Coronavirus causes a steep drop in payments volume. How should banks react?
These are unprecedented times. The COVID-19 outbreak has taken the world by surprise and its effects on our day-to-day life have been unimaginable. Entire countries have gone into lockdown, closing “non-vital” stores, putting a halt on social activities, shutting down schools, and essentially confining people to their homes. While some companies are seeing a surge in demand, such as toilet paper producers and streaming services like Netflix, the economy in general is taking a big hit. Financial institutions are noticing the effect and have been quick to respond.
Banks have taken significant measures to support their customers, ranging from a temporary pause in outstanding loan payments and higher limits for contactless payments, to increasing financing options. Governments have also stepped in, by increasing temporary unemployment arrangements, postponing tax payments and providing emergency funding for small entrepreneurs (among others).
The effects of the global pandemic were first seen in China, where the outbreak originated. They seem to have gotten the virus under control, and are now starting to relax the strict social distancing rules, allowing for public life to reboot. Shops are reopening and commerce is starting to flow again. Unfortunately, in Europe and the US, we are far from that reality. What does this mean for global payments traffic?
Payments are slowing down. Are banks prepared to scale down accordingly?
With the abrupt economic slowdown, payments volume has taken a dive. American Express has already seen a “softness in spending volume at the end of February that has accelerated into March.” Mastercard, Paypal and Visa lowered their Q1 expectations. LINK’s figures in the UK also show a steep decline of 29% in week 13, a rather steep decrease compared to the same week last year.
This 30% drop in payments volume has a financial impact, but there is an interesting operational effect as well. How do banks cope with these types of fluctuations in processing capacity in an efficient and effective manner? Are banks able to scale down their systems to reduce costs, while maintaining the operational stability that is necessary in times like these?
Recently, some banks have taken steps to move to a cloud-based infrastructure for payments. This should allow those banks to scale their infrastructure more quickly, in line with their needs. Operationally however, this is more difficult, as personnel remains on the payroll even with decreased payments volumes. The same goes for (most) software licenses. The income side of the payments equation is mostly volume-based ( banks tend to have a “per transaction” pricing model). In other words, their income moves up and down in direct relation to the volume. The costing side is much more fixed, exposing banks to a big financial risk when volumes deviate from the mean.
How can banks gain the flexibility they need?
Moving to a more flexible cost model for payments is the solution. This could be achieved by moving to a cloud infrastructure, using a (partly) flexible workforce for operational support and paying for software licenses using a variable metric (such as per CPU for example). A potentially easier way to gain flexibility is to partner with specialised providers and move to a Payments as a Service model. According to Accenture, outsourcing payments processing allows banks to benefit from the specialised vendor’s:
- Economies of scale — meaning a multibank operation is desirable.
- Economies of skill — tapping into proven, industry-leading specialist expertise and experience.
- Roadmap and ability to invest — to keep up with regulation and the market, thus enabling the bank to avoid continual multi-year investments.
Considerations for payments outsourcing
When outsourcing payments processing to a third party, it is important to have an end goal which goes beyond pure cost savings. Otherwise, an outsourcing exercise could easily turn into a “your mess for less” situation. When done properly, transferring the payments processing functions – or part of them – to a specialised party minimises the complexity, costs and risk. In addition, it can deliver a new degree of flexibility to the bank, where the bank is free to pick-and-choose new functions and services it wishes to integrate into its application landscape. This flexibility should also be represented in the cost model, where a fee per transaction dramatically increases the bank’s resilience to changing market conditions.
At Visma Connect, we are implementing a new payments platform which is designed according to these principles. Our platform is real-time at its core, with a clear split between interfacing and application logic and built up from business services. With Visma Connect, you outsource the hassle and insource agility.