Payments for Growth: seizing the revenue opportunity in corporate payments

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Payment services have emerged as a key point of competitive differentiation for corporate banks, serving both as a significant revenue generator and an ‘anchor product’ for other offerings. However, changing market conditions across a wide array of dimensions—including regulation, international trade, customer needs, and information technology—are now challenging banks to get their house in order if they are to seize the payments opportunity.

The leaders in the payments industry are responding to pervasive change in two interrelated ways. First, we’re seeing banks ‘Fix the core’—industrializing and building the capabilities necessary for differentiation. This involves banks establishing fit-for-purpose operating models and, where necessary, building ‘hub’ architectures to streamline banking operations. These efforts lay the groundwork for the second area of response that we’re seeing—‘Market differentiation’.

Executive Summary

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Drivers for changeIn Accenture’s view, pursuing the payments growth opportunity is a smart strategy. Developments ranging from expanding regulation to the emergence of new trade corridors, and from rising cross-border payments by SMEs to growing usage of mobile services, mean banks need to raise their game in payments. This imperative is amplified by the need for banks to prepare for renewed growth in the post-recession world.

By fixing and industrializing their core payments operations and IT, and simultaneously developing and delivering new offerings to build differentiation with customers, banks can steal a march on their competitors and position themselves as the go-to bank for their corporate clients.

Responding—by differentiating Fixing the core is about making a bank fit for purpose. It means rethinking the design of the bank’s operating model, often by tailoring it to new market conditions, or by identifying opportunities to realize synergies across the enterprise where retail and corporate payment capabilities converge. Increasingly, fixing the core is about servicing corporate customers more efficiently through a ‘hub’ architecture.

But fixing the core only creates the basis for the next step for payments banks: market differentiation. Differentiation is about standing out from the competition. It’s about recognizing the drivers for change, and delivering a targeted response to them. And it’s about exploiting a changing environment by delivering value-added products and services that capture emerging pockets of economic value.

Accenture is seeing payments industry leaders differentiate through five distinct but interrelated activities. First, they are enhancing their product proposition, with—for example—a clear focus on exploiting emerging trade corridors. Second, banks are also delivering targeted investments in their channel capabilities, including enabling multi-channel payment

functionality through corporate payments portals that integrate an array of services via a single log-on. The combination of a payment hub with integrated corporate services allows banks to provide their customers with consistent global processing, but with localized services, driven by local knowledge and local relationships.

Third, we’re seeing banks differentiate on talent, by empowering and upskilling their people in payments, and fostering a deep commitment to customer service.

Fourth, they’re looking to get their network model right—reflecting the critical importance of having a model that is attuned to the needs of their corporate customers and which supports their geographic footprint. Lastly, banks are viewing regulatory initiatives as opportunities not just to achieve compliance, but to differentiate themselves from their competitors in the eyes of customers.

In this paper, we examine a playbook of these five areas where banks can differentiate and build a competitive edge through corporate payments. In our view, those banks that focus their efforts in one or more of these areas will be well-placed to be the industry high performers of the future—not just in payments, but across the corporate banking landscape.

Accenture is seeing corporate payments industry leaders differentiate through five distinct but interrelated activities Payments banks are seizing the growth opportunity in payments by ‘Fixing the Core’ and then establishing ‘Market Differentiation’. To do this, they are initiating targeted responses to generate economic value through five distinct but interrelated activities:

• Delivering an enhanced product proposition with a focus on trade and cash management

• Providing multi-channel payment functionality— including mobile

• Differentiating on talent

• Establishing a network model attuned to the corporate needs of a bank

• Harnessing regulatory compliance as a competitive differentiator

We believe those banks that recognize the need to respond and take strategic action will be best positioned to survive the shake-up in payments—and, in the longer term, to establish themselves as the industry’s future leaders and innovators.

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Payments services are becoming an increasingly vital source of revenue and customer retention for both retail and corporate banks worldwide. In retail banking, transaction banking is estimated to account for 21 percent of total revenue.1 In corporate banking, the importance and relevance of transaction banking is even greater, at some 41 percent of global wholesale revenues, of which cash management, payments and trade make up a combined 78 percent (see Figure 1).

The rising importance of payments is evident not just among larger corporate customers, but also among SMEs, who increasingly trade and transact internationally.

Today, as banks start to examine how to position themselves for renewed growth and rising client activity in the post-recessionary world, the unique attributes of payments mean it is becoming a growing focus of attention and investment.

With the emphasis switching from cost-cutting and regulatory compliance to an agenda based around growth, investment and innovation, payments is being positioned at the heart of banks’ strategies. The importance of payments is further emphasized by its ability to act as an anchor product supporting the cross-sell and up-sell of other offerings. The prize at stake is the opportunity for banks to use payments’ pivotal role to establish themselves as the primary banking provider to their corporate and SME clients.

Corporate payments: growing in importance and relevance

Source: Accenture Research

Figure 1: Global wholesale revenues (2012 US$bn)

551 (41%)

365 (27%)

335 (25%)100 (7%)

Transaction banking

Lending & deposits

Investment banking

Wholesale revenues

1,351

35%

13%

23%

30%

Cash management

Payments

Trade

Securitiesservices

Transaction banking product breakdown

(2012)

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As Figure 2 shows, the fastest growth in international trade over the coming years will be in Asia by a wide margin, indicating that international expansion strategies for banks’ payments operations will need to be dominated by a strategy for Asia. Eastern & Central Europe and Russia will also see very healthy trade growth, creating good opportunities for transaction banks to grow their business in those regions.

However, the mature economies in Europe and North America should not be overlooked. These regions should rebound strongly, enabling transaction banking businesses active there to move from a focus on cost reduction to revenue generation and renewed growth.

International trade: Asia is on the rise—but other regions also present opportunities

However, as well as increasing the importance and role of payments, today’s changing environment also means that banks are facing a growing need to take action to reshape, renew and reinvigorate their payments operations and offerings. There are four key drivers for this change:

• Developments in regulation at global, regional and national levels—ranging from global anti-money laundering and anti-terrorism standards, to Dodd-Frank and Foreign Account Tax Compliance Act (FATCA) in the US, SEPA in Europe, a new ASEAN Economic Community in Asia, and new AML ordinance guidelines in Hong Kong2—are creating major challenges for banks, as they seek to

The case for action

Source: Trade value = exports + imports, WTO, Quarterly world merchandise trade by region and selected economies; IMF; Accenture analysis. Trade value = exports + imports

Figure 2: Forecast growth in trade 2012–2016 by region (US$ trn)

design and deliver regulatory-compliant products and services. Regulatory requirements are inherently local in nature, but must be met in the context of a global or regional operation, where consistency is at the heart of customer service and operational efficiency.

• Trends in international trade are altering the global landscape by opening up new trade corridors—in turn creating fresh requirements for corporate payments products and services to support those corridors, and for local knowledge and relationships. One example: the rapid growth in international trade volumes in Asia (see Figure 2).

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NorthAmerica

Eastern & CentralEurope

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What will be the strategic focus for managing your transaction services or cash management business over the next three years?

Source: Mysis Finextra, Trends in transaction banking, 2012

Figure 3: Key strategic focus areas over the next three years within payments

26%

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80%Securities services

Improving customer service

Expanding self -service channels, such as mobile and online banking

Staying compliant with new global regulations

Rationalizing and streamlining back-office services

Reducing cost to income ratios

Attracting more corporate customers

Expanding into new geographies

Price competitiveness

Primarily focusing on risk management

•Customers’ needs and expectations are changing rapidly. This affects both corporate and SME customers—as corporates’ supply chains globalize, SMEs increasingly invoice and transact across borders, and all clients seek greater speed and efficiency through automation and digitalization.

• Ongoing developments in technology and mobile communications are opening new pathways to the market for payments offerings, and creating fresh opportunities for banks to deliver new and more client-centric payments services at lower cost. After decades of over-promising and under-delivering, technology is finally living up to its true potential.

As these drivers gain momentum, banks say their clear strategic focus in the transaction banking arena over the next three years will be on improving customer service and expanding self-service channels, as illustrated in Figure 3.

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In Accenture’s view, the most effective way for banks to respond to this changing environment is to become fit for the future by taking two main steps.

1. Fix the core—This involves industrializing payments, separating localized processing from globally common processing, and building the capabilities that will enable differentiation in the market. It includes establishing a bank operating model specifically tailored to new market conditions and identifying opportunities to realize synergies across the enterprise where retail and corporate payments converge—breaking down silos. As we’ll discuss later, this will often mean building a ‘hub’ architecture to maximize integration, agility and efficiency.

2. Differentiate in the market—This step involves offering value-added products and services that capture emerging pockets of economic value. Specifically, this action includes five distinct but interrelated activities (see Figure 4):

• Deliveranenhancedproductproposition, with a clear focus on integrated trade, international payments and cash management offerings

• Providemulti-channelpaymentfunctionality, including via mobile, tablets and online, focusing on real-time transactions and balances, multi-bank applications and analytics

• Differentiateontalent,byempoweringand upskilling the people in payments, and fostering a deep commitment to customer service

• Establishanetworkmodelattunedto the needs of the bank’s corporate customers, with an operating model that supports the geographic footprint of its major clients

• Exploitregulatoryinitiatives—forexample SEPA in Europe—as opportunities not just to achieve compliance, but to differentiate the bank from competitors in the eyes of customers.

