The Paypal scheme could be used for global remittances,


casual purchases, paying contractors or settling bills. Opportunities for financial institutions are given as ‘expansion and engagement’ (including adding fee-based services, gaining revenue from FX, moving into new markets and providing a channel for marketing), and cost savings, moving high-cost transactions from branches and call centres onto mobile devices. For all the assurances, Paypal is a worry to banks. For instance, Rabobank’s Ten Wolde cited the fear of a Paypal savings account as a good reason for banks to invest in new products to try to retain their customers. Certainly, Paypal has been seeking to open up opportunities for facilitating payments in retail stores. Perhaps a telling comment came from Deutsche Bank’s


Digby. Where the likes of Google, Amazon and Yahoo spend 15-20 per cent of their revenue on innovation, the top five commercial banks perhaps spend 7-8 per cent. Traditionally, 80-90 per cent of IT spend is on running the bank, with perhaps 2-3 per cent on ‘new ideas’. Deutsche Bank has a bank portal, dubbed Autobahn, which might come to include an app-type approach to payment and investment products, with these available via mobile devices. The bank also launched an initiative called Drive DB, which sought to capture ideas from clients, support client forums and facilitate one-to-one online meetings. Digby felt banks ‘can’t sit in a bubble, partnerships will very much be the order of the day’ and he foresaw increased use of utilities in the market offering services that banks will not want to develop or own. That partnership message seems to be the clearest of all when talking to participants about future trends in payments. Banks have traditionally struggled to make partnerships work but the raised stakes mean this is ever more important. The opportunities for outsiders are greater than ever before because of the new technology and sometimes facilitated by regulatory change. Many of the incursors are not hampered by the legacy technology, organisational structures and mindsets of the banks. They might also have fewer distractions in the current chaotic financial and economic climate. Investment in internal payment infrastructures, new technology and partnerships does not come easy at present but the risk of not moving forward is essentially disintermediation in one of the bedrocks of the business for most financial institutions.


Today’s payments systems market: the theory and reality


A typical payments architecture, in theory at least, will comprise a central retail and/or wholesale payments engine. Usually, these will be distinct, except for relatively low-end universal banks. The different requirements – high volume, low complexity versus


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low volume, high complexity – has meant that the operations and systems that support them have tended to be kept separate. Nevertheless, there is a line of thought, often encapsulated within the term ‘Payment Services Hub’, that they could be brought together. The retail engine will link outwards to ATMs, point of sale (POS) terminals, delivery channels (payment initiation), to internal systems (back office) and to a range of external clearing systems. The engines will handle the management of those payments, including validation and authorisation, routing, settlement, reconciliation, exceptions handling, repair, and dispute management. That functionality might reside within the engine itself or in satellite systems, perhaps with a role as well for workflow engines and Business Process Management (BPM) offerings. There will also be account management activities, including balance management, billing, statements and reporting. Layered on top are the compliance and regulatory requirements, including anti-money laundering (AML) and fraud detection.


On the wholesale side, many of the requirements at


the back-end are similar, albeit with different interfaces for clearing. The front-end will include links to e-banking/ cash management systems and into the corporate treasury management and ERP systems. The systems will ideally need to handle bulk files, allowing customers to send a range of payments, with the system handling the routing based on pre- defined rules.


So much for the theory. In reality, most banks’ payments


processing has become highly fragmented, typically along silo lines. It is not unusual for a bank to end up processing payments in 20+ areas, resulting in duplicated effort, diluted investment, inefficiency and an incomplete picture for reporting and control. The picture becomes even more complex when the bank has multiple international operations and other subsidiaries, then more complex again where there have been mergers and acquisitions. Those pockets of payment processing might be on dedicated systems but there is also payment processing within more general applications, including the core banking systems or narrow back office applications in areas such as securities.


It is common for banks to become bogged down in the logistics of moving from this complexity to a cleaner payments architecture. The separate payment processing systems are firmly entwined, from a technical aspect with multiple interfaces but also from an organisational aspect, with strong departmental divides and fiefdoms. This is one key reason why so many payment system


projects end in complete or partial failure. It is not so much the target application as the starting point that appears to be the problem. Without strong senior management that is able to cut across departmental lines, such projects will start on the wrong footing and will struggle to recover.


Payment Systems & Suppliers Report | www.ibsintelligence.com


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