Banks’ payments product managers today may feel like Dorothy in the ‘Wizard of Oz’ when she says: “Toto, I have a feeling we’re not in Kansas anymore.” Payments – long banks’ staid and secure product offering – is now in a state of flux. New, non-bank competitors are entering the market with varying levels of success, while at the same time regulatory compliance is becoming more onerous and fraud attempts are increasing. Technology is advancing rapidly: it offers ways to improve and transform payments, but also creates greater systems integration challenges.
The rapid progression of technology creates opportunities for fraudsters, as fraudsters discover ways to penetrate payments systems more rapidly than banks’ fraud prevention solutions can respond. Furthermore, banks face increased financial pressure, as indicated by recent large-bank staff reduction announcements. While the picture may appear bleak, banks can profit by embracing new technology and leveraging these challenges to make the business case for investments to transform their payments business.
Like ‘the horse of a different colour’ in the Land of Oz, there are many ways to perceive regulatory compliance requirements, fraud prevention, and rapid evolution of technology. These topics may be seen as negative factors for banks to overcome, or may be considered opportunities to overhaul payments. Payments transformation is one of those opportunities that can reduce bank costs, enhance bank and customer relationships, and create new revenue streams.
“Nobody’s Ever Seen the Great Oz” . . . “Well, Then How Do You Know There is One?”
Companies’ and banks’ end goal for payments is straight-through processing (STP) from initiation to clearing and settlement to payments posting with no manual intervention. This goal remains elusive, particularly in the global economy.
Segregation of payments by type (e.g. credit transfers, direct debits, wire transfers, cards, etc) and channel, and the differing formats for each type of payment hamper processing. Specific country or area (for example the eurozone requirements with regard to data complicate the initiation, processing and posting of payments. To process exceptions, employee reviews and decision-making are frequently required. The application of foreign exchange (FX) for some international payments is another function that requires intervention in the processing flows of payments.
Proprietary systems, or even systems based on older versions of standards, complicate the ability of banks and their client companies to automate hand-offs between their systems. The complexity of the legacy business models for payments clearing and settlement also negatively contributes to the lack of STP. Central banks, correspondent banking relationships, regional clearinghouses, and industry utilities such as SWIFT all play a role in clearing and settlement. Each of these entities, their business propositions and the systems that support them have evolved over time and use technology developed specifically for their particular business needs.
With the occasional exception of wire transfers, neither payers nor payees can track a payment and view its current processing status. This lack of visibility leads to regulatory concerns and greater levels of systemic risk for payments, as well as suboptimal business agreements and practices for payers, payees and their banks. Transparency is lacking and is desperately needed so that all payments participants know there is a payment and what is its status.
“Pay No Attention to That Man Behind the Curtain”
So, what are the solutions? Is STP an illusion? Systems used by all of the payments ecosystem participants must be able to interoperate – companies’ systems must be able to ‘talk’ to their trading partners’ systems, their banks’ systems, any involved clearing and settlement systems, and third party systems that support exceptions and interventions processing. Does that mean that manual processes must be used to interconnect systems? Or are there automated solutions?
The use of standards supports systems interoperation. Should a single standard for payments be embraced worldwide? Would such a standard eliminate the need for systems integration, or lead to easy systems integration across the many participants in the payments ecosystem? Is the creation and implementation of such a standard possible?
In theory, a single payments standard worldwide will ensure STP no matter the clearing and settlement flow and participants. From the author’s perspective, standards are part of the solution, but not the complete answer. Unfortunately, a single standard is an ideal that is highly unlikely for the industry to achieve. Ignoring pride of ownership in the many existing standards – which is one, if not the major, hurdle – the reality is that companies, banks, industry players, etc all use systems technology in the ways that best meets individual participants’ business requirements. For some, enhancing systems to embrace the latest standards is not financially viable. For others, there is insufficient market demand to make such changes. In other instances, higher-priority projects receive the investment funds required to change payments systems. Regardless of the reason, standards are important, but insufficient to make STP real.
Systems integration is the likely solution to the lack of standards or different versions of a standard. Ensuring that each system can ‘speak’ to each other system with which it interfaces in the payments process is a key approach to STP. Traditionally, systems integration meant custom coding and one-to-one interfacing between each system in the payments value chain. Today, that circumstance seldom occurs. New technology solutions – like service-oriented architecture (SOA), the use of sizable configuration options, and robust, near real-time data translation – obviate the need for custom coding. Many processes originally required the involvement of computer programmers, such as promoting content to a website – content management made it possible for the business person who authored the content to update the website without programming. Now, data translation joins such processes; the line of business can handle it rather than relying on a programmer. By removing at least one person in the chain of communication between a bank’s client and the ultimate employee charged with implementation, client expectations are more accurately met and the time to implement is greatly reduced.
Alternatively, as the cloud becomes adopted by more and more payments participants, it may become a de facto standard – or at least a provider of systems interoperability services. The commercialisation of the internet led to connecting people and computers economically. The cloud could be the next cost-saving step toward integration.
“It Really Was No Miracle”
The concept of a bank creating a payment hub or engine has been touted by industry analysts and technology vendors for more than five years as the panacea to banks’ payments challenges. Yet, no one knows exactly what a payments hub or engine looks like. In fact, almost every execution of a hub or engine specifically fits the particular definition of the bank that implements it. For each bank, the features and functionality, types of payments and channels it supports, and desired business benefit vary. It is time we retire these labels, and instead focus on the need to transform payments.
“There’s No Place Like Home”
Banks’ payments business – initiation, fraud prevention, regulatory compliance, risk management, routing for clearing and settlement, and the data enhancements/corrections/mining that go along with it – are fundamental to the trading activity that runs our global economy. Payments transformation is required for almost all banks worldwide. Among the important initiatives are the following:
- Reducing internal costs for banks by eliminating redundant payments systems that exist in large part due to bank mergers and acquisitions.
- Easing clients’ interfaces with their banks and providing extra value for banks’ clients through consolidating payments systems across payments types, and using enterprise-wide data to improve internal bank processes and support client decision-making.
- Building toward STP by iteratively integrating all payments participants’ automated systems.
- Providing support for new payments channels (e.g., mobile) and types in a way that uses existing systems to quickly and easily facilitate their market entry.
By configuring banks’ payments systems correctly, banks accomplish their goals as follows:
- Reducing total cost of ownership (TCO).
- Using near-real-time or real-time, enterprise-wide data to direct payments to fraud protected, regulatory-compliant, liquidity-optimised clearing and settlement paths that speed payments processing.
- Ensuring accurate payments processing that may be tracked throughout its lifecycle.
- Enhancing user experience by allowing the configuration of user interfaces, providing transparency into repetitive problems and suggesting resolutions, and proactively managing the client experience.
- Optimising bank revenue through quicker identification of product/service opportunities and analysis to support product bundling in ways to maximise the profitability of each client and total portfolio for the bank.
Unfortunately for banks, getting ‘home’ to transformed payments takes more than understanding the value of what home means. But that is a good first step.
Banks need to plan for multi-year, iterative progression toward their desired payments organisation and systems. The answer is a single platform of business services (groupings of IT functions that represent a meaningful service to a business unit) that can be configured as needed according to business demands and desires. Add in robust data translation that converts data from any format (e.g. structured, semi-structured and unstructured) to any other format, and payments transformation eventually becomes a reality.
Regardless of whether the business services platform and data translator resides at a bank or in the cloud, the same outcome can be achieved. What is particularly appealing about transforming payments is that each bank’s implementation can reflect its own business model and be differentiated from every other bank without the expense and time of custom programming.
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