Worldwide electronic payments are set to double over the next four years and will outpace the growth of the global economy, according to a Global Insight study sponsored by ACI Worldwide Inc.
Also in the study: The United States writes ten times the number of checks (35.25 billion) as France (3.7 billion), which writes the second-largest number of checks. And while the United State currently has the largest global share of electronic payments measured by percentage—31.5 percent, compared with the second-place United Kingdom’s 8.8 percent—the U.S. compound annual growth of electronic payments trails nine countries, including Poland, Mexico, and Russia, and is only about equal to worldwide transaction growth. 0Charts can be seen by following this link, courtesy of ACI Worldwide: http://www.aciworldwide.com/pdfs/2006_Payments_Market_Study.pdf
Much of that growth will take place in the world’s emerging economies, especially China, India, and Eastern Europe. This is partly because those economies are still largely cash-based, and any measured growth in electronic payments reflects expansion from a small statistical base. But it’s also because as emerging economies grow, increasing numbers of payments are made electronically, while much of the paper that needs to be wrung out of the global payments system originates in the United States.
While Europe, Canada, and the United States continue operating what are, at best, enhanced legacy systems, developing regions are installing the latest payments technologies. Trends taking shape today suggest that going forward, the world’s emerging economies will enjoy the benefits of advanced-payments technology, allowing stronger and very competitive financial institutions with greater liquidity to develop and grow, while the world’s established economies, constrained by slower payments processing, will experience some erosion of their current dominance.
This result will obtain because modern payments processing is more efficient and less expensive than payments processing on legacy systems. In turn, this creates larger operating margins and greater profits for institutions not wrestling with cobbled-together legacy systems.
Institutions free of the relative operational constraints of such legacy systems also have access to better and more timely portfolio information, which in turn creates more balance-sheet liquidity and more effective risk management.
As a result, such institutions will qualify for the lower-risk capital requirements permitted under the Basle II accords, giving these institutions—and their customers—more money to invest or lend. Resources like that will enable both the institutions and their customers to be more competitive on the global stage, probably at the expense of U.S., Canadian, and European institutions and businesses.
“There’s certainly a need for some reinvention and recapitalization on our part in order to bring things up to a more competitive level,” says Mark Lauritano, Global Insight’s managing director of the lending and payments practice. “The margins are shrinking, which makes it more difficult (for the legacy system-based institutions), and it’s a big challenge, I think, for players in that industry.”
Going forward, and even though the operational risks and costs implicit in meeting the challenge posed by more modern payments systems are large, Western institutions have little choice but to make these investments, because India and China will be able to be quite aggressive on the world stage.
An institution with the modern risk management systems made possible by advanced payments and reporting mechanisms can, for instance, bid more aggressively for large loans, because they can more finely granulate any portfolio risks. That allows them to accept tighter margins, and thereby edge out less well-supported competitors.
The danger to Western economies posed by such modern systems in the hands of our competitors—but not in ours—is even more fundamental than mere business lost, thinks Lauritano, if Western institutions continue to outsource their operations to the lowest-cost provider.
“It’s definitely a competitive threat down the road, but you also have to wonder about the (national) security questions about having all your processing done in China or India,” he says. ”There are certain factors that will prevent a wholesale movement of transactions away from this country, but that having been said, there’s a certain class of transaction that will just go to the lowest-cost provider. I think it’s definitely something people in the industry are paying close attention to, and need to, to position themselves down the road.”
One horrible example: If India and Pakistan go to war again, India could easily choose to punish us—if we tilted towards Pakistan because of the war on terror—by curtailing, or merely slowing down, our access to our own payments transactions. Similar calculations based on perceived national interest could affect other nations, should we begin diversifying our outsourced operations from India.
As a result, thinks Lauritano, Western institutions need to start making the large but necessary investments implicitly called for in the study.
“One of the takeways of the study is that despite the relative growth patterns that are emerging by region, it in no way suggests that the level of investment should follow the same relative patterns,” he says. “There is a need to continue to invest and upgrade, because many of the emerging markets are getting the latest technology, and that will put them good position on a global competitive basis.” (Contact: Global Insight, Mark Lauritano, 781-301-9123)