PAYMENT CARD PROCESSORS
Swinging singles
All banks, without exception, are trying to cut costs – but the decision on whether or not to move to a single processing platform choice additionally involves some tough choices over outsourcing
Bank consolidation is in the news thanks to the competing bids for ABN Amro, which follow earlier deals like Unicredit-HVB and Santander-Abbey. Despite the drama and manoeuvring, these deals are essentially about cost cutting, finding synergies and creating value for shareholders. Even for banks not involved in hunting for new partners, the pressures are similar – cutting costs and returning cash to shareholders.
By Jane Adams
Part of this can come from IT savings and as some banks and other issuers are finding, one approach is to move card payment authorizations, clearing and settlement over to a single platform, across the organization.
“As banks start to grow, start to consolidate, as banks have multi-country issuing and acquiring needs, there is a huge desire to try to bring down the number of platform applications they operate on and ideally move to a single platform,” says Kelley Knutson, managing director of TSYS Europe.
One of the pioneers of this approach has been Danske Bank, which bought the Irish banks Northern Bank and National Irish Bank from National Australia Group in 2004. “It is the strategy at Danske Bank that whenever we acquire a bank, it’s our intention to migrate the bank to our group card platform,” says Merete Udengaard, head of cards at Danske Bank: “We have so far done it with the acquired banks in Sweden, Norway, Ireland and Northern Ireland.”
Danske is now migrating the systems of its latest acquisition, Sampo Bank of Finland, which is expected to be complete by spring 2008. The conversion process for its Irish acquisitions in 2004 took approximately 12 months. “If you look at (our two banks in Ireland), it has improved the banks’ competitive edge. They’ve come on to the same platform and technological standards have been increased quite considerably,” Udengaard says.
Pan Nordic rival Nordea is also aiming at a single platform but its spokesperson told ECR that the timing was wrong for them to comment at present (see also p5).
When Royal Bank of Scotland acquired NatWest in 2000, it moved both banks to a new common platform and now runs all its card businesses, including Tesco credit cards, on the same platform. Speaking in 2003, the then director of group technology for RBS, John White, explained at a group conference: “The Royal Bank platform we decided wasn’t good enough, big enough, capable enough, to take on the NatWest customer base and so we had a new one developed and brought on board.” The process involved migrating 12.6 million credit cards and the entire process took 942 days.
With operations in Czech Republic, Slovakia, Hungary, Slovenia, Poland and Serbia as well as Belgium, KBC is considering consolidation of its processing platforms. Challenges it has identified include the small size of some of its markets, maintaining respect for local management and cultural differences. It concluded that a common platform did not necessarily mean a one-size-fits-all approach in a single location.
KBC identified outsourcing as the easiest way to proceed. “Our internal organization was not ready for group-wide projects,” says Herwig de Preter, GM of KBC. The question then became how far to outsource and which aspects of the value chain to keep in-house.
“Whether to adapt existing systems or to adopt a completely new one was also a sensitive issue,” De Preter says. It also meant that the bank shifted from being the owner of its systems to being a customer of someone else’s system. “This means closer monitoring of costs, treating the provider as a partner and sharing strategic information,” he adds.
“I think there’s the strategic intent and desire to try to migrate to a single platform,” says Knutson: “I think the execution is a different challenge.”
At Visa Europe, SVP Jonathan Vaux, notes: “This is absolutely something we are seeing happening but it’s not something that happens that quickly, so there are more banks evaluating it than doing it at present.” It is a trend Visa Europe encourages, he says.
“As an association we do believe in our interests to help and support members gain scale efficiencies. All banks need to have connectivity to the card associations and since they have the cost of that maintenance and connectivity, it makes sense to put as much traffic through that as possible.”
MasterCard says much depends on customer strategy. “As MasterCard we really want to position this discussion on what’s best for the customer,” says Max Lanckriet, senior business leader, processing: “It’s a difficult job and it depends a lot on the bank having a pan-European reach. Does it have a pan-European strategy and vision? It depends on the size, it depends on the scale, it depends on (existing) contracts.”
