The Beating Heart of Banking: Insights Into Global Payments

RETAIL BANKING
The beating heart of banking

Insights into global payments
June 2009
FINANCIAL SERVICES
In March and April 2009 KPMG International and KPMG member firms interviewed senior representatives of industry regulators,
major banks and financial technology companies about the factors they believed would drive change in the global payments industry
from 2009 to 2014, and how the changing economic conditions had affected the outlook for the industry. The set of in-depth interviews
covered 25 clients and KPMG firms professionals in 12 countries. The results showed a wide range of views from different regions,
types of bank and the activity of the respondents. Parallel studies carried out by KPMG firms in the Asia Pacific and North American
regions provided information about specific aspects of those markets.
© 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International.
KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties,
nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
FOREWORD
Payments and payment systems are important to banks because they are the ‘life blood’ of the customer relationship. Transfers
of value are the principal reason customers have banking relationships. Too often this basic need is overlooked by both the bank
and the customer. In some markets, payments may be priced as a loss leader, underpinning a customer relationship which allows
cross-selling of other products and services. Payments also provide a stable revenue base for banks. When so many other sources
of revenue are uncertain or reducing, banks are welcoming the continued flow of income from payments.
This report offers an overview of current issues and trends in payments, ranging from efficiencies in payment systems to new
technology, systemic risk and evolving business models. One of the key features to emerge is that there has been a reversal
of priorities for payments businesses over the last year. Only a year ago payments were seen as unexciting and low-margin.
Financial regulators paid little attention to payments. Governments were driving forward a social agenda, fighting banks to
reduce prices and introduce new, universal-service products. Banks were focusing on innovation and exploring new partnerships
with non-banks to enable them to reach new customer segments and achieve a higher share of customers’ spending.
Today, payments are helping to drive revenue for banks. Nevertheless, cost pressures are stronger than ever: in the search for
efficiency and cost-savings, paper processes must be driven out. To achieve this, cooperation with governments is needed to
secure ‘sunset dates’ for legacy products.
Banks and financial service regulators have recently experienced ‘systemic risk’ on an unprecedented scale that affects payments
providers: the risk that a financial institution counterparty defaults ‘in bulk’ during the clearing and settlement cycle. Controlling this
will lead to calls for more disclosure, faster settlement and new risk management systems.
New products such as mobile payments and international remittances require investment in infrastructure. In many countries, these
will have quite a slow payback. But for those banks with a presence in emerging markets (mainly in Africa and Asia) where mobile
phones greatly outnumber fixed lines and where the penetration of banking services is low, both mobile payments and remittances
are strategically important products. Banks (and non-banks) from those regions may seek to export their knowledge and systems to
more developed markets.
Establishing a strong, defensible and profitable position in this emerging landscape will require a bank
to take a realistic view of its capabilities and appetite for investment and risk. Banks should choose
their roles: market leader, specialist or retail provider of commodity-based services to a wider market.
The first requires significant investment and global reach. The second requires outstanding skills, and
there can only be a small number of successful competitors in each specialization. The third option can
still be profitable for a bank that can secure sufficient volume.
Banks must make unequivocal choices between these options and seek to ensure that their investment
plans and risk management are consistent with their chosen role. Banks will know they have a strategy
when they stop doing things that don’t fit with it.
David Sayer
Global Sector Leader, Retail Banking
KPMG in the UK
CONTENTS
Foreword
Executive Summary 1
Markets and Products 6

Regional variations 9
Infrastructure and Risk 12

Regulation 17
Technology and Innovation 20

Investing in Payments 24
Business Models: distinct and definitive 28

Emerging polarization 30
Acknowledgements 31
EXECUTIVE SUMMARY
There has been a reversal of priorities on the payments agenda since 2007.
The key changes are:
CEO Payments Agenda 2007 CEO Payments Agenda 2009
. New products and services . Cost Savings

a. mobile a. unit cost reduction and achieving scale
b. stored value b. slashing of investment spend – consolidation
into existing platforms
c. reduction of marketing and sales budget
2. New market expansion – North 2. Risk and Compliance
America and Europe
a. systemic failure – counterparty exposure
and liquidity
b. value of customer balances
c. security - information and loss prevention
d. sanctions
e. understanding implications and requirements
on new and proposed regulation
3. Investment in new front and back 3. Partnerships

office platform
a. renegotiate supplier relationships
b. consolidate relationships, including correspondents
c. focus on customer, currency or service segments
4. Partnerships 4. Debit replacement of credit
a. telcos
b. technology
5. Credit expansion 5. New market expansion – Asia and Africa
Red = New to agenda
This change in priorities points to opportunities

and threats facing the payments industry in the
coming years.
Payments delivers the goods Customers want more visibility Organizational silos are a barrier
The financial crisis of 2008-09 has had and associated data to efficient processing
less impact on the payments business Customers are demanding more There are huge organizational barriers
than on other parts of banking. Customers transparency, particularly in the area of to optimizing the technology used for
have not stopped making payments. transaction management. They want payment processing, with each business
In fact, overall volumes have continued the ability to track and trace transactions area (retail, corporate, cards) seeking to
to increase at an estimated growth rate in flight, and in many cases, to be able manage its own infrastructure. Some form
of 20 percent, from a combination of new to access further information about the of ‘meta-layer’ is required between the
markets and conversion of cash, more underlying transaction, the parties involved customer-facing services and the common
transactions coming into the regulated and the tax details. This is driving an backbone. However, division oriented,
domain, and an increase in data flows per ‘unstoppable’ digital revolution and need transfer pricing mechanisms are a barrier
transaction. Unit values have decreased, for real-time system interfaces. to investment.
as customers manage their cash more
New pricing models could Counterparty risk takes on an
carefully and make more, but smaller,
follow telecoms intra-day dimension
transactions. However, the effect on
margins has been small and this remains At today’s interest rates banks can no Banks and central banks are increasingly
a very positive revenue-generating longer rely on the interest on current- focusing on intra-day and counterparty
activity for the banking sector. This growth account balances to support transactional risk; however there is a shortage of data
rate itself is a compelling criteria for activities. At the lower end of the market, and systems able to measure these risks
investment. margins in mainstream transaction accurately across all channels.
processing are being squeezed, so
Payments continue to converge on a banks are increasingly focusing on the
A slew of regulation is awaited but
uniform platform has yet to materialize
additional information being requested by
It is increasingly possible to perform all customers, and seeking ways of deriving There is widespread fear of a wave of
payments on a single platform. The trend revenue from it. Partial bundling (or partial regulation over the next 18 months; even
towards standardization and ISO 20022 unbundling) as used by the telecoms if this does not materialize, the expectation
(Unified Financial Industry Messaging industry, may yield a fairer pricing model is already affecting many banks’ behavior
Scheme) will continue, albeit at a slower than the opaque charging used by many and investment plans. In the United States
pace for the next year or two. Decoupled banks today; some players are already (US), legislation on Unfair and Deceptive
debit and other ‘converged’ products doing this. Acts and Practices (UDAP) is widely
should help to drive prices down. With the awaited; while in Europe, although
dramatic cutback in overall investment, it is banks are unsure what changes the
now more a question of consolidation onto implementation of the Payment Services
which existing platform, than replacement Directive (PSD) will bring, more customer
with a new platform. information is certain to be on the list.
A new umbrella regulator for banks in
Europe is proposed, with an increased
focus on systemic risk.
Regulators focus on pricing, Investment in mobile payments Opportunities, but also risks,
transparency and liquidity will spread from emerging to for outside investors remain
There is some conflict between the developed markets There are still many opportunities for
social agenda of many governments and There is a marked difference in strategy investors in payment businesses,
consultative bodies, and the systemic-risk between emerging markets, where particularly common infrastructure.
agenda of many central banks and financial few customers have bank accounts, Where bank or inter-bank ownership was
regulators. The balance varies from region and countries where there are already once taken for granted, new investors are
to region, but experience from SEPA many ways of serving customers and now being actively courted. There is no
in Europe suggests that many market m-payments are seen as an additional, longer any reason for infrastructure to stop
interventions are likely to increase costs, often premium, service. Many emerging at national borders, and so international
but generate no customer benefit in the markets favor mobile payments because structures will ultimately be essential;
short or medium term. they have no infrastructure to write freeing payments businesses from
off. Many Asian and African banks, for bank ownership is the first stage in that
Investment has been squeezed whom mobile payments are strategically process. However such investors will face
Almost all major banks have seen necessary, will then see opportunities several uncertainties in the short term,
reductions in their capital, leading in developed markets, leading to particularly in the area of regulation.
to increases in the hurdle rate for partnership opportunities for both banks
investments. At the same time projects and non-banks in those countries. The need for clear strategic focus
face greater risks and a narrower set has never been greater
of qualifying criteria. In particular, large Lack of security structures hampers The most successful payment services
new partnerships providers will be those which pursue
international projects are very difficult to
justify, even where there are significant Partnerships (including in some cases the most thoroughly-articulated and
customer benefits. Only a very few with other banks) could allow more distinctive business models to achieve
cash-rich banks are able to take advantage flexible transaction initiation from a competitive advantage.
of the situation, to press forward with wider range of devices and systems.
However, this depends on agreement Regional variations
projects that will give them a competitive
advantage. to security structures which do not yet While many of the above themes are
exist. For example, in mobile banking and common to all markets, differences
Investment focus has shifted sharply payments, most GSM operators favor between the regions are striking – even
from innovation to efficiency a Trusted Service Manager model, but when addressing global issues – and
Instead of investing in innovation and this is not yet widely supported by banks. often reflect national perceptions and
standardization, which can bring expectations as much as different levels
substantial benefits but over a long period, Investment in security will continue of exposure to global economic conditions
many banks are investing smaller sums in Other security services, such as common and competition. Comments from around
projects that will improve efficiency and identity management and two-factor the world give a flavor of the range of
reduce costs in the short to medium term. authentication, will also see some variation found: few of these comments
These include closer cooperation with investment, since these are important could have been made in any other
very large customers, partnerships with to risk reduction in payments. region region, nor sometimes in any
other sectors and even with other banks. other country (see Figure 1).
Projects to reduce paper and cash usage
have a high priority; however without
support from governments and regulators
to impose sunset dates, legacy systems
must be maintained and cost savings
cannot be realized.
“Healthcare payments are a “Scale is everything anyone with “Electronic invoicing is a key
new and separate market” less than 10 billion transactions part of a payment service”
a year will not survive”
“Alternative Payment Providers

