Approximately 10 million non-cash transactions are carried out daily in Poland and more than half of them are conducted without the use of payment cards. They are performed with the participation of banks via the National Clearing House (pol. Krajowa Izba Rozliczeniowa — KIR). This unvarying picture may soon be subject to a radical change. The market for payment settlements has just been opened to non-bank entities that have been waiting for such an opportunity for a long time.
A regulation of the president of the central bank that has entered into force will radically change the situation on the financial market: it deprives the existing settlement members of the privileged status that they have enjoyed for over two decades. So far, only banks and the National Clearing House have been able to keep accounts with the central bank, used to settle interbank transactions in the SORBNET system run by the NBP. At present, all “entities managing external systems” will be allowed to open such accounts and, therefore, make settlements.
KIR, which has so far managed ELIXIR (electronic retail payment system in PLN) and EuroELIXIR (electronic retail payment system in EUR) SORBNET2, will be used by actors other than KIR for inter-bank fund transfers resulting from settlements made by customers. The operators must be established in the EEA (EU + Norway + Iceland + Liechtenstein), subject to appropriate supervision and carry out settlements in euros or zlotys. Apart from meeting local supervision requirements, no other conditions are required.
What will be the consequence of allowing new entities to open accounts with the NBP? What does allowing new actors to open accounts with the NBP result in? So far, operators of settlement systems (other than KIR) used to be required to order payments to the customer’s bank first; they were later transferred – through KIR – to the recipient’s bank. Now, these operators can make their own payment transfers between banks, without any further restrictions. Instead of paying banks (and KIR) for payment transfers, they will be able to collect fees from the banks for the same service.
The first breakthrough
Who could be KIR’s first competitor? It may be Blue Media SA, which has been successfully promoting its new system of immediate payment in banks (a version of the BlueCash system). The company will no longer have to create a complex system of clearing with individual banks, but stands a chance of immediately debiting bank accounts when such a need arises from a settlement schedule of individual customers or banks in BlueCash.
Given the above, Blue Media may be the first — but certainly not the only — operator who will offer to Polish banks a new system of retail settlements in zloty, an alternative to ELIXIR. The competitive price of these settlements could convince banks to accept the offer.
If Blue Media built a system based on the mechanisms and formats widely used by Polish banks today, company’s services could enjoy significant popularity. For the competitor of KIR SA and its ELIXIR system, an important factor might be the potential of other financial and finance-related services. On the basis of the new system, the operator of the new settlement system could provide similar services to banks and businesses.
An opportunity for money exchange offices and other businesses
The creation of a new settlement system could prove of interest to entities that are already providing financial services in the market, including on a large scale. Having their own domestic settlement system would allow them to improve the quality of the services and reduce transaction costs.
Among many examples, there are Internet money exchange offices, providing currency exchange services to individuals and small businesses. Among these currencies, the share of the value of their EUR/PLN transactions as well as the number of exchange transactions in this currency pair is dominant. This may prove tempting and incite Internet money exchange offices to create a system of domestic settlements in euro. Local banks would, naturally, needn’t be willing to participate in the system, but such a scenario should not be discarded.
We can also expect that an experienced operator of euro settlements enters the Polish market and proposes a solution to Polish banks that will be more comprehensive and competitive to EuroELIXIR. Then, provided that such a system is widely accepted by Polish banks, Internet money exchange offices could also lower the cost of their settlements with customers (e.g. if the online money exchange office could become a direct participant in such a settlement system in euro, without the participation of a bank).
The most interesting and, at the same time, the most serious and long-term consequences for banks are associated with the creation of a national settlement system in zloty by one or more entities that are the operators of “horizontal” (multi-sector) shopping websites. Allegro is the most popular Internet portal of this type in Poland. However, it has strong competitors, ready to expand their share of this market.
Internet shopping websites, allowing potential buyers and sellers to meet and providing mechanisms for conducting transactions and appropriate settlement tools, are becoming increasingly popular in Poland. Even businesses that have their own Internet sale websites and services often sell their products on popular horizontal websites. This type of service has a colossal, and growing, potential in the retail market.
Banks, especially in recent years, effectively benefited from their privileged position, consisting in access to their own settlement systems, or those that have been made available to them. In this way, they could make money not only on settlement, but also on closely associated transactions conducted by their customers. In the age of online shopping, banks have been able to offer value-added services, supporting i.a. the identification of transactions. mOKAZJE, recently launched by mBank, is an example of the bank’s ability to penetrate the retail customer’s shopping process and make money on through the identification of products and services corresponding to their customers’ preferences.
If Allegro, Świstak, Gumtree, eBay or another online sales intermediary decided to swap variable ban costs (the cost of interbank transfers usually carried out in the ELIXIR system) for the fixed costs of maintaining their own settlement system, banks could possibly lose forever a significant part of the e-commerce market process, and perhaps also m-commerce.
A successful launch of its own settlement system by a major shopping website would mean a significant reduction in the number of transfers processed by banks and KIR. Consequently, banks would lose their strong current position in the financial market.
If a large portion of online sellers is limited to activities within the Internet, then after having gained the status of a payment institution, set up under a law that has recently entered into force, a shopping intermediary portal can suggest to the sellers that they open accounts with it rather than with banks. The portal could use a bank to maintain its total net liquidity, derived from the portfolio of payment accounts of its clients. For some micro enterprises, banks would therefore become only primitive liquidity wholesalers rather than specialized retailers with privileged access to customers.
This last example shows that the threat to the banking sector does not only relate to the narrow sphere of settlements, but also the bank’s relationship with its customers which, after all, forms the basis for the sale of other financial services.
The best defence is a good offense
Are banks capable of defending themselves from such a turn of events? How can they prevent the outflow of payments and loss of access to e-commerce transactions?
The solution is simple, but its implementation requires certain involvement, for which the majority of banks are not ready. In order to maintain a sustainable access to online consumer purchases, a bank must take control of these processes. A single bank can do this either by taking over an existing online shopping intermediary portal, either entirely or by becoming an intermediary in such transactions.
Equity interest or a strategic alliance with a shopping portal are probably more effective, but also require a decision that may prove too difficult for a bank. The development of shopping intermediation channels by a bank is more risky and achieving a significant scale – through detailed negotiations with individual sellers – may take a while.
In both cases, defending the bank’s current market position against the threat of competition from non-banking entities requires its entering the domain that has remained far beyond the scope of banks’ operations and, consequently, developing utterly new competences. It is, nevertheless, necessary given the challenges posed by the deregulation that has irrevocably been introduced.
The author is the Strategy and Development Director of the Department of Transaction Banking at BRE Bank. The article reflects the opinions of the author.