Smaller banks may find it difficult to offer basic banking services since proposed regulatory changes will increase the processing cost of cash payments and may trigger industry wide consolidation.
Global giants like HSBC, JP Morgan and Citibank will find it easier since they enjoy the benefits of ‘economies of scale’ and can afford to invest in latest technologies to bring down the transaction cost.
The proposed global liquidity rules, slated to come into effect from 2015 will leave many mid-sized banks high and dry, bankers and analysts fear.
The latest guidelines published by the Basel Committee on Banking Supervision could make it difficult for smaller banks to process customer payments across different account, banks and international borders since it’s a low margin high volume business.
Payment transfer electronically is fast, but banks still need to make provisions by investing in extremely liquid assets to counter any possible default during transaction. Basel III norms require banks to increase their liquid assets holding to face any possible crisis. To conform to excess liquidity requirements, small and mid-sized banks either have to charge extra to customers and lose business – affecting their margins or tie-up with larger banks to take advantage of lower costs.
Mark Gavin – International Chairman for JP Morgan’s Treasury and Securities Services business said: “We haven’t had this much change in such a short period ever before. We think there are potentially unintended consequences”.
Banks are required to park cash and cash equivalents with Central Banks worldwide to offer Real Time Gross Settlements (RTGS) – a service availed mostly by businesses to settle large payments quickly. However, the slower payment processing service through Automated Clearing House – in which millions of payments are bundled together, maybe hit hard.
Paul Styles of ACI Worldwide – a payment software developer said “The new Basel rules make it hard to provide payment services at low cost. Certain players will say: ‘Forget it, I can’t compete”. The smaller financial institutions already face a huge cost barrier, he said; adding that in the US, Credit Unions have already outsourced payment processing while in Germany, only 184 out of 1900 banks provides RTGS facility.
HSBC, JP Morgan and other biggies are building their “white-label” payment processing businesses to offer outsourced services to smaller players.