will continue to dominate the
remittances market”
“There is no regulation of
the main payment networks”
“90 percent of mobile

phones are NFC capable”
“Islamic instruments are essential”

“Payers would never agree “Banks are getting together
to faster settlement” “Governments in with vendors to create a
the region are richer offering”
cooperating to
help promote
low-value electronic
“Any payment over $20 will payments”
settle in a few seconds”
“Regional cooperation
on infrastructure is only
just starting”
“Government can
“Telcos have access to just mandate
a much larger customer changes to
base than banks” payments products
“There is no regional (such as chip cards)”
cooperation on infrastructure”
“Fear of inflation still influences “Mobile payments are critical to “Now that people can use their
consumers’ and businesses’ our expansion strategy, at home transport card in shops and vice versa,
choice of payment instruments” and overseas” they won’t have to carry cash at all”
Figure 1 – Regional variations

Source: KPMG International, 2009
MARKETS AND PRODUCTS
Payment volumes rise, but investment focus shifts
Transaction volumes showed strong growth Today, the emphasis is on achieving efficiency hundreds of years ago for paper-based
in 2008-09, as customers made more through scale and by eliminating paper. transactions. The cost per transaction ranges
but smaller payments. There appear to be The relative efficiency of different instruments from US$0.02 to US$0.20 in the best case,
two separate factors in play here: one is a is carefully measured: even small changes and the systems that support queries,
continuation of a trend, noted in our previous (such as eliminating non-standard account chargebacks and repairs cost tens of dollars
report The future of payments1, for more numbers) have a high priority if they have a per transaction.
low-value payments to be brought into the positive effect on efficiency. Shared services
As we have seen, innovation is not currently a
open-loop, regulated domain. The other projects, previously abandoned, are being
high priority for many bank-owned payments
reflects tighter cash-flow management by reconsidered as many banks are reviewing
providers, and low-value payments have
consumers and by businesses of all sizes. carefully the markets they wish to serve,
a reputation as a graveyard for profits
The ascendancy of debit, as opposed to directly or indirectly, following a focused
and careers.
credit, transactions in the last 18 months sector approach
is remarkable in most regions, attributed Nor are governments in many developed
to a number of factors.
Less is more: Western economies prepared to take strong
Volume growth comes
steps to force migration away from cash
This renewed focus on cash-flow and liquidity from low-value payments
and paper, despite the efficiency gains this
is in turn part of a ‘back to basics’ mood In several regions of the world increased could bring.
pervading the banking industry. Banks must access to, or use of, banking services is
attract deposits in order to bolster their leading to payments volume growth of up to
balance-sheets and liquidity ratios, but this Banks in emerging countries
25 percent a year. Many of these payments
does not mean that payments are less are low-value by global standards (e.g. sub- see low-value payments
important. Only a rich palette of payment US$25). At the same time, people in the ‘rich as strategically important
types attracts high-quality deposits, while world’ are making use of new instruments and could use this to enter
mass-market deposits must be served such as mobile or contactless transactions,
by the most efficient payment services developed markets
and extending their use of debit cards, into
possible in order to keep costs down. lower-value transactions, often as low
It is therefore likely that banks in many
Transaction services are an integral part as US$5.
Western countries will continue to follow a
of cash management.
policy of ‘benign neglect’ of the low-value
Banks are therefore continuing to invest Low-value payments will payments market, being content to leave it
significant sums in payments, primarily in continue to be neglected to ‘Alternative Payment Providers’ (APPs)
security and regulatory initiatives which are
by most Western banks who – it is argued – must still work with
deemed ‘non-discretionary’. The vast majority banks to achieve clearing and settlement.
of discretionary investment is now aimed at
Traditional bank instruments – such as However banks operating in many parts of
increasing efficiency rather than introducing
checks, debit cards and e-payments – are Asia and Africa, where low-value payments
new products or services. This is a big change
badly-adapted to handling these low-value have a much higher strategic importance, will
from the situation in 2006-07, when innovation
payments, carrying little information and a want to be active participants in this market.
was king and new products were seen as
single-sided view of the transaction. Many Any bank which expands from such a base
essential to retaining customers and attracting
low-value payments are ultimately handled into more developed economies is likely to
new business.
using the clearing systems that were set up enjoy a competitive advantage.
1 The future of payments: Opportunity or threat for Europe’s banks, KPMG in the UK, February 2008.
“ ‘Back to basics’ for payments means

efficiency rather than innovation”
Need for speed: Customers want transparency Innovative pricing is key:

