PP001 - Introduction to The Payments Podcast
Participants: Mike O’Hara, Co-Founder & Chief Operating Officer, Voices in Business and Peter Scott, Global Head of Banking Sector, Sun Microsystems
MOH: Hello and welcome to the Payments Podcast, and this is a brand new Podcast series. I’m Mike O’Hara of Voices in Business and I’m here with Peter Scott who is the Global Head, Banking Sector of Sun Microsystems who are sponsoring this series of Podcasts.
PS: Yes, good morning, Mike.
Good morning, Peter.
First of all I’d just like to tell you a little bit about what this Podcast series is all about and why we’re doing them. And this set of Podcasts compliments those that we’ve recently done on MiFID and those of you who are interested can go to mifidpodcast.com and download it or, if you want to get regular updates to your iPod, go to iTunes, and if you search on MiFID, I think you’ll probably find that ours is the only Podcast up there. So, what are these Podcasts about payments going to be about? Well, the aim is to foster debate in the Banking Industry around the business of payments. Payments at the moment are going through a really interesting phase. I think it was a Chinese curse actually to be said, may you live in interesting times.
Indeed.
Well, certainly people in the payments business are living in interesting times today. Some people have said that really almost a perfect storm exists in terms of payments at the moment. There’s regulatory pressure; there are increased volumes; there’s greater and greater customer demand for better services, and all the time there’s a requirement to lower the costs associated with supporting some fairly ancient legacy systems that have been hanging around in these institutions for many, many years. So, all of this trending to increased investments in new services, so interesting times indeed.
Our intention is to bring people together, and we’re going to try and look at different sides to the argument in order to have a true debate on the Podcast, so we’ll be bringing in lawyers; we’ll be bringing in operational bankers, as well as commercial bankers, more on the sales and customer facing side; we’ll be bringing customers in as well, and together with Regulators and other participants in the payments business, we’re hoping that we’re going to have a fairly lively series of Podcasts around the payments issue.
I would hope so. Can you tell us a bit about your own background yourself, Peter?
My role is Global Head of the Banking Sector for Sun Microsystems, and my background is in banking, both in retail and wholesale. I started my career with Barclays Bank, before I joined the Swift Organisation. And at Swift I was Corporate Planning Director and Business Development Director, responsible for Swift’s involvement in a whole series of RTGS national payment projects. Whilst at Swift I also was responsible for leading the sales effort for a series of infrastructure projects, like CREST for the Bank of England, and indeed my next move after Swift was really triggered by my involvement in the Bolero project. Bolero, an organisation for which I was one of the founders, was an innovative, groundbreaking initiative in the financial supply chain space, and it was through that I got, I think, some fairly interesting insights into the world of financial supply chain, particularly in the automotive, the retail and commodity sectors.
So pretty wide ranging experience I think you bring to this Podcast series.
Well, I hope so, Mike, yes.
And just a few words about my own background. I’ve been working in and around the Banking Industry for nearly 25 years now, both as a practitioner at UBS and, on the other side of the fence, as a supplier to the Industry, working for firms like Reuters and SunGard.
For the last eight or nine years or so I’ve been involved with a range of UK based start ups, the latest of which is Voices in Business, established in 2006 as a forum to increase levels of debate and stimulate conversation around a whole range of business issues. We produce a number of business related Podcasts, including the MiFID Podcast, as Peter mentioned, the B2B Marketing Podcast, the Cold Calling Podcast, the Banking 2.0 Podcast and now this, the Payments Podcast. Okay, enough about us, let’s talk about payments. Maybe we should just start by looking at the current situation as far as payments are concerned. A lot of banks are now in the situation where they’ve merged with or maybe acquired other banks, and this presents them with the challenge of integrating multiple payment applications and multiple infrastructures across subsidiaries and across business lines. What are banks typically doing to overcome these challenges?
Right, it’s a really fascinating question and it’s one that I’m really looking forward to hearing debated by people, both from the technology supply side, but also from the operational banking side. I think typically the answer is, as little as possible, in reality. I think historically banks have tended to endeavour to offer levels of service with the minimum investment to existing infrastructure. Clearly, that becomes really problematic as you start acquiring new entities, and I think it becomes particularly problematic today when banks are seeking to improve the quality of their services and, when I say that, what they’re trying to do is to offer a single customer view. So, for instance, if you’ve got an account or a service from one bank, you don’t want to have to sign on through internet based access portals in order to gain access to another service.
