Visa Europe: interbank outsourcing – Tom Houghton
Internal and external pressures are creating rapid changes in the payments industry. With new technology comes new ways of spending money and new platforms with which to do it. The latest raft of regulatory initiatives - including risk reduction, transparency and the much-vaunted Single Euro Payments Area (SEPA) - is also changing the provision of non-cash payments, volumes of which are rising year by year.
It's a lot to take in for today's banks, which are facing mounting regulatory and cost pressures from elsewhere. Questions are being posed, such as: do they reassess their entire processing capacity; or do they stay true to an area often considered part of the lifeblood of banking?
"Whatever choice they make, payments remain core to the industry," says Tom Houghton, head of processing services at Visa Europe. "Whether it's commercial or consumer, access to funds and the movements of funds are crucial to the banking business."
Payments strategies for financial institutions
How financial institutions choose to provide their services will depend on their individual retail and commercial payment strategies. The scale of work required by their legacy systems is likely to influence that decision, and so will the emotional attachment they have to payment processing.
Options are available once banks finally make up their minds. The choices range from outsourcing all or part of their payments to complete in-house development. Each carries its own advantages and disadvantages, with banks left to assess them according to their own interests.
"There are trade-offs and potential risks with every approach," says Houghton. "It's down to each institution to look at their own appetite for risk and evaluate exactly what their approach to customer service happens to be.
"From Visa Europe's perspective, we want to provide these key interbank processing capabilities in a cost-effective way, with a strong focus on quality."
Banks' outsourcing dilemmas
With full outsourcing, the key problem appears to be a loss of control. Relinquishing proprietary ownership can be a liberating experience, but it also presents security concerns to banks that already face stringent requirements on data management and transparency. For smaller and medium-sized banks, the choice to outsource may not be so open. The problems they face in terms of competition and cost may make the retention of payment facilities all but impossible.
Whatever their strategy happens to be, Houghton is confident that Visa Europe can help the industry. As well as its card services, the company provides interbank connectivity across Europe for core retail payments. It's a proposition that gives them a slightly different view in terms of outsourcing.
"As it relates to outsourcing, our role is to function as an interbank payments processor on behalf of our members and markets," explains Houghton. "We're working to protect our membership from the twin pressures of revenue and regulation.
"Our clients face a great deal of challenges. Their legacy systems are under increased pressure from the rapidly changing payments industry, and their compliance teams are facing more legislative change, so we've built a next-generation interbank system. It provides authorisation, clearing, settlement and risk-management services that enable our members to reliably provide core retail payments to their customers across Europe."
The SEPA challenge
With a lot of banks struggling to act outside of their core business areas, taking away the fear of regulation - present and future - is vital in order to move forward. The regulative pressure on the marketplace is affecting all players in the payments ecosystem, no matter what their size is or where they participate in the payments landscape.
SEPA is one of the biggest legislative changes financial institutions face today. It's been in the pipeline for years, but an end date for the bill was finally announced by the European Council earlier this year. The relevant parties now have until 4 February 2014 to standardise their payment systems and migrate to a SEPA-friendly infrastructure.
"There's a pan-European level that SEPA is trying to bring about," says Houghton. "The broad idea is that we want a system where the movement of funds from one market to another effectively operates like a domestic payment. The challenge for our members or any financial institution is the new set of requirements that SEPA brings. It creates costs and operational complexity, which can be hard to manage on top of everything else that they're doing.
"SEPA may end up replacing the systems they have today, but in the interim period, there's a lot of work that needs to be done. As a European-based organisation, we're very much interested in what's going on."
Visa Europe's approach to SEPA regulation is similar to the work it does on other legislative issues. The idea is to minimise the financial and operational challenges of the regulation being introduced.
"We see it as our responsibility to provide our members with cost protection and to shield them from the changes," Houghton says. "It's about understanding what regulators are trying to drive towards and being engaged on behalf of our membership."
Financial regulatory interaction
It's not just SEPA that concerns Visa Europe and the financial institutions it serves; regulation comes at multiple levels across Europe. In the UK, the company tracks changes within the Financial Services Authority and the UK Payments Council. In mainland Europe, the European Commission is rolling out other regulatory issues for its member states. Not all of them directly affect interbank payment services, but a number do.
"In all these cases, we try to interact with the relevant regulatory body," Houghton explains. "We do our best to understand what they want to achieve so our members don't have to go through and make changes to each of their individual systems.
"More than most, we're able to grasp how the regulators are moving and what we can do to help. It's our engagement as a member association that brings such clear financial benefits."
Leveraging interbanking capabilities
Wherever Visa Europe is able to help, it provides a crucial level of future proofing. In order to move forward and focus on their core values, businesses need to be sure about what's coming.
"Our service involves two key aspects," Houghton says. "On the one side, it's about regulation and financial protection; on the other, it's about supporting the industry in its technological development.
"We don't just work on the regulatory side of things, we're also keenly involved in the investment aspects of payment processing. It's about coming to the market with new products and services that our members can take advantage of. In both areas, it's about leveraging our interbank capabilities to create benefits for our members."
Visa Europe is a member association that serves 3,700 different institutions across the continent. As the payments landscape becomes more complicated and the regulatory burden stacks up, the company is ideally poised to cement its reputation as a leading interbank processor.