NAB bolsters payments systems

PayPal, Google still playing on the fringe.

The National Australia Bank has committed itself to the payments market in the face of growing competition from digital players like Google and PayPal.

According to Callum Nelson, head of strategy and delivery for NAB’s payments transformation program, banks would likely lag behind niche players in releasing new offerings like contactless technology.

But payment processing remained a core function of Australian banks, he said, noting that banks would “absolutely stay in the payments game”.

“Banks can definitely compete but I don’t see banks being first movers in this market,” Nelson told the Cards and Payments conference in Sydney this week.

“Because the need for an integrated service offering, for banks to go to market with a new product or service is very expensive; there’s a long lead-time to it, whereas a smaller niche player can go to market with a very thin slice of that banking offering far, far more easily.”

Last year, an AIIA panel heard that third-party providers were better placed to bring new payment technologies to the Australian market than banks, which were saddled with core banking upgrades.

The ANZ bank and NAB subsidiary UBank have separately named digital companies like Google, PayPal and Apple as new competitors as consumer preferences evolve.

Jane Calder, general manager of marketing at Queensland’s Heritage Bank, told the Cards and Payments conference that consumers cared more about outcomes – like whether or not they could pay a friend in real time – than about who provided the service.

But Nelson said Australian consumers still had “an affinity for banks”, and did not see digital businesses like Facebook as primary providers of payment processing services.

Calder, Nelson and Grant Thomas, transaction operations manager at the Victoria Teachers Mutual Bank, agreed that digital players were unlikely to target the more complex commercial payments market as yet.

“PayPal are targeting small businesses, but probably don’t want to get into EFTPOS terminals,” Calder said. “I think there’s such an entrenched mechanism now.

“Facebook and Google are really very consumer-centric and you think, well, they’ve probably got other fish to fry than necessarily going after commercial payments.”

While the range of Australian banking services were based on similar, connected back-end platforms, digital players had disparate systems that tended not to communicate as seamlessly with those of their competitors, NAB’s Nelson said.

Additionally, consumers tended to trust digital providers less than banks, using services like PayPal for small transactions but keeping a bulk of their funds with traditional banks.

“The customer behaviour that’s coming out is that people are taking up these [digital payment] services, but they’re doing so in a way that is limiting their exposure,” Nelson said.

“I won’t store $10,000 in my PayPal account, but I’m happy to do a small transaction on PayPal … Whereas I’m far more secure and comfortable with my bank for a large transaction.”

Back-end transformation

Speaking “generically about how banks can modernise their payments systems” – rather than about NAB specifically – Nelson warned that an “explosion of change [had] been welling for some time” in the payments space.

Even so, he said it was often difficult to build business cases to upgrade existing payments systems, especially back-end processing systems and payment gateways.

“The types of things that we want in the end are certainly in the channels space and in the products space; the type of things that the customer sees,” he explained.

“But there’s a whole lot of back-end systems and back-end processes that tie everything together and really give us an end-to-end customer offering that we really need to take into account when we think about how and why to modernise.”

Nelson noted that core infrastructure upgrades were often difficult to build a case for because those systems did not directly contribute to business revenues.

Although it was cheaper and faster to build new customer-facing products on legacy systems, doing so may force the bank to have to upgrade all those systems in the long run, he said.

Nelson said banks aimed for real-time systems that were business-aligned, standardised and built on componentised, services-oriented architecture to be flexible for change.

Changes like real-time banking were “easier said than done”, he warned, explaining that same-day payments processing required new reconciliation and fraud checking processes.

Partnerships

Nelson highlighted NAB’s preference for buying systems from technology vendors instead of building its own software to leverage vendors’ research and development spend and expertise.

“Few corporates are still developing their own software; the buy-over-build [tendency] is pretty much right across the whole industry,” he said.

“Absolutely, we’ll partner with service providers; we’re good at banking but not necessarily at building software.”

Nelson told the conference that digital payment providers like Google, Facebook and PayPal were “potentially competitors, potentially partners; we don’t quite know”.

He did not disclose further details on whether the NAB was pursuing any such partnerships and with whom.

When the Commonwealth Bank launched its Kaching mobile banking application last year, it unveiled a feature that allowed customers to send payments to their Facebook friends.

Commbank is understood to be pursuing a wider partnership with Facebook, but a bank spokesman declined to disclose details of any such plans.