Transforming Payments Through Technology

Banks are under pressure to make transformational changes to their payments businesses – corporate customers are demanding greater visibility into transactions and regulators are mandating faster transaction processing for lower fees. Bank strategists are looking to differentiate their payment services to retain customers in an increasingly competitive and commoditised area.

Data spread across the payments value chain and people-intensive manual processes has hindered the banking industry. Traditionally, banks have assumed addressing this problem is a daunting task because of the inherent scale and complexity involved. However, we challenge the implied assertion that transforming the payments function is only for the largest, most ambitious institutions. We believe that somebody waking up today looking at this problem afresh would see a relatively narrowly defined set of required changes, enabled by a variety of comparatively recent technology-related developments.

If focus is maintained sharply on the payments needs of corporate customers (and implications of upcoming regulation), we maintain that the transformation required is no more daunting than other change initiatives successfully undertaken by most banks, and has a very clear and compelling business case for immediate action.

Defining the Right Problem to Solve

Today, corporate customers are used to high levels of value-added services and customer orientation from their suppliers, such as logistics. Their expectations are set by features like transparency of the status of their transactions, which gives real-time visibility into the movement of their supplies. This is a long way from features provided by banks in the payments area, and creates one of the critical opportunities for banks to fight the commoditization of the payments business.

So while some in the banking industry will continue to seek reasons why such change is not possible, others will take the risk of disintermediation more seriously, and look creatively at the true needs of corporate customers.

We believe there are three aspects of the problem to be addressed:

1. Reducing the cost of processing payment transactions;
2. Improving collaboration across the payments value chain; and
3. Identifying new ways of adding value to corporate customers.

What this does not mean is overall re-engineering of enterprise-wide payments processes, comprehensive data integration or payments applications consolidation. Such areas may be worth considering in the future, but are not a necessary condition to meet corporate customers payments needs today.

Technology Hype Cycles – Seeing the Bigger Picture

As a society we are familiar with the hype-ing of new technologies, and often treat news of emerging technologies with healthy scepticism. There has been so much of a hype cycle for individual technology trends that the big picture generally disappears in the cacophony. Yet we forget that in the last 10-15 years many significant transformational technologies have become main stream. It is also easy to miss the fact that with several of these trends coming together, a payments technology environment has been created that has never existed before.

In particular, there are five technology advances that together will provide an environment to drastically reduce the costs of payments processing and improve collaboration across the payments value chain.

1. IP networks, standardization of basic infrastructure: Today, the IP network is ubiquitous and we expect continuous increase in bandwidth availability (Gilder’s law). This is vastly different from the scenario even 15 years ago where each set of banking networks required a different protocol and connectivity to support payments processing and the high costs of bandwidth.
2. Improved telecommunication infrastructure and falling cost of chip manufacturing: Technology advances underpinning the rapid globalization of the last decade reduced costs of telecommunication, including VoIP (voice over Internet Protocol) and increased availability of computing power due to lowered manufacturing cost of chips. This opens up new possibilities for collaboration on the payments front.
3. The Internetand XML: The Internet and web have grown explosively on the back of telecommunication cost reduction and IP network standardization. They have made instant communication and collaboration possible, which has led to significantly compressed cycle times on payments. The Internet also introduced XML as a way to define common standards on pretty much any information exchange. The initial years had groups struggling for supremacy on setting standards, but today there is realization that “just getting on with it” is vital in the banking community. This is one of the reasons why several SWIFT standards and solutions, such as exceptions and investigations and real time cash reporting are available today or awaiting adoption by the industry.
4. Globalization and outsourcing: The last decade has seen the institutionalization of globalization in many industries enabled by advances in technology. The question today is about whom you will outsource to, and the scope of activity. For instance, outsourcing to quality providers raises operational performance standards, to lower cost geographies reduces commodity transaction costs and enabling customers to help themselves (self service) reduces transaction costs and enhances customer satisfaction.
5. Automation of processing – Rule and Workflow Engines: From hard coding rules, to having sophisticated rule configurators, the world has accepted the reality of rapidly changing business. Similarly, workflow products today facilitate both application and human workflows with approvals and rendezvous points. Together, these enable automation of a number of manual payments business processes including enquiries, exceptions management for cost and cycle time reduction across the payment value chain.

Effective Use of Technology

Imagine being a new bank entering the market that wants to get started in the payments arena. Without the baggage of ‘we’ve always done it this way’ and any legacy technology, there’s a fairly obvious list of ways you would use technology to reduce costs and generate loyalty from their customers:

1. Utilize a well defined set of internet technology based applications to process payments.
2. Leverage the IP network, XML and web services as the communication standard both internally and with partners in the value chain.
3. Provide customers with a near real-time personalized view into their payments transactions utilizing either one or all of the following: the internet, telephone (VRU), mobile devices.
4. Proactively notify customers of exceptions in the payment transactions.
5. Pass through additional information required by corporates for payments reconciliation.

Is the Glass Half-full or Half-empty?

Transformation of the payments landscape is on the horizon for many, much closer for some. It is likely to commoditize this business. Banks must respond through differentiators arising primarily from innovation, service and value-addition by payments providers. Winners are likely to be those with a clear understanding of business needs, ideas for innovation and the ability to implement these plans. For them, it becomes easier to see the big technology, as well as business, picture.

Those without such clarity of thought or approach are more likely to see technology trends as individual problems to cope with rather than pieces of a bigger picture that enable transformational change. The difference is not in the opportunity itself, or even the steps required to take advantage of it; It’s about how you look at it.