Insights into instant payments

The cost of migrating to Instant Payments structures for small and medium-sized banks is far lower and more controllable than many imagine, claims a newly-published report.

The authors suggest that “cost misconceptions only fuel the struggle felt by banks when attempting to make a commercial case for the transition to Instant Payments”.

Researched and written by German real-time payment specialist firm Lipis Advisors and issued by London-based computer consultancy Icon Solutions the report, entitled ‘Instant Payments: Insights from Early Adopters’, also finds that smaller banks are better positioned to respond to regulatory and consumer pressures for faster payments and that “real time banking doesn’t need to be the preserve of large, well-funded banks.”

The report notes that “the ability to offer instant payments has become a necessity for banks around the world to keep up with customer expectations and to set themselves up strategically for the future.”

Instant payments infrastructures are developing around the globe in response and the number of banks connecting to these systems is growing rapidly. However, both smaller banks and large banks operating in secondary markets “have different needs when it comes to choosing an instant payments solution that fits their budget, timescale and maintenance needs”.

As all banks avoid costly and extended “rip-and-replace” approaches, implementing a full-blown payments hub can easily cost “many millions”. The report aims to provide insights on how banks with smaller budgets and fewer IT resources than their larger peers can approach the implementation of instant payments.

As the authors note, the move requires banks to make several important changes. These include:

  • Enhancing internal IT systems, so that they can operate on a 24/7/365 basis.
  • Developing processes to support all stakeholders around the clock.
  • Preparing back-end systems designed for batch-based files, to ensure they support message-based payment processing. Systems affected include core banking, fraud prevention and sanctions screening processes.
  • Developing front-end applications and channels that utilise instant payment capability, such as online banking, mobile channels and person-to-person (P2P) apps.

Two strategies, four approaches

Survey respondents who contributed to the report suggest that there are two basic strategies for implementing instant payment capabilities.

The first strategy involves the bank upgrading its existing legacy systems through a targeted approach that adds an instant payment module to work alongside legacy systems. This approach “preserves the legacy architecture and enhances it through the addition of new functionality”.

The alternative is to opt for broader modernisation, which involves the consolidation of interfaces with legacy systems, or even their replacement with a new central platform or payments hub. This second strategy costs more in terms of time and resources, but helps to modernise the bank’s IT infrastructure and prepares it for future digital banking expansion. It also offers the potential benefit of breaking down the bank’s internal siloes that have built up as legacy systems have extended and expanded over many years.

Each strategy offers two separate approaches and respective ‘pros’ and ‘cons’, which the report summarises as follows:

Extending legacy systems through an “off the shelf” framework:

  • Pros: Lower development and implementation costs; shorter time to market; support from the solution provider; easier maintenance and enhancements.
  • Cons: Reliance on the solutions provider for functionality of new products and services.

Extending legacy capability through custom development:

  • Pros: Tailored to the bank’s existing IT systems and processes; if successful, will integrate well into the current environment.
  • Cons: Higher costs for development, implementation and testing; longer time to market; high need for subject-matter experts; complex maintenance.

System modernisation through “off the shelf” payments hub:

  • Pros: Enables modern payment processing; uses standard software; support from the solution provider; easier maintenance and enhancements.
  • Cons: Extensive and costly configuration, integration and testing; can easily cost millions; longer time to market; complex maintenance.

System modernisation through replacement of legacy through custom development:

  • Pros: Enables modern payment processing; most flexible approach.
  • Cons: Costly, time-consuming “rip-and-replace” solution that costs tens of millions; high need for subject-matter and technical experts; most complex maintenance.

Research for the report suggests that small and medium-sized banks are unanimous as choosing the adoption of a targeted instant payment solution as their preferred strategy. The approach “allows the banks to integrate a module that contains pre-programmed functionality such as core banking extensions, templates and scheme rules that add the instant payment capability alongside legacy systems.

Cost structure of instant payment solutions

Analysis of the initial cost structure of instant payment solutions reveal that four cost categories emerge as standard:

Hardware, including all costs associated with acquiring the hardware to operate the solution.

Licensing, including costs paid to the vendor for an initial licence. Costs for software-as-a-service (SaaS) or per transaction fees are considered license fees.

Integration, configuration and customisation, which includes the costs of taking a standard software product and aligning it with the functional and non-functional requirements.

Maintenance fees, including costs resulting from software updates and minor enhancements, including incremental software upgrades, scheme rule changes, configuration changes and others.  Maintenance fees are typically 20% of the solution’s cost per year.

Breaking down the cost of the initial investment for migrating to instant payments is typically 35% for integration, configuration and customisation; 25% for testing; 25% for licensing; and the remaining 15% for hardware. Maintenance expenses are a key driver of cost after the initial implementation period is completed.

So what is the bottom line? The report’s authors suggest that the outlay for a low-cost solution, suited to a small bank that wants only a low investment in hardware and integration only with industry-standard software is €50,000 for hardware, €80,000 for licensing, €110,000 for integration and €80,000 for testing, with maintenance costing 20% of the licence per year.

At the other end, a second-tier bank needing a premium solution with the most costly hardware and involving complex integration into legacy IT can expect to spend €350,000 on hardware, €600,000 for licensing, €850,000 for integration and €600,000 for testing, with the same percentage of 20% for maintenance.

The report concludes: “As instant payments become a reality in banks around the world, many banks without large volumes need to pursue a targeted approach that helps meet regulatory demands and customer expectations without completely overhauling the bank’s technology.”

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