Medium-value payments move and control The fully-bundled current account
rapidly to all-electronic Across all markets and payment types, there pricing structure is unsustainable
There are two almost universal trends within are growing demands for transparency and At current interest rates, a current account
the medium-value payments markets, which control of value-dating. pricing model that depends on subsidizing
include most B2C and SME payments: transactions from the interest on demand
Prepaid instruments are growing in popularity
deposits is unsustainable. However, the
• Increased demands for information and acceptability; in several applications they
bundled charges model remains attractive
(and providers’ need to extract value are preferred even by those who have
to many retail customers and smaller
from providing that information), and plentiful credit. Many retail businesses,
businesses. Traditionally, banks have sought
• Increased demands for visibility and speed telcos and other issuers of prepaid cards and
to square the circle by earning money from
accounts offer discounts to customers using
These two run hand-in-hand: the increasing unauthorized overdraft charges and other
these payment methods; this means that
use of internet-based channels for business fees. But these are increasingly considered
many customers can get better deals this way
in general, leads to a demand for payments unfair by customers and regulators.
than by keeping money in a deposit account.
to follow the same route and to meet the
In other words these retailer-owned balances Banks do offer many added-value services
same expectations for immediacy and
actually represent a better return on capital for which could be chargeable. New pricing
completeness of information. We can expect
many users than bank accounts. models, perhaps based on the hybrid
that as more business moves to a mobile
models (bundled charges + extras) used
channel, a similar trend will drive payments. Whereas banks distinguish between pay
very successfully by the telecoms industry,
later, pay now and prepay products, what
There is a link between the quality of deposits could allow a move to more selective
customers often want is control and visibility
and the richness of the payment services charging with little customer resistance.
of the value-date. Faster payments (for
offered: consumers and small businesses
example, the UK’s near-real-time service) Examples of added-value services which
are likely to concentrate their deposits with
do not mean that all payments take place could be chargeable include:
payment services providers that meet all
earlier; since the payer retains control of the
of their needs. These customers are likely • Notification of transactions to a mobile
value-date, some will take place earlier and
to base their choice first and foremost on phone or email alert;
others later. The requirements of different
convenience and user-friendly services; • High-speed transfers (e.g. the near-real-
applications can be surprisingly disparate,
for most people, pricing is a secondary time services offered in Brazil, Russia and
and banks need to adapt to the ‘fat tail’ of
factor and security a distant third. the UK) – although such transfers can only
non-standard value-dating requests
Customers’ needs include: be chargeable as an extra service if there
corresponding to post-dated checks,
are slower, cheaper alternatives;
installment payments and express
• Availability in all locations and countries
clearance etc. • Authentication of internet merchants
where they travel;
and services.
• Adequate information on transactions, While corporate customers have for some
time sought the ability to ‘track and trace’
often within minutes; Regulators should ban
payments, consumers initiating transactions
• In some cases, integration with personal
online or by mobile phone increasingly want a
the word ‘free’ in financial
or small business accounting packages.
clear view of the process as well. They would advertising
like to see the payment leave their account
and arrive at the payee’s account. Real-time Regulators could unblock the competitive
notifications are as important as real-time impasse which prevents banks being
payments, and opacity is no longer honest about their charges and sources of
acceptable; if the bank earns three days’ revenue by prohibiting the use of the word
interest on the balance being transferred, ‘free’ in financial advertising. This would
then – in response to consumer demand – help customers to understand what forms
many regulators now say it must identify part of their bundle and what are chargeable
that charge. services.
Customer or partner: This is not to say that they do not need delivery mechanisms and operational
Which side of the tracks? payment services: but the services that they structures are used. However the delivery
Global customers, traditionally the most need are much more closely related to the mechanisms share many common features,
valuable customers for any payments Treasury and cash management functions, and products have a high degree of overlap
bank, are increasingly capable of bypassing and require a very close co-operation with the in the SME and smaller corporate business
banks and the clearing and settlement provider to deliver the correct set of services sectors.
infrastructures. Direct corporate access is with the necessary levels of integrity, accuracy Leading businesses have identified the
already available for SWIFT and is becoming and speed. As one payments provider puts it: need for a ‘meta-layer’ which connects the
available for many more CSMs2. However, the “Even two or three years ago our customers customer-focused channels and products
level of investment required by the customer would help us to work round a problem, now to a common high-performance, high-integrity
deters most of them from doing so; in practice they are better informed, and as a result much backbone ‘engine’ that drives the whole
it will be a long time before the level of usage less tolerant”. payments business (see Figure 2).
of these services becomes significant.
Silos are a barrier to efficient Achieving this will require organizational
For many global organizations, national change, and in some cases a shift in the
processing
borders are an inconvenience, and even balance of power between the customer-
The demands of scale and of a common
regions are fairly meaningless. They see the facing and back-office businesses.
risk view require core payment systems
world in currency areas: mainly dollar, yen and
to be closely connected or common to all
euro, although several other currencies are
customers, channels and instruments.
important in some markets and businesses.
Businesses that are excessively ‘siloed’ will
Minor currencies are an inconvenience and
lose out to those that have a common view
extra cost. Some of the largest players are
and strategy across all payment types. In
able to form their own clusters, and to perform
many banks, the customer-facing businesses
netting and clearing within that cluster.
are still divided with entirely separate retail,
Many employ banking specialists familiar
corporate, and wholesale payments; different
with the options available.
Banks in emerging countries see low-value payments

as strategically important and could use this to enter
developed markets
High performance, Interfaces to clearing and