And it’s also, I think, brought into relief when we get to things like SEPA and the debate that we’re going to have there, banks need to refresh their services, but how do they do that if they’ve got a very, you know, wide and disparate set of service offerings, with a multitude of applications and operating in different parts of the world?
I was talking to a major supplier of international payment services, a US bank recently that had over eight different centralised, regional applications running, with over 27 different applications worldwide that handled Patriot Act and AMLs type systems, so a very complicated environment for Institutions.
Complicated indeed, and how are banks addressing these issues?
One of the challenges that banks have got is that their services, particularly around the payments base, have not been developed holistically, so they haven’t set out thinking, right, I’ll design a payments application. What’s happened is that as they’ve grown, both in terms of acquiring new entities or bolting on new products and services, they’ve kind of built out additional payment applications.
Created a bit of a Frankenstein’s monster almost.
Absolutely, Frankenstein’s monster, you know, a Plumber’s nightmare, all of these are very, very difficult to control and, obviously, you know, if you’re trying to enhance them it really – it is really – it’s really quite challenging. So, you know, one of the buzz words around the Industry right now, or acronyms, is SOA, Service Orientated Architecture. And the idea behind this is that bankers can disaggregate functionality across a whole series of different payment applications, and consolidate them into one capability, which can then be drawn upon, both to operate their existing services, but also to develop new services a great deal faster than they can today.
I think the challenge that bankers have got, and one of the exciting things I’m looking forward to discussing with Practitioners and Technologists alike, is that these SOA projects are a bit of a mouthful, quite honestly, and they’re really quite hard to swallow. And what would be interesting I think to debate is how banks can practically start engaging with this type of technology, which they need to do in order to improve the way they run their services at lower cost, but how can they do it in a practical way?
And in a piecemeal way.
In a piecemeal way, yes, eat the elephant a bite at a time rather than trying to swallow the whole thing, so this one of the things that I think will be really interesting to discuss.
That’s going to be a fascinating discussion, I think.
Yes.
Now you mentioned SEPA there, and obviously throughout this Podcast series we’ll be talking a good deal about SEPA. Let’s just talk a couple of minutes about it now, can you explain exactly what SEPA is and why it’s being introduced?
Yes, SEPA is particularly exciting, Mike, I think it’s been said that after the introduction of the Euro and the Schengen Agreements on relaxations of cross border passport supervision, the SEPA project is being touted as the third most visible symbol of a continent uniting to drive collective benefit and advantage. And in this case through fiscal infrastructure renewal, so it’s a fairly exciting time.
I think what it also does quite interestingly is, by making the EU a more efficient place to do business and to execute transactions, it’s putting pressure on other parts of the world to, you know, raise the level of their game to come up to the same level of efficiency. However, it has to be said that, you know, all of this has got a significant amount of cost and in the price tag that’s been touted around the Industry is, you know, somewhere in the region of eight billion Euro being actually spent on implementing system change in order to facilitate the introduction of SEPA. And as a counterpoint of argument to the justification for this investment that really queries whether or not the changes are really going to bring benefit to the community. And this is certainly a point of view that we’re going to be inviting guests to debate on the programme.
The other side to the argument, that all of this does come with a series of benefits, is also going to be represented on the programme too. The first benefit that we should consider is the benefits to there being less cost to society in the use of cash. Cash is an extremely expensive medium of exchange, and by driving that out of the system, cost to society will be reduced with the implicit implication that there will be significant economic benefits to the community in general.
It’s also been suggested that the elimination of domestic barriers will lead to better cross border competition in payment services, and that really is going to mean better services at lower costs for individuals and for corporates operating within the Euro zone. Obviously, another key benefit is going to be economies of scale. We’ve got those already with some of the major international players, but with a reduction of some of these national boundaries, there are going to be systemic benefits to payment operators and customers alike, just simply because people are going to be able to aggregate volumes very much more effectively.
