Don't miss the payments party

The payments arena continues to change in line with regulatory and technological trends, and banks face the prospect of being marginalised. Non-bank players such as PayPal are carving out niches, and mobile payments services, which could leave banks with only the nuts and bolts of the basic transaction rather than the value-added elements, are developing.

To ensure they are not bypassed, banks must offer services that are relevant to the new payments environment. The growing demand for mobile transactions and e-payment, in a market where Single Euro Payments Area (SEPA) regulation is standardising processes for direct debits, credit transfers and card payments, means they must act quickly to take a central role in these transactions.

Change is certainly happening, but so far SEPA has pushed standardisation only in bank-to-bank payments, leaving much to be decided in the market for mobile and e-payments. "It is easier to standardise something that exists in a similar form in all SEPA markets, like direct debits," says Eric Tak, global head of cards, cash and new business at ING. "The European Central Bank has pushed for eSEPA, which covers mobile and e-payments, but not much has been achieved so far. Uptake is in the early stages and there are different models deployed, so it is hard to regulate across 25 countries where the specifics and payment habits are vastly different.

"Efforts to standardise these processes increasingly risk running foul of the competition authorities, so the market is still wide open. There are also issues around security and money laundering to address. The question is whether to standardise something now that is not properly there, or to let many different flowers bloom, see what survives and then look at how to standardise mobile and e-payments."

Defining a role in payments

There are many layers in the payments space, some well defined such as clearing and settlement, and payments services using cards and direct debits. However, at the customer level, where payments are initiated, there is room for different models and technologies. It is here that ING and other leading banks are working hard to define their role.

"We are trying to reuse technology and infrastructure that is already out there. Our iDEAL e-payments service in the Netherlands, for example, uses a payment authorisation message linked to existing online banking infrastructure. The lower cost and compelling value for merchants and consumers alike means that it has a market share of over 50% in our home market," says Tak.

"For mobile proximity payments, we use standards such as PayPass and PayWave, which allow us to benefit from existing contactless payment infrastructure. Research has shown that customers don't want to use different wallets and accounts. They want to use their own current account in order to control their spending. The market wants cheap, efficient, guaranteed and secure payments."

iDEAL is a system run by the Dutch banking community that allows payments to be made using the online banking services that consumers and merchants already have. iDEAL payments link into online banking applications from ABN AMRO, ASN Bank, Friesland Bank, ING, Rabobank, RegioBank, SNS Bank, Triodos Bank and Van Lanschot Bankiers.

So far, iDEAL is purely a domestic system in the Netherlands, but it demonstrates the underlying principle of banks' efforts in the payments space, which is to link any transaction, whether for a business or a consumer, to the customer's existing current account.

"We want to ensure that transaction flows go through our accounts, rather than bypassing them," explains Tak. In markets where banks have successful solutions that manage to match their customers' needs, while linking transactions to current accounts, the penetration of competing service providers, such as PayPal, is reduced.

"In the Netherlands, PayPal has very limited use outside of eBay because of solutions like iDEAL. In the US, where e-payments between accounts are not cheap, easy or efficient, PayPal is far more popular. Banks must stay intermediated by providing easy and safe transactions from their current accounts," stresses Tak.

The four-party model for card payments, involving the consumer, the retailer, the issuing bank and the acquiring bank, is a good way for banks to stay at the heart of the payments process and scale easily across Europe, but Tak sees problems with it.

"The drawback is that individual banks have to cooperate on a large scale, which means there is a lot of scrutiny from regulators and competition authorities," he says. "Banks need to come up with a transparent model to run such a scheme with a strict difference between the cooperative space and the competitive space. The real battle, however, is for the customer interface."

Making mobile transactions pay

Much is said about the growing use of smartphones as a means of making payments, and this is one consumer interface where banks must take action if they are to derive significant value from the technology.

"Mobile has very little lasting value over other types of payment, though perhaps it has an initial novelty value. No one in the chain is willing to pay more for a mobile transaction than for a card payment. We are actively supporting it, but for a long time banks will still have the cost of simultaneously issuing plastic cards and virtual cards on phones. Mobile payments will grow as there is a lot of demand, but how can banks benefit from it?" asks Tak.

"So far, there is no evidence that mobile payments will drive out card payments in the short term, although some transaction growth is expected, especially in low-value payments, which will help drive out cash. We have to take the opportunity to play a larger role than just handling the actual payment, and banks may have to partner with other organisations to be present in the whole offer-to-pay chain. A lot is expected of banks, so we have to come up with a solution for the long haul."

For Tak, the solution to getting lasting value from mobile transactions, and to avoid disintermediation in a payments market that is increasingly standardised, depends on banks realising that the challenges are not technological. The task at hand is to develop services that tie transactions to customers' current accounts.

"The technology is already there; the question is about business models," he concludes. "We expect that different standards and models converge, but this will take some time, especially for cross-border payments as most initiatives in this space are still very much country-based in Europe."