The emerging single euro payments area is forcing changes from banks and payments processors. Visa Europe, an association owned and operated by its 4,500 European member banks, has pledged its support committing to implement SEPA principles in its own processing business.
“The consolidation of the European processing sector has been predicted for many years,” states Visa Europe in the white paper titled “Processing: where business and technology meet.” “With a steady stream of mergers and acquisitions it is now happening – and it’s happening far faster than many people had imagined possible.”
The end result, said Mr. Philipe Menier, deputy chief executive, Visa Europe, is that “by processing more transactions, we believe Visa Europe can ensure greater interoperability and reliability for payments across Europe. This will ultimately help in our aim to replace cash with cards.”
The paper highlights key input from experts who participated in Visa Europe’s “Insights 07 Payments Forum Europe” event held earlier this year.
Declining payment revenues a likely result
Chris de Smet, head of the Unysis European Payments practice, predicts that the new environment for processing will lead to major shifts for the inter-bank and acquirer processing sectors.
He noted that the SEPA initiative, plus the threat of further regulations, could very well lead to a decline in payments income. “In instigating the (SEPA) change the politicians focused not on the way payments have always been processed, nor on the implications for banks, but on the cost of services to consumers or merchants. Consequently, there is a real risk that payments income will converge towards the lowest level. This will have a severe impact on the bottom line, and many banks can expect to lose up to 50 percent of payment revenues.”
He said larger pan-European banks would be able to bring down their costs by investing in a new SEPA payment infrastructure. However, that’s expensive … and for the smaller banks, there is little flexibility.
In demonstrating the large changes coming, Mr. de Smet pointed out the “sheer frenzy of merger and acquisition activity over the past months” and predicted this trend will continue.
He said banks “are actively considering their options. They are evaluating outsourcing and off-shoring. And they are looking specifically at their payments processing operational environment.”
But card payments are only one facet of the retail banking payments business. In the future there will be a need to pool volumes of all electronic payments (direct debits and credit transfers as well as cards) in order to deliver more flexibility at an efficient cost, he added.
Consolidation in the processor space
Consolidation in card processing should be the first step in the overall convergence of payment processing, suggests Mr. de Smet. This will have particular implications for the domestic processors (who will find it difficult to achieve enough scale to compete effectively). It will also have implications for the third party processors who will need a broader role to succeed in the new European environment.
Kelley Knutson is managing director of TSYS Europe, one of the world’s leading providers of issuer and acquirer processing services. He predicts a continuing decline in number of payment processors. “Two years ago there were 80 processors operating across Europe. Now it is down to around 65. And, over the next five years we see that consolidating to somewhere between 20 to 25.”
Of those remaining, he said four or five would be large scale, high volume players. “A further six-to-eight would succeed in finding a mid-range processing segment. Then, a whole range of players that have capabilities in a specific niche would successfully secure high volumes within that niche. This is not a winner takes all market,” he added.
“The belief that a single processor can give you everything you need is not going to happen soon and it might not ever happen. You need to look across the landscape and look at different processors providing different services.”
As the Visa paper notes: “The processing sector has already changed. More changes are coming. And this is giving banks more choices – and more strategic choices – about how they manage their payment processing operations. This is one of the big SEPA benefits. The payments value chain is being unbundled. Banks are free to choose between more providers, and more commercially-minded providers, across every link of the value chain.”
What is Visa Europe’s role?
“First, Visa Europe is fully committed to the SEPA,” the white paper says. “The organization moved quickly to implement the SEPA principles in its own processing business. For members, there are no mandated processing solutions, no bundled pricing, and a clear separation between Visa Europe’s card solutions and its processing solutions. Domestic or cross-border, members choose when they use Visa’s processing services and how they use them.”
Finally, “Visa Europe is also committed to processing more transactions. This means Visa Europe can ensure interoperability and reliability, better monitor service quality, support new payment services like cash back, balance enquiry, recurring payments or card not present and ultimately accelerate cash replacement…Visa Europe sees a clear linkage between the two sides of its business: the card solutions and the processing solutions. Each reinforces the other.”
To access the Visa Europe white paper, click here.