Payment systems are used in lieu of tendering cash in domestic and international transactions, and represent some of the major services provided by banks and other financial institutions. In the simplest form, this is an infrastructure which facilitates transfer of monetary value between parties to settle mutual obligations. There are various players in this structure, including financial institutions, payers/payees, and their participating accounts backed by rules, procedures and standards.
The primitive barter system used to exchange goods or services, is synonymous with today’s payment system differing only in the fact that it did not use money as a medium of exchange.
A big question today is: why is there a need for sophisticated and secured payment systems, when the basic needs of settling the obligations are being met by the traditional system? Customer demand for 24/7 service availability, increased demand for domestic and international payments, large volume processing and faster settlement, customised service options and growing security and compliance concerns have forced banks to change their focus to innovate their business offerings continuously.
Advances in technology, gateways, devices and channels have driven transformation in the payment system. This game-changing trend has particularly impacted banks in the last five years with a shift from traditional silos to a well-organised central hub solution being preferred by the banks. The shift has largely been driven by the desire of banks for integrated systems capable of tying together various business units and channels like the internet, ATM and mobility.
Payment system transformation has become a pressing need for banks today. The rate at which this is happening is largely controlled by the conflict between rapid technological shifts and the barriers to product acceptance.
Traditionally, payment systems were the only mechanisms that enabled smooth transfer of funds between buyers and sellers, and between banks. Their role and importance was seldom noticed by end users because the processes were performed by people in banks and carried out mostly in the background. Since most of the end users were retail customers, and demanding timely settlement of obligations, the mechanism had remained inconspicuous.
How times have changed! A lot of attention is on payment systems that facilitate timely and secured transfer of payments. An increasing array of solutions aimed at different customer segments, expanding access channels, mobility, large volume, faster settlement and enhanced technical support have all added to the pressing needs of banks to look for ways to strengthen their payment systems.
Traditional payment systems were negotiable instruments such as drafts, cheques, and letters of credit. With added technological options, comfort and standardisation, large number of alternative electronic payment systems have emerged. This includes real-time and netted electronic funds transfer, cards, direct credits and debits, internet banking and e-commerce systems. Credit mechanisms can also be considered as a payment method.
To maintain the competitive edge, recruit and retain their customers, banks need to ensure that they have the ability to validate beneficiary details quickly, easily, and accurately. Banks face the challenge of making routing decisions for individual payments and meeting real-time, or near real-time settlements. Payment processing these days involves accounting, risk management, process management, anti-laundering, workflow and interfacing. The interfacing between the solutions needs to be seamless, responsive, and flexible. To ensure customer retention, need-based payment solutions with innovative payment models is the top most priority for banks. Need based payments is focused entirely on customer experience and control over the financial value chain.
The challenge is immense. Superior customer experience in making payments is the key. Issuing mass market instrument solutions is not enough. Banks have to consider regulatory factors, context and location support with the help of available technology and experience mix for their customers. Banks should ensure that the performance of the back office is not adversely affected while supporting these higher levels of customisation and modernisation.
