Banking as components or integrators

I just spent the day in a payments conference focused upon operational excellence.

We talked about Basel III, SEPA, the PSD, Mobile … the usual stuff, but there was a particularly intriguing presentation from Olivier Denecker of McKinsey in the morning session on what operational excellence in payments is all about.

I took a whole bunch of notes, and here’s a few of the key bullet points:

• EU banks RoE went from 13.5% in 2007 to 3.9% in 2010 = increase revenues or decrease costs to survive
• Payments = 30% of the €150 billion cost base of EU banks
• Although payments is well automated for STP, half of all costs are still people-related
• IT application costs in payments vary by a factor of up to 3x between the best and worst in class providers
• IT spend varies between 5.7% and 11.7% of operating income between best and worst in class performers
• Outsourcing in EU has DECREASED for the issuance of credit and debit over last decade (increased for acquiring)
• McKinsey recommend banks become more like car makers and common source components, outsource more and use standard metrics for benchmarking

What struck me as Olivier talked is that banks don’t view payments as a separate product stream.

It’s not an individual product line.

For most banks, it’s an integral part of the bank operations.

It’s the glue that hooks the customer to the bank.

It’s the core of their offer.

That’s why banks find it so hard to think of payments neutrally, objectively, dispassionately.

Payments are not objective, they are emotional.

For most banks, they are very emotional.

Ask a banker to outsource core payments processing and they’ll give you a look like you’re the devil’s spawn.

It’s just not done.

And yet, this is changing.

Payments is no longer the glue for bank, but more like the foundation and even bulilders don’t always drill the foundations.

They bring in specialists.

That’s what Olivier was driving at: bring in common component providers and develop value on top of their services.

This is where it gets interesting as banking has historically been a vertically integrated industry, providing an end-to-end service that is wrapped around the customer and is incredibly difficult to unlock.

And yet it will be unlocked if Olivier’s message comes true and banking is driven into a componentised industry where you have a payment app, a balance app, a cashflow app, a budgeting app, a fraud app and so on and so forth.

Oh, wait a minute.

That’s Banking-as-a-Service if I remember rightly (presentation from February 2009!).

The presentation may be two years old but Banking-as-a-Service is coming around faster than many might believe if you checkout

Square (now processing $2 billion a year),

iZettle (€8.2 million raised this week),

PayPal (now going offline as much as online with cards),

Movenbank (no plastic, no cards, no hidden fees),

Zopa (active lenders up from 9,000 in 2008 to 16,000 in 2009 to over 22,000 last year),

Banksimple (over $13 million invested and now demonstrating their offer

BankSimple Demo from BankSimple on Vimeo.

… jeez, there are 100s of these startups and established disruptors out there doing stuff as I’ve not even mentioned what Facebook, Google, Amazon, Apple, Bitcoin, Ven Currency and others are doing here.

Suffice to say that the componentisation of banking and shift from vertical integration to horizontal components that can be put together as you like, is happening and happening fast.

Has anyone noticed?