However, he agrees that from MasterCard’s own perspective, banks using a single platform is helpful: “If we can make it more attractive for the bank to have a single pipe with MasterCard, having a single relationship rather than multiple relationships can sometimes be a huge benefit for a customer.”
Knutson says banks with purely domestic market strategies and ambitions are likely to be more interested in putting more volume through their existing infrastructure. The single platform route is more likely to benefit banks with multi-country activities, which are cumulatively putting enough volume through all their operations to be able to benefit from economies of scale on a single platform. That’s particularly the case for groups which have grown by acquisition and have a diverse range of systems to deal with.
However, the biggest multi-national groups may already operate core regional platforms in their different regions. In addition, the more decentralized a banking group is in terms of its business objectives, the less likely it is to have centralized technology solutions. “You need to look at business objectives, with the operating model, with your platform or solution set together,” says Knutson: “They really need to hang together to come to a conclusion around the technology infrastructure you are looking for.”
Banks considering the single platform route have to decide how to proceed. Do they do it in-house or do they outsource to processors such as TSYS?
While the largest multi-nationals may be able to support all their operations in-house, that isn’t the case for all banks. “You have institutions that are trying to grow quite quickly and get in multiple markets fast and the fundamental reality is that they’re not able to do that with their systems. They want to go single platform and they tend to outsource to providers who can provide a single solution in multiple countries,” says Knutson.
“If you have an outsource provider, and you buy other banks and consolidate, it probably is easier for you to move to a common platform than if you are your own in-house IT provider. The ability to bring over these acquisitions in-house traditionally takes longer than what an outsource provider can do.”
Says Vaux: “There is probably a handful of banks that is significantly large enough to do it themselves, but generally it’s something that banks would consider outsourcing. Processing is a scale business and it’s not an area that’s easy to differentiate on.”
Dainis Krastins, chief technology officer at processor PBS, thinks this is just part of an overall trend to outsourcing in the financial sector. Processors like to ask banks to consider whether running IT platforms is a competitive differentiator for them or whether they would be better concentrating on product development and customer relationships.
“IT is more and more becoming a commodity and that is what is happening in financial services. In parallel, things are getting more complex, but they are also getting commoditized, so what companies are doing to conquer this complexity is to outsource it and what companies such as PBS are doing is to specialize in this,” Krastins says.
However, bank activities aren’t always so simple. “If you look at banks that have been built up by acquisition, you won’t find a consistent insource or outsource answer. You’ll find a complex network of arrangements,” says John Chaplin, European payments adviser at First Data: “They are looking to simplify that and the chances are that if you simplify that you are more likely to move it outside than bring it inside.”
While it is inevitable that system changes involve migration costs, the major reason all commentators mention for bank interest in single platforms is cost-cutting. “It’s driven off the belief that there are better terms and conditions to be had from processors for a larger volume,” says Chaplin.
Udengaard says: “We find it more cost-efficient to operate on only one card platform and you achieve economy of scale by providing the same product universe in all countries.”
Gianluigi Rocca, prepaid and credit card marketing manager at processor SSB, says: “The most important (benefits) are economies of cost. Customers are able to get the level of cost that is the sum of the costs of the different countries.”
That means banks can total volumes across different countries to get an overall cost. The result, he says, is two-digit percentage cost reductions. “But most important is the reduction of time,” Rocca adds: “If you are able to deliver an initiative in three-six months’ less time, this is a large amount of money.” The six months’ time saving is over an average of four countries.
Knutson says that outsourcing alone provides savings of 10%-20% and moving to a single platform adds a further 10%-15% savings. “That’s why some institutions are willing to live with a couple of solutions. While it is interesting, it’s more about how much religion do they have about getting to a common platform,” he says: “Do they believe that by getting to a common platform, down the road they can save 20%-30%?”
The challenge for many banks “is that the volumes they are trying to consolidate are not that big,” Knutson adds: “Once you start to consolidate big volumes, that’s when you see the 25%-30% savings.” He defines big volumes as four markets of 5 million cards each but says that efficiencies kick in at 2 million-3 million cards.