Figure 4: Accenture’s payments for growth framework

Differentiate in the market

Enhanced product proposition

Multi-channelpayment functionality

Empowered andupskilled talent

Differentiated regulatoryinitiatives

Appropriatenetwork model

Fix the core

Seizing the opportunity

Source: Trade value = exports + imports, WTO, Quarterly world merchandise trade by region and selected economies; IMF; Accenture analysis. Trade value = exports + imports

Figure 5: Forecast growth in trade 2012–2016 by top 12 countries (US$ trn)

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Fixing the core—by redesigning the operating modelIn light of the rapid and sweeping change in the payments environment, many banks are choosing to rethink their operating model strategies, and are increasingly focusing on servicing corporate customers through a hub.

In general, banks are moving to redesign their payments operating models with two main objectives: first, to reflect market conditions by servicing corporates in a single global way across borders, but aligned to localized requirements where regulation and local practices demand it; and second, to provide clients with a common and consistent customer experience across all payments products and services.

A hub can enable banks to achieve both of these goals, while also offering significant additional advantages. As well as making it easier for a bank to offer new corporate payment and trade services across its customer base, experience shows that a payments hub model can also generate financial benefits for the bank.

These include opportunities for cost reduction, in our experience, of up to 25 percent to 30 percent of IT and operational costs per transaction; higher payments revenues through increased transaction volumes, fees and deposits; and increased share of wallet, through enhanced customer retention and support for international expansion. More detail on the benefits available from a payments hub is provided in another Accenture paper, “Payments for Growth–Fixing the Core”.

Differentiating in the market—through five key activities In combination with their efforts to fix the core through moving to a hub-based operating model, banks are also looking to differentiate themselves in the marketplace through five distinct but interrelated activities.

Delivering an enhanced product proposition that integrates payments, FX, trade and cash management

With the emergence and growth of new trade corridors, there is a major opportunity for banks to differentiate

themselves by providing trade and international payments services within these trade corridors.

As Figure 5 shows, the ongoing increase in global trade through 2016 will be weighted towards emerging economies, and especially China. In fact, we estimate that emerging-to-emerging trade flows (“E2E” trade) are set to overtake trade between developed economies in 2013.

Within these overall trends, many regions are dominated by trade growth in a single country—meaning that targeted coverage of the most dominant countries worldwide can provide a bank with access to a large share of global trade and international payment growth. Also, the top 20 countries in absolute trade terms are evenly split between emerging and developed economies. So, rather than focusing solely on emerging or mature markets, the most successful strategies are likely to target countries with the strongest absolute trade growth.

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These changes in global trade flows are creating clear opportunities for those banks that can rise to the challenge. For example, trade denominated in non-traditional currencies—notably the Chinese Renminbi—is growing fast. We estimate this will take the Renminbi’s total share of total global trade from 1 percent in 2011 (US$425bn) to 4 percent by 2016 (US$2.6trn).

In response, banks need to provide Renminbi facilities to their corporate customers on an industrial scale, comparable in size within the next five years to Japanese Yen and UK Sterling. This is not an incremental development but a clear market discontinuity. As well as taking advantage of it by supplying capabilities and account services in non-traditional currencies, banks might also consider opening branches in new locations to service payments in these currencies.

However, all the major currencies will see strong growth in absolute trade volumes, even if they start to lose global market share. This means the clearing capacity for conducting payments in these traditional currencies also needs to be increased to scale with this expansion.

There are also growing opportunities for banks to provide corporate customers with seamless integrated access to all important information along their entire end-to-end value chain, encompassing customers, suppliers and business partners. Banks’ rising adoption of hub models will enable corporates to benefit from direct integration and automation of their e-banking cash management directly with their bank’s platform, and connectivity to infrastructures such as the SWIFT network.

As Figure 6 shows, by splitting up corporate business on the hub into three key areas—payment processing as a base capability; treasury and portfolio management; and financial supply chain integration—and servicing these through one integrated cash management platform, banks can simultaneously ease their own operational burden, and serve corporate customers with enhanced services on a modular basis. This approach also opens up additional opportunities such as flexible sourcing for corporate connectivity, for example through service bureaux, or through direct connectivity to customers’ ERP systems and shared service centers using platforms such as SAP’s FSN network.

Providing multi–channel payment functionality, including mobile

Many banks are actively increasing their investments in channel functionality to automate and enhance their on-boarding and client service processes. These initiatives are often supported and facilitated by the move to hubbing, which enables payments functionality to be extended across multiple channels, all integrated through a single “corporate portal” and connected directly to a bank’s payment hub.

Banks’ strong focus on improving and automating on-boarding and customer service is underlined by recent research (see Figure 7). More than 80 percent of payments banks are seeing revenue increases of 10 percent or more through automation of on-boarding and customer service. At the same time, corporate customers are keen to gain greater access to self-service functionality to boost transparency. Automation via a corporate portal can enable banks to meet this demand.

