Voice of the Industry

Why European banks should adopt PPaaB to avoid also going into the red

Thursday 20 April 2023 08:51 CET | Editor: Andra Constantinovici | Voice of the industry

Toine van Beusekom, Strategy Director at Icon Solutions, discusses why it’s time for banks to shift their thinking and adopt new Payments Processing-as-a-Business (PPaaB) models.


The current payments transformation landscape across Europe

The Dutch payments system stands out among global financial systems as an example of efficiency and innovation. Like their counterparts from other countries, Dutch payment processors contend with increased competition, growing fragmentation of services and products, regulatory standards and scheme changes, emerging technologies, and geo-political pressures. In the face of these challenges, the Netherlands has continued to enhance payments transaction to meet the evolving demands of customers and the marketplace. 

Despite these successes, increased risk and costs associated with regulatory compliance are straining Dutch payments margins. While payment account management and credit cards generate positive results for the country, a McKinsey & Co report commissioned by the Dutch Payments Association revealed that banks in the Netherlands collectively made an aggregate loss of EUR 570 million before tax on payments services in 2021. Note too, that this included a positive result on Account Servicing – read Interest – and credit card transactions. Without these, the processing losses would surpass EUR 1 billion.

Why banks in the rest of Europe need to take notice

If one of the most efficient payments processing systems in the world is finding it difficult to maintain profitability in the face of such challenges, banks across the rest of Europe must certainly feel the squeeze. In fact, independent research from Celent indicates that the current payments processing model may be unsustainable: 86% of Tier 1 banks report that they find it difficult to maintain margins on payments – up from 59% in 2021. 

If this is true – and by all accounts, it seems to be – then financial institutions must take stock of their strategy to determine if they’re on the right track or if it’s time for a fundamental shift in the way banks think about their payments business model. 

While some have attempted to ameliorate the situation and cut costs by moving to open standards, open source, or cloud-based models, these moves will provide, at best, short-term relief. 

Instead, banks need to brace themselves for a potential step-change in their own environment and swiftly rethink their payments business model. To ensure long-term profitability, it’s time to move from the thought process that payments processing is a commodity – and instead start thinking of it as a revenue stream. 

The right mindset: payments processing as a business

The good news is that many financial institutions are already primed to shift their thinking about how payment processing can create new value opportunities. A quick poll during a recent webinar hosted by The Paypers found that 68% of the webinar audience said their organisation viewed their current payments processing as a business opportunity.

Enter Payments Processing-as-a-Business (PPaaB). A model that offers big banks the opportunity to open new revenue streams as a provider of value-added services for smaller banks struggling under the weight of their own payments processing. 

Research indicates that the time is right for Tier 1 banks to make their move. Celent found growing interest among smaller banks for working with other, bigger banks for payments. According to Celent, 22% of Tier 2 and 3 banks in Europe said they would consider working with another bank for these services. Similarly, 55% of Tier 2 and Tier 3 banks in Europe want processing partners that can deliver value-added services. 

Clearly, smaller banks are coming to see that outsourcing offers the clearest path for their transformation, which translates to a sizeable opportunity for larger banks willing to move to a PPaaB model. Banks that do so will not only find that profitability increases, but they will also see an uplift in agility and ability to stay on top of evolving regulatory requirements. 

A path to enhanced payments processing

Banks interested in adopting PPaaB will certainly need a strategy built on sustainability, resilience, and independence – and one that allows them to develop PPaaB services at their own pace. Additionally, infrastructure must be capable of handling fluctuating payments volume (not value), 24/7 real-time next to payments scheme industry engagement, and the cost of doing business for financial crime risk and compliance.

Icon has a proven track record of helping banks strategise and grow their own payments infrastructure to support more streamlined, cost-effective, and profitable operations, as well as the development and management of additional value-added services. Icon’s low code IPF framework allows banks to take back control and transition at their own pace, ultimately setting them up for seamless and successful partnerships, for example, with other banks. 

To find out how Icon can support your transition to a future-proof payments processing model, get in touch to schedule a meeting with Icon’s team of experts.

About Toine van Beusekom

Toine van Beusekom is a Payment Strategist and Lead Architect at Icon Solutions with over 20 years’ experience in the payments industry. He has a wealth of expertise and knowledge of the payments and cash management domain obtained from world-class banks and IT companies, leading global consultancies and dedicated payment tech firms following senior roles at J.P. Morgan, IBM, Clear2Pay and CapGemini.

About Icon Solutions

Icon Solutions is a leading specialist provider of services and technology solutions that are simplifying banking transformation. Icon is the past, present and future of payments. With a proven record delivering mission-critical solutions for global institutions, it is driving the next-generation of banking and payments architecture. Icon combines industry-leading domain experts, services, accelerator assets and technology that empower customers to solve problems, fight complexity and embrace change.

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Keywords: PaaS, payment processing, online payments, payment gateway
Categories: Payments & Commerce
Companies: Icon Solutions
Countries: Europe, Netherlands
This article is part of category

Payments & Commerce

Icon Solutions

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