I think what it’s also going to lead to is probably a leapfrogging of investments. I mentioned earlier that banks tend to typically try to invest as little as possible, you know, business case scrutiny in the payments area now is far more intense than it used to be ten, but even five years ago. But having said that, the spur of something like SEPA is going to lead to a great deal more investment in technology, and in making that investment, I think banks are going to want to probably future proof what they do. Some of them are looking at small tactical investments just in order to be compliant with the demands to meet the availability of SEPA compliance services by 2008.
But I think other banks are saying, “Okay, let’s make that initial tactical investment but then, at the same time, let’s make deeper, far more enriched investments in order to develop service propositions that go out beyond the date of 2010 and beyond.”
So, there we’ve got some benefits to the users, some benefits to the institutions operating in the space, but in general, I think it’s also going to position the EU as a leader in facilitating the growth of business and create structures that make doing business in the EU more efficient than elsewhere in the world. And that’s where I think the international implications are going to be felt.
If we continue on this SEPA theme, and if we look at the post SEPA landscape…
Yes.
…who do you think some of the winners and losers are going to be and why?
It’s an interesting question, again. I think the winners and losers is a very interesting debate; there is all sorts of people out there who definitely will be losers. I was looking the other day actually at a group called ESTA who represent the guys who drive cash around in armoured vans, and they’ve got a whole policy group who are actually lobbying the EU because they’re terrified that SEPA is going to drive out cash transactions and they’re going to be hit.
So, yes, I think they’re probably going to be losers. But in general terms I think within the Banking Industry, the major winners are going to be those who can aggregate volumes and increase the quality of their services. And I think that when we look at, you know, the way banks approach this, many of them have gone for what I call the band aid approach, with a view to meeting the short term deadlines, and then sort of evaluating investment decisions in a more kind of leisurely atmosphere.
But certainly many of the banks that I’ve spoken to recently are suffering from what I call the, aha moment, you know, they start out thinking that this was something they could kind of put a rope around for Europe and the EU, but then they’ve realised, when they look at the implications on a global basis and they’re taking into the huge growth and volumes that are taking place out in Asia, the drive for enhanced service levels that are coming out of the United States, that actually what they’ve got on their hands is a huge, great global project. And, of course, that leads to a scope creep, and opens up a whole can of worms, which many institutions find difficult to achieve.
But, sort of digressing slightly, but I think the winners are going to be those who can really leverage the breaking down of national boundaries to win new business, and they’re going to do that through innovative new services.
Will those new services come at a cost, do you think?
Yes, one of the issues when we’re looking at innovation and investment in payment infrastructures is that, you know, somebody’s got to pay somewhere. You know, lower card transaction fees have been highlighted as being implied, but then there’s a higher probability that you’re going to have to pay for your card services. We also see this in checking accounts as well, and payment prices may come down, but we’re going to end up with probably things like free banking being removed as being a service offer.
So, you know, watch out for higher prices, and statements and other services as banks look for ways to recoup their investments in the short term.
Okay, so, looking on a wider, global basis, SEPA obviously is Single Euro Payments Area, but the US has a very different landscape to Europe, as far as payments are concerned.
Yes, indeed, yes.
What are some of the key differences between the US and Europe? How have those differences come about, and how do you think the US and Europe, andAsia for that matter, will be more closely synchronised or closely integrated going forward?
Well, the US is a long established and mature payment market, and it’s got certain characteristics all of its own. There are more cheques actually processed in the United States than anywhere else in the world, and I think the current levels are 74% of all cheques written in the world actually are written in the United States. And also the use of cheques, of course, in the United States is something which is in enjoyed, and is supported very much by the end users themselves, many of whom find it very difficult to move away from them.
And I think what’s exciting and interesting, and I’m looking forward to seeing debated, is some of the trends that we’re seeing in Asia where the explosive growth, both in the new economies, but also the very large numbers of new and un-banked populations that are building out there, are leading to investments in technology which are actually leapfrogging some of the more assumed natural steps that have taken place in the USA and in the EU. And I’m really looking forward to seeing, particularly I think, the difference in the way cheques and cheque technology is evolving, and certainly we’ll be looking at things like Cheque 21 in the United States, but also seeing as a counterpoint the way that the Card Industry on a global basis, and particularly out in Asia, is driving change and innovation in terms of customer services at, what I believe is, probably a very significantly higher levels of service capability at much lower levels of individual cost.
