Lisa Vasic, MD of transaction banking at ANZ
ANZ has rolled out a native capability to process PayTo transactions within its institutional bank and next month will open the service to at least one large national biller seeking to initiate payment agreements with customers.
While the country’s three other major banks are at various stages of development for delivering PayTo capability to billers and retail customers, ANZ is expediting its rollout as part of a wider program to consolidate its leading position in the highly lucrative institutional payments market.
PayTo is a new digital billing and payments service that allows retail customers to give recurring billers such as AGL and Telstra a standing mandate to pull monthly payments from their bank accounts.
ANZ’s launch of PayTo looms as a milestone for the local payments industry as it will mark the entry of large-scale Australian billers to the service.
It is also noteworthy from a strategic perspective at the bank given that the launch is being managed through the highly profitable transaction banking arm of the institutional division.
The group’s recently released full year financial results show that the digital payments and cash transactions business within the institutional division is now the fastest growing revenue and earnings generator across ANZ’s operations.
Revenue sourced from digital payments managed by the institutional bank more doubled in the last two years to A$1.8 billion amid booming demand from domestic corporates, government agencies and overseas banks for access to platform services, NPP and other real time payments services managed by ANZ.
The transaction banking arm, which also includes currency payment transactions, delivered record total income of almost $2.3 billion in 2023, which means it now accounts for more than one third of the institutional division’s aggregate revenue.
Lisa Vasic, the managing director of transaction banking at ANZ, believes the bank’s imminent rollout of PayTo services will propel further expansion of the institutional payments business.
“We have taken a strategic decision to build native capability for PayTo initiation to support our institutional and commercial customers,” she said.
“We see PayTo providing a genuine alternative to cheques and legacy payments methods going forward, both in the business-to-business and business-to-consumer spheres.
“In the next few weeks we’ve planned the first in a series of releases of our strategic launch of PayTo initiation with an institutional client.”
While ANZ has lost competitive ground in retail banking for more than a decade, it is a completely different story for institutional banking.
Since Westpac’s acquisition of St George in 2008, ANZ has progressively overtaken Westpac as the “go-to” institutional bank for domestic and international customers.
Previous longstanding clients of Westpac’s institutional bank such as the New Zealand government and the state government of NSW are now ANZ clients.
ANZ is also the largest provider of “host to host” banking services, which means it accounts for the lion’s share of cross border transactions processed on behalf of overseas banks operating in Australia and New Zealand.
Around 60 per cent of all correspondent clearing payments in Australia and New Zealand were processed by ANZ in 2023.
ANZ’s grip on the institutional banking market might be difficult for rivals to loosen as corporates and government agencies move to integrate their treasury and payments systems with the bank’s service platforms.
As big corporates deepen their technology dependency on banks such as ANZ it requires a lot more planning, effort and capital for a client to unwind an institutional banking relationship.
“At ANZ the average relationship with institutional customers spans more than ten years mainly because – unlike retail–we are highly integrated into our customers’ systems to support automation and efficiency,” Vasic said.
“The level of straight through processing via integration between the bank’s payments infrastructure and the systems of our institutional clients is significant and growing – in 2019, 63 per cent of customers’ transactions were executed via straight-through processing, today it is over 70 per cent.
“So that is telling you that institutional customers are looking for a long term relationship with banks like us that are clearly committed to ongoing investment in their products, propositions, people and platforms,” Vasic said.
ANZ’s strength in institutional payments has been confirmed by independent surveys conducted by Peter Lee Associates, which rates its transaction banking service as a “clear leader” in Australia and New Zealand.
According to PLA’s latest survey published in June, the bank was also ranked by the country’s largest corporates as the top-ranked innovator of institutional banking solutions.
INTERNATIONAL EXPANSION
The payments processing business at ANZ is driving an international expansion of the institutional bank – a point highlighted earlier this month by group managing director, Shayne Elliott.
“Institutional is more international and increasingly driven by payments and currency processing,” Elliott told a briefing of investment analysts on 13 November.
“That transformation has largely been driven by our payments and currency processing businesses which are low capital, high return, with high barriers to entry.”
Surging demand from overseas financial institutions for the Australian bank’s payments processing services is stoking growth throughout Asia.
The executive overseeing integration of institutional payments operations in Asia and across the bank more generally is Nigel Dobson.
Dobson, a ubiquitous and influential figure in the Australian payments industry, was handed a mandate to re-engineer the group’s payments technology stack in 2017.
“We are the only bank in Australia building an end to end solution in real time payments and settlement for institutional clients,” he said.
“The digital payments processing capability is also embedded throughout our Asian network.
“That agility is a big reason why we’ve had a lot of success in the region.
“The strength we have in payments and currency processing gives ANZ a unique presence in the region.”
While a few other Australian banks, most notably Westpac, have scaled back their operations in China and Hong Kong in recent years, ANZ signalled in June that it was considering further investment after applying for additional licences in the Chinese market.
A hallmark of Dobson’s overhaul of payments architecture at ANZ is the focus he has put on cultivating in-house capability.
“Our institutional payments infrastructure is fully built with in-house capability,” he said.
“It’s an ANZ solution with no dependency on outsourcing.
“This is important for ANZ as we have complete control and visibility of the change and maintenance roadmap.
“We also avoid vendor calls on ‘end of life’ assets which force upgrades or re-design into our schedule.”
A corollary of this proprietary approach to reworking its payments platforms is that ANZ is now positioned as a technology services provider to its institutional customers, rather than as a pure manufacturer of standalone banking products and services.
In the long run that strategy has rich potential to transform ANZ’s business identity as its technology linkages mediate interactions with customers.
The client relationships – founded increasingly on entwined technology - are likely to refashion the types of services the bank is called to deliver.