Johannesburg, 15 Apr 2016
From Direct Debit to BitCoin, RTGS to Apple Pay, and even the humble plastic in your wallet, the world of payments has been steadily moving away from coins and notes for decades.
The proliferation of payment channels is accelerating, driven by consumers demanding faster access to cleared funds; mirroring the expectations of financial professionals.
The result is that according to an SQS white paper 'The Payments maze - Transformation in enterprise Payments', banks in 2013 handled $410 trillion in non-cash payments - over five times the global GDP[1]. This is expected to increase to an incredible $780 trillion at a CAGR (Compound Annual Growth Rate) of 7% by 2023.
Such vast proportions of the world's wealth flowing through these payment systems will have profound impacts on enterprise strategies and decision-making. Smart decisions require an awareness and understanding of the trends influencing the payments industry; the challenges faced by banks and the transformational strategies being implemented at enterprise level (e.g. centralised payment hubs).
The trends also extend to regulatory initiatives and oversight across markets, technological innovations, emerging payment types and channels, the entry of new players into the payment processing services, and pricing pressures due to competition, not to mention the ever-present beast in every system; process and operational inefficiency.
Here are the current key areas that are moulding the payments industry right now.
Regulatory and external pressures
For better or for worse, finance is one of the most highly regulated industries in the world. Although generally with good reason, the impact is enormous, ever-present and ever-changing. Lately we have seen a large step-change in the payments industry, driven by new technologies and the consumer demands they create.
As a result, the companies that are best-positioned and most keen to push this development comes from outside banks, from other financial players such as Apple, Google, Boku, Square, and on the corporate side Odette, SWIFT among several others. Of course, banks are not lagging and are either adopting third party technologies or improving their own to keep pace.
Combining a wider industry trends with a push for a higher volume of simpler, faster payments, we find two core focuses. While retail customers want anytime, anywhere payments, using a choice of payment instruments, focus is aimed at Internet and mobile payment security and data privacy. Corporate customers want improved control, visibility and speed in processing payments, so regulations have focused on these areas, as well as on anti-money laundering and anti-terrorism financing.
Internal and operational challenges
Efficiency gains are critical to any organisation, but payment processing is feeling the pressure more than most sectors, due to the gargantuan task of keeping IT infrastructure up to date. In many major financial institutions there will be legacy IT that still needs to remain compliant and efficient.
The biggest problem is that legacy systems can be operationally as well as technologically obsolete. Modern systems are integrated and designed to cope with high-speed/high-volume traffic; whereas legacy systems generally sit in silos for each payment category. Add to this mergers and acquisitions, throwing legacy infrastructure from multiple organisations head-long into each other, and you end up with many operational bottlenecks; duplication of infrastructure, inability to support volume and delayed responses to market demands.
In turn, this leads to customer dissatisfaction and escalation of costs. According to the Boston Consulting Group, although banks generate 35% of all revenue through payments, they also incur 40% of their total costs this way. This is forcing banks to think about their payments operations in terms of profitability and cost management.
Proliferation of payment hubs
Payment service hubs are expected to become the dominant architecture in the payments industry. A payment hub can be seen as infrastructure that ties together the specialised services required to build payments applications, such as data completion, exception handling and settlement, anti-fraud screening, risk management and dispute resolution.
Payment hub implementations are large, expensive and multi-year projects that fall into three broad categories, based on how they fit into the overall payment architecture of a bank;
1. Front-end landing zone
This will consolidate front-end channels such as online banking, treasurer management and branches on the one end; transaction processing on the other such as the ACH, wire, etc., through a single funnel; rather than requiring multiple systems at each end.
2. Back-end aggregation
Similar to the front-end, this hub consolidates the transaction processing systems and funnels them on, sending appropriate volume to downstream processing applications such as payment networks and deposit platforms.
3. Consolidated transaction processing
This is the most ambitious hub model, involving building new payments applications, either to replace a legacy system or to support an entirely new service, such as Single euro payments area (SEPA) payments in Europe or image-based cheque clearing in the United States.
Recommendations
According to the SQS white paper, the key recommendations when implementing a payment hub solution are:
* Avoid a 'big bang' approach in implementing payment service hubs - a phase-wise implementation is suggested;
* Align the implementation programme to business objectives, for example:
Increased STP rates
Harmonisation of payment products
Flexible integration with channels
* Prioritisation of business objectives and transformational activities in tune with objectives;
* It will be critical to select a testing partner who can bring extensive knowledge of the payments domain, who understands payment systems, messaging standards, regulatory requirements and business processes, and applies rigorous testing standards.
It is becoming clearer every day that whether from consumers, customers or colleagues, the pressure to constantly evolve and improve payment systems is ever-present. Against the backdrop of wider technological developments, convergence is key and those who can operate safely and speedily in this environment will be successful in the long-term.
For more details on payment hubs and all the subjects covered in this post, plus live examples and actionable takeaways on a range of payments industry topics, make sure to download the SQS Thought Leadership 2015 white paper collection.
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