SiNSYS has launched with ambitious targets: to build up a pan-European presence and process 100 million cards within the next 10 years. Can it beat the Americans?
The formation of the SiNSYS joint venture by Italy's SSB S.p.A., Belgium's Banksys sa/nv and Holland's Interpay Nederland B.V. is a significant step in the rationalization of Europe's nationally based card processors. For the first time, interbank processors have agreed to set aside vested interests and pool some of their assets and skills in a single entity, based on a single platform.
There will need to be many more such steps before there is a seamless card-processing infrastructure, not only in the so-called eurozone-the 12 countries that use the new euro currency-but able to extend into the 10 countries acceding to the European Union next year.
"There are 80 companies doing interbank clearing in Europe," says John Chaplin, executive vice president for payment-processing services at Visa International's London-based Visa European Union region. "We expect six, eight or 10 big players by 2010."
As a pan-European payment-card processing venture, owned by European banks, SiNSYS is aiming high.
"Ten years out, we should be one of the leading processors here in Europe, with a very serious market share and 100 million cards or more," says Dirk Syx, chief executive of Brussels-based Banksys. "Within a few years, we should be operating in eight or nine countries, and if some other national processors join us, I don't exclude up to 15 countries."
Adds Gian Bruno Mazzi, CEO of Milan-based SSB: "SSB has been for some years the largest processor in Europe, with 30 million payment cards in 2002. The growing need for processing harmonization at European level has led us to think of a pan-European joint venture able to catalyze our expertise and competence to serve the market, placing our advanced card-processing platforms at partners' disposal."
The main forces driving consolidation among the national processors are:
* The concept of the eurozone as a single domestic market, backed up by the threat of European Union legislation if banks fail to act accordingly;
* The drive everywhere for greater scale and operational efficiency;
* The increasing number of banks with operations in several European countries, including Central and Eastern Europe;
* The challenge posed by U.S.-based processors, particularly First Data Corp. and Total System Services Inc. (TSYS), both of which have a significant European presence.
SiNSYS is launching with 18 million credit cards on its books-12 million issued by Italian banks and 3 million each from banks in Belgium and the Netherlands. Probably the key decision in the formation of SiNSYS has been to concentrate operations on SSB's Milan-based data center and card-issuing platform.
"What I personally like about the deal is their maturity in picking one platform," says Philippe Scheppers, senior vice president, strategies, at MasterCard Europe. "There have been many tentative deals that have never surfaced because everyone wants to push their own platform."
SSB has invested heavily in its platform, drawing on big-time technology providers like International Business Machines Corp. and Computer Sciences Corp. to develop modern facilities. As well as processing for most Italian banks, it has won cross-border business from its shareholder UniCredito, which owns banks in Poland, Croatia and Slovakia.
"Before choosing SSB, Banksys and Interpay asked a third-party consultancy to evaluate us," says Nicola Cordone, deputy general manager of SSB and CEO of SiNSYS. "The audit said ... SSB has built up state-of-the-art solutions, so I think we are capable of delivering."
Another key element in the structure of SiNSYS is the provision for an ongoing role for Banksys and Interpay, not just as shareholders and directors, but also operationally through the competence centers they will manage. Banksys is responsible for the Brussels-based acquiring center and Interpay for the customer-delivery center in Utrecht, the Netherlands.
There is an obvious parallel with so-called centers of excellence for debit and smart card development in Europe established under the terms of the 2002 merger between Europay International and MasterCard International. The devolution of specific responsibilities in this way gives the banks involved a comfort zone.
More generally, SiNSYS will operate as a bank-owned processor, of the kind familiar to mainland European banks through their existing interbank companies. It contrasts with the public shareholder structure of the U.S. third-party processors.
SiNSYS hopes this will give it an advantage over its American rivals. "Our philosophy is to serve the banks, not to maximize profits," says Syx. "The American philosophy is a return of 'x' percent per year. That is not our philosophy."
Nonetheless, SiNSYS is claiming it will be able to match U.S. processors in cost terms. "Taking the best things we have, we can achieve economies and grow," says Willem Stolwijk, SiNSYS chairman. "We will be at least 30% to 40% more cost effective than we are today-not immediately, but we can grow to that."
Regarding customer service, Cordone says, "I am sure we are at the same level (as U.S. processors) ... We are better at understanding customer needs, because we have a European culture, we are an interbank company and our customers are our shareholders."
The advantage of SiNSYS, he adds, is that "we are more open to customer needs and avoiding to impose our own standards. If a customer asks for different features, we're committed to seriously analyze the proposition. U.S. companies are a little bit less flexible."
There seems to be no doubt about the support that SiNSYS has received from its own bank shareholders.
"The three boards unanimously approved the business case and the foundation of SiNSYS-and there isn't a single indication any of the 66 members of Banksys wouldn't like to use SiNSYS services," says Syx. Other than Citigroup Inc.'s Citibank subsidiary in Belgium, all Belgian banks are shareholders in Banksys.
One of the assumptions underlying SiNSYS is that its bank shareholders will use its services outside their domestic markets. Banks like ING and ABN Amro in the Netherlands and KBC in Belgium have built up operations throughout the EU and Central and Eastern Europe. They are also the type of bank most likely to turn to the U.S. processors, as ING has already done with its Visa E-go program in the Netherlands.
