The acquisitions of HBOS by Lloyds TSB, Bear Stearns by JPMorgan Chase, and Merrill Lynch by Bank of America – to name a few – appear to have made good business sense in current economic conditions. Under normal circumstances, competition and monopoly committees may well have prevented mergers on such a scale. But the financial crisis brought with it a new set of ground rules based around the concept of survival and the need to react quickly to rapidly changing market fundamentals.
Bringing two organisations together is never easy, but when it involves giants such as these, ‘difficult’ is by no means a descriptor. Now, as transition periods unfold, tough decisions have to be made – even at relatively early post-merger stages. Those tasked with responsibility for integration projects will no doubt be conscious of cost above all else, as they aim to appease the regulators, the shareholders and even for some the government. Unfortunately, cost-cutting initiatives are often at the expense of innovation. With this in mind, when it comes to payments operations, many banks will be looking to take what initially appears to be the most logical option – consolidating on to the stronger of the two or more existing platforms.
While understandable, this approach can lack foresight and, for many, is fraught with consequences. Instead of attempting to make an old or even legacy system suffice, merged banks have a strong opportunity to take advantage of new technology and pioneer a scalable, central approach to payments.
Currently, payments operations in most banks are made up of myriad systems, a large proportion of which are coming to the end of their natural lives and struggle to meet today’s demands. In many cases the payments infrastructure hasn’t even been fully merged from previous acquisitions. The result is cumbersome code that doesn’t span across regions and simply can’t keep up with rising payments volumes or increasing complexities. Inefficiencies are further escalated by their disparity and lack of transparency, which means they are expensive to maintain and slow to adapt to change.
Compliance causes further headaches. Legacy systems weren’t designed to support today’s payments landscape. Schemes, such as the single euro payments area (SEPA), and regulations, such as the Payment Services Directive (PSD) in Europe or the new Nacha IAT requirements in the US, have an increasing impact on these systems. But it’s not just payments regulatory compliance that old platforms can hinder. Under the Basel II Accord, if banks are not in a position to fully supervise their systems, regulators can force them to disclose potential losses and reserve the appropriate amount of working capital – negatively impacting trading.
Just as damaging as operational risk is reputational risk. If weak payments infrastructure prevents a bank from meeting obligations to its customers, its reputation – and consequently its future business – is on the line. With trust in the financial system at an all-time low, this is a risk that banks cannot afford to take. Considering this, it is surprising that merged banks decide to increase their risk by pushing an old payments operation to take on double the responsibility.
Now is the Time to Look at Payments
Post-merger integration is an ideal time for banks to take a long, hard look at their existing payments environment and review what they need from their infrastructure – both in the short- and long-term. Moreover, it is at this point when banks should be planning not only how they can best meet the needs of the shareholders, but also how they can maintain customers of the combined entities and attract new ones.
Initiating such an approach to payments can only be fully achieved through a modern architecture and open technology with the capability to span regions, currencies and languages. With this comes the scalability to process higher volumes of payments quickly and accurately, increasing straight-through processing (STP) rates and significantly driving down operational costs.
Equally advantageous is the flexibility to support current and imminent payments regulations. This is vital, given the vast operational requirements of SEPA and the PSD. Furthermore, a viable solution will reduce money laundering risks through tracking fraudulent payments, even where the volumes and types of transactions needing to be scanned are significantly increasing. This will substantially aid compliance with filtering sanctions, such as those posed by the Office of Foreign Assets Control (OFAC) in the US and the numerous regional and domestic watch lists in use around the world.
Despite being mammoth organisations, technology can enable these merged banks to achieve real agility. Indeed, it can allow them to bring new payments products and services to market more quickly than ever before, as well as adhere to changes in market infrastructure, such as SWIFT messages or alterations in clearing and settlement mechanisms. Moreover, the right technology can ensure full transparency over operations, including the tracking of payments at every stage in their lifecycle.
These business advantages cannot be achieved with legacy platforms or by bolting different systems together. Post-merger progress relies on an overarching payments framework, which places retail, corporate and institutional customer services at the forefront. With strong competition fast emerging from non-banks offering financial services, a sound payments strategy becomes even more essential for successful growth. Banks that take a smart approach can even make payments a profit centre by developing an outsourcing business and processing other banks’ payments. Furthermore, with potential for further consolidation over the next few years, acquiring banks must ensure they have the scale to take on the volumes of their purchased banks and achieve timely integration, if they are to truly deliver value for their shareholders.
Payments is one of the core processing environments in financial institutions, yet has become the most complex and costly. Rather than add to these gross inefficiencies by overloading an already-struggling system, post-merger is the right time to get it right.
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