Payments: Making the Right Strategic Choice

The theme of the recent Payment Strategies Day on Tuesday 10 June, hosted by Experian Payments, was the power of choice. The balance of power in the payments industry is gradually shifting with corporate organisations increasingly being given more choice as to how they make and receive payments. The single euro payments area (SEPA), SEPA schemes, SWIFT for corporates and the UK Faster Payments service – among others – offer corporate organisations additional opportunities to simplify their payments processes, reduce costs and differentiate themselves from their competition. But what are the choices available and how can corporates ensure they make the right strategic decision?

Choice Driven by Change

“The pace of change within the European payments environment has traditional been incredibly slow,” admitted Gareth Lodge, senior analyst, European payments at TowerGroup, one of the lead speakers at the one-day event. “However, we are now seeing rapid change as a result of events in March 2000 – possibly the most important date in the history of payments.”

In March 2000, the Cruickshank Report and the Lisbon Agenda were published, both of which sought to introduce competition and change into the European payments landscape. The Cruickshank Report, in particular, highlighted the fact that while the existing monopoly in the payments environment suited the banking community, it was not beneficial to the end-user. The Lisbon Agenda focused on the fact that the EU payments landscape wasn’t as competitive as the rest of the world as a result of having 27 countries operating independently. The Agenda endeavoured to create the ‘most integrated and effective financial services market in the world’ by increasing competition and reducing the number of banks and payments systems in Europe through the Financial Services Action Plan (FSAP) and Financial Services Policy 2005-10.

This led to a tsunami of regulation (117 measures in all) of which three relate to SEPA – one of the most talked about initiatives in the EU over the last 12 months. “SEPA will happen because it is a political vision,” affirmed Lodge. “And contrary to public perception, it isn’t really about payments but rather underpins the goal of creating a more integrated financial services market in Europe with more competition.”

An initiative that is more important than the creation of SEPA, however, is the introduction of the Payments Services Directive (PSD) – an event that corporates and banks alike need to pay close attention to.

Pay Attention to the PSD!

The key aims of the PSD are to:

  • Generate competition in payment markets by removing barriers to market entry and guaranteeing fair market access.
  • Improve transparency of payment service information.
  • Provide a simplified and fully harmonised set of rules with regard to the rights and obligations linked to the provision and use of payment services (i.e. execution time, liability for failed or unauthorised execution, full amount principle, refunding conditions and irrevocability of payment orders).

“The PSD will have a profound impact on the payments business because every legal contract between banks and corporate clients will need to be re-written and re-negotiated before it comes into force in November 2009,” explained TowerGroup’s Lodge. “Right now, every contract that a corporate has with its bank will be in conflict with the PSD and 15 months is not a long time to address this challenge.”

The lack of understanding and impetus around the PSD was highlighted by recent research that Lodge highlighted (see box below) where a survey of corporate organisations revealed that only 16% had studied the impact of the PSD on their business. Among the audience at Payment Strategies 2008, 50% of the attendees had not even heard of the PSD – a figure that Lodge described as “frightening”. Furthermore, only one corporate attendee said that they had performed a PSD impact study, while all the attendees said that their banks had not yet actively discussed the PSD with them.

Figure 1: Differing Views of the Payment Services Directive (PSD)

Source: SAP, Finextra SEPA Survey and Bank of America

Without a revised agreement with their banks, corporate clients will automatically gain the same protection as consumers and micro-enterprises, and banks will have the same obligations and information requirements as they do for consumers. “Service levels need to be re-established given the changed reality of the post-PSD environment, which could be a competitive tool, as corporates consider which bank could offer them the greatest benefits,” said Lodge.

Moving Beyond Payments

One factor that is clear about the change sweeping across the European payments landscape is that the price of payments will fall and that different fees for types of payments will be erased (see box below for figures).

Figure 2: The Wide Range of Payment Transaction
Fees Across the EU

Source: TowerGroupNote: All fees are in euros or converted to euros at exchange rate on the day the data was gathered.
High fees shown are the maximum and may be depend on the value of the transaction.

In addition, the introduction of SEPA and the PSD will lead to wider benefits for corporates beyond payment cost efficiency, such as global account consolidation and the integration of payments and reporting for enhanced STP. “Reliable payment processing will be a baseline expectation in the new era of European payments,” said Lodge. “Banks must therefore differentiate themselves with additional product and client services value and make sure they are agile in terms of adapting to change.”

