Challenges and Trends in Wholesale Payments
Changing mix and convergence of payments
While there is a gradual transition of check payments to electronic form (primarily ACH), a majority of wholesale payments will continue to be made by checks (see figure 1 below).
source: Aite Group
However, there is an increased convergence of the traditionally distinct checks and ACH payment channels with developments such as Check 21 and back office conversion (BOC).
Check 21 enables image based clearing and processing of checks, and has also opened up the remote deposit capture (RDC) option for corporates to submit scanned images of checks to banks electronically for further processing. BOC, effective since March 2007, allows checks presented at the point of purchase to be converted into ACH transactions as part of corporate back office processing, or by the bank.
While image based clearing and check conversions into ACH help banks reduce processing costs overall, banks are faced with the need to manage information and processes across traditionally siloed systems.
Another facet of convergence is the emerging ideal of ‘real time payments on a stipulated date at an optimal cost’. Banks will seek to differentiate themselves with ‘intelligent routing of transactions’, i.e. selecting the appropriate payment method based on customer specified rules and parameters, such as payment value, priority, currency and operational parameters such as clearing cut-off time or holidays in the currency of payment.
Intelligent routing services, although yet to take off in the US, have been in practice in other regions, e.g. leading banks in Malaysia offer the ability to select the appropriate payment method (RENTAS or GIRO or paper) for payroll, dividends, tax and social security payments based on the value of the payment and certain other attributes.
Increasing globalisation
As large corporates expand international operations, they will seek opportunities to improve operational efficiencies from shared service centres, and for lowering cost of funds by centralising treasury functions.
As seen in a gtnews survey, payment processing is already highly consolidated with 62% of companies describing their payment processing as already centralised. This is expected to increase further, with 72% of the respondents expecting their companies’ levels of centralisation to increase (see figure 2 below).
Large corporates are also consolidating banking relationships globally, with expectations of better global relationship-based pricing and services, flexible client operating models and a consolidated view of payments and account information (across regions and payment methods).
With mid-market corporates expanding internationally at a rapid pace, banks are increasingly under pressure to offer more international banking and payments services. While the larger multi-national banks are continuing to leverage their physical network to offer their customers more integrated global cash management services, more regional banks will be looking at strategic alliances with local banks that enable them to offer strong in-country cash management services in regions where they do not have physical presence.
source: gtnews survey on payment processing centralisation trends
Stronger focus on compliance
The focus has evolved from achieving compliance with regulatory requirements (KYC, AML, SOX, etc.) into doing so in a more efficient manner, unifying compliance solutions and operations across businesses.
As new regulations are enacted, payment systems need to be operationally agile to support changes in payments processes, business rules, reporting requirements and in general, enable greater transparency of payments operations. For example:
- NACHA operating rules of 15 September 2006 specifying the rules for business checks ineligible for check conversion.
- Check 21 impacted the entire check processing business, authorising check truncations, substitute checks related processes.
- Bank Secrecy Act (BSA) requires institutions to comply with reporting requirements, which result in the filing of currency transaction reports (CTRs) and suspicious activity reports (SARs).
Banks will increasingly work towards centralising compliance function across the enterprise for a leaner compliance organisation, standardised compliance systems and processes and enterprise-wide view of compliance risk. Such initiatives will span across lines of business, including payments.
Emerging business opportunities
While core payments services continue to get commoditised, banks and payment service providers continue to explore new related business opportunities, in the process evolving new business models.
One such opportunity is automation of end-to-end payables process of the supply chain including invoice receipt, purchase order invoice reconciliation, dispute management and payments approval workflow solutions, payment initiation and processing and finally, posting to accounts payables/receivables systems.
Another such example is integration of healthcare payments process with claims processing services. Leading banks have formed strategic alliances or merged with claims clearing house or processing service providers to offer end-to-end service from claim validation and submission to health-plans, processing the payments (checks or ACH) and performing the end-to-end reconciliation of claims and payments.
Along with these new business opportunities will emerge strategic consolidations (e.g. JPMorgan Xign, Amex Harbor payments) and collaborative business models (e.g., Mastercard payment gateway offerings in collaboration with banks).
With increasing value-added services from leading banks, the trend will be towards increased stickiness and further consolidation of banking relationships, with larger banks grabbing a bigger share of the market.
The Future Imperative for Banks – Payments Transformation Initiatives
The resulting impact of these industry forces and future imperative for banks, is analysed below in four dimensions.
