My Payments BBQ Lessons 2022
On September 8, we celebrated The Banking Scene's birthday at the annual Payments BBQ and discussed "Balancing the P&L in Payments" in a 2-hour power program with a keynote and 2 power panels.
For our keynote, we had the honour to welcome Gottfried Leibbrandt, Chairman of the Dutch Payments Association and former CEO of Swift. The main reason why I asked him to join us is for his excellent book The Pay Off: How Changing the Way We Pay Changes Everything.
He explained why the balancing exercise in the payments business is so essential today for the financial industry. With loads of statistics and actual use cases, he made it clear that banks are being challenged today but shouldn't ignore the value of payments like society shouldn't ignore the value of banks in the payments industry.
Payments are changing fast, very fast, which means that banks must constantly catch up. On top of that, it is a volume business. Gottfried shared some numbers on payments revenues. Probably the most striking number was that global revenues equate to roughly 2-2,5% of GDP. Unfortunately for Europe, they are unevenly distributed across the world.
Gottfried explained that the biggest revenue drivers in payments are interest margins, interchange fees and margins on revolving credit and commissions and fees.
Interest rates in Europe were below 0, interchange fees are capped, and consumers are not willing to pay (much) for daily banking services, especially not in The Netherlands and Belgium.
Gottfried: "I think as a society, we should want the banks to make at least some money on it, rather than it being a loss leader at the end of the day." Banks provide critical infrastructure, and it is by large thanks to them that people can pay in shops and online, they can transfer money and are treated fairly in case of a dispute. So there should be an incentive to keep doing that.
So banks should investigate new revenue opportunities and/or explore options to improve their payments processes' efficiency. Gottfried believes collaboration within the banking industry is the most logical answer to achieve that, "setting aside the politics and starting to judge solutions on their real merit".
The Revenue Opportunities
In the first panel, we discussed how banks should grasp revenue opportunities. Our executive panel consisted of:
- Inge Ampe, Chief Commercial Officer, Argenta
- Hemakiran Gupta, Europe Head for Banking and Financial Services, Tata Consultancy Services
- Geert Matthys, Global Head of Marketplace Solutions, Deutsche Bank
Kiran (Hemakiran) nicely explained: "Things become a commodity because you take them for granted. But for one minute, let's think the payment does not go through… the real value of the payment is seeing when it doesn't happen." By building a great customer experience around payments, banks can avoid payments being perceived a commodity when things are going smoothly.
Kiran referred to Vipps in the Nordics as a great example of that. It connects 101 (retail) banks that see their payment revenues being cannibalised by another platform that offers additional features people are willing to pay for.
Corporate banks have a more interesting clientele. These business customers require more features and see tangible results from performant payment services. They see it in more successful sales, a more efficient finance department, better reconciliation etc…
With that in mind, Deutsche Bank (DB) answered the need of their clients and decided to build a solution to support their client’s marketplaces to their customers. DB helps those corporates with a marketplace with payment solutions, dispute management, FX solutions, KYC and onboarding, additional features through partner fintechs etc…
It is different for retail banks. They serve customers that expect a great user experience at the lowest possible cost. Inge Ampe explained that payments at Argenta are at the core of their service, but making money with it is a lot more complicated. In finding the right value-added service to make revenues, the bank will always revert to its value proposition, to be responsible for its clients and to help them improve their financial resilience.
As a smaller bank, Argenta doesn't aspire to become an ecosystem, "but that doesn't mean that a fintech with a great idea and an aligned value proposition cannot work with us to benefit from the brand and distribution capacity we have."
Argenta recently stopped its 100% free current account policy, and they see partnerships like with Cake as a way to build more value for their consumers that are open to a better service at the right price.
Cost Reduction Opportunities: Mutualisation of Services
Mutual service across banks is getting more attention these days, but examples like SWIFT and Isabel Group show that it is of all times. For the panel on mutual services, we welcomed:
- Tom Lambrecht, Country Manager Benelux & Nordics, Sopra Banking Software
- Cassy Ramsey, Non-Executive Director, serving the board of Mercury TFS and Degroof Petercam
- Frank Stockx, Chairman, Isabel Group
- Saskia Devolder, Strategic Programme Director Cross-Border Payments, SWIFT
One of the first messages that struck me in this session was from Saskia: "It's not only about reducing costs, it's also about making it operational excellent, because if you make an investment in the centre and that investment might be high, but at least it's split over many, many organisations that take the benefit of that."
This message of working together for better operational excellence came back a few times. Cassy shared, for example: "You have fintechs that can now do plug-and-play technology, along with open architecture within the banks, where you can actually create ecosystems. So if you look at the question, FinTech Friend or foe, I see it as being a bit of a partner."
Agreed, not every bank likes the idea of plug and play, or SaaS technology, as it transfers certain controls to a third-party organisation. To help banks with that kind of uncertainty, Sopra Banking Software has a mutualised approach of working where they create a kind of 'tripartite', as Tom explained, where they bring themselves, banks and the regulator around to the table to find a common approach.
Later in the panel, Cassy also explained her doubt about certain fintech companies with respect to dealing with a highly regulated environment like financial services, which is becoming increasingly more complex, given the current geopolitical tensions. On the other hand, she added that banks might need support to digitise their trade finance processes, for example, to ensure they can adapt at the same pace as regulatory change.
That is a powerful message for a few reasons. Banks should not be afraid of fintech companies but add their strengths to the strengths of fintech companies or even of other banks and end up more robust than before. Needless to say, this is easier in the non-competitive space, like behind the scenes where SWIFT is active.
One way to improve collaboration, to mutualise more services is by speaking a similar language. The panel agreed that ISO20022 is an important element in that respect, not just because it bridges organisations by speaking the same, and more structured language. At least over time, it should also lead to sharing much more transaction details.
Frank shared the Dutch example of Transactie Monitoring Nederland to reduce the cost of compliance across banks. This is clearly a non-competitive space, it costs enormous amounts of money, and banks miss many patterns if they ignore each other's transaction data.
When we asked Tom about his vision for mutualisation of services in the payments value chain, he explained: "We strongly believe in the creation of hubs. And it will not only happen in the payments domain. Some banks, for instance, have sufficient size to create their own hub. One of our customers is a large French tier-one bank with subsidiaries in more than 17 countries. They decided to create a lending hub. So the big tier-one bank, and all their subsidiaries are using exactly the same lending engine. And we see that happening in other domains as well, like from example regulatory reporting."
With this food for thought, the community was ready for a great reception and didn’t lose faith for an excellent BBQ, despite the awful weather. I guess the aftermovie speaks more than words 😉: