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Payment Systems of the Future

By: Louis Blatt

During the past 30 years, banks have invested billions of dollars in creating a payments infrastructure that covers each business unit, channel and service. But as systems and platforms have multiplied throughout the organization, they have become victims of their own success; siloed and less than the sum of their parts. Simply maintaining the status quo has become time and resource intensive. And for banks operating in an increasingly competitive market, populated by new players, real-time technologies and ever-more vigilant regulators, it is a huge problem.

But if today’s infrastructure is a maze of non-compliant, inflexible and uncommunicative technologies, the payment system of the future is the diametric opposite. Whereas legacy processes and architectures risk disabling new initiatives and placing inflexible limits on the ability of the financial institution to be proactive, advanced systems and architectures can facilitate revenue-raising and cost-reducing strategies.

The Payment Hub

Conversations about the future of payments systems invariably turn to the concept of payment hubs. A hub is a central platform that breaks down the internal, vertical barriers to integration that plague complex legacy infrastructures. So instead of each channel, payment type or business unit being served by its own individual payment system, a mature hub (or set of hubs) provides a central processing service to feed all channels and all payment types.

Hubs work by processing input data from all wholesale and retail channels and then routing it intelligently to the relevant downstream application, such as check-clearing networks, ACH networks or DDA systems. At the same time, they provide a single feed to all centrally managed utilities such as risk management, settlement and reconciliation and customer services, as well as value-added capabilities such as data analytics and product enhancement. With hubs, payment types are integrated onto a smaller number of platforms, as are business processes such as customer service, fraud prevention and risk management, which are transformed into single-service units to be shared by the entire enterprise.

There is no single hub design, and hubs may take a number of forms, including front-end collation of data, middle-office reporting and customer service, or back-office processing and settlement. But regardless of form, all hubs have an essential characteristic that underpins them all: they can enable business agility.

Business Agility — the End Goal

Financial institutions need to be agile to realize their strategic goals and tactical programs without compromising the confidence they have in their systems. This agility is enabled by the use of consolidated, flexible, scalable and efficient platforms.

Getting to this stage inevitably involves transforming how payments are managed in a number of ways. The first step is often to collapse the system silos that separate business, operational, customer service, risk management and fraud prevention. They can then be consolidated into operational units that provide optimal support to payments that are received through any channel. Services and capacity are shared up and down the enterprise and across units, reducing resource requirements and improving the ability to anticipate change.

This allows financial institutions to develop products and services that target “markets of one”: A financial institution that is truly agile is able to focus tightly on its individual customers and understand their specific needs, regardless of the channel, payments type, system or business silo they are using. Rules and predictive models within its payments platform allow the agile business to respond dynamically to market changes and to create new offerings on the fly for specific customer segments. Everything the organization does regarding payments, including product development, security, sales and marketing is geared to the needs of those customers.

These technology changes also ensure that profit and loss can be measured at a unified payments business level and managed right down to the incremental value of a specific customer’s transaction. They give financial institutions the opportunity to look at a specific customer’s transactions and place the person in the context of his past and current activities and his relationship with the institution as a whole. This is a different proposition than a narrow account-based view, which is how customer relations are viewed by the majority of institutions currently.

Finally, responsive, scalable and flexible technology helps boost revenues by maximizing the potential benefits of new systems, keeping costs and risks to a competitive minimum, and shortening the time to market of new, carefully targeted products, services and strategy initiatives, as well as enabling financial institutions to update or replace functionality on a service-by-service basis, making the organization more agile in response to market changes and new demands.

With the right technology infrastructure in place, organizations are better able to leverage payments volume more effectively, as well as derive competitive advantage from their transactional capabilities and their liquidity capacity to improve operating income. With the Basel III regulations on capital adequacy coming into force, similar U.S.-specific legislation looking more and more likely, and an increased focus on liquidity management in general, this is a critical area for banks.

Transforming Payments Systems

The challenge, of course, is that for many institutions, the existing payment infrastructure is so entrenched, so pervasive and with so many touch points throughout their operations that creating an accurate map of what is already in place is daunting enough. The idea of pulling it out and replacing it is almost inconceivable.

So perhaps one of the more significant advantages of a payment hub model is that it need not be the result of a massive replacement project. It is not a question of completely retooling the entire payments infrastructure or ripping out the entire edifice and starting again. It is more of an evolutionary than a revolutionary process that will deliver business agility. With one or more payments hubs it is possible to avoid the risks traditionally associated with enterprise-wide deployments by working on an incremental basis: starting with the most profitable or easiest areas and steadily incorporating more functionality over time.

The next challenge is that there is no universal blueprint for replacement. The extent and nature of an individual organization’s existing system will be largely dictated by the company’s history, the markets and customers it serves, and the regulations that provide the parameters for its operations.

No two financial institutions are identical and the path to agility for one may be the path to ruin at another. Each bank has to determine its own requirements and priorities, and the means by which these will be achieved. Nonetheless, the basics of project planning apply: taking stock of the current situation, assessing the impact, creating a watertight business case and assigning project ownership and leadership.

Remember, this is not a theoretical position. A growing number of banks have successfully delivered business agility, and even more are on the journey. They have acknowledged that having an efficient, consolidated and flexible payments platform is not one of a number of options for the future: It is the future.

Louis Blatt is chief product officer at ACI Worldwide, Elkhorn, Neb. For more information, go to www.aciworldwide.com.


Copyright (c) October 2011 by BankNews Media.


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