Independent research conducted by Celent on behalf of Icon Solutions has revealed that, in response to commercial pressures and changing scheme and regulatory requirements, payments processing is transforming from a commodity to a business, creating compelling new value opportunities for banks.
The survey, launched today at Sibos, found 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. In response, banks are increasingly turning to vendors and third parties for payments processing, enabling focus to remain on other strategic priorities. According to the report, 57% of tier 2 and 3 banks currently partner with vendors in order to dedicate internal resources on business innovation initiatives.
This market dynamic presents a sizeable opportunity for banks to adopt Payments Processing as a Business (PPaaB) strategies. Although many banks already provide payment and banking services to other banks through existing correspondent banking models, there is significant potential to expand these opportunities further. The data indicates that 22% of tier 2 and 3 banks would now consider another bank as their full strategic payments sourcing partner. This comes as 87% of tier 1 banks have actively considered spinning out payments as a separate business.
“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”, comments Kieran Hines, Principal Analyst at Celent. “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.”
Despite the importance of easing margin pressures, the survey also found that PPaaB strategies must go further and be focused on supporting the delivery of value-added services that deliver innovative offerings to customers. Banks attempting to enter this market will need to invest in new capabilities as well as adopting the mindset of a vendor or fintech, with regards to service delivery and improvement.
Toine van Beusekom, Strategy Director at Icon, explains: “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.”
The report notes that capitalising on the transformation of payments processing will require banks to undergo a payments transformation of their own. To succeed, banks will have to modernise and adopt a cloud-based, elastic and connectivity-focused approach. Investment in skills and new capabilities will also be crucial.
Beusekom adds: “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.”
Icon will be discussing payments processing strategies in more depth at Sibos. Find the team at Dis36 to learn how Icon’s expertise, solutions and pedigree can support banks in defining and executing a ‘greenhouse approach’ to payments processing for sustainable control.