Thursday, March 17, 2011

Payment Hub Realities

At BAI's Payments Connect conference in Phoenix last week, I moderated a panel discussion on "Getting the Technology War Elephant to Dance". One of the avenues explored was to "extend" the reach of legacy systems through Payment Hubs.

The panelists were Taylor Vaughan, Director Treasury Services at First Tennessee Bank, Dave Shipka, Senior Vice President Enterprise Payments at Comerica Bank, and Elizabeth Cronenweth, Product Line Manager at Sterling Commerce (now a part of IBM). There were interesting perspectives from two bankers who were in the midst of implementing hubs, and a technology solution provider with a handle on industry trends. Here are some take aways:

  • Financial institutions are being buffeted by strong headwinds in the form of potential lost revenue (aka the Durbinator), heightened compliance regimes (one bank- not represented on the panel- stated at the conference that they project 30% of their IT budget to be spent on compliance), polarized demographics with Boomers and technology savvy Gen Nexters demanding very different services, explosions in channels and payment alternatives, increasing non-bank competition and globalization.
  • Some of the imperatives driving technology infrastructure planning are:
    1. Comprehensive customer view across all relationships. Most systems in place are transaction centric and don't offer a customer view- let alone a 360 degree view across relationships.
    2. Multi-channel and multi-payment capability as opposed to the silo'd legacy environment.
    3. Real-time operations to enhance customer service and reduce risk.
    4. High up-time availability and ubiquity- anytime, anywhere.
    5. Nimble operating environment lending itself to agile change management.
  • Existing infrastructures present barriers to the imperatives through silo'd architectures and organizations, batch operating environments, old and poorly documented code, hard coded interfaces and long lead-times for change management.
  • There are two broad approaches to deal with the challenge- "extend" the reach of legacy systems, or replace them altogether.
  • It is very early in the evolution of Payment Hubs and there is considerable debate as to what it is, and is not.
  • A vision of a Payment Hub- a single platform that operates across all customer relationships, channels of interaction and payment alternatives.
  • Payment Hubs can be data centric where data and business rules reside at the hub, or message centric where the hub is a traffic cop. The reality is that evolving hubs include combinations of both approaches.
  • The main driver for hubs is the "spaghetti" environment in most institutions, with one-to-one paths from every channel to multiple legacy systems.
  • A challenge that should not be overlooked is political pushbacks from the owners of various legacy turfdoms. Some see the implementation of a hub as a direct threat to their jobs.
  • It is absolutely essential to have an executive sponsor who will stay the course, as the hub can and will touch many parts of an institution.
  • Both revenue and cost perspectives should be carefully looked at. Clearly, the cost of an increasingly expensive and unwieldy status quo needs to be compared with the expense of implementing hubs. Often, the cost of the status quo can be untenable. What is needed then, is the will to take on the risk of transformation through enabling technologies like hubs.
  • Another perspective is to "sell" the hub on the back of one or two revenue opportunities. This view suggests that it is difficult to get consensus on implementing a hub on a cost reduction play alone. Integrated Payables can be one such revenue opportunity. Eliminating silo'd payables and multiple files not only enhances customer service, but presents an opportunity for value-added pricing. A follow on can be the other side of the mirror- Integrated Receivables. This view recommends building the case based on the revenue opportunity, and having the transformational foundation for the enterprise pulled along by a growing topline.
  • The option to replace legacy systems as opposed to the "extend" paradigm was examined, but discarded due to the complexity of "legacy spaghetti". An interesting observation shared was that if much of the intelligence ended up in the hub, there was no need for a legacy system, except for settlement. Can a hub be a Trojan Horse that eventually eliminates legacy infrastructure? Intriguing concept indeed!
  • A perspective on batch versus real-time was that both capabilities were needed in the hub as the batch based legacy systems were not going away overnight. This implies a careful definition of the Target Operating Model and a well defined Change Management Program to get there.
  • Lastly, a challenging note to the hub concept was raised, in that an attempt to over-centralize can end up in a potential single point of failure. Clearly, thought needs to be given at the design and architecture stage to safeguard against the hub bringing down the whole ship.
  • It was a fascinating dialog, and one that I enjoyed moderating. My take is that we will see more hub implementations in larger institutions in the U.S. and other older economies that do not have the benefit of leap-frogging from manual or poorly automated environments to the latest and greatest.
Watch this space as we evolve into a post Great Recession society!