Product innovation
Banks are increasingly moving towards a more ‘enterprise payments’ strategy, a horizontal view of customers across payment products and business strategy aligned towards maximising overall payments business rather than individual product line revenues (sometimes, at the cost of other product lines).
- Corporates can expect to get more ‘relationship based pricing’ as against ‘product’ based pricing. Banks will want to track and monitor profitability from a relationship perspective, rather than at a product level, seeking to maximise profitability of the banks, and also utilise pricing based incentives to enhance customer stickiness – at a global level.
- Banks will increasingly focus on offering their customers multi-bank reporting and payments transaction services on a single online banking platform, developing alliances, interfaces and integrating processes with partner banks.
- Faced with commoditisation of payments, banks will seek enhanced revenue opportunities through customised end-to-end payments solutions providing significant business value, such as procure to pay solutions to automate the procure to pay process, from invoice/purchase order reconciliation to payments initiation and automated posting to accounts payables and receivables systems.
- Services such as ‘least cost/optimal’ routing will be the differentiators for banks offering the corporates fastest/most optimal combination of cost and speed of payment, based on intelligent rules on customer preferences and operational parameters such as clearing cut-off times, currency based holidays for cross-border payments, partner banks’ payment cut-off times etc.
Customer experience
Banks have evolved over the years with different front-office and back-office payment systems in different regions. As corporates expand relationships with banks globally, they will expect to receive consistent online banking and payments experience across regions, which would not be possible with disparate systems.
- Banks will seek to consolidate numerous file transmission and online banking systems, currently siloed by payment methods and in certain cases, by different customer segments (mid-sized and larger corporates) to a single online banking solution for a more consistent experience, information and streamlined processes.
- Many banks today take several weeks to on-board new customers – partly due to the limited flexibility and configurability to support the corporate’s custom payment workflows, entitlement structures and interfaces (i.e. file/message) formats, and partly due to the numerous back-end systems on the banks’ side that each new customer has to be set up on.
- Banks will look to significant improvements in customer on-boarding processes with more self-administration, configurable workflow and entitlements set up, flexibility to support clients’ custom payment file/message/report formats through easy configuration, rather than time-consuming system enhancements.
Operational agility
Banks face the need for increased agility to deliver innovative services, remain compliant with changing regulatory requirements, and counter the impact of redundant check processing infrastructure and reducing per-unit costs. Banks will need to bring in operational efficiencies to re-engineer their payments processes and systems.
- STP in customer facing processes – payments transaction initiation, reporting and G/L posting to clients’ accounts payables and receivables systems.
- STP of payment transactions – support of intelligent routing of transactions to back-end payment processing systems, providing automated exception and reconciliation management and to seamlessly integrate payments processes with related compliance/risk and fraud management/billing processes.
- Centralised payments operations and shared centre models for better economies and scale of operations.
- Consolidation of common payments functionalities into a single technology platform.
- Simplifying interfaces through a common messaging framework.
Information management
Banks will need to consolidate transaction data from multiple back-end systems into a single logical view – both for banks and their clients. Information management initiatives will be focused around:
- End-to-end transaction status visibility, i.e. enabling a customer to track the status of each transaction across different stages of transaction life cycle, touching different front/mid-office or back-office payment system.
- Aggregated transaction information analytics that gives the accurate picture of total payments volumes, values, liquidity positions, consolidated risk/pricing/cost and profitability view across subsidiaries.
- Analytics that enable process improvement, recommendations and fraud prevention through transaction, funds and user behaviour pattern analysis.
Payments Transformation
As detailed above, banks will seek to undertake large-scale payments transformation initiatives in the following areas:
- Re-engineer client touch points to customise payment workflows, user interfaces to customer end-users and to provide a consistent experience across channels, payment methods and countries.
- Implement enterprise payments hub solutions, integrating siloed payment processes and infrastructures, i.e. messaging, information management, process management and workflow systems and payment processing platforms.
- Develop strong vertically focused end-to-end payment solution platforms, leveraging the strong foundational enterprise payments hub and online banking infrastructure, e.g. financial supply chain and healthcare payment solutions.
While there is a huge technology focus of these initiatives, the scope of such transition extends beyond technology into business and operations transformation.
The transformation from current state to the end-state vision of a bank with centralised payments systems, operations and governance can only happen in a phased manner, over several years, across multiple geographies and lines of businesses.
Banks that develop a strong strategic roadmap for enterprise-wide payments transformation, and combine it with a strong organisation change management framework and best-of-breed technology solution will emerge as the long-run winners.