Showing posts with label Payments. Show all posts
Showing posts with label Payments. Show all posts

Saturday, 12 October 2013

Why the new Payments Systems Regulator needs to avoid rushing in change


The UK government has announced that the bank dominated Payments Council is to be replaced by a competition-focused utility style regulator for payment systems, under the Financial Conduct Authority (FCA), part of the Bank of England. This new body will assume its powers in late 2014 and will be fully operational by Spring 2015. The focus will be on providing competition, innovation and responsiveness to consumer demands in the payments system. It is hoped by the government that the Payments Council will in turn reform itself into a more traditional trade body.

Talk of reforming the payments system has been going on for a very long time with the Cruikshank Report into competition in banking  back in 2000 recommending the setting up a full blown payments regulator, the so-called ‘Payco’. That recommendation was never acted upon, not only because of the active lobbying by the banking industry but also because of the size of the investment required to set up the regulator and the fear of disruption to the payments system in the process. Little progress has been made since 2000 except the slow introduction of Faster Payments and the reluctant abandoning of end of cheques, which had been due in 2018.

The new Payments Systems Regulator may want to show that whilst the creation of the body has taken a long time that it is a body with a mission and at pace. However whoever heads this body should be wary of rushing in change too quickly.

The UK has one of the best set of payments systems in the world – in many ways the envy of the rest of the world. After 9/11 it wasn’t the fact that the Twin Towers had come down or that the US had been attacked on its own soil and that hundreds had died that nearly brought down the US economy, but rather the grounding of all the airlines. In the US at that time (and even today)  because the economy was highly reliant upon cheques (or checks if you are outside the UK) the fact that the planes could not fly the cheques raised on one bank to deliver them back to their originating bank for clearing meant that the US economy almost ground to a halt.  The flow of money was stopped. Given similar circumstances in the UK the impact on the UK economy would have been far less. The UK has a highly resilient, highly reliable payments infrastructure. Britain should be proud of the long history of a payments infrastructure that is only invisible to most because it works and customers take it for granted that when they make a payment it will arrive where it is meant to in the time that it is meant to. This is despite the fact that the systems have, primarily, been built by those 'empires of evil', as portrayed by the politicians, the big four banks (Barclays, Royal Bank of Scotland, Lloyds Banking Group and HSBC).

However the UK payments infrastructure has been slow to change, has failed to grasp innovation and has had to be dragged and screaming towards the twenty first century. The Payments Council dominated by the Big Four banks has had the unenviable task of leading by consensus and with each of the Big Four being competitors has rarely got to consensus and where it has it has been through a suboptimal compromise.

The new regulator has the challenge of addressing the level of competition in the industry, increasing the innovation and making sure that the consumer’s voice is heard.
Despite all the reviews and all the parliamentary committees which have reviewed and reviled the banking industry, a forensic analysis of the payments industry has not really been carried out. Whilst the small banks and building societies who process low volumes of transactions and the new challenger banks may complain they are unfairly charged for access to the payments system the arguments seem to be based on little data and a lot of emotion.
One of the first tasks that the new regulator should commission is an independent, forensic analysis of the costs to both build and operate the existing infrastructure. The natural instinct will be to use one of the Big 4 accountancy firms to do this, however they are so dependent upon fees from the big banks that it is questionable whether they will be seen to be independent. The purpose of this analysis of the costs will be to determine what a fair cost to use the infrastructure should be (allowing for investment to build the next generation infrastructure) and compare that against what is being charge today.
The new regulator has an unenviable task because there is a clear conflict between significantly reducing the cost of using the infrastructure and encouraging investment and innovation into that infrastructure. It is analogous to Ed Miliband, the UK leader of the Labour opposition, saying that he will freeze the cost of utility bills whilst still expecting those utilities companies to invest in green technologies and maintaining and upgrading the creaking infrastructure.
This brings into question whether there can be real and speedy investment and innovation into the payments infrastructure while the big four banks still collectively own it. Over the last forty or so years they have demonstrated that getting to consensus has inhibited progress and has compromised innovation. There has also been a chronic lack of investment in building the next generation infrastructure. Is there any reason to believe that this will change?
The new regulator needs to decide whether the three objectives assigned to the regulator of creating competition, encouraging innovation and responding to consumer demand can be met while the ownership of the payments infrastructure remains with the big four banks.  A solution could be that the big four banks are forced to dispose of the payments infrastructure to an independent business to which they will become customers just like the smaller banks, building societies and challenger organisations. The acquiring organisation will need to demonstrate not only that they have the experience to run the infrastructure the resilience and reliability of which  is of national importance but also have a realistic strategy for the payments industry going forward and how they will fund both innovation and maintenance of that infrastructure whilst actively engaging with consumers. This is not a task for those who are looking for a quick in and out with a healthy profit. Only an organisation that is prepared to run the infrastructure independently of the banking sector for the long term will make any sense.
Without taking a measured, fact driven and courageous approach to changing the payments industry with cross-party support (given the length of time any programme will take to enact) this regulator will be no better than the Payments Council it is replacing. 

