditions under which the necessary management attention and capital can be provided.
  • Directly identifying the most promising direction.

With respect to the first part of the challenge, a company such as Equens can help create these conditions by taking over the core payment processing activities. For the second part of the challenge, Equens is doing preparatory work by setting up an Innovation Sounding Board (ISB) with a group of clients, partners, European organisations and industry experts (see box). The objective is to start a process of open innovation with initiatives that have the highest probability of success.

Customer-orientated and Financially Feasible

This combination of knowledge of customers’ needs in all possible market segments has already yielded a top 15 of potential new services across the four paths of innovation that the payments industry is following:

  1. Mobile payments via smartphones.
  2. E-commerce payments on the internet.
  3. Business intelligence on payment data.
  4. Electronic invoicing (e invoicing).

Concrete ideas vary from remote mobile payments, the mobile phone as a point-of-sale (POS), and eVouchers, to biometric authentication and an electronic mandate service. All these services are perceived as promising business cases. This is important, as there are also many ideas that sound highly innovative, but are too exotic to be financially feasible.

This is where the ISB comes in. It is a forum for discussing purely content-related matters, free from any internal political restraints. The participants, who include representatives of large banks, told us that this is the board’s specific value. By discussing goals in groups, participants are able to open their minds and determine which developments should, and should not, be given priority. The board enables them to share their views, ideas, doubts and observations of trends, and make concrete proposals in ‘co-opetition’. The partners find this an exciting process, due to the wide range of disciplines involved. One participant even remarked that he truly believes the collaboration model is as important as the subject of innovation.

Innovation Process and Sounding Board

Since users hacked the
iPhone and forced Apple to establish the now hugely successful ‘App’
store and model, it has become clear that it is better for a company to
be open, rather than try to maintain walled gardens and pretend that
they can do everything themselves. The App stores, now successful not
only with Apple but also with Windows, Nokia, Facebook and Android, show
what creativity is unleashed when an external community is allowed to
develop solutions based on a standard infrastructure. This process is
called open innovation.

Being aware of these huge
benefits, Equens has set up a process to harmonise, channel, funnel and
prioritise the new innovation activities. These ideas are collected
internally on our ‘radar’ of all possible topics and then prioritised
into a list of topics to be pursued.

In order to
ensure that no single aspect dominated the discussion, an objective set
of criteria on what makes a good new service were established. Only if a
potential new service is equally within our area of competence, has the
potential to produce revenue and will extend our value chain, thereby
integrating us better into our customers’ solutions, will it rank highly
in our evaluation. After many days of intensive cross-departmental
discussions on how well the many potential new services on the radar
score against the criteria, we emerged with a set of innovations that
all departments across the company jointly recommended for further

Sounding board
In order to validate our
internal findings with the outside world, we set up an Equens Innovation
Sounding Board (ISB). The ISB consists of valued clients (ING, Rabo, DZ
BANK etc), partners (SWIFT), European organisations and associations
(Italian Banking Association (ABI) and European Association of
Co-operative Banks (EACB)) and industry experts (the head of the
European Commission’s E-invoicing Expert Group, a consultant with close
links to PayPal/Amazon/Google, a professor engaged in financial
innovations), an ex-banker now close to the role-model automobile
industry – and even a sceptic to keep our new world enthusiasm real. The
ISB members were extremely positive about this new-style process (which
we believe is an innovation in itself), and also fully approved the
top-priority list.

Four streams
After this encouraging
start, we explored the idea of open innovation with this panel. We all
felt that we should dig down into a few of the top subjects together and
see what concrete results we could come up with. Four streams were
defined for this purpose:

  1. Mobile payments (m-payments).
  2. E-commerce payment on the internet.
  3. Business intelligence on payment data (which needs to be treated very sensitively, but has absolutely massive potential).
  4. E-invoicing (an invoice being the initiator of a payment).

each of these streams, interested parties from the ISB are working
together with Equens to see if we can make something creative happen in
these areas.



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