Evolving a Mid-Tier Payments Architecture: Part 2
In designing and developing a new flexible business and technical architecture to address challenges banks face in the payments business, one of the main requirements is to overcome the limitations imposed by existing architectures, which usually comprise independent processing silos.
Across lines of business such as treasury, corporate banking and foreign exchange there is often duplication of functionality in systems. This duplication is entrenched by the fact that each line of business often chooses to implement different platforms and solutions to other areas of the bank, and can do so because they each control a separate budget. The result is incompatibility between systems and inefficient internal communication.
Wholesale replacement of all these processing silos with an entirely new infrastructure – new back-office systems and a new organisational structure, is not a cost effective option for banks, particularly in the current business climate.
Any effort to move away from the present structure needs to be a gradual process, not big bang. Banks often can’t make a step-change because they still have to live with the rules from the past and accepted and entrenched ways of doing things. New projects also need to offer a short-term return on investment. This rules out the wholesale replacement approach, which comes with greater uncertainty of success and a high price tag.
The following diagram represents a migration strategy to develop a new payments architecture that is based upon the development of valueadded services and the separation of processing.
Although current organisational structures can be an impediment to developing efficient payment systems, the organisational structure need not be an inhibitor to improved payment offerings and better customer relationships. By putting in place a mid-tier layer that is developed around, and integrated to, existing systems and organisational structure, and that co-ordinates payment processes, banks can quickly improve their payment offerings and attract new customers and revenue.
A mid-tier layer in the payment infrastructure serves a multi-channel delivery function. It faces in two directions – one way towards the customer and one way towards the bank’s various back office systems. Such a design enables the bank to take a payment instruction and data in a generic way, and then using a services concept based on business rules, the right systems are accessed to process that payment further. This enables the payment infrastructure to add value rather than just doing basic validation.
The power of the mid-tier design is that it can make use of existing bank systems. Back-office systems are usually more than capable of providing the processing power to cope with future growth in transaction volumes. This functionality is necessary and is not best suited within a mid-tier layer. The mid-tier layer is better used for integration across processing silos and the development of workflows, business rules and processing maps.
The best way to get the most out of existing back-office infrastructure is to sweat the assets – to increase transaction volume through new business and reduce the unit cost of processing each payment. But without a mid-tier layer in the architecture, each time new service offerings are created, which will attract new customers, the back office needs to be enhanced, often a costly exercise. By implementing a midtier architecture banks can break away from this existing limitation to new business growth.
Because of the complexity of the payment business, and the different needs of each and every bank, it is difficult to buy off-the-shelf software packages that can improve the way a bank serves its customers. Each bank operates in different markets, serves customers with different needs and has different internal structures and ways of doing business. For this reason many banks have in the past chosen to develop their own payment solutions in-house. While this approach was often correct in the past, it is now viewed not to be cost effective as it takes resources away from the bank’s core business – banking.
Please see the following diagram, which represents an integrated payment architecture:
A’buy and build’ approach is too simplistic, instead what is needed is an ‘architect, buy, re-architect and then build’ methodology. This approach recognises that banks have defined architectures within which a solution must comply. The re-architect exercise could be for the bank (if it has identified value in changing to a new architecture) or for an external party implementing a mid-tier architecture (to comply with existing bank architecture), but it is important that before the build phase commences a full architecture review and design is completed. This approach ensures that banks can successfully assemble and deploy highly customised, scalable and flexible enterprise solutions in less time, for less cost and less risk than it would take to implement and tailor an off-the-shelf product.
This approach creates processing maps, based upon re-usable components, for individual payment types. These maps are integrated with different processing services, reference data and validation rules, as well as different business rules to provide a bank with the flexibility to change with the prevailing business circumstances.
For example, if a bank uses an internal system as well as a multi-bank portal such as FXall for foreign exchange pricing and execution, a midtier payment solution’ from Concise for example, provides a generic way of processing that can use either of these, or even quickly add new sources of data.
The architecture enables the use of third party services such as discount houses, FX portals, or B2B exchanges, but to do this the mid-tier layer must be based on open and extensible technology.
It also supports different segments or lines of business within the bank, thus enabling a reduction in the duplication of systems and hardware. From a customer point of view, dealings with different business units shouldn’t result in different experiences. But often, corporates have to communicate with different departments and relationship managers when all they want to do is make a payment.
An illustration of such a situation is where a bank may limit the size of a foreign exchange deal that can be handled within the corporate banking department. For example, a deal over £50,000 might have to be handled by the treasury department. When a customer requests such a large amount via his relationship manager in corporate banking this will be passed, not so seamlessly, along to treasury. If something goes wrong with this payment, the chain of responsibility, communication and integration between each party, lengthens the time it takes to resolve the situation. But by building business rules in the mid-tier layer to automate situations such as these, workflows operate more seamlessly, staff become more productive and there is less room for error, but more importantly the customer has a better experience.
The corporate world is keen to replicate the physical supply chain efficiency that has been gained over the past 10 years in their financial supply chains. And they are increasingly turning to their banks to help them do this.
In today’s tough business environment, banks are presented with an opportunity to differentiate themselves from competitors and provide more value-added services around payments. These services can take many forms, but all are enabled by a better understanding of corporate business and tighter integration with corporate back-office systems and online procurement channels.
To gain this level of integration, banks need to evaluate their payments infrastructure across all lines of business and look to technology solutions that can deliver not only the functionality the customers want, but also the return on investment that the bank’s board is looking for.
With a mid-tier architecture that maximises the potential of existing systems, provides new revenue generation opportunities and better internal integration, the dynamics of the payments business are changed and new opportunities made available to those who choose to make themselves more agile.