Time for Change - Why Banks Must Better Exploit Real-Time Data
Regulatory pressure on banks to operate in a more transparent way has led not only to a downward force on existing revenues, but also to a number of technology and infrastructure changes. These, in turn, have ushered in a new era of possibility; banks are finally capable of offering corporates information-rich payments data that is both clean i.e. free of anomalies that could hinder straight-through processing, has more valuable content such as remittance information and is available in real-time. This article focuses on the manner in which such data can help banks provide time-sensitive, value-added services to their clients.
Thanks to Continuous Linked Settlement (CLS) and Real-Time Gross Settlement (RTGS), not to mention the regulatory demands of Basel II, banks are now in a position to manage their liquidity on a real-time basis. Yet, given that 60 per cent of corporates responding to a recent gtnews poll said they would pay more for information-rich payments, the banks appear to be more than a little coy in developing value-added services that can take advantage of real-time. Why is this, and is it soon to change?
The banking sector and its associated payment and settlement infrastructures – most notably SWIFT – have long championed the concept of real-time information. But progress has been slow as banks deal with other, more immediate issues, such as the levelling of domestic and cross-border payments fees in Europe. Downward pressure on fees and low interest rates means the banking sector is searching for new and innovative ways to boost revenue. Value-added services, based on real-time data, are fast becoming a kernel of this transition. As a result of the demands placed on banks by the CLS initiative – which requires same-day, irrevocable settlement – and of course Basel II, which has upped the stakes in terms of minimizing credit risk and operational risk – the technology is now available to allow banks to deliver payments at specific times and to track the amount of time during the day that a customer goes overdrawn. In addition, RTGS systems now allow final settlement of interbank funds transfers on a continuous, transaction-by-transaction basis throughout the processing day. Consequently, it has been proposed that banks can profit from this situation by charging customers who encroach on their daylight overdrafts. Traditionally, banks have only charged for night-time overdrafts and, providing the client clears their overdraft balance by close of day, the issue is rarely considered. By charging for daylight overdrafts, banks could mine significant revenues. However, this strategy has so far been left on the shelf for the simple fact that, should one bank go it alone and implement such a policy, it would risk alienating its customers. And this isn’t the only problem. If a bank charges someone for being overdrawn for a couple of hours in the day, it won’t take long for the following conversation to take place:
Customer: Why was I overdrawn when the bank could have delayed my outgoing payments and avoided the situation?
Bank: You went overdrawn because we executed the payment as soon as we were instructed to.
Customer: Then I will send my payments much later in the day to avoid this scenario.
This would potentially result in the bank’s payment department sitting around for most of the day before being engulfed by a flood of payments at close of day. In operational terms, this would clearly not be a good thing for the bank.
The customer may also point out that, while today they may well have been overdrawn, the previous day they had a surplus of funds. It seems a little unreasonable for a bank to charge for daylight overdrafts but not credit accounts that have daylight surpluses.
Clearly, the issue of daylight overdrafts raises many more questions (and problems) than it answers. But that is not to say there are no answers, just that a degree of creativity has to be employed. For example, some of the CLS banks, instead of simply charging third-party CLS users for daytime overdrafts, have employed a more sympathetic approach, effectively saying: “We understand that there are cash flows here and that CLS cash flows are often out of step with the normal business day, especially in the US and Asia. We will therefore, allow companies or third-party banks within a reasonable credit rating to go overdrawn, at least up to the amount that we know CLS owes them, because we know it is good money.” These banks simply open up an account and charge third-party CLS users a service rate for that account. It is a different way of charging which does not draw attention to the ownership of the money or to the fact that a bank has to pay interest as well as charge it.
However, real-time information is about more than overdrafts; it is about value-added services. To differentiate themselves, banks need to think about ‘customer intimacy’. This means focusing more on what the customer is trying to achieve – for example greater efficiency in the back office or improved visibility of cash flows – as well as how the bank can help by providing enhanced payment information such as invoice and remittance data (and be remunerated for this help).
Instead of the bank trying to affect behaviour by charging companies if they go overdrawn, the customer could be given the facility to instruct the bank to only make payments when the cash is available. This ‘special service’ uses the carrot rather than the stick to encourage corporates to stay in the black and the bank can charge a nominal fee for it.
The key point here is that the bank itself would have to build into its basic service offering the ability to separate some transactions for special i.e. timed processing. The information received to identify such payments could be gathered in two ways:
Clearly the second option is the most palatable to the client, as it does not involve any system changes. But it also holds benefits to the bank, as, once the criteria have been agreed, only minor systems modifications are required to recognise them.
Now this sounds all well and good; banks deliver more useful payment services in return for new revenue streams. So the obvious question is, why is it not happening already? Banks have offered value-added payment services (albeit in a pretty limited manner with debit advice and credit advice facilitated) for some time. That these services have not blossomed in the past can, at least in part, be put down to the fact that additional, core service revenue streams meant that banks were able to maintain profits without diverting resources to new, untested grounds. In today’s climate however, with political pressure both in terms of the amount they change and the transparency of charges, they have little choice but to employ (and charge for) evermore sophisticated, client-centric services.
Clearly, the banks face a tough challenge in maintaining revenues from their payments business, but they do have the opportunity to provide a number of real-time-based value-added services that their corporate clients should benefit from – like enabling clients to schedule payments against cleared receipts on an intra-day basis. The notion of just-in-time payment services is now a very real possibility thanks to the technological advances and regulatory reforms of late and, it has to be said, without such innovative services in place, many banks will fail to maintain revenue in the long term.