The Payments Processing Opportunity for Banks: Moving Account-Based Payments from Cost Centre to Revenue Stream

The model used by most banks for processing account-to-account payments is under strain. Despite payment services being mission critical, a bank’s payment operations are largely seen as a cost centre. Crucially, margins are being squeezed from all sides, making current approaches increasingly unsustainable. Engaging a third-party processor or taking a PaaS proposition from a vendor are two options that are gaining traction, and offer clear alternatives to managing this internally. However, this shift is also a commercial opportunity for those banks prepared to enter the market.

Driven by a combination of commercial pressures and changing scheme and regulatory requirements, many banks are investing time and resources in modernising their account-to-account payment processing infrastructure. One theme underpinning much of this activity is the more strategic question over where in the value chain the bank should play, and where they should work with partners. This reflects the growing orthodoxy across the industry towards focusing on the core strengths or assets of an organisation and partnering with specialists who are better able to deliver on the rest.

Partly as a result, there is now a growing ecosystem of players with offerings to address these needs. Adoption of vendor Payment-as-a-Service (PaaS) offerings and propositions from third-party processors continues to grow and shows little sign of slowing. In parallel, the concept of Banking-as-a-Service has become one of the most important topics in the industry. The idea is a simple one: a bank provides a technology capability and licences for another party to deliver regulated services to its own customers. In short, they deploy their regulatory and technology assets to become a service provider to a third party. That could be a non-bank provider, but it could equally be another bank.

The question this raises is whether the BaaS approach can be applied to payment processing. In other words, is there an opportunity in today’s market for banks themselves to extend beyond the current models of correspondent banking and scheme access services to offer more comprehensive payment processing services to other financial institutions? For financial institutions, this would be an opportunity to move payment processing from a cost centre into becoming a commercial activtity bringing in a new revenue stream.

To investigate this, we have sought opinions and insights from a broad base of financial institutions across Europe. The aim is to understand where the opportunities are in today’s landscape, as well as the appetite among banks to consider this kind of model. A key input to this process is a substantial program of primary research run through June and July 2022: the Celent Payment Processing Survey. Through this, we have canvassed the opinions of 92 senior executives at banks across Tiers 1–3, each with responsibility for (or insight into) the payments strategy of their organisation. In addition, we conducted several in-depth interviews with senior executives at Tier 1 banks in Europe to further explore these issues.

Key findings from this research include the following:

• 86% of Tier 1 banks report that margins on payments are becoming more challenging to maintain. This is up from 59% a year ago.
• 70% of banks in Tiers 2 and 3 expect to make significant changes to their payment infrasturcture in the coming 24 months, or have this work underway.
• 22% of banks in Tiers 2 and 3 would be happy working with a larger bank for payment processing services.
• 51% of these banks identify the ability to connect to a processing partner via a single API as a clear value add.
• 75% of Tier 1 banks would consider processing for others if it would lead to lower costs.

Figure: Mid-sized banks want processing partners that can offer them new value in the form of value-added services and a simple integration path

While there is clearly an opportunity for banks to consider, capturing this will require investment in both technology and skills. Consideration must also be given to the commercial and reputational risks involved. Nevertheless, those financial institutions looking for a way to move their payment processing infrastructure from cost centre to revenue-driver should give serious consideration to building a service offering for other banks.