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Rebalancing the business of payments
The payments equation:
The cost of providing payment services is too high for smaller banks
Rebalancing t thebusinessofpayments
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
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 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.
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
TSB is delivering on proposition partnerships already with TSB Marketplace, which introduces customers to services provided by third parties. These include life insurance from Legal & General, a savings and investments platform from Wealthify, switching service ApTap, and, for businesses, payments services from Square and advice from Enterprise Nation.
Returning to his prediction that payments will become increasingly invisible for both e-commerce and point of sale, Lyons says that is being driven by open banking opportunities and the speed of the UK’s Faster Payments system.
“Open banking is growing significantly, I see it in the volumes every day – more customers are initiating payments from within third-party apps than ever before,” he says. “I also foresee a move from card acceptance to instant Faster Payments, particularly in e-commerce, as those smaller businesses try to avoid expensive merchant acquiring costs. As this capability is now far more instant, it’s starting to knock on the door of the traditional card rails as a viable alternative for the movement of money.
“Over time, the payment will become quite invisible and roll off the back of the customer experience, whatever the artificial intelligence and partnership working, while striving to reimagine its branch network. For example, to cope with increased customer queries at a time when branches were shut due to COVID-19 lockdowns, the bank introduced TSB Smart Agent chatbot for internet users last year, and added it to its mobile app in March. Powered by IBM, it helped the bank cope with a wave of retail customers seeking advice on mortgage and loan repayment holidays, and SME customers who wanted funding from the Government’s business interruption and bounce back loan schemes.
By early 2020, TSB had also completed a proof-of-concept using Adobe Sign and XD to build self-service forms. The timing was
customer is doing, in whatever app or e-commerce experience they’re in, and which is not the banks’. Real-time payments will kick on and create more value to customers, both consumers and SMEs.
“Payment initiation embedded in customer journeys will be a critical theme. That leaves the banks sandwiched between a changing customer landscape, and a changing clearing and settlement layer, and being squeezed on both sides.
“We'll all be forced into modernisation – TSB has already made very significant strides in putting modern platforms in place, but not all of the banks have.”
THE RENEWAL AGENDA
Modernisation has been significant for TSB in the last three years – a look across its services reveals a strong commitment to fortunate – when COVID hit, the bank was able to roll out 21 forms for which signatures could be provided without the need for physical contact. It processed 140,000 forms in three months, which it said saved 15,000 branch visits.
Electronic forms proved a huge advantage in attracting SMEs seeking Government COVID support to TSB.
“We have a growing SME franchise at TSB” says Lyons, “and our customers are desperate for the tooling that makes them more efficient. I think all the things that sit around the core payments journey are going to proliferate, and none more so than in the SME market.”
Meanwhile, branch closures were already a factor for TSB before the pandemic struck and further pressure from lockdowns prompted a decision to shut 164 more
“I don’t see a landscape of failed legacy systems across the industry,” he says. “Everybody has incidents and we resolve them. In some respects legacy systems are incredibly stable. The problem is they’re not easy to change. Cloud could certainly make putting new services live a less disruptive experience but there’s a huge amount of technical choreography that’s required behind the scenes to make that possible.
“That’s particularly true when the customer journey is part in the Cloud and part on premise, within a branch, and that transition back and forwards is something that needs to be proven,” adds Lyons.
He believes banking will be reshaped over the next few years by changes in central infrastructure, increased standardisation and transparency – all of which will drive competition, openness and innovation – and protections for those who use these services. "I think the road ahead is going to be a long and winding one,” he says.
during 2021, and has announced a further 70 will go in 2022. But TSB is developing pop-up branches in town halls, libraries and community centres in places where branch provision is lacking, while reinvesting in the branches that remain.
Lyons says: “We’re very proud of our branch network – it’s part of our core proposition. Our customers like the convenience of digital, as all bank customers do, but they also like the comfort of knowing they can walk in and get advice, face-to-face, if they need it, and that will continue.”
As regards infrastructure, Lyons does not agree with the often-heard view that it’s a choice between doomed legacy systems or the Cloud, but rather, he believes, both have a roll to play in a modern bank.
