There is a growing sense that when it comes to payment processing, everything is up for grabs.
For example, the new regulator for the UK payment-systems sector will become operational next year and one of its first tasks will be to consider whether new entrants are being disadvantaged as well as to assess the quality of existing services.
On the other side of the Atlantic, the Federal Reserve banks have spent the past 12 months conducting an extensive programme of research and input-gathering designed to inform an initiative to improve the speed, efficiency and security of the US payment system.
The Fed says it will share its roadmap for payment-system improvements over the coming months.
With banks estimated to generate up to one quarter of their revenues from processing payments, it is inevitable that non-banks will look for a slice of this lucrative action.
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According to Accenture, competition from non-banks could reduce traditional bank revenues by one third by 2020. Such estimates take account of the fact many more consumers have a positive perception of Google or Apple than they do of their bank, and that a succession of high-profile technical glitches have seriously dented consumer confidence in banks’ technology platforms.
Nick Holland, senior payments analyst Javelin Strategy & Research, floats the possibility of Apple starting its own payment network and says there will be work going on in the background during the next few years.
“There is deep dissatisfaction among US retailers with the two major card companies in relation to the interchange fees they charge,” he says.
Holland expects alternative payment providers to look at acquiring money-transfer licences and says some might become banks in their own right or absorb existing banks.
“We will also see traditional payment providers building out person-to-person networks with real-time transfer of funds,” he says.
According to Paul McMeekin, global retail payments product marketing manager ACI Worldwide, the main competitive concern for banks is that Google will give away the transaction and become a ‘real’ bank.
This point is taken up by his colleague Mark Ranta, who says Google is happy to forgo the transaction fee to earn multiples of that amount on the associated advertising space.
Ranta also suggests Apple has entered the alternative payment space in a discreet manner behind the iTunes store, adding: “It is incredibly easy to order music or a movie on your iPhone. Apple hasn’t yet rolled out the service any further, but it is already effectively in the wallet space.”
McMeekin says there is considerable potential for tie-ins between banks with sizeable market share and companies who bill large numbers of customers, such as mobile operators.
“If an operator worked directly with a bank, they could develop a smartphone app that would allow the customer to directly access their funds,” he says.
One potential obstacle to such partnerships is data ownership, says Ranta, adding: “Both the bank and the merchant will want to own the customer data, but the network operator will also stake a claim to it. There will have to be sharing of information between all parties.”
Danne Buchanan, executive vice-president, merchant services at Fundtech, suggests the established banks are likely to tap into this market via partnerships with retailers and/or social network operators, such as Royal Bank of Canada’s tie-in with Facebook.
“It is difficult for banks to innovate, as they are heavily regulated and therefore conservative institutions,” he says. “Partnerships can enable them to work with more agile firms.”
Stephen Kenneally, vice-president of the Centre for Regulatory Compliance at the American Bankers Association, accepts Apple has the potential to be a game-changer because it has a ready base of consumers and that alternative payments could impact legacy bank systems.
“But while Google Wallet has put an interesting consumer-based front-end on the payment, it is still settled the old-fashioned way through the card networks, so the banks are not being cut out of the transaction – what they are missing is the consumer interface,” he says.
Not every digital/mobile wallet service will be sustainable in the long term, says Kenneally, adding it is important that everyone is regulated to protect those on both sides of the payment, whether they are a bank or not.
“Consumers may not factor this into their decision of which wallet to use, but banks are subject to intense regulation and regular examination to make sure they are compliant,” he says. “That is not necessarily the case for non-banks, which potentially places everyone in the payment channel at risk.
“Regulatory scrutiny will increase as the value of the market and the number of transactions grows and it would be a logical next step for regulators to provide clarity around the rules non-bank payment providers have to follow.”