Research with leading banks identifies approaches to make account-based payments a revenue stream instead of a cost center
LONDON, 10 October 2022–(BUSINESS WIRE)–An independent study conducted by Celent on behalf of Icon Solutions has found that in response to business pressures, changing trends and regulatory requirements, payment processing is becoming more of a business than a product, creating new value opportunities for banks.
The study, launched today at Sibos, found that the current payment processing model for account-to-account (A2A) payments is inefficient, with 86% of Tier 1 banks finding it difficult to maintain margins on payments – a rate, it was 59% in 2021. In response to this situation, banks are increasingly turning to vendors or third parties to whom they entrust payment processing to better focus on other strategic priorities. According to the report, 57% of Tier 2 and Tier 3 banks are currently partnering with suppliers to dedicate their internal resources to initiatives related to business innovation.
This market dynamic is a good opportunity for banks to adopt Payments Processing as a Business (PPaaB) strategies, processing payments as a commercial activity. Although many banks already provide banking and payment services to other banks through similar banking models, there is considerable potential to expand these capabilities. The data indicates that 22% of Tier 2 and Tier 3 banks today would consider another bank as an external strategic partner for payments. This is not surprising as 87% of Tier 1 banks are actively considering making payments a separate business activity.
“The payment processing industry is very dynamic, but any bank that wants to enter this space can bring new value to the market,” said Kieran Hines, principal analyst at Celent. “As regulated entities, banks are uniquely positioned to provide an end-to-end service-like offering to other banks, including services related to compliance, customer service, liquidity and liquidation. This would be an attractive proposition for mid-sized banks and is an opportunity for larger institutions to increase revenue, increase processing scale and accelerate the modernization of their own payment systems.”
Despite the importance of easing margin pressure, the study also found that PPaaB strategies must go even further and center around supporting the delivery of value-added services that bring innovative offerings to customers. Banks trying to enter this market need to invest in new capabilities as well as adopt a provider or fintech mindset in service delivery and improvement.
Toine van Beusekom, Chief Strategy Officer at Icon, explains: “New demands create new opportunities for value. For example, open banking regulations are driving the dramatic increase in the adoption of A2A payments as a more cost-effective, faster alternative to card-based payments. But gradually as competition intensifies around A2A payments, banks will come under pressure from fintech stakeholders and big tech firms, which will allow banks to use their unique technology and regulatory values to provide value-added services such as credit, claims handling and insurance, that are needed to make A2A payments a true match for card products without giving up new market participants.
The report says that to benefit from payment processing transformation, banks need to undergo payment transformation at their own level. Their success requires modernization and adoption of a cloud-based, elastic and connection-centric approach. They will also need to invest in skills and new capabilities.
Beusekom adds: “It is not easy to bring a competitive PPaaB offer to the market and treat payments as a profit center. This requires a clear strategy based on sustainability, robustness and independence, supported by technological solutions that give banks back control and give them ability to scale their offering at their own pace to meet new requirements. And for banks preparing to select a PPaaB provider, it’s important that the demand side is well planned and prepared to ensure a smooth provider selection process.”
Icon will present in detail the payment processing strategies at Sibos. Join the team at Dis36 to learn more about how Icon’s expertise, solutions and experience can help banks define and apply a greenhouse approach to payment processing for sustainable control.
To download the full report, The Payment Processing Option for Banks: Moving Account-Based Payments from Cost Center to Revenue Stream »please click here.
About Icon Solutions
Icon Solutions is a leading specialist provider of technology solutions and services that simplify banking transformation.
Ikon is the past, present and future of payments. With a proven track record in delivering critical solutions to global institutions, the company is driving the development of next-generation payment and banking architectures. Icon brings together specialists, services, accelerating assets and industry-leading technologies that empower clients to solve problems, tackle challenges and embrace change.
Icon has applied its technical, integration and payments expertise to create IPF: an open source, low-code and cloud-native technology platform to accelerate payments transformation.
Icon’s clients include leading global banks such as BNP Paribas, HSBC and Lloyds Banking Group.
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