21 October 2014

Chris Pickles

Chris Pickles - Consultant

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Who moves a greenback cheapest

10 January 2013  |  2688 views  |  4

I was doing a project some years ago for the OECD, looking at how to regenerate the electronics industry in the UK in the face of heavy competition from Asia/Pac.  One of the most memorable interviews that I did was with the head of a disk drive factory in the UK.  With increasingly automated processes, the machines that automated manufacturing processes were no longer being built in the UK, as they had been when steam engines and hydraulic presses were invented.  The new machines for automation were being built in Asia/Pac, and those machines had two buttons – a red one and a green one.  As the UK no longer “makes the machines that makes the machines”, then UK industry was competing against other countries on the basis of who could push green buttons the cheapest.

When you look at the financial sector – areas like payments or financial markets – the industry is faced with a similar challenge, whichever country you happen to be in.  How can you operate at least as efficiently as anyone else but do it cheaper?  If you’re using the same software or hardware as your competitors, the challenge that you face is - how can you operate it cheaper?  Going back to “making the machines that make the machines” –otherwise maybe known as a “do-it-yourself” approach – is no longer a viable option, because the market has achieved scale, national borders no longer act as an economic protection, and new regulations are breaking down many of those national borders in any case – just look at PSD and MiFID in the EU.

So – as with that view of the electronics industry - will success in the financial sector come down to being the organisation that has the lowest costs for pushing that green button – being the organisation that can move a greenback cheapest?

TagsTrade executionPayments

Comments: (5)

Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 11 January, 2013, 18:14

No. Moving money is still fraught with several issues around complexity, convenience, security, trust, regulatory compliance, and so forth. Unlike many industries dealing in physical goods, the payments business is far from commoditized. Companies who address these fundamental issues satisfactorily still stand a good chance of achieving fame and fortune. Cost is far from being the sole determinant of success in moving greenbacks. With no disrespect to the retail industry, let me paraphrase the words of a veteran retail IT program manager when he was put in charge of his first ever BFSI project: A few minutes of downtime only means the loss of a few t-shirts in retail whereas it could place the whole bank at risk, especially if it happens close to a payment cutoff.

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Chris Pickles - Consultant - England | 14 January, 2013, 13:30

Yes, it's complex, with lots of issues, but other industries are capable of dealing with even greater complexity with an even lower failure rate and at a lower cost.  The winners will be the ones who solve those payments problems and deliver the service cheapest.  The young customers of today (as well as the not-so-young customers of today like me) don't want to know about the problems, and they will find service providers who make it easy - and cheap.

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Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 14 January, 2013, 16:37

Customers of all ages and across all times - myself included - have wanted the best possible product at the cheapest possible price and the least amount of headache. But the point is, there are no service providers who are able / willing to deliver such products for many types of payments. Let me take, for example, the very common use case of B2B fund transfer from USA to INDIA between two small businesses, and look at what payment products are available that are not necessarily cheap but are trustworthy and simple to use. Western Union and its equivalents won't handle payments to a business and are ruled out. PayPal tends to freeze merchant accounts arbitrarily and hence is not trustworthy. Wire transfer is not suitable since it's too complex for most SMBs and their community banks / credit unions. Against this very real backdrop, I was forced to settle for cheque - yes, paper cheque sent by FedEx and taking 45 days to clear - to receive a customer payment from USA a couple of years ago. By all counts, this is a huge market waiting to be disrupted. However, I don't know of a single PSP who has been willing / able to do it. Given my personal interest in such payments, I'd love to be proved wrong.

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Neil Burton - Self - London | 17 January, 2013, 13:14

Cheapest isn't the only success criterion, but it helps.

Sure it's complicated, but that doesn't justify costly. One industry estimate suggests that the total network bandwidth used by banks in making international credit transfers is approximately equal to downloading 10 videos a day (and knows no country boundaries). The typical cost and speed of a domestic ACH transaction is lower by orders of magnitude than correspondent banking, a hub and spoke, store and forward model. What do you get if you put a global-reach utility model on top of today’s standard secure messaging?

Speed may be another, albeit infrequently. Ask a consumer if he’d like a payment to be realtime, he’ll say yes. Now ask how much extra he’ll pay for that – very occasionally a lot, but usually nothing. Knowing with certainty that the money will be here tomorrow is usually good enough. Is a credit card transaction immediate? Yes – and no. Settlement takes longer.

Transparency (how much are the total fees, how much will the beneficiary actually receive, when will the funds arrive) is also important - Dodd-Frank 1073 is imposing that for US consumers.

Success for the service provider comes in delivering value. But payments aren’t valued. Consumers should care about some things the industry has encouraged them to take for granted, by providing domestic retail payments free of charge. Finality, security, resilience. Trust. Those can't be delivered for free.

Ketharaman, as you know, India’s a special case. Alternative payments models, proven elsewhere, do what you ask. The challenge is in obtaining the approval of the local regulatory authorities who  - with justification - prefer traditional models. Eventually – perhaps even soon - proven, regulated, safe alternative models will cross the line into ‘traditional’.

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Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 18 January, 2013, 17:06

@NeilB:

That's precisely my point: Regulation is very much an integral part of the landscape in which new payment products can, or cannot, be designed. Lacking a similar millstone around their neck, many other industries can - and do - come up with products that deliver greater value at lower costs. It's not so easy matching that in payments. 

India may be special in some ways but other markets have unique characteristics of their own: I was shocked to hear from a US-based relative of mine a couple of weeks ago that his bank's Internet Banking portal didn't even support domestic Account-to-Account fund transfer within USA (forget cross-border). He was surprised to learn that the Netbanking portals of most banks in India supported ACH and RTGS equivalent online A2A payments. When I mentioned UK FPS and Barclays PingIt, he was completely bowled over!

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Chris Pickles

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