Banks are not usually adept at spotting the next big thing. A generalisation but one that’s not far off the mark. PayPal and other payment service providers like WorldPay, for example, might never have taken off if banks had seen the enormous opportunity in online retail and invested in e-commerce technology first.
A revenue stream that many banks have currently been overlooking is corporate prepaid cards. The prepaid market is the fast-growing part of the cards business. Mastercard estimates global prepaid growth at 22% with the corporate prepaid segment to account for $385bn of spend by 2017 (2012 Global Prepaid Sizing Study, commissioned by Mastercard).
These are big numbers by anyone’s book, yet it is not (yet) a crowded marketplace. So why aren’t banks jumping at the opportunity? Well, corporates tend to be more demanding than retail customers – they have specific needs and expectations when it comes to payment services and these do not always fit well with the standard offerings available from mainstream banks.
The relationship managers know what their corporate customers are looking for but the banks are not equipped to be flexible, and building tailored solutions in the traditional way for just a few clients does not make financial sense. Historically, banks have invested in processing systems that are great at handling high transaction volumes for simple but mainstream use patterns; but these systems are simply too rigid to provide tailored services.
Initiatives like Open Banking are starting to provide ways of addressing this conundrum faced by bank CIOs. Moreover, with the advent of cloud computing, banks don’t need their IT departments to suck up time and resources setting up a flexible infrastructure and developing bespoke solutions in house.
We’re now seeing payments innovators develop cookie-cutter yet highly customisable solutions for banks to offer to their corporate customers. At Ixaris we have created Ixaris Payments Server – a platform for banks to build bespoke corporate prepaid solutions for their own customers – but we are seeing this sort of innovation happening in other areas of payments as well.
These types of arrangement are beneficial for both banks and for entrepreneurs and innovators. Banks can quickly bring a profitable payments offering to market with minimal capital expenditure. Payments entrepreneurs and other innovators would not need huge upfront investment in payments infrastructure to take new payment applications to market, and would be better equipped to tweak them once the new service meets real customers.
We know that there is demand for these services because we’ve been marketing, selling and deploying prepaid card solutions to corporate customers for the last few years. So if we are confident of the opportunity, why are we opening up our technology to third-party banks and entrepreneurs who might then compete with us. We believe that this is a real win-win and is all about how rapidly we can capture market share. We could, of course, attempt to hog it to ourselves by increasing our sales and delivery teams, but we would miss out on the huge sales teams, expertise and established relationships that the banks have. We’d rather get a smaller slice of a much larger client footprint.
It’s also a win for banks and entrepreneurs. Through partnering, they get a fast track to lucrative payments products which would take significant time and capital to develop and get right. Back in February we asked the world’s leading payments innovators how banks should approach innovation (Payments Innovation Jury Report 2013). 76% of respondents said that banks should partner with companies with innovative solutions or innovative start-ups. We’re putting out our stall – and looking forward to the banks taking on our invitation to collaborate.