high integrity common systems settlement systems
‘Meta-layer’
Customer-facing products and services
Figure 2 – Meta-layer
2 Clearing and Settlement Mechanism
Regional variations
North America coupled with ACH5 systems that support many large corporates either own banks or
In North America APPs, including telcos, a higher level of information but involve must work with a large state-owned bank.
are likely to dominate low-value payments three to five day settlement. However, Others use systems that are effectively
provision. Since all payments will be online, experience from other countries suggests tailor-made for them.
low-value payments will be linked to islands that provided payers have control of
value-dating, faster payments are not only
Europe
of connectivity: networks where every
technically feasible but highly desirable Low-value payments are already in several
device can speak to every other, with the
from the perspective of both payer and regulators’ sights, through the e-Money
security and value storage ‘in the cloud’.
payee. We therefore expect increasing Directive and other initiatives. This will be
In the US there is likely to be little regulation
demand for both near-real-time payments an increasingly regulated sector: licensed
of this sector, although probably more in
and flowing of transaction data, as a APPs, often working in partnership with
Canada and Mexico. In the medium term,
premium service, and that banks will want banks, will provide services through cards,
banks may seek to buy some APPs,
to provide such services. The emergence mobiles and the internet.
which are seen as channels for accessing
customers, although bank ownership of a separate market for payment services
Europe has traditionally been divided into
risks increasing the regulatory burden. for healthcare is an instance of the broader
two or three sub-regions, but these are
need for data linked to payments, which is
now converging towards a “predominantly
North America is probably the most price- difficult to address without a more general
debit” model for personal cards and
sensitive payments market. For this reason, infrastructure upgrade.
e-payments. This means that customers
steady growth in credit and scheme debit
Latin America in the UK and CEE countries are reducing
has been seen, at the expense of PIN-
their dependence on credit instruments
based debit, together with much more In Latin America, there is likely to be more
(but may still use credit accounts behind
rapid growth in prepaid and decoupled government involvement and – given the
them), while Germany and the Nordic
debit3– a product that has only recently much higher penetration of chip cards –
countries are making more use of debit-
started to reach Europe and is unknown scope for many more chip-card schemes.
driven (i.e. payee-initiated) instruments
in other parts of the world. Fear of inflation remains a potent driver
and reducing their dependence on cash for
in this region and both governments and
There is a growing range of account point of sale payments. This is only slightly
central banks are prepared to be more
services (analysis, reconciliation, driven by SEPA – which supports both
proactive in formalizing the economy and
EIPP4 etc.) linked to payment transactions. credit and debit formats – but is more to
promoting efficient instruments.
Most of these are delivered using do with banks’ and acceptors’ desire for a
e-banking. Nonetheless, and despite Growth in debit and e-payments has been common set of instruments and structures
many years of prediction of its demise, accompanied by an equally steep decline in across all channels.
the check remains a much-used instrument; the use of checks and paper instruments:
There is considerable interest from retailers
e-payments and mobile-initiated payments decades of inflation and monetary
in ‘SEPA-compliant’ decoupled debit and
have started to play a role, but have so far uncertainty have made all users highly
e-payments at the point of sale as well as
displaced only a very small proportion of aware of the time-value of money. The
online; this is driven by cost considerations
check payments for small businesses; uptake of mobile payments has so far been
(it is felt that e-payments will be cheaper for
many personal customers remain heavy slower than in other regions, but there is
the merchant than card payments) but at
check users. more growth in products for SMEs, many
this stage these products are still in the
of them offered by overseas banks in the
Some argue that little change is likely – or design or pilot stages.
first instance and then adopted by local
necessary – to today’s two-level structure
banks. SMEs and smaller corporates are Business-to-business payments are much
of fast ‘wire payments’ for high-value
more of a business driver (for political more likely to be payer-initiated; the point
transactions (but with little information),
reasons) than large corporate business: of initiation is moving further into the
3 Payments made using a debit card which are immediately converted into a direct debit and are cleared
using ACH channels rather than the more expensive card scheme networks.
4 Electronic Invoice Presentment and Payment
5 Automated Clearing House
The beating heart of banking 10
accounting and business systems of infrastructure to provide their services. there will be a rapid acceleration once
the corporate payer, and all competent Person-to-person (P2P) services are an critical mass is reached. Regulation will
business management software packages important factor in this market. take some years to catch up. Australia and
now have facilities for payment initiation. New Zealand, on the other hand, are more
In the Middle East and Africa, paper
EIPP and EBPP6 services are widespread likely to follow the North American or
payments still predominate, and cash is
but in many cases exist alongside rather European models.
widely used even for medium-value and
than within payment networks; the
B2B payments; however the move to In several Asian countries (including China,
European Central Bank wants to change
e-payments is accelerating, largely driven by Korea and Singapore) government initiatives
this and to force adoption of the Nordic
Government and ‘official’ use of e-payments. exist to promote e-payment and these
model, in which EBPP is a service provided
Pre-authorized debit and prepaid cards are are likely to lead to a rapid decline of other
by the payment network. It is by no means
rapidly gaining acceptance as instruments instruments. In cards, there is a move from
certain that large corporate billers would
for spontaneous payments, however there ATM cards to scheme-based debit cards,
be keen to change their systems to
is still demand from affluent sectors for and considerable interest in contactless and
switch from one network, and one form of
credit cards and open-account instruments. mobile payments; customers in this region
transaction initiation, to another which may
An important factor in many of these have shown a remarkable willingness to
offer wider coverage but fewer features.
markets is the need for instruments that embrace new instruments and payment
support ‘Sharia’ transactions acceptable structures.
in Islamic finance.
Large corporates in Asia Pacific are more
likely to retain some local characteristics
Europe is converging on a “predominantly debit” and to work with local providers than in
model for personal payments other parts of the world. This gives those
providers scope to develop products that
meet the specific demands of those local
Middle East and Africa Asia Pacific customers, and has led to the introduction
In the Middle East, governments are often There is a wide divergence between high- of several innovative products in low- and
the initiators of change: low-value payments and low-income countries. In Japan and medium-value payments; we expect to see
are likely to take place initially within South East Asia, partnerships between similar outcomes in high-value payments,
Government-supported but bank-operated banks, telcos and transport operators will with some innovative, highly secure
structures, using conventional payments achieve a very high density of low-value products based on new technology and
backbones. In Africa, Mobile Network payments very quickly. There is already taking advantage of the lower level of
Operators (MNOs) are much more likely some regulation in place, and this will be integration with global systems that exists
to have a relationship with the target consolidated. In South and Central Asia, in most parts of the region.
customer than a bank, and so they are mobile-to-mobile payments are a major
the predominant product suppliers, factor in formalizing much of the economy;
but increasingly they are using bank
6 Electronic Bill Presentment and Payment
INFRASTRUCTURE AND RISK
Two key themes emerge very strongly:

• The need to identify and mitigate risk within the payment system itself, in particular
counterparty risk.
• The extent to which payment networks must carry further data related to the
payment transaction.
Counterparty risk: may feel that their exposure to this type of where the driver was not so much
Now an intra-day dimension risk is minimal, this is probably too relaxed a banks’ own risk as a response to
With the increasing speed of capital view; they, and some of their customers, may regulatory demands.
movements and wholesale transfers, risk have much larger exposures than they realize.
Migrating medium-value payments to near-real-
positions can change in minutes. The highly Even corporates suddenly care about the risk
time (usually a few seconds in practice but
leveraged positions in which some banks rating of the banks they deal with.
with guaranteed service levels measured in
found themselves in the middle of 2008 The risk needs to be measured across all hours) greatly mitigates liquidity and counter-
became risk exposures when the supply of channels and instruments – another potential party risks, and offers business benefits to
liquidity reduced; the ripples spread rapidly benefit of having a common infrastructure customers. It improves transparency and
from specific markets (e.g. US sub-prime and database. However, as yet there are few facilitates the provision of ‘track and
mortgages) to affect all inter-bank lending. systems capable of assessing these types trace’ services. But it requires significant
of risk, and the reference data on holding infrastructure technology upgrades and a high
Risk positions can change structures, instruments etc. do not exist in degree of coordination between competing
in minutes any consistent or accessible way. Banks must players; systems to protect against fraud and
simply develop their own. Over the years money-laundering must be bolstered in order
Banks participating in payment networks there have been several initiatives to develop to avoid a loss of control in these areas. Few
need to understand who their counterparties a common set of reference data, and this is countries will be prepared to embark on such
are and the level of risk exposure of those likely to now reappear on the agenda. projects in the current investment climate,
counterparties. Few organizations dealing although planning could start now for the next
One way to reduce risk is to decrease the
with Lehman Brothers’ subsidiary in London major upgrade.
time taken to clear and settle transactions.
in September 2008, realized that Lehman’s
In Brazil this was recognized in the late However, it is surprising how many
systems routinely ‘swept’ cash to New York
1990s, and efforts were made to reduce all countries do not have a core RTGS structure
overnight and at weekends. As this was a
settlement times and to move all systemically at all; banks in these countries – and their
new and unanticipated risk, many banks
important systems and transactions to a real- counterparties – are exposed to huge risks7
spent weeks on disaster recovery; with
time gross settlement (RTGS) basis (see and if everyone does their sums correctly
several banks still failing each week round
case study, page 13). The same principle of they could find the cost of doing business
the world. The level of exposure is still high.
moving most medium-value payments to rising very steeply.
The main global banks are now acutely aware a real-time or near-real-time basis has been
of this risk; one respondent told us that it is followed in Russia – using a combination of
the main new focus of investment in its risk intra-bank mechanisms and inter-bank clearing
management. While many domestic banks using SWIFT messaging – and in the UK,
7 Unless they use SWIFT for all domestic high-value transactions
13 The beating heart of banking
Drawing strength from adversity: sale and the corresponding payment).

