Credit card company Visa proposes a solution to the problems
posed by banks' ageing systems. Nick Huber reports.
Visa's European arm has revealed ambitions to route payments for
banks over its revamped network and process direct debits and
direct credits. The move would put the credit card giant in direct
competition with UK clearing house Bacs.
Visa argues that banks badly need to modernise their ageing payment
systems, which channel millions of transactions from shops and
cashpoint machines to card providers. Like many legacy systems in
the banking industry, this core infrastructure is more than 20
years old and is expensive to support.
With payment volumes expected to rise, banks will have to update
their technology to keep up. But given the value and volume of the
transactions passing through core payment systems, updating or
replacing them would be a high-risk project.
"The bank systems may look like a gleaming Ferrari, but if you lift
the bonnet you have something like a British Leyland 1956 car,"
said Peter Jones, director at Visa Payment Systems, Europe. "It is
dangerous for retail banks and financial institutions to continue
to wait and see, given the cost, inflexibility and resources taken
up with supporting existing payment systems."
Banks could outsource the project to a consultancy or collectively
developing a new industry-wide payment platform. The cost of such a
project would run into tens of millions of pounds.
There are specialist payment switching suppliers, such as ACI and
S2 Systems, but the more sophisticated switching software is
generally only being used by small and medium-sized banks, said
Jones.
That leaves the Visa option. This would see the Visa network handle
the payment switching requirements of its member banks.
The credit card company is halfway through a major overhaul of its
payment processing infrastructure, which will see it move to an
open architecture.
"We might be willing to sell that architecture down to the bank
level and drive their ATM and point of sales," said Jones, although
he stressed that no decision had been taken on whether to introduce
the service.
Visa is also keen to use its network as a springboard into other
areas of the payments market.
The automated clearing house market is one target. The European
payment market is ripe for consolidation, with about 80
organisations offering payment switching services. In the UK, for
example, there is Bacs, which processes direct debits and direct
credits, cash machine network Link, and Swift, a high-volume
payment and messaging service.
"Should the payments industry have three to four really large
organisations having this capability?" said John Chaplin, executive
vice-president at Visa Payment Processing Services. "At the moment,
basically everyone rolls their own."
Although Visa has the right technology to expand into outsourcing
and direct debit processing, analysts said it may struggle to
persuade banks to switch suppliers.
"I could not see the top tier of UK banks outsourcing their payment
switching systems to Visa," said Daniel Mayo, lead analyst at
Datamonitor's financial services practice. "I think there would be
a risk, given the huge customer contact of dealing with millions of
transactions per day, if you outsource the [payment] switching bit.
The top tier UK banks probably have quite good switching systems
anyway."
Mayo said it is more likely that banks will slowly upgrade their
payment systems, allowing enough time for adequate software
testing. However, he said there is potential for Visa to expand its
presence in cross-border money transfer services.
Will banks want to use Visa system?
In order to keep up with payment volumes and offer new payment
services, banks need to update their switching software. But Visa's
suggestion that it could run banks' payment switching over its own
network has met scepticism from analysts, who argued that larger
financial firms would rather run critical systems in-house.
Visa's overhaul of its core technology - largely through the
efforts of its 150-strong European IT department - has placed it in
a strong position in the increasingly competitive payments market.
However, although the Visa network has the capacity to process
millions of direct debit and credit transactions, there are already
strong incumbents in the clearing market.
Visa's IT shake-up
November 2002 Visa Europe launched a
cross-border money transfer service designed to allow member banks
to comply with forthcoming European Union legislation. From July,
banks in the EU will no longer be able to charge more for low-value
cross-border EU transfers than they do for domestic
transfers.
January 2003 Visa Europe launched a series of
services designed to allow its 6,000 member banks to improve their
management information. The services enable banks to diagnose where
they are performing well and help to identify areas of inefficiency
that may be affecting customer service or back-office costs. The
service uses information stored on Visa's new datawarehouse.
December 2004 Visa will overhaul its European
payment network, moving to open architectures such as IP network
technology. The move is designed to speed-up the network and reduce
IT costs.