Tuesday, November 30, 2010
The recently released "World Payments Report 2010," an annual barometer of payments worldwide, found that payments volumes kept growing in 2009 despite the financial crisis. In addition, new entrants to the payments market, such as e-payment providers, and increased regulatory mandates are creating a more complex payments landscape. Unfortunately, electronic payment systems used by many banks today often are too complex to quickly respond to changing customer needs and to deliver real-time insight into activity across the enterprise.
Given this, banks are under pressure to transform their payments infrastructures to meet challenges and gain strategic advantage.
Financial institutions understand that fragmented and siloed organizational structures, worsened by years of mergers and acquisitions, impede innovation, profitability, customer retention and risk mitigation. So the question is how to move toward more comprehensive payment solutions. This is challenging because of the complexity of payments but also because the current, splintered systems are consuming information technology resources and sidelining payments as an expensive commodity. Getting to the next generation is a journey that differs for every financial organization in view of its strategy, objectives, historic IT investments and current capabilities.
The first step for any institution is to understand these five stages (which my company, ACI, and Aite defined) of modernizing payments:
• Reliable. Having a reliable IT infrastructure means banks can serve their members with a consistently functioning payment service that is available for use when needed, meets capacity requirements, is secure and helps ensure regulatory compliance. At this stage, the payment system is still a cost center, focused on individual payment types and channels. It is estimated by Aite Group that 25% of global banks are currently at this stage.
• Scalable. This stage begins to address the challenges of the multiple systems resulting from mergers and acquisitions by adopting standards across each individual payment system. Though still siloed, products, operations and customer service are optimized by shared practices. In addition, fraud prevention, risk management and regulatory compliance are applied consistently across systems. The bank can add payments volume while reducing the amount and complexity of customization required, thus reducing costs and risk. The customer interface is also streamlined and tied to an account, giving the bank insight into customer activity across payment types and channels. About 50% of banks worldwide are at this stage.
• Efficient. Reaching efficiency means eliminating redundant systems and deploying a common set of services on a single hardware platform or in an on-demand model, an approach that will reduce unit and operational costs. When moving from the scalable to efficient, banks experience benefits in terms of lower unit costs, decreased risk, reduced time to market for new products and increased payments volume. Though the bank maintains its account-based view, it gains knowledge of the incremental cost and value of a new transaction per customer. About 20% of global banks are at this stage.
• Responsive. At this stage, payments are still optimized by specific types, but the silos are bridged with one-off automated interfaces built to multiple systems. This creates the appearance of a unified bank payments business. Banks with responsive infrastructures have the visibility they need to react to new business requirements in a timely way, create better customer service and leverage payments volumes strategically, and 4% of global banks are at this stage.
• Agile. A financial institution achieves agility when it can orchestrate common services that are automatically activated based on changing business and technical conditions, such as packaging a new product based on customer circumstances and current risk profiles. At this final stage, the multiple payment forms are integrated into a single platform, and all internal organizations, data, processes and systems are focused around the bank's relationship with the customer across all dimensions. To reach this level, banks must alter the way they think about their lines of business and focus on the customer regardless of channel, payment type, system or business silo; everything the bank does in payments is geared toward customer needs. An estimated 1% of global banks have reached this stage.
By evolving from stage to stage, a bank can achieve benefits including lower costs, from payment process efficiencies across the merged enterprise, and less financial crime, a result of greater data availability and real-time analysis. In addition, it can enjoy increased revenue with improved time to market for new products and the ability to leverage payment volumes, thus improving liquidity and pricing power.
An agile payments environment will adjust in response to current conditions and let banks face whatever the future holds.
Louis Blatt is the chief product officer of ACI Worldwide.