Exceptions processing is one area that typically involves a high degree of cost and complexity for banks and, therefore, represents a big win in terms of improving automation. If we look at an example of a typical mid-size bank, it should be possible to see how investment in the right solution can represent both the resolution of negative exceptions processing challenges and the possibility of creating positive exceptions.
In general, payments processing using a bank’s in-house legacy applications can represent up to 40% of a bank’s operating costs and often contributes only 33% or less to a bank’s revenue. This task can therefore appear to be overwhelmingly expensive because of these inefficiencies in the methods and technology used, especially for those facing serious recessionary pressures. Moreover, if we use an example of a mid-tier bank that is processing on average 20,000 transactions a day and has a straight-through processing (STP) rate of 80%, it is possible to see the true extent of the payments processing challenge overall.
Payments processing costs are generally split into the following seven main areas:
- Invoicing and billing.
- Customer support.
- Data maintenance.
- Settlement.
- Payment input.
- Validation.
- Repair and enrichment.
The greatest cost by far is the repair and enrichment of payment messages, which generally represents a massive 42% of overall costs, much more than any other step in the payments lifecycle. For our example mid-size bank, this could involve a cost of around US$2,112,000 per annum for this process.
Moreover, the other processing costs that occur as a result of negative exceptions are also fairly significant. To illustrate these further, in a typical year: invoicing and billing costs could be US$201,143, customer support costs could be US$1,005,714, data maintenance could be US$352,000, settlement could be US$50,286, payment input could be US$905,143, and validation could be US$402,286. Given the current economic climate and cost consciousness around payments processing, these are not costs that banks can afford to sustain.
There is a good reason for these high costs. In-house systems of banks such as these tend to be a patchwork of different incompatible IT workarounds that have evolved over time from legacy applications. They are disjointed due to banks opting for tactical approaches to regulatory edicts and as a result of geographical expansion and mergers and acquisitions. The disjoint between these ageing infrastructures actually compounds the problem with regards to exceptions processing: they add in more complexity to the process and can be the underlying cause of the exceptions themselves.
In addition to this lack of proper connectivity between ageing and legacy infrastructure, exceptions can be caused by a plethora of reasons including the use of duplicative payment systems, changing industry standards, regulatory change and client demands. These issues result in negative exceptions that need to be dealt with such as incorrect structuring, incorrect routing information, account number cleanup and free format verbose text.
In order to tackle these exceptions, banks must deal with message repair and enrichment, payment initiation, routing and enquiries and investigations in a largely unstructured and complex environment. This necessarily involves frequent manual intervention, ad hoc steps to deal with data gaps, a lack of overall visibility during the process and a number of redundant processes due to these outdated technology platforms. Banks are held back by their infrastructures to such an extent that they are incapable of substantially increasing their STP rates and sometimes even fail to fully repair particularly complex exceptions.
Given these problems and their significant costs, it is no real wonder banks are keen to gain new efficiencies and adopt different approaches to what once were deemed largely manual tasks. In order to be able to tackle the root of the problem, banks must invest in specialised solutions capable of dealing with these challenges. The focus is on providing three key things: cost reduction, revenue generation opportunities and customer retention. Cost reduction necessitates the elimination of manual intervention and an increase in STP. Staff can then be freed to provide their clients what they need and offer value added services on top of these basics, which plays into key focus on innovation and customer retention.
Investment in a specialised payment solution, therefore, can allow banks to deal with all these problems and benefit from intelligent repair of payments messages. This can drastically reduce the cost of operations in this area by taking these tasks out of the hands of those engaged in manual processing. Cost savings of around 70% can be achieved in this way and headcounts can be reduced for repairs and customer support due to higher levels of STP and there is a knock on reduction in charge back costs.
In order to put these cost savings into context, if we take our earlier example of a mid-tier bank with an 80% STP rate and 20,000 payment messages per day, the introduction of such a solution would increase the STP rate to close to 94%. This in turn would result in a decrease of the costs of payments processing from the current level of US$2,472,000 down to US$717,600 per year, that is a reduction of a US$1,754,400.
Furthermore, although all this represents great progress towards tackling a serious problem in banks’ back offices, it is only half the story. Exceptions are not always just a cost centre – they can represent positive opportunities in which to gain profit.
Negative exceptions are obviously created due to incorrect or incomplete information, but positive exceptions are created deliberately to detect and respond to special events. These positive exceptions can be used to create new products and services such as profit-based incentives for customers, thus improving customer satisfaction and ensuring banks are able to retain their market share. They create the possibility of generating additional revenue, which is vital in times of fierce competition between banks.
Further examples of positive exceptions include triggers for special purpose payments, incentivised products, differential pricing based on factors such as volume and customer profile based pricing, such as the ability to reward long-term customers.
Positive exceptions can involve a substantial reward and benefits for both customers and banks themselves. Taking our mid-size bank example, if you look at the potential revenue generation due to positive exceptions, it could potentially achieve annual additional billable revenue of US$1,920,000. Looking more closely: the ability to share fees with a sending bank could represent around US$1,080,000 in annual revenue; the ability to share fees with a receiving bank could mean US$2,100,000; the ability to provide differential pricing could result in an additional US$1,188,000; and additional products resulting from positive exceptions could add US$2,160,000. Adding all this together, a mid-tier bank could achieve an increase of US$6,528,000 in total additional revenue per year.
In order to achieve exception automation in both a positive and negative manner, banks need to select a solution that is able to automate a process that requires often-complex human interventions. This necessitates a platform that uses advanced artificial intelligence and semantic understanding in order to provide automated exceptions processing of even the most complex problem. It also requires a degree of flexibility, so that the system is able to cope with frequent changes in the payments environment.
Exceptions processing has long been negatively perceived by the banking industry, but it should no longer be purely seen as a cost to be borne. Rather, banks should also view exceptions as a commercial opportunity in which to differentiate a bank’s service offering to its customers. Investment in the right solution can futureproof your business accordingly.