If these aggressive, multi-country operators back the SiNSYS approach, not only by voting for it on the Banksys or Interpay board, but by giving SiNSYS their business, they will close off one of the most promising avenues of expansion for First Data and TSYS. But will they do it?
"It's very normal that they will look to SiNSYS to fulfill these strategies," says Syx. "We will not be favored, but we will certainly not be disfavored. If SiNSYS presents a good case, banks will prefer that SiNSYS handles their business, because they are shareholders in the company."
Bob Evans, senior director, business expansion at TSYS, sees the formation of SiNSYS "as validation of our views. It confirms that European issuers are seeking alternatives to nationally owned processors. The market is consolidating, it's driven by scale and demand for improved services, and a small number of pan-European processors will evolve."
But a consequence of SiNSYS, says Evans, is that "this new alliance has prompted an increased level of interest in TSYS services from banks based in those three countries."
Nor does TSYS believe European banks will always prefer to use a bank-owned processor.
A Changing Mindset
"We're in a process of evolution," says Evans. "Though the national companies have served their banks well over many years, factors like EMV (the common Europay/MasterCard/Visa smart card standards) and the euro make national models unsustainable. SiNSYS is the next stage of evolution. In five to seven years time, we'll have moved to a much more open market."
TSYS is "in discussions with organizations which are becoming more receptive to commercially driven processing, so we're seeing a mindset change," Evans adds. Meanwhile, TSYS is "absolutely open to joint venture and/or partnership models."
First Data declined to comment for this story.
While SiNSYS represents the brave new face of interbank processing, an obvious question is whether it will be subject to the problems sometimes associated with national processing structures: difficulty in innovating, because features requested by one issuer have to be board-approved, and difficulty in setting priorities among customers who are also owners.
Will SiNSYS be forced to move at the pace of the slowest members?
"I disagree," says Syx. "Belgian banks don't find this. When a bank wants to innovate, there is a special price and the bank pays the development costs."
Relations with the card associations are another area where SiNSYS will tread carefully. Though both Visa and MasterCard say they welcome SiNSYS, there is potential for future conflict.
Visa's Chaplin says he does not expect SiNSYS to affect Visa, but adds: "We aim to play a part in the consolidation of the processing industry, and in terms of scale and functionality we are well-placed to do this."
As an issuer processor, SiNSYS does not compete with the card associations. However, "interbank card transactions-switching between acquirer and issuer-is very definitely where we work," Chaplin says. "Driving POS terminals and an ability to take transactions is also a space where we have a lot of capability."
So there are two areas of competition between Visa and SiNSYS?
"Yes, our view is that it's an increasingly competitive marketplace and (there are) many different ways of doing things," says Chaplin. "Businesses are looking for economies and driving transactions costs down. The technology in some of the national processors is 15 to 20 years old, so they face big costs to upgrade." Domestic interbank transactions account for 85% of Visa EU's total processing volumes, he adds.
MasterCard's Scheppers says that "we have every reason to work with SiNSYS in delivering services and we need to find a modus vivendi."
The card associations provide value to the banks through the payment guarantee, brand promotion and specialty functions like monitoring fraud, Scheppers notes. "We consider that the brand provides a value which banks pay for through assessments, and we would not want processors to substitute for banks. So that's something we'll be very attentive to."
Scheppers adds that, "We would like to remain at the center of the value chain-acquirers send transactions to us and we send them on to issuers for clearing and settlement. Our concern (with SiNSYS) is that traffic between Belgium, the Netherlands and Italy would end up on the books of the joint venture. We would like an agreement that we provide the switch and they handle the processing."
The Dutch banks' credit cards will be converted to the SSB platform during 2004, with the Belgian banks converting in 2005. During 2005, SiNSYS aims to start processing simultaneously for new clients, probably Dutch- and Belgian-controlled banks in Central and Eastern Europe.
The formation of SiNSYS began with banks like ING and KBC "re-analyzing the role of Interpay and Banksys," notes Chaplin. "Once you get banks going cross-border, their desire to participate in multiple national systems is reduced."
2005 may also be the first year when SiNSYS could contemplate enlarging its shareholder base to accommodate other interbank processors. Stolwijk notes that SiNSYS has had "some contacts" with other interbank companies. "They're curious about what we're doing," he says.
Who might apply to join SiNSYS will be revealed over time. Banks in the Nordic region will be among those tracking developments, as they own processors like PBS in Denmark with sub-scale credit card operations. Moreover, pan-Nordic players like Nordea and Den Danske are examples of banks that have to buy services from multiple interbank companies.
However, the Nordic banks are more likely to develop their own regional version than to join SiNSYS. In Germany, most of the banks appear committed to the big processor GZS, which has had some success in renewing processing contracts and also won Europe's first interbank cross-border processing contract, with the Viseca group of banks in Switzerland.
In France, Cartes Bancaires (CB) remains intent on pursuing an independent destiny.
Outside of Central and Eastern Europe, Spanish banks are probably high up on the SiNSYS hit list, because of their fragmented card-processing industry. "There are three processors, which everyone agrees is two too many," says an association executive.
One issue is to what extent future new shareholders might insist on hosting a competence center as part of the price of joining SiNSYS. "In our mind we need three competence centers," says Cordone. "If we have a new shareholder, I'm not sure. We don't want double roles or inefficiency."
But he adds: "We could have a specialist, for example in Spain, being part of the issuing competence center, and avoiding outside consultants which are very expensive."
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