Source: Accenture analysis

Figure 6: Integrating financial supply chain and treasury & portfolio management with payment operations

Payment Factory Operations

Modular service offering to corporates

Automated corporate treasury services, previously semi-automated

Value-added services and processes tightly integrated with financial supply chain processes of corporates

Integrated payments platform enabling centralized and cost-efficient payment operations

Treasury & Portfolio Management

Financial Supply Chain Integration

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As banks make these investments, hubbing brings several key benefits—including enabling corporates to send payments in bulk to their bank across multiple channels, and facilitating the use of a single portal, rather than multiple or separate interfaces. Hubbing also lends itself to multibank functionality, including supporting sweeping and pooling between accounts at different banks in real-time. And it enables online self-service, which both reduces costs and places the customer in control. All of these capabilities help the bank to position itself as the corporate client’s one-stop-shop for payments-related services via a convenient and integrated multi-service portal.

As banks refine and execute their channel strategies, the rapid growth in usage of mobile devices by corporate clients—increasingly including tablets as well as smartphones—brings further opportunities for banks to increase their differentiation and revenues, and exploit additional transactions. In our experience, around 60 percent of clients are investing in mobile or online payment services.

The mobile capabilities now being developed include mobile apps—such as tablet-based dashboards—for checking liquidity positions on the move. An example of this type of service is the Wells Fargo Corporate CEO Mobile app.3 Trade services are a further focus area, for example using mobile solutions to release payments against documentary collection. Increasingly the use cases for mobile are targeted at supporting specific roles within a corporate, starting with core finance roles such as financial controllers and treasurers, but expanding into roles in the physical supply chain such as field inspectors and logistics operators, and their actions relevant to the payments value chain.

In addition to services tailored to corporate functions and specific roles, a growing number of services are emerging that are targeted at the corporate clients’ employees. An example is Luup,4 which has been adopted by Deutsche Bank to support its corporate customers operating in emerging markets. These customers often employ significant numbers of

unbanked expatriate workers who need to remit money to their home countries. To meet this need, the bank provides these corporate clients with a service under which the corporate offers its employees a “virtual” account that they can access—and make transfers from—via mobile.

Source: Accenture, Corporate Banking Customer Satisfaction Survey 2010; Finextra Research October 2010

Figure 7: Banks’ investments in improving and automating on-boarding and customer service

45% On-boardingprocess automation

21% Sophisticated corporate portal

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Differentiating on talentWith many payments services becoming commoditized, talent remains the ultimate differentiator for payments operations. In many banks, the payments operating environment has a legacy of manual and internally-focused processing, and isn’t fully organized around end-to-end customer service.

To close this gap, the future structure for payments will organize teams into logical units, with a shared administrative back-office function supporting specialized teams focused on areas such as standard high-volume payments, specialist complex transactions, transaction compliance and documentary products. This structure will simultaneously enable high-quality services and outputs, risk minimization and process simplification.

Rather than hiring in new talent, the route to achieve these outcomes lies more in making better use of existing talent—including enhanced training and development—and ensuring that the right people are incentivized in the right way, especially in the client-facing front-end. The bureaucratic, nine-to-five culture of traditional payments back-offices should be replaced by a more client-centric mindset, grounded in a keener awareness of service, pricing, compliance and customer value.

One UK bank leading the way in this regard is moving from “payments operations” to a “transaction management service”, characterized by skilled and empowered customer-facing teams focused on managing their customers’ transactions, with routine support activities either automated away or outsourced, moving from an industrialized “factory” mind-set to one focused on “centers of excellence”.

Adopting the appropriate network model The optimal network model for a transaction bank requires an operating and engagement model in each market that is appropriate to—and aligned with—the type of business and clients there. As Figure 8 shows, the network model used in a particular market might range from “remote” operations involving partner bank arrangements or even no physical presence, to a foreign branch or subsidiary arrangement, to a full-presence in a “domestic market” operation.

Considerations when choosing the appropriate network model for a specific market include the market’s economic outlook, the degree of access to the client base, local channel usage, product characteristics and use, set-up costs, regulatory requirements and the strategic significance of the market to the bank globally. Also important are connectivity to local clearing systems, relationships with local banks and forecast business volumes with both.

