Banks hoping to navigate the uncertainties of 2023 will be looking to their modernisation efforts as a way to claw back some value.
In its 2023 banking outlook, Deloitte has advised banks to “…reassess traditional product, service, and industry boundaries to create new sources of value”.
The company has suggested that this could include exploring fintech opportunities, embedded finance, tokenized assets, and other digital payments. But freeing up resources to do this could add a good deal of risk to existing acquiring offerings.
“Many banks have entered the acquiring space in the last few years, enticed by the transaction revenue opportunities and in some cases to augment their commercial, transactional or lending capabilities to provide fundamentally new services into their offering,” says Brenda Varrie, vice-president group head: acquirer processing and product at Network International.
“In addition, we’ve seen existing players boosting their acquiring product teams and expanding their service through a better omni-channel product line and digitisation of existing capability.
“But maintaining good margins and solid profits in an increasingly complex regulatory environment is proving difficult for many. And, for banks hoping to stay competitive, outsourcing their traditional acquiring back-office functionality is the best, and in some instances, only way they can safely tap into those new sources of value they are all looking for.”
Varrie explains that, while transaction revenue offered by digital payments has made acquiring an attractive option, she says running and managing merchant acquiring services comes with a good deal of time-intensive requirements. A skill set not always readily available given the complexity of the acquiring ecosystem in an ever increasing competitive space.
“The outlay to provide all the merchant technology is just the start of your requirements,” Varrie explains. “Your merchants really just want to run and grow their business while trusting their payments environment works, but they increasingly need to manage stock, authorise and settle transactions, do their end-of-day settlements and complete reconciliations, in addition to all of the other regulatory requirements placed on you as an acquirer.
“Many banks are realising that acquiring is a lot more complicated than they thought and requires significantly more time and effort for relatively slim margins. For a bank looking to capitalise on new opportunities, finding a more efficient way to deliver existing services will become the priority.”
She adds that outsourcing these cumbersome processes will allow banks to free up their staff to focus more on margin-friendly new services without disappointing current merchants or customers. What’s more, outsourcing will also allow banks to scale their acquiring offering, which optimises their chances of hitting margin targets.
Shrinking margins, with more complexities to come
South African acquiring banks are not alone in their battle to maintain healthy margins. According to Capgemini Payment Trends 2022, as many as 45% of surveyed executives rate their payments business to be “slightly unprofitable to highly unprofitable”. In addition, The more traditional methods of payments (such as cards), will continue to lose profitability and by 2025, the company predicts these methods will contribute just 45% of total payments revenue, down from the current 73%.
In an effort to address their failing profit margins, global banks are turning to Payments as a Service (PaaS). The same Capgemini research shows that more than a third of the companies they had engaged with had already started implementing PaaS and believed they would realise the benefits of their effort within a year of implementation.
“Multiple hidden costs related to people, processes and time lurk in acquiring systems. Compliance is a constant process that requires whole departments. For instance, one area where banks lose a lot of money is in chargebacks, which can see banks haemorrhage profits if they get it wrong. Shifting the burden to a payment processing partner can reduce the cost per case and, because of better systems and support, the number of cases can be slashed,” Varrie says.
She goes on to warn that the burden is expected to increase over the coming months and years.
“As we move towards an open banking and open API future as well as our rapid payments environment, banks can expect to have an increased cadence of regulations to comply with. Having a trusted partner to take care of that in the background allows banks to focus on what they do best – understanding their customers and designing products they need and want. Acquiring will always be a crucial part of the service, but companies offering financial services should be consumed with how to maximise profits by providing the best digital products, not how to staff their back office to deal with chargebacks and other operational issues,” Varrie says.