Banks used to hold this domain with their customers.

The space changed between 10-15 years ago through the rise of the internet, and the slowness of many banks to respond to the needs of business who wanted to move their business online and then needed a payments gateway to facilitate the payment. Banks started to separate the ‘capture’ of the transaction to the ‘clearing’ of the transaction.

This meant that some (but not all) Banks sent their customers to newly found ‘credit card gateway’ companies whilst continuing to offer the underlying ‘merchant’ facility to the customer. This mean that the credit card transaction was ‘captured’ by the online gateway provider and ‘cleared’ by the Bank. Online gateways were agile, could develop programming interfaces (API’s) that allowed merchants to integrate their online shopping carts with the credit card system to enable payments. Banks were typically big and slow, and whilst offering a very reliable merchant service that underpinned the card transaction, they weren’t very agile at developing on-line API’s for merchants to integrate, and were less agile (or it didn’t even fit their business model) to deliver integration assistance to their customer base.

Nowadays then, if you are online merchant the typical model is to buy your card capture product from an online gateway (or even PayPal) and have that gateway integrate with their chosen Bank’s back end merchant facility.

The Bank part is a necessity (and taken for granted), the capture part is what the customer really needs. In essence, that is the product being purchased. Online gateways have been very smart, continually adapting and offering value added services (such as card reprocessing, tokenization for PCI DSS compliance), integration services, out of the box shopping card modules and the like.

What once was the domain of the Bank has now been commoditised and disaggregated from the Bank’s own offering.

As we move into corporate payments processing, it is important to examine the way that corporations ‘tender’ their banking business to the banking community. Traditionally, a corporate would issue an RFP for the provision of banking services. A shortlist would be created, various Banks would tender and more often than not a sole provider for the provision of Transaction Banking services would be selected. That provider would normally win the right to provide core banking services (such as bank accounts, liquidity (Debt), FX) and ancillary ‘value added’ services such as payments processing, merchant processing, supply chain, corporate card programs and the like.

When the GFC hit, corporations then had to diversify their banking relationships to reduce counterparty risk. This meant that corporates had to now spread their banking services across a number of banks, each relationship meaning a new online banking site, many and varied authorisation dongles/tokens, a different bank for a different region and so on. Each bank had their own particular way of doing Host to Host services, ERP systems integration, Treasury Management, Payments processing, receivables and the like. This has created a headache for corporates wishing to be more efficient in payments and treasury operations as most banks have their ‘own’ proprietary way of achieving this processing. The industry has done its best in agreeing on new standards of processing such as ISO 20022 but not every bank has adopted these standards, and most banks don’t agree on the bilateral mechanisms residing within the standards to achieve efficiency in payments processing. In essence, each integration with a Bank is a new project.

At the same time, most Bank’s haven’t changed their delivery model of payments processing product. They still respond to tenders for Transaction Banking solutions by offering the core banking services tied in with the ancillary value added services. This then by its very nature creates a further web of a corporate having to buy its banking product from many providers to simply do business.

What if you could by your banking product from a universal/independent provider (especially in payments processing and integration) and then let that provider do all the back-end ‘stuff’ with your chosen bank in your chosen region? How would that change your perspective?

To use the previous analogy, instead of the Bank doing both the payment ‘capture’ and the payments ‘clearing’, why couldn’t another provider build a payments ‘capture’ engine and then let the chosen bank do the ‘clearing’. With the world becoming more real-time and ‘instant’ there are methods to connect to banking services now that mean that a corporate could buy their product not from a bank and instead buy it from an independent supplier that is connected to the bank for clearing.

My hypothesis then is that transaction banking payment ‘product’ (capture of the payment) will become disaggregated from traditional bank ‘clearing’ systems. Bank’s will find themselves competing with tech companies for payments processing and for other value added services that simply need a smart way to connect to the bank whilst at the same time increase efficiency and reducing complexity for the client.

This creates an opportunity for tech startups to be innovative in payments and integration processing, aggregating between banks/corporates and using best of breed agile technologies to create efficiency for corporates who just want to worry about their own business instead of worrying about the Bank processing their payments.

The opportunity in Australia alone is huge – look at the below table:

High Level Transactions Statistics (apca.com.au)

*These figures are values exchanged and do not include “own items”. Note also that a full picture of RTGS transactions would require HVCS transactions to be supplemented by Austraclear and RITS transactions which are not captured by APCA.

^Customer Payments Accounts cover day-to-day accounts and include: cheque, statement, savings and passbook accounts.