Figure 8: A perspective on network model adoption

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Critical mass of clients exists for all client segments

A historical connection has developed, either through organic growth or acquisition

4

Characteristics of ‘remote’ operations Characteristics of ‘physical’ operations

Weak economic outlook and ‘second tier’ in terms of economic and political importance

Strategically important economically or politically, with strong growth outlook

Predominantly electronic processing of paymentsProduct characteristics tend towards physical (cash, cheques, trade documentation)

Onerous regulatory compliance or technology requirements

Regulatory or technology requirements less onerous(e.g. onshoring of systems)

Significant channel usage, permitting online sales and servicing

Digital channel usage less commonplace, requiring physical presence

Disparate, remote or limited client baseCritical mass of clients or opportunities for growthin specific client segments

Partner bank arrangement costs attractive relative to in-house

In-house costs attractive relative to partner bank arrangement

1

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Foreign subsidiary or branch (niche services)

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5

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6

Domestic market

Characteristics of domestic operations

Source: Accenture analysis

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In general, the optimal approach is to “follow the client” and invest in each market when the local business from global corporate clients justifies it—thus matching the corporate client’s footprint as it expands. This also means using standardized, centralized processing and only providing localized variations where there is no alternative, due to factors such as regulation, local payment scheme requirements, or widespread local practices. This strategy minimizes the investment risk in each market and can provide a sound revenue base on which to offer services locally to more clients.

There are many opportunities for a bank to offer corporate clients specific tailored services that help to expand the bank’s network, benefit the client and deepen the relationship. One large corporate bank has invested in its international payments offerings to enable the customers of its corporate clients to pay them where they have no banking relationship in a country. This removes the need for the customers to pay locally in local currency, minimizing foreign exchange and treasury costs and risks for the corporate.

Harnessing regulatory compliance as a competitive differentiatorCustomers expect regulatory-compliant payments products as a given. However, the smartest banks are capitalizing on the need to make changes in response to regulation, and using compliance-driven initiatives to build differentiation and competitive advantage in the marketplace—for example by becoming compliant ahead of the competition, and by making it easier for their customers to navigate along their compliance migration path.

A good example of regulation presenting opportunities for banks is the Single Euro Payments Area (SEPA), whose rules require migration onto SEPA-compliant frameworks for credit transfer and direct debit by 1 February 2014. Larger banks in the region are offering corporate customers the capability to collect money across Europe under SEPA standards, thus enabling clients to save costs by rationalizing their payments with a small number of banks. Meanwhile, the level playing field enabled by SEPA makes it harder for banks to differentiate, and the investment required to do so typically takes second place to simply becoming SEPA-ready in time for

the deadline. With corporates issuing RFPs for cash management placing a high importance on SEPA-ready services in their selection decisions, the threats of customer attrition and the opportunities for customer acquisition are high.

In the US, payment service providers are working to absorb the impacts of three different sets of legislation: Dodd-Frank Section 1073, the Durbin Amendment, and FATCA. Again, corporate clients are willing to pay for a service that takes away the compliance burden on their own business. The same applies to the new global standards for anti-money laundering, anti-terrorism financing and payments systems’ financial stability that have been released by Intergovernmental Organizations.

Developments in Basel III liquidity requirements are presenting further opportunities for differentiation. As an example, these represent a key reason why a major financial services player in Western Europe is investing heavily in an improved international payments offering, targeted exclusively at selected high-profile corporates.

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Historically, payments were regarded as a necessary but unglamorous and undifferentiated adjunct to banks’ other activities. However, times have changed—as has the ability of payments to drive revenues, differentiation and more profitable client relationships.

Today, as banks look to enhance their payments operations, there is no time to lose. As more and more banks seize the growth opportunity in payments by investing in new platforms, structures and service offerings, the bar is rising fast. And those that fail to move quickly with smart, targeted investments risk being left behind.

Conclusion: a time for action

Appendix: Dynamics and opportunities in the pan–European and Russian corporate payments markets

Leaders in the payments industry are responding to ongoing market change in two interrelated ways. First, they’re ‘Fixing the core’, industrializing and building the capabilities necessary to distance themselves from competitors. This enables the second response—’Market Differentiation’, which involves offering value-added products and services that capture emerging pockets of economic value.

We’re beginning to see specific opportunities play out at the regional level, blending local dynamics with common cross-regional characteristics. Here’s where we see the opportunity in Europe and Russia (Next edition to include analysis for all major global regions).

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Current market state and key featuresEurope is a sophisticated market for corporate payments, served by global banks such as Deutsche and Citi; large regional banks such as Unicredit and Nordea; and local banks such as LBG (UK), Bank of Ireland, and Credit Agricole (France). In total there are over 9,000 banks in Europe, linked to each other for payments through a set of industrial scale inter-bank clearing systems.5

The Target2 RTGS system processes most of the high-value euro payments, averaging €2.5trn per day;6 Euro1 processes an average of €216bn per day;7 and CHAPS processes an average of £286bn per day.8 Many countries have their own ACH system for lower-value, bulk domestic payments, the largest being Equens (Netherlands, Germany and Italy), VocaLink (UK) and STET (France and Belgium).