Okay, maybe we can talk for a couple of minutes about Regulation. Banks are facing increasing Regulation around payments, I believe.
Absolutely, Mike. Regulations, I think Regulations have been likened to, one of the most amusing analogies I heard, was the cockroach motel syndrome, the idea being that once you’ve got cockroaches in a motel you never get them out and the only way to deal…
Right, and it’s the same with Regulators?
It’s the same with Regulators, exactly. But I think what everybody accepts, two important points that I’m looking at exploring with our guests on this show, are going to be where Regulations are going, how they’re going to be built out into the future, because it’s absolutely certain that the Regulations that we’ve got today we didn’t have five years ago and in five years time, we’re going to have even more Regulations than we’ve currently got. They are going to build up, so we’re going to get lawyers on the show; we’re also going to get operational bankers to discuss the profound implications of Regulation.
When you look at what banks spend their money on today, within the back office and the product systems, you find that a very large proportion of the investments go in just maintaining existing systems, and what there is left for new products and services is very largely soaked up by Regulatory compliance, and this is as true in the payments area as it is in the securities trading space, with initiatives such as MiFID, Reg MNS and others on a worldwide basis.
But, yes, we’re going to look at money laundering; we’re going to look at KYC, and we’re going to look at known party listing, i.e. blacklisting type services that are very much a part of the provision of payments, as we’ve seen with JPMorgan Chase’s acquisition of Asteria and other trends.
So, yes, Regulatory environment, it’s going to be an exciting one, and I’m certainly looking forward to that debate.
And fraud as well. I mean, payment fraud is becoming increasingly more sophisticated, and I think we’ll have some interesting conversations about, you know, how can banks be sure they know exactly who their customers are and who their counterparties are, and what they’re doing to combat fraudulent activities.
Yes, and I think that give us a great opportunity to get a lively debate, both on the way customers interact with their banks in initiating transactions via the internet and the requirements for the banks to deepen and strengthen their existing security structures. We know that banks stand to deepen their margins the more customers that they can move onto e-banking, because straight through processing then starts with the inception, with the origination of the transaction. But there is a challenge there that many customers still perceive that online banking is not as secure as other more manual means. So, in terms of addressing fraud, we’re going to have a discussion around what’s its degree of prevalence, where is fraud going today? You know, and I think fraud is like one of these balloons, that if you push, if you push it in one area…
It goes out in another area, yes.
Yes, it pops out somewhere else, and we’re going to explore where that’s happening. I think every day we read something new about chip and pin and how some of that technology can be fraudulently bypassed. But we will have a debate, both with technicians, with operators, with people who own the business of payments around the issue of fraud.
Up to now we’ve been focusing primarily on banks, but within this Podcast series, we’ll also be talking about some of the issues that corporates face around payments, particularly some of the challenges they face when trading internationally across borders, across currencies and across time zones.
I think the position for corporates generally is that they’re going to benefit from all of this innovation in the payment space. Payments are going to be far more transparent in terms of when are they going to settle. It’s going to be much easier to operate things like multilateral netting across currencies, and certainly within the Euro, and I think that we’re going to see that it’s much easier for centralised Treasury operations to operate within the Euro zone.
But I think globally there is a trend towards far more automation in the processing of payments, both on the bills payable, both on the receivable side, and we’re beginning to see that in an increase and a build out of bank services into the financial supply chain. And certainly one of the issues that we’re going to be addressing during the Podcasting series, is the ways in which banks can develop and build out value in financial supply chain, and really move up the value chain within their corporate relationships, in order to deepen their value proposition, and assist companies to really better operate the way they run their businesses.
Can we talk for a moment about outsourcing, a number of banks are now completely outsourcing their entire payments infrastructure. Now, there are some benefits to this, but I guess there are also some disadvantages, what are some of those advantages and disadvantages, do you think?
Well, I mean, I think first of all we’ve got to be clear. There are very few banks who are outsourcing all of their payments business to third parties, but very often what we see is that banks decide to outsource clearing in a particular country to a third party, and that makes a lot of sense. But I think what we’re seeing interestingly now is, so much pressure on institutions to make money out of payments, some of the middle tier payment providers are going through the analysis of saying, “Well, if I’m going to stay in business, not only am I going to have to, you know, meet Regulatory requirements or step up to the plate with service level enhancements to work tomorrow, but I’m also going to have to build a base, which is something on which I can actually build future services, you know, next year, the year after and five years after that.” Because, you know, the legacy platforms, as we talked about earlier in payments, and some of them have been kicking around for ten, 15 years.
