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.