BEYOND PAYMENTS: LEGACY BANKS The payments equation: The cost of providing payment services is too high for smaller banks
Rebalancing the business of payments TSB’s Head of Operations John Lyons considers how mid-tier banks like his own might respond to a massive upheaval in the payments landscape “The mobile banking app will be increasingly replaced with embedded finance, with the payment initiation happening elsewhere – initiation embedded in customer journeys will be a critical theme.” That’s the prediction of TSB director of operations John Lyons, now that the global pandemic has given digital momentum a hefty shove. Inevitably, it raises questions about how much of the end-to-end value chain for payments stays with the traditional banks, but, in truth, banks have long since accepted that payments in and of themselves will never be the income generators they once were. Lyons, who has been working in payments for 30 years, moved to TSB in 2017 from Royal Bank of Scotland, and performs advisory roles for the Bank of England, UK Finance and Pay.UK. His responsibilities at TSB are diverse – open banking, payments and partnerships are included in his brief – and he is clear ffnews.com
that the business’s modernisation must continue to accelerate post-COVID. “In some respects, nothing has changed and, in other respects, everything has changed,” he says. “Behind the scenes, as regards our central infrastructure, the same agenda remains – there’s a programme of renewal covering CHAPS, real-time gross settlement, the new payments architecture, becoming ISO compliant. These are multi-year programmes. But, jumping to the customer end of the value chain, we’ve seen massive change in the last year: cheque use down by 24 per cent; Faster Payments growing by 10 per cent; and we’ve seen our digital adoption skyrocket – in excess of 90 per cent of our customer interactions are now done digitally.” A mega-theme for banking going forward will be partnerships, Lyons says, especially for the industry’s mid-tier and smaller players – and, if there is an upside to those decreasing payments margins, it’s that income erosion will force them to innovate elsewhere. “There’s a squeeze in payments – more volume, less opportunity to charge for them, higher costs of old infrastructure, growing compliance costs,” he says. “Then there’s the cost of introducing new protections, such as confirmation of
payee and secure authentication. It all adds to the cost of delivering a basic compliance service to customers.” In the face of such pressure on their payments business, Lyons suggests banks pursue two strategies. “First, standardise and consolidate infrastructure to reduce cost – that will be incredibly important,” he says. “Banks have too much infrastructure, it’s too costly and the smaller banks, in particular, cannot sustain that. Banks like TSB, which is a mid-tier bank, may need to seek partners, and I certainly see smaller organisations using payments-as-a-service. “I see a future with a smaller bank payment infrastructure, and processing consolidating into a smaller number of payments-as-a-service providers, running in the Cloud – either single or multi-tenanted. Banks will connect their front-end experience through APIs, and then their accounting and reconciliation through back-end APIs, with everything else in the middle done by a provider. “Payments are a commodity; you can’t differentiate, you just need to find the safest and cheapest way of doing it. “The other response [to this changing landscape] is more proposition partnerships to bring new services and products to customers to drive growth. Issue 10 | ThePaytechMagazine
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