The Brazilian payment system The reporting by each clearing-house also
In response to a history of inflation and gives the Central Bank a high level of visibility
contagion from every financial problem into each institution. Objective rules identify
in Latin America, Brazil’s Central Bank in systemically important components and
2000-01 introduced a wave of reforms. these are closely monitored.
The main feature of these was real-time These changes greatly reduced the impact
gross settlement (RTGS) for all interbank of the global financial crisis on Brazil.
transactions and securities clearing. Settlement and liquidity risks were mitigated
Retail payments were also updated: fully and the Central Bank was fully aware of
electronic transactions now take place in each bank’s reserves. However the scale
seconds, while paper transfers and checks of investment required by all parties
clear in one day. All the clearing systems are meant that innovation was put on hold
linked to a high-speed central network which for some time.
gives the Central Bank the ability to match
two halves of a transaction (e.g. a security
Global infrastructure:
National services will persist unless there is a strong Still hampered by regional
policy of sunset dates and national variations
The need for scale and standardization, and
Digging deeper: systems – banks should develop expertise greater personal and trade mobility, all favor
A greater focus on associated data in these systems in order to serve this group the development of regional, and even global,
of customers. infrastructures.
Risk management can also be supported by
carrying more data within the transaction, or The types of data required include underlying However, history and culture have left a
linking to other data sources. transaction data (source, participants and legacy of national idiosyncrasies as to
line item detail), tax details, associated preferred instruments, behaviors and legal
Historically, payment networks have
parties (insurers, guarantors), associated and tax systems. In general, governments do
developed using very sparse, efficient
transactions, (part payments), shipping data not see any benefit in eliminating these, even
messaging systems with few message
etc. It is unrealistic to assume that all these if – perhaps because – some of them have a
types and the minimum of data; this offered
can be carried by global payment networks protectionist effect.
high transaction speeds over widely-available
networks, with minimum processing (many of them are specific to an industry or Lobbying by existing institutions is unlikely
and hence a low probability of errors. national tax régime), and hence there is a to be effective in these cases, and many of
The widespread availability of high-bandwidth need for a structure that allows parallel the potential global players are stateless
communications networks in all parts of the networks to carry these data. constructions such as SWIFT or CLS Bank,
world removes one obstacle to richer data Those financial institutions that can not only joint ventures between national players, or
sets while the introduction of data structures identify movements of associated securities technology companies whose main job is the
based on xml and ISO 20022 offers a route or goods and services but also facilitate those provision of outsourced infrastructure rather
to removing the other major obstacle. transactions, have a much higher degree of than customer-facing services.
Corporate customers need to assemble control; they are best placed to set the future Even where new services are introduced,
data relating to a transaction from within shape of the industry. suppliers carry the cost of supporting the old
their Enterprise Resource Planning (ERP) Information is a valuable asset whose one until it is finally eliminated. Corporates,
systems long before initiating the transaction. provision could go some way towards SMEs, their software suppliers and ultimately
They need to reconcile payment demands replacing revenues lost through the their customers represent a long chain that
and payments received with these data; a commoditization of core payment products. must all adopt the new product before any
high level of ERP integration is an absolute However, no clear business models have cost savings emerge. Unless there is a strong
necessity at this level. Recently, smaller yet emerged to realize this asset (See section policy of sunset dates (probably supported by
corporates and SMEs have started to seek on Business Models, page 28). a regulator or set of governments) there will
a slightly lower level of integration with their continue to be a demand for national services.
business management and accounting
Regional variations
In North America, we believe there will be further the development of global structures Asia Pacific – even more than the other
a need for a parallel ‘e-wire’ network, initially and services. regions described – is a collection of national
alongside the ACH and Fedwire systems markets rather than a regional market.
In Europe there are likely to be two parallel
but perhaps later as an upgrade to the ACHs, However there have recently been some
developments:
to provide a faster service, higher level of moves to coordinate regulation, while
control for banks and customers, and wider • ‘SEPA-compliant’ services with a several service providers have set up
range of associated data. European scope but ‘lowest common links with their peers in other countries;
denominator’ functionality; e-payments in China are relatively
Latin America is likely to see a trend
• Development of international hub standardized and one interface design
towards replacement of existing
networks by the largest banks. gives access to at least 20 providers.
correspondent networks with
These will have richer functionality and These represent the first signs of some
hub-based networks run by major
may be marketed as a premium service. regional infrastructure to come, probably
banks and central banks.
based in the first instance on cooperation
In the Middle East and much of Africa,
In Europe and the Middle East, a regional between national ACHs and debit-card
global banks with a local presence are the
hub strategy is often promoted as a switches and major players in China. In
main providers of international services, and
pragmatic approach (‘you have to start South Asia the infrastructure is still quite
these do meet most current demand.
somewhere’). However, this is at best, a fragmented and the next phase is one of
holding strategy and may simply delay consolidation and rationalization.
R EG U L AT I O N
Industry fears a wave of regulation

Everybody interviewed expressed a similar view: that regulation will increase as a direct
result of the financial crisis; that this in turn would lead to increased costs, but only in a
few cases would this bring customer benefits.
“SOX & SEPA will be kindergarten activities