However, there are other reasons. “A lot of it is driven internally,” says Chaplin: “The cost of running all these platforms with all the knowledge and people working on them is considerable, but a lot are also driven by the thought that if they could get to a single provider they could then simplify their own organization considerably.”
The big issue for banks at present is the SEPA process of removing national barriers. “SEPA has driven a lot of our customers to look at their payments platform base and to revisit that going forward,” says Vaux. However, banks still have to work within local interchange systems at present, something that may delay major changes for another few years.
SEPA isn’t the only area where compliance issues are becoming more complex. Indeed, there are many types of complexity and overheads with multiple owner-operated systems.
“You’ve got to maintain all your own connections to Visa and MasterCard. You’ve got to do all your own compliance arrangements in multiple markets. You chew up a lot of resource,” says Chaplin, who used to head Visa’s European processing. “And I can say from my own Visa days that that really is a considerable burden. People underestimate the complexity of compliance with Visa and MasterCard – the testing, the retesting, the certifications – and they don’t make it easy.”
On top of that there are data protection and privacy compliance regulations, anti-money laundering, know your customer requirements, data retention, PCI compliance, messaging security compliance. “The compliance burden for banks has gone sky-high,” says Chaplin, who estimates that around 20% of bank IT expenditure goes on compliance – “And that doesn’t get you any competitive advantage.”
“The more compliance rules are brought in in different countries, the easier it is to get compliance stuff done by an outsourcer,” agrees Krastins.
So far, so positive. What are the disadvantages of striving towards single platform operation?
For a start, the single platform approach isn’t 100% straightforward politically. Local markets have local needs and managers may feel that their existing approach works fine. “It raises the problem within the bank of defining the approach and combining the different approaches of different countries,” says Rocca: “It’s a matter of organizing internal operations. But all the problems are before the decision of moving in this direction. It’s quite complex.”
Does a single platform have to mean a single product approach? “You of course are missing some possibilities to differentiate in the market place. That is a slight disadvantage. But as things become more commoditized, you don’t need to differentiate,” says Krastins.
However, that isn’t always necessarily true. “You can have same technological platform and still adapt to the market,” says Udengaard: “The challenge is that the market situation varies from country to country. But on the other hand, this sharpens the organization, enabling us to adopt unique local product features and implement these as best practices as group standard.”
Not only banks are trying to streamline their platforms. SSB has offered a Milan-based single platform solution for all its customers for the past three years. Before then, it offered different platforms for different customers. “Our approach is a unique platform on a unique data centre,” says Rocca: “The same platform on different data centres is a problem – there are not so many economies of scale.”
Feedback “is very positive,” Rocca adds, noting the big benefit is that “customers are able to define one single product in one country and just replicate it in other countries, thus reducing the time for delivering the product abroad.” They can also “use an industrial level process which is only available on large volumes” – in the region of 8 million cards. SSB customers include KBC, ING and UniCredit.
TSYS has not followed that route although, says Knutson: “We prefer to have as few platforms as possible. But we don’t think a single platform satisfies everyone.” He says that TSYS has two applications for core issuing.
Chaplin says that First Data’s goal is as few platforms as possible, although that that does not mean just one. “However, it isn’t just about having a platform,” he adds: “Clients won’t deal with you unless you’ve got local knowledge, local expertise, local support. You still have to commit to local servicing and local resource.”
PBS tries to use the same platform for different customers but it depends on the specific needs of the customer. “The amount of work we do differs between companies – maybe we are doing everything or maybe we are just doing some tasks. But we try to use a single platform to get economies of scale,” says Krastins.
Ultimately then, the single platform choice isn’t that simple. “It’s more than just technology,” says Knutson: “It’s the operating philosophy of the bank. Do they want to centralize? Do they want to decentralize so they can run it from a regional perspective? Or do they want a hybrid – in their big markets they run independently and they group their emerging markets together.”
The operating model dictates the infrastructure solution. “The more decentralized you are, you find individual countries looking for their own technical solution,” Knutson concludes, adding that all but one of TSYS’s clients are trying to limit the number of platforms and solutions they use.
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