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Diminishing returns – responding to payment margin pressure in the age of transparency

Two months in, and the ban on what European regulators and industry bodies labelled “rip-off card charges”, has seen retailers – and in particular airlines and travel agencies – adapt their pricing models through surcharging or suppression of commercial cards and new business models geared towards low-cost payment methods. For card issuers restrained by legacy commercial card models, the pain is all too real with EU interchange revenues falling by over 50 percent, amounting to up to €2 billion annually.*

Low-cost payments are here to stay. This blog examines the key trends emerging from regulatory intervention and provides a number of considerations for issuers to adapt and maintain their market share against established and new low-cost payment options.

Travel leads the way. Again. Travel (and in particular the airlines sector) continues to break new ground for business-to-business payments, and once again, they are quick off the mark with steps to increase transparency in commercial payments. The airline industry body, IATA’s, new Transparency in Payments (TIP) directive coming into force this month, is aimed at, not only increasing transparency in transaction costs, but ultimately driving down the cost of processing of their inbound payments.

The interchange model – a moving target. Regulators are continuing to increase their focus on the interchange model, with continued review of European directives. In Australia, where interchange was capped in 2017, the Australian Productivity Commission is now recommending interchange to be abolished entirely!

Disintermediation of the payment networks? In Europe, PSD2 and Open Banking is opening up new means for payments to be initiated and executed, and this has the potential to disintermediate the traditional payment networks.

The reality of immediate payments. One of the most significant developments in payments is the adoption of real time bank payments, most recently marked in the US by the implementation of the American Clearing House’s Same Day payments and others like Australia’s NPP and Europe’s SEPA Instant. By driving a lower cost, richer data instant payment option for businesses, banks have a real opportunity to add value to their business customers through more efficient tracking and reconciliation of payments.

All of these factors point towards a low cost future for B2B card payments, and this means a need to focus on the underlying value of the solutions being offered, namely through flexible working capital, efficient reconciliation, particularly through virtual card offerings, and richer transaction data.

Five steps to surviving the low-cost future

Transaction costs must fall, that is a given. How then, can issuers adapt to this new low-cost future, and still maintain their market share against established and new low-cost payment options?

  1. Work with bank colleagues to support the convergence of different payments types.
  2. Meet both buyer and supplier needs by creating solutions that facilitate the right payment using the appropriate payment network.
  3. Offer payments that can leverage working capital benefits when needed regardless of the payment network and provide rich transaction data for both buyers and suppliers regardless of the payment type.
  4. Offer solutions that support differential economics to reflect buyer and supplier requirements.
  5. Put customer experience at the heart of your strategy by providing a single point of entry for the business customer to the different forms of funding and payment execution.

At Ixaris we already see some of these elements emerging in travel payments where the provision of multiple card types with differential economics, access to payment from cash and credit sources; and access to non-card payment options is becoming critical to serving this bellwether sector.

Payments are changing and changing for good. Whether enforced by the regulators or the industry lobby, the relationship between buyer and supplier is being re-balanced and old revenue streams defunct. Incumbent financial institutions must be ready to adapt or face the consequences. Banks that succeed in this new environment will be those with technology solutions that can respond quickly and flexibly to the new demands of their commercial customers and deliver value for every payment.

Post by Andrew Auden, Product Director at Ixaris

* “18 months on – Impact of the Interchange Fee Regulation on the European Union cards market” – Peter Jones, Managing Director at PSE Consulting, published by European Payments Council