by comparison”
It is likely that there will be ripples of economy transactions, and should also In The future of payments8 we wrote that
regulation during 2009, and a more significant help in the management of fraud and banks should start to manage regulatory
increase in 2010, ultimately leading to a money-laundering. risk as they would do any other risk.
Basel III which is expected to include the However banks feel that it is virtually
However, this kind of reporting conflicts with
impact of flows as well as cleared balances. impossible to plan for, or to mitigate the risk
the desire for privacy, and so a growing level
Central banks are likely to demand much of regulation, particularly reactive regulation.
of conflict should be expected between bank
more reporting of liquidity, and many more
regulators on the one hand, and competition Although the effects of this new wave
services will be brought into the scope
authorities and privacy commissioners on of regulation will be felt more keenly in
of regulated activities. Collateral will be
the other. Competition authorities have been some countries than others, and by some
specifically identified and ring-fenced, to
active recently in Australia, Europe and the institutions more than others. The fear of
try to mitigate the ‘Lehman risk’.
US, and are expected to continue their direct regulation is common to all and is already
Many banks and their customers will have intervention in price-setting and charges, proving a disincentive to investment in
to provide more information on the other half despite the often unintended consequences payment infrastructure and products.
of the transaction, especially for securities this can have for innovation and other
and financial instruments. This should help to services.
manage risk and identify illegal and shadow
Where is the value? Banks also believe that the authorities have However KPMG firms are not aware of
Benefits of regulation are taken control of bank pricing and driven prices an investment program that can meet
not obvious down, at the expense of innovation and the specific needs of the Payment
European banks in particular have recent without any evidence of client demand in the Services Directive9.
experience of politically-driven regulation. short or medium term. Offering cross-border
The overall view from interviewees is that
Many of our firms’ clients emphasize that transactions is a differentiator for banks but
this is not a model that will lead to greater
they support the specific objectives of high repair costs mean that it is far from being
innovation and standardization in global
greater standardization and a common legal a driver of profit.
payments.
framework for payments across the EU.
Many European banks have now made the
However, they feel that the long gap between
minimum, infrastructure investments required
the timing of the investment and the
for SEPA, and many have launched SEPA
expected returns, lack of any tangible support
products; we noted earlier that there is also
from national governments and what they
interest from retailers in decoupled debit
see as an antipathetic attitude of European
and other new business models. Some
commissioners have eroded much of that
banks have been able to pass off beneficial
support and distracted energy and investment
technology upgrades (for example, installation
from projects that would have yielded
of ISO 20022-compliant software) as
benefits to customers.
being necessary for SEPA compliance.
9 SEPA is usually defined as the self-regulated activities to meet the common SEPA Credit Transfer, SEPA Direct Debit and SEPA Cards Framework
rulebooks; the Payment Services Directive is a new legal framework for all payments in the EU and must be adopted into law in all EU countries
by 1 November 2009.
Regional variations
In the US, which is making a point of European Central Banks are focusing on Saudi Arabia Monetary Authority (SAMA)
setting the tone for the world, the largest the specific issues around managing and Reserve Bank of South Africa (RBSA)
institutions can expect to be even more systemic settlement risk, but are coming are dominant in their respective areas.
tightly regulated, smaller institutions and into conflict with other regulators. It is now
There is still only weak cooperation
infrastructure providers much less so. almost certain that a European ‘umbrella’
between regulators (and central banks) in
In Canada, regulation is generally tighter regulator will emerge, but with initially
Asia; they are likely to focus on regulating
but applied more evenly. poorly-defined powers; it is likely to become
major elements of infrastructure and large
more powerful as national Central Banks
There is wide variation from country to state-owned banks.
delegate upwards.
country within Latin America; regulators
will stress locally important factors (such as There is likely to be increased regional
money-laundering) as well as reacting to cooperation in, for example, the Gulf Co-
international and domestic (economic and operation Council (GCC) and Communauté
political) pressures. Financière Africaine (CFA) areas, while the
T E C H N O L O G Y A N D I N N O V AT I O N
The last 12 months have seen a dramatic slow-down in discretionary technology investment
by banks. In the US many projects have simply been cancelled, in Europe or Asia they are
more likely to have been delayed or moved down the priority list. The focus of investment has
moved sharply from innovation towards efficiency, with small projects that will yield short-
term benefits gaining a high proportion of the attention and investment funds. Some banks
are holding back on investment because they fear that they will be swamped by regulatory
changes in the next year.
However, some strategic projects do remain Many people have access to a mobile phone. relationship but the bank managing the funds
on the agenda, particularly in emerging Mechanisms that allow them to pay bills, and risk, are gradually emerging.
markets and those less affected by the send money to family or simply deposit a pay
The sequence of introduction of mobile
reduction in inter-bank lending. Mobile and packet for safety offer huge benefits. Mobile
payments is quite different in richer countries
contactless payments and security upgrades payments may be the key to formalizing the
(see Figure 3), where many customers
were the categories most often mentioned market and offering banking services to large
have a banking relationship and the bank is in
by respondents. swathes of the population. Many mobile
greater control. Here, mobile payments are of
telephone companies (telcos) are keen to
Mobile payments: greatest benefit to some specific applications:
offer such services.
An imperative for some, for example migrant workers wanting to send
a bonus for others money home, small business managers
Mobile payments may be authorizing their employees’ transactions or
In emerging markets, especially, mobile
payments are continuing to receive the key to formalizing taking payment on a doorstep. The mobile
significant attention and investment the market phone has a particular place as a ‘pivot
support. In countries with poor fixed device’, able both to make and receive
telecommunications infrastructure and low Banks are often less keen and may often be payments.
rates of access to banking services, mobile seen as a barrier to mobile payments rather
payments offer far more benefits to most than an enabler; however business models
people and small businesses than that allow cooperation between banks and
conventional payment types. telcos, with the telco managing the customer
‘Rich world’ (bank- Alerts and ‘push’ Balance enquiry Full m-banking M-payments
driven) model: services
Emerging-market M-transfers using M-transfers using International Account facilities

(telco-driven) model minutes local currency transfers (deposits etc)
Figure 3 – Models for mobile payment introduction by banks and telcos

However for many customers in these Few banks feel that they are completely on Resolving this issue in any general way brings
countries, the mobile phone is just one top of the security problem: no-one can say together a very wide range of challenges and
channel among many; although mobile when the next major breach will come or how requires deployment of advanced technology.
ownership is very high, so is ownership of much it will cost. The wide range of channels It needs mobile, near-real-time payments,
televisions, portable entertainment systems and high degree of control expected by many sensitivity to customer behavior, sophisticated
and computers, all of which can initiate customers pushes the boundaries of the fraud & AML management, international
payments – and many forms of payment do bank’s network very far from the firewalled cooperation on Know-Your-Customer (KYC)
not need the account-holder to own any and physically secure systems at its center; and regulation. In some instances it can be
device at all. However, the mobile phone is at when mobile phones and portable associated with corporate services provided
the center of a shift that involves a reduction communicators carry bank keys and secure to an employer. A system that could meet
in the use of cash and checks, and an increase applications, the range of possible attacks these challenges would act as a test-bed for
in electronically-initiated and centrally-cleared increases dramatically. Banks need to many other services.
transactions from transport and telecoms continue investment in security, although
However at this stage, despite considerable
applications; it can be seen as a Trojan Horse continuous security upgrades are a tax on
interest and many conferences, no such
that is likely to stop a whole generation from the P&L and reduce product usability and
solution is yet in sight. No bank has made
becoming cash- and check-users. convenience.
a successful business from this activity.
Remittances: For many large global banks the market
The mobile phone is a A challenge but potentially is too small and specialized, while those
Trojan Horse that is likely worthwhile that would be interested in the business
to stop a whole generation Regulators, governments and banks generally lack the infrastructure and reach required.
Technology cannot fully solve this problem.
from becoming cash- and agree that the current systems for handling
low-value international transfers (including
check-users. migrant worker remittances, pensions, travel
deposits etc.) are too costly and do not serve
Security remains a problem: some mobile
the needs of users well. But the volumes are
payment vendors report that 75 percent
very large (at least US$300 billion in 200810).
of transactions are (usually crude) fraud
This potentially very profitable market is
attempts. At present there is insufficient
currently shared between informal networks
agreement on the security model and
and specialized remittance networks such as
infrastructure needed for interoperable mobile
Western Union and TravelMoney. None of
payments: is there a need for a Trusted
these networks is integrated with the rest
Service Manager (TSM) and if so who should
of the international payment system and
perform this role? Until this issue is resolved
banks play only a very small role in
mobile payments will remain in the pilot
these transactions.
phase in most countries.
“The bank is not used to having its portals left in taxis”
10 Revised Outlook for Remittance Flows 2009 – 2011; World Bank, March 2009
Regional variations
Technology is international and so there • In much of Africa and the Middle East, • The mature markets of North America
are few variations in the technology the need to extend penetration of produce an intense need for product
available to banks and service providers banking services is forcing innovation in differentiation, and so the pace of
in different parts of the world. However, business models, and even instruments innovation in product features, as well
the appetite for innovation does vary, (such as pre-authorized debit cards) as devices that can support those
while large sunk investments and legacy which are little-used elsewhere. Mobile new features, is very high. However,
structures are frequently a disincentive to payments, here and in South Asia, are products must work within the
innovation. Our research indicates that: strategically important to many banks. limitations of a multi-party clearing and
• Europe is the cradle of much product settlement system, and a multi-state
• Asia offers not only many of the
innovation: devices such as the GSM legal framework, that is constrained
consumer products involved in
telephone spread from Europe, while by its scale and complexity to develop
innovative payment instruments, but
much security innovation takes place in slowly. So whereas contactless cards,
also a market that is willing to accept
Europe, if only for the negative reason for example, have been able to take
new technology. Close cooperation
that many attacks are first seen within hold relatively quickly, products such as
between vendors and service providers
Europe or at its boundaries. However, mobile payments will be limited in their
is often a feature of these innovations,
entrenched structures, many-sided scope by the networks that support
and is helped by the fact that in several
regulation and the variations between interbank messaging and clearing.
countries one single dominant player
national markets mean that it can too The US is a major source of overseas
(e.g. a telco or transport company) is
often be the grave of such innovation. personal remittances and this is one
unfettered by serious competition
area where there is a need for some
concerns. Prepaid transport cards and • Latin America is more of a user of
new infrastructure to support innovative
mobile banking services are ubiquitous technology than an innovator, but there
services and business models.
in many countries. However, the is growing interest in, and pilots of, new
relatively loose cooperation between technology such as contactless and
countries in the region on infrastructure mobile payments.
and regulation has hampered innovation
in areas such as cross-border
remittances.
INVESTING IN PAY M E N T S
In The future of payments11 we commented that few banks have consistent criteria for
making buy – sell decisions. The situation today is possibly even worse, with many banks
being forced to cut projects affecting compliance, risk management and infrastructure
maintenance as well as technology innovation and customer-facing improvements.
However payments and associated functions (such as forex) remain some of the most
profitable activities within the banking sector. Cash management and corporate treasury
functions, once seen as boring and unworthy of senior management attention, are now
among the most reliable revenue opportunities for banks. These changes can require a major
shift in thinking for many senior executives. Internally, some of the best opportunities come
from bringing together common payment functions into a single, efficient and high-availability
engine that serves multiple business areas. Yet, for many organizations this could represent a
structural and culturally difficult change.
Convergence and standardization of payment systems and layered logical access control, to The development of channels for associated
classes still offers good returns in the medium compensate for the growth in channels and data is unlikely to be a high priority for banks;
to long term, particularly with the introduction allow that growth to continue. Risk managers however technology companies (including
of ISO 20022 and xml messaging. In many should have systems that can identify and payments processors) may see this as a
banks, there may still be room to eliminate measure counterparty risk, across all channels worthwhile opportunity and it definitely adds
non-standard processes and paper, and and in real time – this requires urgent value for many customers. In Europe, there
to reduce repair costs for cross-border development of software and databases. is political pressure for banks to introduce
transactions, which will yield good returns EIPP systems. In both cases appropriate
in the shorter term. Payments … remain architecture and security structures must
be developed before serious technology
Security and risk management require some of the most
development can begin.
continuous investment; currently there is a profitable activities within
need for common customer identification
the banking sector
Conventional technology developments much of that growth will initially be in infrastructure development, but the spread
addressing mobile banking and mobile low-value payments, there are also a rapidly- of RTGS systems for high-value transactions
payments, contactless cards and Near-Field- growing middle class and small business has also reduced risk and allowed many other
Communications (NFC) devices are expected sector that have few of the prejudices and developments. An issue for banks is the
to continue. The need for these is particularly legacy systems which constrain and slow pricing of services that use these premium
great in South Asia, Africa and other emerging down introduction of new products in the channels; although the price differential is
markets; here mobile payments in particular developed world. reducing, the added-value must be clearly
may be the key to formalizing the market and identified and sold.
Infrastructure owners and investors should
offering banking services to large swathes of
now be planning or building systems with For those banks and outside investors who
the population. Another reason for investing in
wider (regional or global) reach and near-real- have the cash and risk appetite to exploit the
emerging-markets payments is the volume
time capabilities. SWIFT remains one of the current situation, or who see a dominant
growth respondents expect there: although
biggest success stories in payments position in the payments business as
Long-term
Near-real-time and
other infrastructure EIPP and
upgrades Architecture
other
to permit
associated
associated
data
data
Convergence and
Timescale standardization
for returns Mobile and
Partnerships contactless
and ERP (developed
integration markets)
Security
and risk Emerging markets
management infrastructure
Mobile and
contactless
(emerging
markets)
Reduction in
Short-term paper
processes
Internal Investment focus Customer facing