Europe is home to many global and regional multi-national corporates which have pan-European and global payments and trade requirements. They often have shared service centers that consolidate payments processing across their business units and geographies. These act as payment factories or internal banks, and are generally based in locations such as Dublin, Bratislava or Warsaw.

Government and public authority payments constitute a large proportion of payments in Europe, reflecting the state’s leading role in many European economies. For example, there are more government benefit and pension payments (1.1bn transactions per year) in the UK than private sector wage and salary payments (594m transactions per year).9

Europe is also home to many new entrants and innovators in payments. Most of these players are focused on C2B payments and merchant acquiring, but there are also a growing number of B2B payment companies such as Travelex, Traxpay, and Earthport.

Recent market developmentsCurrent trends in corporate payments in Europe are dominated by the creation of SEPA (the Single Euro Payment Area), waves of new regulation, and weak economic growth.

Migration to the new SEPA payments scheme, replacing 17 national euro payment schemes, is a huge task for banks and corporates alike—possibly impacting up to 50bn payment transactions per annum. Aside from the complexities and effort involved in meeting the migration end-date of February 2014, SEPA brings the following implications:

• BanksacrossEuropeareexperiencingsevere revenue decline. Not only have they lost international payment revenue as cross-border transactions have migrated to SEPA, but the commoditization of domestic payments into SEPA transactions is also causing significant pricing pressure. While the imperative to provide better services and drive new revenue streams is becoming increasingly urgent for all banks, smaller-scale banks focused mainly on servicing local corporates and SMEs are facing especially tough strategic decisions over whether and how to invest to retain their corporate payments businesses.

• SEPAprioritieshaveedgedoutinvestments in the corporate channel. Despite the urgent need to invest in new corporate capabilities and services, investments could continue to face delays from further rationalization of IT and operations in 2014 and 2015 in the aftermath of the migration to SEPA.

• FewcorporatesappeartobeusingSEPA strategically to rationalize banking relationships, consolidate collections and accelerate a shift to shared services. However, SEPA is catalyzing their thinking for strategic change, and it is likely that the landscape of corporate banking relationships will undergo further significant reshaping over the next five years.

In common with the rest of the banking industry, payments are being hit by ongoing waves of regulation in Europe, including not just SEPA but also Basel III, central bank liquidity requirements, PSD 2, and the European Markets and Infrastructure Regulation. Although this ongoing flow of new regulations is a burden, it does give banks the opportunity to gain a competitive advantage through providing compliant services earlier than their rivals, and through strengthening corporate and SME relationships by helping customers to understand and fulfill their regulatory obligations.

Weak economic growth since 2008 has caused many banks to cut costs and restructure their activities, including their payment operations. M&A has also featured—for example HBOS with LBG, Dresdner with Commerzbank, and Fortis with BNPP—creating opportunities to consolidate IT and operations. These cost cutting, restructuring and M&A initiatives have led many banks to re-platform their core payments systems, with SEPA providing additional impetus. This re-platforming is a key feature of the European payments landscape which will continue for many years. Those banks that can afford it are doing so, while there are others who would like to re-platform but are still suffering from the financial crisis and are currently unwilling to invest. These banks will either wait until their finances improve or seek alternative sourcing models.

As economic growth eventually picks up in Europe, competition for corporate and SME payment business will escalate. GDP growth amplifies trade growth, and the demand for trade services and international payments will be healthy. This applies particularly to the SME segment, where globalization is increasingly connecting small companies with international suppliers or customers, or even both.

Europe

Opportunities for differentiationAgainst this background, we are seeing banks in Europe differentiate their corporate and SME services in each of the five opportunity areas.

Product propositionsBanks are focusing on providing integrated product offerings, enhancing their international payment offering and harmonizing their products for use across European borders.

By integrating their product offerings, banks can improve customer service and enable more effective cross-selling. Examples include combining correspondent banking services for financial institutions with trade services, or cash management with fixed income and treasury. Cross-selling can also be facilitated by centralizing product catalogues, processing and billing conditions, and client agreements and contracts.

With cross-border payments within the Eurozone no longer “international”, banks can increase margins by extending their international payments offering into new areas, especially exotic currencies and the SME sector. By differentiating themselves in international payments, banks also gain the opportunity to win business from cash rich multi-country corporates. These cash-rich corporates have a beneficial impact on a bank’s capital and liquidity requirements under Basel III, making them an attractive segment to target.

As a result of SEPA, some banks are harmonizing product offerings across the Eurozone countries in order to compete for new customers outside their home country. Where appropriate, they are also including localizations (such as AOS for SEPA payments), and adding specific local products to complete their product portfolio.

Multi-channel capabilitiesHere the opportunity lies in targeting the SME sector with enhanced offerings and providing richer channel capabilities to all corporate and SME segments.