It is clear that banks have a lot to contend with over the coming months and years but corporates also have to face their own set of challenges. For example, while the PSD aims to harmonise payments regulations, it is already apparent that country interpretations might undermine the overall goal. For example, the PSD has 23 optional clauses while the French, German and English version of the legislation has a different number of paragraphs. This indicates that regional variations in the adoption of the legislation are likely to arise affecting corporates in their implementation of the legislation. In addition, the Lisbon Agenda allows corporates to transact with any bank anywhere in Europe, but how do corporates make such a decision from a choice of 8,500 banks?

“Corporates will clearly have to do their homework and opt for contracts with bank partners that are no more than 3-5 years, as so much is likely to change,” said Lodge. “Both banks and corporates must take action in order to deal with the transformation because doing nothing will not be an option.”

Reducing Risk and Complexity in Payments Worldwide

When it comes to managing risk, there are three key factors to bear in mind: avoidance, mitigation and contingency. In his presentation at Payment Strategies 2008, Jonathan Williams, director of communications and product strategy at Experian Payments, identified the main areas where risk and complexity currently exist in business payments. “Corporates now operate in a payments environment of increasing complexity where they work across countries with multiple banks through different connectivity models and bank software, as well as various internal payments systems and business applications that generate payments, such as the Internet,” he said. “In order to manage this, corporates must carefully choose the business processes that are right for their organisation and work best for them.”

Figure 3: Current Corporate Payments Environment

Source: Experian Payments

Williams highlighted the fact that efficiency and effectiveness underpinned this aim and outlined seven key principles for corporates to focus on.

  1. Standardise operations wherever possible using standards that are applicable across the EU.
  2. Validate information using shared components in business applications to reduce the operational risk of non-payment, for example.
  3. Simplify and make sure the same processes are used across the business.
  4. Consolidate systems to minimise discrepancies between operations and people’s expectations of how the systems should work.
  5. Reduce duplication everywhere and avoid re-keying information to minimise the risk of error.
  6. Automation within the date transfer process is vital and will reduce risk and complexity substantially.
  7. Always focus on the choice available and choose the payments service provider that can provide you with the best breadth and reach.

According to Williams, while the complexity in the payments environment was the result of proprietary bank systems that previously dominated the bank-to-corporate relationship, industry efforts towards standardisation is improving connectivity for corporates. “Corporate access to SWIFT enables them to have one communication network with all of their bank partners,” he said. “In addition, corporates can take advantage of the combination of establishing a payments factory or shared service centre in conjunction with a single payments gateway.” (See diagram below.)

Figure 4: Reducing Risk & Complexity: Tomorrow’s World

Source: Experian Payments

Conclusion: Making the Right Strategic Choice

Mark Hale, director, advisory – banking and capital markets, performance improvement consulting at PwC, the final speaker of the day, pointed out that corporates are beginning to exercise their power of choice and this was evident through the way they managed their provider selection processes. “The customer decision-making passes through two stages. First, the customer decides whether the bank meets its minimum requirements,” explained Hale. “Secondly, the customer considers whether the bank anticipates their needs and whether it will support its operational efficiency goals with technology.”

As a result, payments service providers need to provide better service models with enhanced financial and operational sophistication driven by the needs of the corporate community. This point was reiterated throughout the day and underlined by Marion King, CEO of VocaLink, a keynote speaker, who said that cost and customer service were now “hygiene factors” and that market demand would drive the choice of payments channels and instruments that service providers had to deliver.

“Corporates must take ownership of payments changes and re-visit what they do and how they do it in order to benefit from the choice and change in the market today,” argued PwC’s Hale. He recommended the following key questions for corporates to consider in making this decision:

  • Have you fully understood the key market changes?
  • Have you sufficiently challenged your existing business model?
  • Are your assumptions well founded?
  • Have you got a clear business change strategy in response?
  • Have you upgraded and adapted your sourcing capabilities and strategies?

Convergence, standardisation, consolidation and competition were the key themes discussed during the day and are the major trends transforming the payments environments right now. The good news is that while corporates need to make difficult choices about how and who they conduct their payment business with, it is the corporate community that is driving change and dictating the agenda.

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