(efficiency gains) (new peoducts and
services)
= Relative size of investment
Figure 4 – Potential areas of investment focus

strategically important, investment in systems Buying market share or a presence in a

and partnerships that will meet the needs of new geographic area or activity remains an
the largest corporate customers is essential. attractive option; the opportunity for ‘distress
This will require a deep understanding of sales’ is reducing but a more orderly M&A
ERP systems, how data can be extracted market is likely to emerge during 2009-10.
from and used within them. ‘Track and trace’ Figure 4 illustrates some of the potential
and dashboard tools must be developed. areas for investment focus; the ‘hurdle line’ is
And in particular the bank should build local probably rather close to the bottom-left-hand
presences, links with relevant ACHs, other corner at present but some opportunities may
banks and non-bank providers, that allow as soon become too attractive to miss.
many transactions as possible to be on-us or
contained within the bank’s sphere of
influence and pricing control.
BUSINESS MODELS:
DISTINCT AND DEFINITIVE
Across the world, banks are facing competition in payments markets, initially from other
banks: international banks typically begin by providing cross-border services, and then enter
the domestic market directly. Large domestic players are consolidating and buying smaller
providers. Global technology players are moving progressively round the world; although
their core business remains the provision of outsourced services, they compete actively
for a share of the value-chain and tend to have lower prices. As we have discussed, other
transaction service providers such as telcos or PayPal are most likely to have an impact on
low-value payments provision initially, but with time they could extend this franchise to other
services and again erode the value chain.
The need for clear strategic focus has never office activity associated with payments, Keep your friends close but your
been greater. It is no longer enough simply so long as they retain overall control of enemies closer
to seek to manage greater volumes with the value-chain and customer proposition. As well as outsourcing, many banks are
greater efficiency. Institutions need a more Many large banks do not see any advantages prepared to consider forms of partnership
discriminating approach, and the development in outsourcing their payments activity (joint ventures such as Monilink in the UK,
of a distinctive business model in which altogether, however this is not unusual BIN-rental as used by many prepaid card
they can pursue competitive advantage. for some smaller players. schemes, co-issuance with retailers or
This may be in a particular client sector, or transport companies such as TaiwanMoney)
We believe that if more banks had a common
a specific currency or a leading technology. in order to deliver a service to customers
infrastructure for all payment types they
Those payment service providers that nd avoid being locked out of sections of
could gain more from that coordination
most successfully grasp the opportunities the business (such as low-value payments
than from outsourcing any significant part
available will be those which pursue the most or migrant worker remittances). Instead of
of their payment operation. Controlling the
thoroughly-articulated and distinctive business keeping telcos and transport companies
price-points (through routing and additional
models – whichever sectors of the market strictly at arm’s length, many individual banks,
services) is one of the keys to maximizing the
they focus on. schemes and inter-bank organizations are
business potential of the payments business
and delivering optimum value to customers. actively working with other sectors to develop
Who manages the price-points
technology architectures and business
controls the business
models that may look very different from
Payments remain a core activity for banks; “Anything is up for grabs if
today’s concept of customers accessing bank
they form an intrinsic part of any cash- it brings user-friendliness, services through predetermined channels.
management or Treasury offering, and are one
cost or scale advantages” In these new models transactions may
of the most frequent contact points between
originate in a wide range of devices and
retail customers and their bank. Many banks
systems, well outside the control of the bank.
are comfortable outsourcing most of the back-
Several respondents pointed out that scale Sharing infrastructure can also reduce Some global banks have already specialized
is so important in payments that banks external costs, since more transactions in this way; they are clearly aware of the
and processors are often happy to share can be ‘on-us’, where in this case ‘us’ markets in which they wish to engage,
infrastructure components, or to subcontract includes both parties12. and the strengths they can bring to bear.
parts of the business to other banks. In many Others continue to provide the widest
The value-chain for all payment types is
ways it is easier for a bank to work with possible services across all markets; this
becoming longer (see Figure 5); but the
another bank; it is more likely to understand strategy will require extraordinarily deep
richest user services will be those for
its partner’s motives, priorities and pockets. Those who neither specialize nor
corporate customers. These will include
differentiation factors than when working invest heavily may at best form a feeder
dashboards, ‘track and trace’ functions,
with a telco or technology company. service, with higher costs and longer
specialist trade services and currencies.
supply-chains than the specialists.
Payer Payee Payer Payee
User services User services User services