SMEs have often been under-served in corporate payments, with little access to the cash management, international payment and trade functions available to larger corporates. However, web technology makes it easier to offer SMEs these services in a standardized way and at a reasonable price point.

Historically, many banks have underinvested in their corporate channels, creating opportunities to bring to market new and differentiated capabilities for corporates and SMEs. These include:• multi-bankaccessthroughasingle

sign-on• customerself-service,e.g.forenquiries

and investigations, account opening, user rights

• mobileandtabletaccess• virtualaccounts• simplifiedcorporateconnectivity

through SWIFT and ERP connectors.

TalentGrowing numbers of banks are locating operations in Eastern Europe in countries such as Poland, Romania and Turkey. Here the workforces are young and well-educated, and often cost just a third those in Western Europe—and the local managers they employ are not only capable of running large operations, but are also enthusiastic and entrepreneurial, driving high levels of productivity and innovation.

Some banks in Europe are also moving beyond industrialized factory operations. They are taking these to the next level, implementing payments centers of excellence, with workforces expected and empowered to provide end-to-end customer service and risk control.

Network modelWith the opportunity under SEPA for banks to acquire new customers across the Eurozone outside their domestic market, the landscape for banking relationships will undergo a structural change over the next 10 years. Banks will compete based either on local knowledge and presence or on specialization, or sometimes on both factors.

This is already happening. Cross-border expansion is under way—for example with Danske and BNPP in Ireland, and CGD in Belgium—and will continue, resulting in larger and wider banking networks. Specializations across Europe are already evident and could develop along a variety of dimensions including industry verticals, such as Swiss banks in pharmaceuticals, and Dutch and French banks in agribusiness and agriculture.

RegulationSome banks such as Deutsche and Danske are using their readiness for SEPA to attract new corporate business. This selling-point certainly resonates with corporates, who will now typically issue RFPs for cash and payments services only to those banks that can demonstrate they are SEPA-ready. During the migration to SEPA, there is also the opportunity to help corporates and SMEs with the migration, and to capitalize on this role to develop and extend new relationships.

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Current market state and key featuresThe Russian banking landscape has experienced significant consolidation over the past six years, with some 300 banks having been taken over by large state-owned or international institutions.10 However, with over 1,000 banks still operating in the Russian market, competition remains intense, and there is no leading player with a clearly differentiated business model. The key participants in Russia’s banking sector include large federal banks (a sector dominated by state-owned institutions) and regional players focused on local markets.

Against this background, the Russian payments market is quickly becoming one of the most attractive in the world. Growth in the market is expected to continue at around 6 percent per annum over the next few years, driven by an expanding economy, rising usage of debit, credit, and prepaid cards, and a take-off of the e-commerce market—which is projected to expand at around 25 percent a year.11

While the growth outlook is favorable, Russia has very little in terms of interbank infrastructure for clearing and settlement of payments. Processing and settlement of payments is performed by the Bank of Russia Payments System, which is comprised of two key features:12

• Anetworkofintra-regional(online/batch) settlement systems linked to a cross-regional settlement mechanism, allowing for transfers between regions of 2 days

• AnRTGSfundstransfersystem(knownas BESP) designed for nationwide real-time settlements (mostly used for high-value, over 1m RUR payments)

Card operations and credit transfers represent the majority of non-cash payment transactions in Russia, due to very low usage of direct debit schemes (which represent less than 4 percent of payments), reflecting the limitations imposed by

regulatory and infrastructure constraints.13 Virtually no cheques are used in Russia, and the market still has a low number of ATMs relative to the size of its population. This situation has led to dramatic growth in non-banking payment terminals networks (called “payment agents”), which provide cash payments to a variety of providers.

Recent market developmentsThe market for corporate payments in Russia is undergoing a migration from cash to non-cash services, along with the adoption of new information technologies and continued cross-border integration.

The volumes of electronic payments are increasing, with an accelerating migration from cash to non-cash payment instruments. These trends will enable the launch of new products such as online and mobile merchant acquiring. Rising e–commerce activity will also enable banks to generate transactional revenues. While plastic cards are still the leading non-cash payment instrument, the market for “e-money”—such as WebMoney, Qiwi and Yandex.Money—is expanding. Russia’s third-largest market for payments is internet banking, which is also experiencing significant growth: 22 percent of customers used internet banking in 201114 rising to 32 percent15 in 2012.

Russia’s combination of high penetration of mobile phones with low penetration of banking services means the country’s mobile banking payments market has significant potential.16

Total penetration of mobile internet in Russia by the end of 2012 for all types of devices was equal to 55 percent (40m subscribers).17 Also, while social media adoption is lower in corporate banking than in the retail segment, it does present opportunities in the SME marketplace. Currently, banks in Russia are using data from social media for support purposes only, and have yet to start selling products or executing payments via social media. Crucially, the low level of market maturity

in both e- and m-payments means new entrants such as MNOs, e-money operators and non-banking payments providers are in a position to shape the market.

