Published in the Financial Times.
Thursday, December 30, 2010
Regulatory changes are expected to drive up the cost to banks of processing cash payments and are likely to hasten industry consolidation by forcing smaller players out of some basic banking services.
Big global banks such as JPMorgan Chase, HSBC and Citigroup are most likely to benefit because they can afford to invest in cost-cutting technology and process many payments internally.
Many midsized banks may be hard pressed to provide payment services at a competitive price if new global liquidity rules take effect as planned in 2015, say bankers and analysts.
Transferring money from a bank customer to another business or person, across accounts, banks and international lines, is a low-margin, high-volume business. It could be hit particularly hard by the new bank rules published in final form this month by the Basel Committee on Banking Supervision.
The Basel III reform package requires banks to hold enough easy-to-sell assets to weather a market crisis, thereby driving up the internal cost of business lines that tie up liquid assets, including payments services.
As a result, banks will either have to charge more for payments processing and see their profits shrink or turn to outside providers and save their liquid assets for other businesses.
“We haven’t had this much change in such a short period ever before. We think there are potentially unintended consequences,” said Mark Garvin, international chairman for JPMorgan’s Treasury and Securities Services business.
Banks already lodge liquid assets with central banks to participate in the Real Time Gross Settlement network – used mostly by businesses for large, quick payments. But the new rules could hit the Automated Clearing House, a much larger but slower system that bundles together millions of smaller payments, particularly hard.
“The new Basel rules make it hard to provide payment services at low cost. Certain players will say: ‘Forget it, I can’t compete’,” said Paul Styles of ACI Worldwide, a payments software provider.
Small banks, such as US credit unions, already outsource payment processing. In Germany, there are more than 1,900 banks but only 184 participate in RTGS, Mr Styles said.
JPMorgan, HSBC and others are building their “white-label” businesses, to which other banks outsource their payment processing.