User services
Channel Channel Channel

Channel
Account Account Account Account
Peer to peer mechanisms

Clearing and settlement Clearing and settlement
2007 2017
Figure 5 – Payments value-chain in 2007 and 2017

12 These structures are sometimes called ‘on-we’
Emerging polarization
The payments business could be seen as Specialists will undertake activities requiring Retail suppliers will form the interface with
polarizing into global leaders, specialists detailed – but still world-class – knowledge the majority of customers in the market,
and retail suppliers. and skills, and will again provide those using the services provided by the global
services to other banks, often through leaders and specialists. However the best
A leading group seems to be separating
partnerships with the global leaders. customers are likely to have been cherry-
from the group; it is likely to consist of no
Geography is no longer seen as a picked by the larger players, and this group
more than 10 banks worldwide, including
specialization in itself, although some of banks may have little control over pricing,
for example JP Morgan Chase, HSBC,
currency groups – e.g. Sterling or South as this is a commodity market with low
Citi, Deutsche Bank and Bank of America.
East Asian currencies – may form the margins. However, even the low-margin
Each of these banks can provide – without
basis for a specialization. Other fields end of the payments business is growing
needing to access a single Clearing and
of specialization could be international and underpins many other banking activities
Settlement Mechanism – global reach,
trade, migrant-worker remittances or card – few banks will want to leave this market
all major currencies13 and a range of
acquiring. This may seem like an attractive completely.
services to major corporates and to other
option for many banks today, but they
banks. This strategy requires substantial The threat of new entrants with different
should not underestimate the degree
investment in the most up-to-the-minute business models is likely to increase as the
of investment required to acquire and
infrastructure, very high availability and market resumes a more normal trajectory.
maintain the necessary skills, and should
security as well as a rich palette of A key component of each of any provider’s
be prepared to defend their specialization,
customer control and integration options. strategy should be a risk management
as there will be room for only a very small
model that is tuned to the risks involved.
number of specialists in each field.
13 At least dollar, euro and yen
ACKNOWLEDGEMENTS
KPMG International and KPMG member firms would like to thank those who participated in
the interviews of this and the associated surveys in Asia Pacific, North America and Europe,
for their time and views, including:
Deutsche Bank Symcor Inc APACS

Bank of America CIP (Camara Interbancaria SEPA Consultancy
de Pagamentos)
Fiserv Credit Suisse
Russian National Association SWIFT
Logica
For further information please see related publications or visit www.kpmg.com:

Mobile Payments in Central and Eastern Europe, KPMG in Central and Eastern Europe, April 2009
Consumers and Convergence, KPMG in the US, May 2009
Card Payments in Asia Pacific, KPMG in China, June 2009
Special thanks
Editorial contributors:
Oliver Kirby-Johnson, Partner, KPMG in the UK
Steve Blizzard, Director, KPMG in the UK
Mike Hendry, Associate, KPMG in the UK
Also thanks to:

Irene Pitter, Sector Manager, KPMG in Germany
Amber Stewart, Assistant Marketing Manager, KPMG in the UK
Freddie Hospedales, Head of Global Marketing & Communications, Financial Services, KPMG in the UK
kpmg.com
David Sayer
Global Sector Leader, Retail Banking
KPMG in the UK
+44 20 7311 5404
david.sayer@kpmg.co.uk
Europe Americas Asia Pacific
Oliver Kirby-Johnson Carl Carande Andrew Dickinson

Partner, Financial Services Partner Partner
KPMG in the UK KPMG in the US KPMG in Australia
+44 20 7311 4005 +1 704 335 5565 +61 2 9335 8952
oliver.kirby-johnson@kpmg.co.uk ccarande@kpmg.com adickinson@kpmg.com.au
Steve Blizzard Mitchell Siegel Simon Gleave

Director, Financial Services Director Partner
KPMG in the UK KPMG in the US KPMG in China
+44 113 231 3737 +1 678 592 3471 +86 10 8508 7007
steve.blizzard@kpmg.co.uk msiegel@kpmg.com simon.gleave@kpmg.com.cn
The information contained herein is of a general nature and is not intended to address the circumstances of any © 2009 KPMG International. KPMG International is
particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no a Swiss cooperative. Member firms of the KPMG
guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the network of independent firms are affiliated with KPMG
future. No one should act on such information without appropriate professional advice after a thorough examination of International. KPMG International provides no client
the particular situation. services. No member firm has any authority to obligate
The views and opinions expressed herein are those of survey respondents and interviewees and do not necessarily or bind KPMG International or any other member firm
represent the views and opinions of KPMG International or KPMG member firms. vis-à-vis third parties, nor does KPMG International
have any such authority to obligate or bind any
member firm. All rights reserved. Printed in the
United Kingdom.
KPMG and the KPMG logo are registered trademarks
of KPMG International, a Swiss cooperative.
Designed and produced by KPMG LLP (UK)’s
Design Services
Publication name: The beating heart of banking
Publication number: RRD-141121
Publication date: June 2009
Printed on recycled material.

The Beating Heart of Banking: Insights Into Global Payments

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RETAIL BANKING

The beating heart of banking

Markets and Products 6

Infrastructure and Risk 12

Technology and Innovation 20

Business Models: distinct and definitive 28

CEO Payments Agenda 2007 CEO Payments Agenda 2009

. New products and services . Cost Savings

3. Investment in new front and back 3. Partnerships

Red = New to agenda

This change in priorities points to opportunities

“Alternative Payment Providers

“90 percent of mobile

“Islamic instruments are essential”

Figure 1 – Regional variations

MARKETS AND PRODUCTS

Payment volumes rise, but investment focus shifts

“ ‘Back to basics’ for payments means

Need for speed: Customers want transparency Innovative pricing is key:

Banks in emerging countries see low-value payments

High performance, Interfaces to clearing and

Customer-facing products and services

2 Clearing and Settlement Mechanism

6 Electronic Bill Presentment and Payment

INFRASTRUCTURE AND RISK

Two key themes emerge very strongly:

7 Unless they use SWIFT for all domestic high-value transactions

Drawing strength from adversity: sale and the corresponding payment).

Industry fears a wave of regulation

“SOX & SEPA will be kindergarten activities

Emerging-market M-transfers using M-transfers using International Account facilities

Figure 3 – Models for mobile payment introduction by banks and telcos

“The bank is not used to having its portals left in taxis”

Internal Investment focus Customer facing

= Relative size of investment

Figure 4 – Potential areas of investment focus

strategically important, investment in systems Buying market share or a presence in a

Payer Payee Payer Payee

User services User services User services

Channel Channel Channel

Account Account Account Account

Peer to peer mechanisms

Figure 5 – Payments value-chain in 2007 and 2017

12 These structures are sometimes called ‘on-we’

13 At least dollar, euro and yen

Deutsche Bank Symcor Inc APACS

For further information please see related publications or visit www.kpmg.com:

Also thanks to:

Europe Americas Asia Pacific

Oliver Kirby-Johnson Carl Carande Andrew Dickinson

Steve Blizzard Mitchell Siegel Simon Gleave

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. New products and services . Cost Savings

“SOX & SEPA will be kindergarten activities