The opportunities surrounding corporate payments are emerging at a crucial time. Russia joined the World Trade Organization in 2012, and is the EU’s third biggest trading partner, with EU member countries exporting 108bn of goods into Russia annually.18 It will now be easier for Russia to access international markets, and thus see an increase in foreign investment as well as demand for international payments. Additionally, in December 2012 Russia began integration into the CLS, which offers the potential for increased foreign exchange volumes and, in turn, higher demand for liquidity management services.

Opportunities for differentiationIn contrast to banks in the more mature European markets, Russian banks have not yet fully penetrated non-interest income products, as fees and commissions have only accounted for 25-30 percent of total revenues compared to 65-70 percent of interest generated income. Certainly, there is great potential for banks to earn revenues from non-interest income; however, it is not clear when this might come about.

Of the five main ways in which banks can differentiate their corporate and SME payments offerings we are currently seeing banks in Russia focus on four.

Product propositionsBanks are taking steps to deliver an enhanced product proposition with a focus on trade and cash management. Integrated cash management services are seen as the key factor that can differentiate banks in the diverse and fragmented Russian market. Payment banks are seeking to develop capabilities and services that will enable them to become more customer-centric. In particular, corporate customers are demanding cash management services including:

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• Cashflowforecasting,cashpooling,cross-currency notional pooling and zero-balancing

• Spreadbusinessaroundmultiplebanks,with ability to gravitate toward low risk banks

• Rationalizationofbankingrelationships

• Consolidationofpaymentflows

• End-to-endintegrationofTMS,ERPand bank to increase straight through processing

• Optimizedallocationofbankfeesandbusiness across multiple banks

Enhanced trade propositions are a further key focus. This reflects the fact that Russia’s international trade is expected to more than double between 2012 and 2016, driving demand for FX, multi-currency capabilities and trade finance products, primarily around open-account services. Russia’s main trade corridors include the US, Europe, China, South Korea, and Japan.

There is also the potential for the largest banks in Russia to offer “banking for banks” services to a number of smaller players in the market through the use of white labeling, including cross-country and international payments, trade finance products, and documentary services and letters of credit.

Multi-channel capabilitiesBanks in Russia are moving to offer improved core payments services through multiple channels–including mobile–based on an industrialized transaction platform, online portal solutions and host-to-host integration capabilities. These attributes will enable a stable transaction platform with: continuity of operation; professional and online technical support; high speed; a lack of errors in operations execution; convenient, reliable and error-free operation of remote channels; and differentiated pricing for customers.

TalentLabor costs across Russia are still attractive and Russia’s regions represent ideal locations for major payments banks to centralize operations into hubs and shared service centers. However, there is still a lack of skilled and managerial talent to support front office payment activities in Russia, especially to support the growing demand for more complex and cross-border products. Payments banks should look to invest in acquiring and developing talent to support front-office activities in Russia, for example, optimizing sales models in such a way that focuses on both an enhanced proposition and strengthened client relationships.

RegulationBanks in Russia will be able to use regulatory initiatives as an opportunity to develop and extend their corporate relationships, complying with regulations ahead of their competitors and helping clients with their own compliance efforts. One way this can be achieved is through regulatory initiatives aimed at improving market infrastructure and increasing transparency of the corporate sector. Examples include: regulating electronic money, stimulating migration to non-cash products, and supporting the development of international financial centers in Russia.

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Next edition to include analysis for all major global regions

Endnotes

1 European Commission, Report on the Retail Banking Sector Inquiry, 2009; Accenture analysis, 20112 Hong Kong Monetary Authority, Guideline on Anti-Money Laundering and Counter-Terrorist Financing, 20123 wellsfargo.com4 luup.com5 European Central Bank, 20126 European Central Bank, 20127 EBA, 20138 CHAPS Clearing Company, 2013 9 Payments Council UK, 201310 ATK, A Chessboard Strategy for Russia’s Banking Market, 201211 World Payments Report, 2012; Accenture analysis, 201312 Committee on Payment and Settlement Systems, Red Book, 201113 World Payments Report, 201214 National Agency for Financial Studies, Russian Microfinance Center: Which Payment Types are in Demand in Russia, 201115 Online Market Intelligence, Queueless Payments, 201216 ADL, M-Payments in M-BRIC, 201017 J’son & Partners Consulting18 Delegation of the European Union to Russia press release, 2011

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To find out more about how Accenture can help your bank win the race to drive higher value from payments, please contact:

Jeremy Light jeremy.light@accenture.com

Luigi Zanghellini luigi.zanghellini@accenture.com

Chris Hilson c.j.hilson@accenture.com