Across EMEA, more often than not, banks are operating payments infrastructures that are no longer compatible with current or future needs. A high proportion of credit card issuers in EMEA are still reliant on legacy systems or joint processing ventures and in both cases find themselves customising their own software. In comparison, many of the emerging credit markets are benefiting from new systems. Financial organisations in more established markets are starting to realise that their growth and success is being restricted by their IT.

As we all know, Western Europe is a mature market, where credit cards have been an active credit vehicle for many years. History underpins the technology infrastructures of many of today's major financial institutions and provides an interesting reference point into how they currently operate.

At the advent of credit card offerings the major banks and financial institutions were simply keen to get up and running. Their ‘what suits me now' mentality was based upon satisfying their initial requirements, with little concern for what might lay ahead. Consequently, many decided to maintain control of IT development by buying in software, customising an ‘out of the box' solution or by developing their own IT infrastructure.

This has led to a situation where many of Europe's largest banks are today running on outdated systems that don't have the flexibility or agility to cope with current requirements. As a result, they struggle to bring new products to market within the very short timeframes necessary to compete in today's fast-moving environment (days, certainly no more than weeks), creating a situation where issuers can't be as competitive as they need to be to meet their business goals.

Compliance has also played a major part as banks wrestled to develop their internal systems, which evolved largely independently of external controls - to meet ever-demanding regulation. This has forced those looking to update and enhance their platforms to strike up partnerships with software vendors. Clearly, this is an unsatisfactory way of overcoming the problem as it merely resets the clock until the platforms are again unable to cope or at least means much more internal focus is being placed on compliance and regulation and less on product innovation. 

A key advantage of emerging markets is that they are able to bypass the restrictions imposed by legacy systems, opting instead for a ‘how would I like start?' approach. They are able to ensure they select the most up-to-date, reliable and future-proofed solution. This means they tend to work with a processing partner or buy the software, with an option to migrate to an external processing service further down the line.

This doesn't mean however, that banks in all emerging markets, such as those in Eastern Europe are setting themselves up in the best possible way. They may be limited by a nationalistic approach where there is a wariness and reluctance to forming partnerships with vendors and providers outside their geographies. In some cases this may create an adverse situation where card issuers don't gain maximum benefit from leveraging the knowledge and expertise of global technology companies.

Eastern Europe may therefore be missing a trick as financial institutions choose to implement software in-house rather than outsourcing their systems to specialist payment processors. Interestingly, if we were able to fast forward ten years, we could well find a repeat of what is happening in Western Europe now.

Global technology companies are subsequently driving change within these markets by providing software licences with a view to fully outsourcing banks' system requirements  in the medium to longer term (over five or seven years) once the confidence and relationships have been fully established. Alternatively, they are adopting the ‘bricks and mortar' approach. In this way, they look to overcome resistance to foreign partnerships by acquiring data centres in emerging markets in an effort to ‘buy confidence'.

The ideal solution would be to fully outsource the whole processing function from the outset to shared data centres serving multiple markets that confer clear cost efficiencies through economies of scale, but acceptance of this approach is not quite there yet. 

The threat of new market entrants

One factor that is likely to enforce a change in Western European markets is the impact of aggressive new entrants. Retailers, for example, are entering the fray keen to take advantage of the public's disillusionment with banks and the technology conundrum that they are facing. Backed by significant funds, major UK retailers can benefit from an open-minded perspective, happy to outsource their IT infrastructure and processing systems and concentrate their efforts on their core business strengths.

Telcos are also well-placed. With excellent anchor products, significant funding, strong brand equity, generally good customer service reputations and a market progression towards mobile banking, they are ready to take on both the banks and the retailers. It is therefore very much a question of not whether but when they will enter the market.

How can the established Western financial institutions retain their lead against these two threats?

For most of the established banks the cost and risk of creating a new platform from scratch is not likely to be feasible in the current climate. Consequently, many are looking for partners who can take on the burden of compliance and infrastructure management to help improve their ability to innovate, without being constrained by their IT systems.

Payment processors, such as FIS, already have the systems and solutions available to facilitate this transition. Those banks that adopt this model are more likely to be innovative, agile and quicker at bringing new products to market, whilst also exercising due caution in their approach to managing the risk.

Astute market players appreciate they will have to evolve to remain competitive, but they are in danger of losing ground to the new kids on the block if they don't do so quickly. BT

Matthew Willman is general manager for Credit Card Solutions at FIS EMEA