6 minute read
Small but beautiful?
Smallbutbeautiful?
Can banks adapt their business models to capitalise on the explosion of high-volume, low-value worldwide transactions? ING’s Evelien Witlox describes its experience
Whoever would have thought that buying a bottle of milk, bar of chocolate or loaf of bread would come to involve the swipe of a card?
Yet this is just one of the new habits we’ve all adopted as a result of the surreal experience surrounding the COVID-19 pandemic, and the resultant aversion to handling notes and coins.
However, while the advent of contactless payments technology with no lower limit is great for us, it is causing a significant headache for the banks that make this happen, with the exponential increase in such tiny transactions hitting their revenues head-on.
This, coupled with other, significant developments affecting the financial and payments industry, such as the European Payments Initiative (EPI), the imminent advent of the new ISO 20022 messaging standards and the plethora of Cloud and API solutions – all against a historically low-interest-rate environment, which is further depressing income – are forcing providers to have a long, hard think about how they make money and, by doing so, retain their market influence.
Evelien Witlox, global head of payments and cards at ING Bank, believes the pandemic-wrought changes are significant and long-lasting: “E-commerce has flourished and so we’ve seen a huge take-up of digital payments, compared to cash,” she says.
And the explosion of digital payment transactions has made this a scale business for banks, with revenue now reliant on volume rather than individual transaction values. “That’s one way that we keep up with this,” she says.
ING’s Q1, 2021 results highlighted ‘subdued’ numbers of payment transactions, although with an expectation of a bounce back over the year as a whole. In an earnings call at the time, ING CEO Steven van Rijswijk said low levels of international travel had impacted credit card fees and international payment volumes were down. The bank responded
“We see further progress for our fee income on new product propositions, for increased charging on the cost of operating accounts and for fees on daily banking packages,” continued Van Rijswijk.
“Year-on-year income grew by 18 per cent, with growth both in retail and wholesale. Retail fees were up 20 per cent, with an impressive 46 per cent growth in daily banking, and this reflects the increase in payment package fees and the recovery of domestic payment transactions.
“In wholesale banking, fees were 14 per cent higher year-on-year as we saw some growth in lending-related fees including in trade and commodity finance, while payment fees also increased.”
Shaving operating expenses is also a priority. And major changes in the market environment – like the rollout of the EPI to which ING, Santander and Deutsche Bank have signed up – are also forcing banks like this to adapt,
The initiative focusses on providing instant payments for consumers and small businesses, and aims to streamline electronic transactions, which can currently take as long as two days to complete.
It is being launched as the latest attempt to homogenise and so simplify payments across the Eurozone. It could also help Europe’s biggest banks pinch market share from the US duopoly of Mastercard and Visa, as they also nervously eye up US tech giants Google, Amazon and Facebook’s attempts to grab a firmer foothold in European payments.
The European Commission and the European Central Bank have both put weight behind the EPI, but it remains to be seen how comprehensively it will be adopted across the region. Meanwhile, it does ING no harm that its Netherlands ‘homeland’ is among those that are ahead of the game, along with the likes of Spain.
by adapting its product and service suite to achieve ‘higher fees for payment packages’. By Q2, COVID was still having an impact on spending – although how people transacted rather than how much was more notable: the bank reported ‘mobile payment volumes up 35 per cent, sequentially’.
Van Rijswijk is presiding over a business looking to make changes to be fleet of foot, to meet challenges across the payments industry and, more broadly, the banking sector.
Like many of its peers, ING has had to adjust its approach in-step with such market developments, and this included rowing back on elements of its Think Forward strategy last year, announcing it would retreat from some markets and focus on its core business areas. It withdrew from wholesale banking in South America and will have transferred retail banking activities in Austria to Bank99, the bank of Österreichische Post, the Austrian postal service; and retail customers in the Czech Republic to Raiffeisen, by the end of this year.
Meanwhile, as of June this year, ING is ‘reviewing’ its retail banking business in France. In deciding which markets to maintain a presence in, the CEO has said he will always look through 'four lenses, which is attractiveness of the markets, the ability to reach a scale, the ability to get to decent profitability in the medium-to-long term, and the benefit that presence in that market has for other markets or whether that country delivers something that can be used by other markets as well’. And this strategic review has encompassed ING’s product and pricing structure, too.
According to a recent Payment Matters report by the law firm Eversheds Sutherland, 90 per cent of all single credit transfers between Dutch banks are instant payments, dwarfing a 15 per cent average across the Eurozone.
The reason for this, it said, was that instant payments were still a premium payment method in most countries, available only to select customers such as business users, or only for mobile payment transactions. “In the Netherlands, however, most banks are facilitating instant payments for retail customers, which makes transferring money via instant payments the new normal,” the report added. That said, there is little point in rolling out instant payments without the instant reporting to go with them, argues Witlox.
Tiny but mighty:
ING is finding ways to make myriads of smaller payments pay “If you do an instant payment and there is no instant reporting, then your clients are really at a loss,” she explains.
“So, first and foremost, we try to help clients with the data we have from them, to improve their internal processes and enable them to explore other possibilities to improve services.”
And changes in customer expectations of their payments experience – including a fresh appetite for new types of payment method, are also informing this industry reset.
Witlox says: “COVID really gave people a push to use payment methods that were there already, for the first time. From the numbers, we see they like them and so will continue to use them,” she adds.
To meet these evolving consumer preferences, an increasing number of providers are also looking to the Cloud as a means of adapting their existing, legacy infrastructure. It has helped ING be more flexible and reduce costs, says Witlox, but is only an enabler and must be deployed in the right way to be effective.
“It’s more what you do with that Cloud technology, what solution you make available via it,” she adds. Meanwhile, ING understands just how vital it is to overcome the geographical disparity in instant payments availability, and is playing its part in that. Witlox says: “We think they deliver a lot of opportunities for our clients to improve their processes, and also develop new services on top.
So it’s very important we roll these out, and you’ll see us doing that now, country-by-country.
“Then the next level will be how we connect that, so that it becomes a worldwide infrastructure on which we can build the services that we need. If we look forward, I think one of the important things we want to do as an industry is to really connect cross-border payments to an instant payments transaction.”
She summarises ING’s vision for this: “Cross-border, cross-continent, instant payments will be a big part of our development. If we can then combine data with payments and digitise, and connect networks to each other, we, as banks, but also third parties, can make really great services for our clients, and make payments easier and easier.”
