Payments: A Changing Landscape
Banks are under increasing pressure – from both clients and regulators. Customers are demanding enhanced services, while regulators are asking for more complex, granular and frequent reporting.
Many financial institutions, looking to cope with these evolving operational requirements, are reviewing their core payments systems. With payments services an anchor for customer accounts, and a key differentiation for client services, banks are examining how they can maximise scalability, reuse service components and replace ageing and inflexible processes. Financial institutions need to make a number of considerations when overhauling their infrastructure.
Many banks went through operational cost cutting exercises during the tough early days of the economic crisis and feel that they are already pushing their existing systems to the limit. Some, though, are reviewing all the components of their payments infrastructure and finding that there are many processes that could be combined to create economies of scale. To realise these benefits, they need to break down the siloes in payments processes.
Over many years, most banks have dealt with new instruments and customer demands by tacking on systems to their existing infrastructure. In the long run this has led to disparate systems that are costly to maintain. By consolidating their payments processing into a single system, banks can cut these costs, while still maintaining their processing abilities.
As regulatory bodies around the world become ever more stringent, demanding higher levels of insight into institutions’ liquidity positions, banks are required to report their positions more frequently and in greater depth. Currently, it is difficult for financial institutions to get a view of their organisation-wide exposure, as systems are so fragmented.
Again, a single hub which consolidates all payments processing can provide banks with a true birds-eye view of all positions. They should also look at implementing a single data warehouse, connected to all systems across the organisation. This can then be plugged into regulatory reporting systems as required, allowing institutions to report their liquidity positions in a much more expedient and flexible way.
Meaningful regulatory data can also provide a competitive advantage, by helping management make informed decisions and better manage risk.
Operational efficiencies are not the only aim for financial institutions coming out of the crisis. As margins remain tight, banks are looking at ways to grow their business by boosting the number of services customers access through using new channels.
Many banks may see new channels as a threat to their existing customer relationships – with organisations such as Google taking ownership of the client-facing services. But banks will always be involved in these transactions – it’s unlikely that the PayPals of this world will be interested in the actual wholesale processing of payments.
Many banks will try to retain control over the customer relationship, though. Those which do should consider using a ‘disposable’ model for new channels – and think of their platforms as a retailer thinks of its shop front. While the shop front is often updated, the goods in the shop itself rarely change, much as the products at a bank fundamentally stay the same. Banks should build new channels quickly and cheaply, but with a short shelf life – reflecting the ever-changing nature of new communications channels.
Using a disposable model also means that institutions can involve themselves in a wider range of channels – BlackBerry, iPhone, Android, Windows, etc. But some of these will grow rapidly, while others will fall by the wayside. Clearly, investing in every single new channel, even with a disposable model, is an expensive proposition. Institutions should find experts and form partnerships with those who can help them understand how to work with new technologies, which platforms will grow and which will shrink. It’s vital that banks make long-term strategic decisions, rather than opting for quick-fixes – this will guarantee that they are always are one step ahead of the new channel game.
Apart from new customer platforms, financial institutions can explore new revenue streams by investing a centralised payments hub. Banks are finding that they are able to offer capacity from their payments system to other banks. This is especially relevant should banks be able to process new payment types such as single euro payments area (SEPA) payments in Europe.
A strong example of this can be seen in Deutsche Bank, which implemented a new hub, including SEPA functionality, in 2009. The bank now processes more than three million SEPA Direct Debits (SDDs) and SEPA Credit Transfers (SCTs) per month, many on behalf of other institutions.
SEPA is also impacting the relationships that banks have with their corporate clients – and the payments requirements those customers have. When SDD comes into place in 2013, the responsibility for managing the mandate will move from banks to corporates. This presents an opportunity to banks.
Many corporates will choose to keep their mandate management outside of the organisation by outsourcing it to a bank. Those financial institutions who implement systems that allow them to offer this service will find a new revenue stream. As corporates will then be significantly reducing the number of financial institutions they work with to process direct debits across Europe, this will also be an opportunity for banks to expand other services to the organisation across the continent and capture even more of their lucrative transaction banking business.
Even those corporates that decide to in-source the processing of SDDs present an opportunity, as they will likely be consolidating their banking relationships across Europe as the boundaries between different domestic cash flows break down. Institutions that can offer a single service across Europe will be well placed to meet their needs, and banks should begin work towards consolidating national payments processes now.
Ultimately, financial institutions that want to remain competitive in the payments market will need to ensure that their back-offices are up to the job. Consolidated, flexible and transparent payments systems will enable banks to offer the services that clients demand, and respond to changes in a mercurial financial world.