Friday, 1 February 2013

How did Citibank get European retail banking so wrong

According to Reuters Citibank is looking to pull out of consumer banking in a number of countries beyond Pakistan, Paraguay, Romania, Turkey and Uruguay, which they announced in December 2012. The withdrawal is all part of new CEO, Michael Corbat's strategy to get Citibank back into shape.

The reasoning given behind the withdrawals is that these are countries where Citibank has not managed to build sufficent market share to be a significant player or to make sufficient profits from. This is not unlike the argument that 'the world's favourite bank', HSBC has been making for some time (see http://www.itsafinancialworld.net/2011/05/hsbc-goes-back-to-its-roots.html ). However where HSBC has from its beginning been a bank that supports world trade and has successfully leveraged its global brand this is not what Citibank has done with its consumer banking strategy, particularly in Europe, but also across the globe.

When Citibank has entered a European country it has not been part of a joined up global or European strategy, it has been on a country by country basis. It has usually led with either its Citifinance, the finance house brand, or a mix of Citifinance and its mass affluent brands. 

One of the challenges with entering with a finance house brand is that in many markets it tends to attract customers that cannot get a loan from their main bank or they have to compete on price. This has proved to be the case in a number of the countries that Citibank is looking to address.

Citibank with its Citiblue and CitiGold segmentation was aiming to attracted the premier banking segments, but this was in many ways conflicted by leading with the unsecured loan product.

Citibank has tended to enter these markets with a standard offering not tailored to the local market and not recognising the nuances of these markets. In Germany, for instance, the tendancy of customers to have their current account and savings with a local or regional savings bank, meant that Citibank has, to a large extent, ended up with a loans business that is made up of customers that the local German banks would not lend to, resulting in a low quality book. Citibank as long as it wanted to leverage the power of the global brand was never going to be seen as a domestic bank, so in Germany the strategy it adopted was to compete on price and/or availability of lending.

In Spain, one of the most over-banked countries, where it feels like every other high street outlet is a bank branch (or at least until the financial crisis) and where there has been a lot of innovation in branch formats, Citibank opened very standard, unappealing branches. Going to a bank in Spain is often a social event, but the standard design that Citibank chose to deploy meant that from the street visibility into the branch was minimal and far less welcoming than their local rivals. Without branch footfall in Spain it is difficult to compete in consumer banking.

Citibank failed to recognise in Europe that  one of its  brand's greatest strength is its global nature and its payments infrastructure. If Citibank had recognised the entrepreneurial flair of European migrants and the share of their wallets that flows  from and to the home countries, then their market share of consumer and SME banking could have been far higher.  This was an offering many of the local domestic banks which tend to be inter-country regional in their focus could not compete with.

Focusing on the migrant and ex-pat markets could have produced a far more successful result. However in Germany in particular the focus was firmly on the local German and certainly not on the migrant market.

For instance Turkey, one of the countries that Citibank consumer banking is pulling out of, has one of the most vibrant and innovative banking sectors with a young, educated, increasingly affluent population. It also has a large number of  its citizens living in Germany and the UK, many of which are sending money back to Turkey on a regular business. Many of the Turkish living in their adopted countries are successful businessmen ideal targets for the wealth offerings that Citibank is a very strong in. Targeting those Turkish in Germany could have been a very successful model for Citibank, particularly with the receiving bank being Citi.

Equally there are a lot of Pakistanis living and working in the UK and the Middle East with very high levels of remittances going back to Pakistan. There a lot of wealthy Pakistani entrepreneurs investing in a range of industries including real estate and leisure,. Many Pakistanis are well educated and mobile. Again this is a country that Citibank is withdrawing from.

This missed opprtunity is not limited to Europe. In Latin America many Spanish people live and work and with the increasing financial crisis in Spain, whereas it used to be that Latin Americans working in Spain  were sending money back to their home countries the flow of remittances is now going the opposite way from ex-pats back to Spain.

The failure of Citibank to gain market share in consumer banking across the globe is not because these markets are unattractive or too competitive but  it is the failure of Citibank to recognise the value of its global brand, the strengths of its payments infrastructure and its failure to think globally and execute locally. It is an opportunity that others will step into reducing Citibank to a minor player in consumer banking.