June 26, 2015 by Leave a Comment
Yesterday saw very interesting news coming out of Europe regarding a joint venture between 6 European ACHs. To understand why many of us have sat up and taken VERY close interest in the announcement, we need to review some recent history first. Much of this will be covered in more detail in a forthcoming report on ACHs. In the very early days of SEPA, the European Commission made many public comments. As SEPA was as much a political goal as anything, many of these were observations on how the Commission thought the market ought to develop. Given the size of the task and the perceived reluctance to the banks to do anything about SEPA, the Commission narrowed down the observations to a set of specific requirements, eventually culminating in the regulations that made migration mandatory in Euro countries. The downside is that some of the initial elements triggered some activity, but they were never fully pushed through. One such item was the Commissions perceiving their to be an over-supply in payments processors. In the Commissions view, a single market would reduce the 50+ processors to between 5 and 7. That would be enough for a competitive market, but not so many for an inefficient market. The latter stance is based on the fact that processing is broadly a fixed cost business and so the larger the volumes processed, the cheaper the cost per transaction is to process. As a result of this statement was a flurry of activity amongst the ACHs to be one of the “survivors”. It triggered a wave of mergers (Equens is a German/Dutch/Italian merger for example), near mergers (everyone courted everyone else!) and direct approaches to banks and markets to acquire them as customers and boost volumes. But whilst there were mergers, the market broadly remained unchanged. Indeed, some markets chose to build their own SEPA compliant ACH, rather than use the services of a SEPA-ready ACH. There are many reasons for this, not least ownership and control. The announcement yesterday therefore was very significant. At face value, 6 ACHs are going to collaboratively process cross-border SEPA payments. Given the tiny volumes, this isn’t exciting. However, dig deeper, and it becomes clear that Equens – arguably the largest ACH in Europe – is providing all the infrastructure and services to the new company, and the new joint entity company is registered at… Equens HQ. Those other 5 ACHs are considerably smaller – their volumes combined are still dwarfed by Equens. Secondly – it’s for cross-border SEPA payments today but mentions possibly delivering the real-time payments interoperability that’ll be required going forward. That means more ad more services that will be offered by Equens to these other ACHs. It’s particularly noteworthy as many believe that EBA Clearing has been positioning itself to provide exactly that service, and has been leading the discussions. The third point is a broader one. There has been considerably more talk in the last few months about processing, given various elements of PSD2. It’s not yet clear whether the scheme/processor split will apply to “just” card companies, particularly when some of the ACHs process cards. A number of organisations have also mooted whether the XS2A provision potentially provides a way to bypass ACHs – that is break the connection between bank and ACH. Given the range of potential impacts, it seems likely that there will at least some impact. Finally, we are aware of more than one discussion in Europe about the future of that countries ACH, particularly as they ponder on how to deliver a real-time payments solution for that country. All bets are off. The net result suggests to me that we’re entering new phase for payments processors, particulalrly ACH, which has been a relatively stable market for many years. The industry – and technology – is in a very different place than when the discussions happened in c. 2005. What made sense then may not make sense now. We believe that the announcement yesterday will be just the first of a number over the next 2 years. The phrases exciting times and ACHs can be at last mentioned in the same sentence!
September 16, 2013 by Leave a Comment
I came across an interesting story last week about a conflict between PayPal and an augmented reality glasses startup that’s raising money on crowdfunding site Indiegogo. The story highlighted the risks and challenges that payments companies face when dealing with areas where regulation is struggling to keep up with the pace of innovation; a topic we discussed in our report earlier this year, Managing Digital Payments Risks: A Regulatory Perspective. Crowdfunding, basically an investment activity, is growing and increasingly popular, yet remains largely unregulated. To complicate matters further, it’s inherently cross-border, which means either coordination of regulatory efforts across countries or the need to operate across many different frameworks. Of course, there are many different risks in crowdfunding. In addition to risks related to individual projects (“what if the company dissappeared with the funds?”), you also have platform risks, such as, (“what if the crowdfunding platform funds «strange» projects?”) Crowdfunding also demands some unique functionality from payment processors – for example, many platforms require projects to achieve their funding requirements completely; if the project doesn’t raise all the funds it asked for, all the pledges made have to be refunded. All these things make it difficult for payment processors to support crowdfunding platforms. While no one likes their funds frozen, it is understandable that payment providers can be cautious as they thread these uncharted waters. PayPal says it’s in the “midst of overhauling our policies in this space.” Some processors prefer to stay away from crowdfunding altogether; at least PayPal is prepared to “roll up the sleeves” and take on the challenges.