Some really old technology.
Really old technology, yes, there’s some really pleased programmers out there with big smiles on their faces, who are still maintaining code that, you know, goes back years and years. So, you know, some of the operators of these services are beginning to say, you know, “At what point are we going to really outsource a great deal more of our payments business to third parties?”
And that’s a tough one; I think it’s going to be interesting. We’re going to get people who actually offer outsource services from major global outsourcers, but we’re also going to talk to people who operate within the correspondent banking business in offering managed services to their correspondents in the payments space.
I think the key concern of the banks has got to be service levels, which is the major issue, and costs. And the problem with service levels is that you can outsource your services today, that’s great, but are those service levels and is that payment proposition that you’ve outsourced to, going to evolve with time, and is it going to evolve in the way that you need it to evolve in order to mesh in with and compliment the way that you’re building your other services?
Remember that, you know, payment’s dropped off and is tagged to the back end of really most services that banks provide.
And I think it’s going to be interesting as well to look at it from the other angle as well, hopefully we’ll have a guest on the programme who offers payment outsourcing services…
Yes, absolutely.
…to say, you know, what banks, because there are banks who offer other banks, you know, these kind of services and why they’re doing that?
Yes indeed, and I think that what we’re probably going to see is a period of time over the next two or three years where many of the, what I’ll call the tier two and tier three institutions, will continue to invest, and I think that many of them will find it difficult to let go of payments. It’s a fairly core and critical part of their business, and they will continue to invest for a few years before they really have to make the quite tough decision to outsource to third parties, either through managed services, as you mention, or through other institutions. But no, I think that’s going to be an interesting debate.
On a final note, to finish things off for this introductory episode of the Podcast, what are some of the future trends around payments?
It is an interesting time for payments, and I think what we’re seeing is a proliferation of services around, sometimes around technologies that have been here for quite a long time, and it’s going to be spread all the way across micro payments, store value cards that, you know, we saw with Mondex and Tim Jones, you know, ten years ago. These are ideas are coming back, but in different forms and into markets which are now significantly more mature than they perhaps were when they were originally proposed.
I think what we’re also going to see is changes in the banks’ positioning with regard to things like online payments. We’re all aware of PayPal and the banks regularly talk about threats of disintermediation by institutions like PayPal. Interestingly, Google, over the course of the last few months, has recently launched an online payment service for online retailers, and that is now growing apace. And I think one of the questions that I’m sure banks collectively will want to discuss on this show, is whether or not they should now be acting more collaboratively in developing services that take on people like Google and PayPal in this space.
Google and PayPal have got the, if you like, the online franchise but, you know, the banks have still very much got the payment franchise and it’s theirs to lose. So, I think it’s possible that we’re going to get an interesting debate around that issue.
Okay, well, we’ve talked a lot about Europe and the US, what about Asia?
We’re going to be talking to bankers out in Asia about new innovative services that they’re developing. It would be great also if we could get some insights and some interpretations as to the applicability of some of the uses of mobile telephony in the payment space for contactless payments, DoCoMo in Japan has done a tremendous amount here and has really done a lot of groundbreaking activity, which I think we’re going to start seeing come through into other global markets over the course of the next few years, so I’m looking forward to some interesting debates around that area.
Indeed, I think we’re going to have some very interesting and stimulating conversations on all of these topics as this Podcast series develops.
A quick note to our listeners, if you would like to subscribe to this Podcast then, on the right hand side of the page at paymentspodcast.com, you’ll see full details there of how to subscribe, either via email or using iTunes or using RSS into your feed reader. So, go along to paymentspodcast.com for full details of how to subscribe. Thank you for listening. Peter, thank you.
Yes, well, thank you for listening too, and I hope very much that everybody out there will join us in what we expect is going to be an insightful and interesting journey. It only remains for me to thank you all for listening and hope that you’ll join us again next time on the Payments Podcast.
Goodbye.
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