Banks must now consider the core of their operating model if they are to
maintain their leadership in client journeys and the payments industry.
Incremental efficiency improvements won't be sufficient to keep banks'
structural advantages in the market. We think that for banks to generate
the headroom required for investment and respectable profitability, cost
improvements of at least 30% will be required. And although that goal may
seem challenging, we think it is doable.
The convergence of various market dynamics increases the need for a
comprehensive rethink of the payments operating model. These include
expanding worldwide standardization, which enables possible scale gains
and the advent of change-supporting technology, increasing pressure on
margins, increased regulatory pressure to restructure operations to
support services like fast banking and open banking, and so on.
But what will change? There are four possible operating models, each
appealing to banks facing specific strategic challenges. These include
payment carving out and scaling, utility sharing partnerships, payment as
a service offers, and outsourcing of specific payment services.
Underinvestment and lack of scale may occasionally affect a payments firm
operating under a bank organizational structure. The lack of an outside
payments market focus could contribute to this issue. In these situations,
banks should think about whether a carve-out and expansion of the payments
business, run as a distinct profit and loss, may generate additional value
for clients and other stakeholders.
Payments organizations must quickly achieve scale to lower per-transaction
costs and enhance profitability profiles as payments services commoditize
and margins narrow. As most payment services are only available to bank
customers, that can be challenging to achieve inside a bank framework. The
expansion of services to other banks and direct offering of services to a
wider range of clients are made possible by treating payments as a
stand-alone company, which increases scale and boosts profitability. A
successful carve-out will also strengthen the new entity's entrepreneurial
leadership, which can stimulate the acquisition of new knowledge and
foster a desire for expansion.
In the end, this strategy often allows for higher company investment and
the introduction of more innovative and value-added services to clients
than a wholly internal operation would have likely accomplished. It's a
technique that banks find intriguing since it may strengthen their
operational advantages and help them stand out from the competition by
encouraging more investment. The ability to take a more flexible approach
to expansion is made feasible by carving out the payments sector.
Carve-outs also create a currency that paves the way for future
consolidation.
