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!

StratEx at BAI Payments Connect

In the post Dodd-Frank-Durbin world, the mantra chanted by many is that banks have to be more innovative and nimble. They have to provide differentiated value in the face of fierce competition from non-banks. Customers want to interact 24/7, through multiple channels, and using varied payment methods. The holy grail is a real-time, 360 degree view of the customer that includes all relationship types (deposit, loan, investment etc. etc.), channels of interaction (online and brick and mortar) , and all payment vehicles from check to card to wire.

Easy, right? Wrong!

Most financial institutions are saddled with systems that are decades old, and impossibly silo'd. The choices in front of financial institutions are to:

(a) Extend the reach of legacy systems through systems like payment hubs, or
(b) Rip out old technology completely and replace them with new systems.

The Bank Administration Institute (BAI) will address this choice between the devil and the deep blue sea, among many other interesting topics, at Payments Connect in Phoenix, March 7 through 9.

I will be providing an overview of the topic and moderating discussion on the topic at a session, aptly entitled, "Technology and Process En Route to Payments Profitability: Getting the War Elephant to Dance."

If you're planning to be at the conference, you may want to put this session on your agenda. It should be informative and interesting. If you don't plan to be in Phoenix, watch this space, I'll post a summary in the near future.

Payment Convergence- Vision or Hallucination?

According to a recent study by McKinsey, the U.S. payments industry is a $282 billion business. In a report entitled "Weathering the Storm: Global Payments 2009", The Boston Consulting Group estimates the global payments business at $805 billion, ramping to $1.4 trillion by 2016. It goes without saying that payments is big business. But is big beautiful? It could be, if those that ascribe to a converging payments paradigm are right.

Silo'd be thy name. Payment during early times was as simple as trading bartered goods or exchanging coins. The last two hundred years have seen an explosion in the many ways value can be transferred, including cash, checks, wire transfers, automated clearing houses (ACH), card payments in various hues, mobile- the list is endless. Each of these evolved separately to meet a specific need, creating distinct processing systems and organizations in their wake. Today's financial institutions have multiple systems, with separate rules of governance, and organizational fiefdoms that resist attempts to blur boundaries.

Holy Grail anyone? The idea of a unified infrastructure to process all payment types has been mooted for decades. It is argued that, at a notional level, there is little difference between "capture-validate-clear-settle" in check-speak, and "acquire-authorize-switch-settle" in card-talk. So, would it not be simpler, as some would argue, to have one system that did it all? But given that we have spent the better part of a century perfecting these older systems, does it makes sense to go where angels fear to tread? If it is not broken, why fix it?

Can I call you Sybil? The world, unfortunately, is not that simple. Checks can now be converted to ACH payments forcing an erosion of previously impervious walls. In an even more bizarre twist, checks can be imaged, transmitted, and reprinted as paper substitute checks. Newer forms of payment like mobile and prepaid use the debit or ACH rails as the basic underpinning for moving money. Automated bill payment is essentially an Internet front end to ACH transfers. With payments morphing from one to another with the skill of Dickens's artful dodger, financial institutions are pressed to ensure profitability across payment channels, adherence to disparate rule sets, and risk management that spans silos.

Brave new world. The 21st century has ushered in the need for compliance with a dizzying array of legislation. There is the Patriot Act, Sarbanes-Oxley, Basel II, and OFAC- to name just a few. The post bailout era will likely herald significant new legislation, if I am reading the winds from Washington correctly. The cost and complexity of updating legacy systems one at a time to ensure compliance is prohibitive. Moreover, it is difficult to find skill sets to modify dated systems within an acceptable lead time.

If there is one reason that trumps all others, it is the need for improved customer service. Customers are decidedly unsympathetic to the self-inflicted tribulations of their financial institutions. They need to be able to interact through branches, call centers and the Internet to get information across accounts and payment vehicles. The new "millenial" generation is not likely to have the patience to wait while an operator logs in and out of multiple systems.

End or the beginning? While few would argue against the case for convergence, there are practical considerations to be addressed. Does one begin with the settlement end of the value chain and work one's way forward? The move towards Real Time Gross Settlement (RTGS) systems, particularly in emerging economies, suggests that "the end as a beginning" idea has some takers. Nevertheless, I suggest that the greater payoff is at the other end of the telescope. The conversions from one payment to another take place closer to the point of origination, and that is where the greatest benefits are to be garnered from a unified infrastructure. It is also where the functional and technical challenges are acute.

Buckets or pipes? While there are varied perspectives on how to get there, all are agreed on one thing- do not try to redesign existing legacy systems. There are two approaches to a convergent payments platform. There is the data-centric model based on a central repository for all payments information, and customized one-to-one interfaces with the various payment and core processing systems. An alternate approach is message-centric with a central hub through which all communication between payment, core and other systems is routed. The nirvana is a combination of both, governed by versatile business rules engines that financial institutions can control.

Does size matter? The technology vendors in this space are faced with an interesting choice. Does it make sense to target large financial institutions where the payoff from convergence is likely to be greatest? Or is it better to focus on smaller institutions, where implementations of this kind are not akin to open-heart surgery? The answer depends squarely on the vendor's positioning and business model. If the major contribution to profits is from systems integration and professional services, the high end segment suggests itself. On the other hand, if the model is tilted towards license sales with a modest service component, the lower end would make sense. Technology vendors would be well advised to pick their poison. It is a toss up as to whether it is harder to scale up or scale down. They are both incredibly difficult. This is an instance of clear positioning and alignment at the outset being critically important.

Back to the future. It is perhaps counter-intuitive to suggest that the way forward involves re-engineering legacy processes with the introduction of new convergent systems. Nevertheless, evidence indicates that there is an emerging synthesis between checks and ACH to be followed by online debit. The path is fraught with challenges, some of which I have touched upon.

A mentor of mine once told me that there is a very thin line separating a vision from a hallucination. Where do you think payment convergence lies? Let me know.

TransPay Perspectives

I was in San Diego this week to attend the Bank Administration Institute annual TransPay conference. This conference which has its roots in check processing has been gradually repositioned as a venue addressing a broader payments ambit. As someone who spends a lot of time advising companies on positioning and alignment, I understand the challenge of balancing legacy wealth with future promise. I will say that BAI has made partial gains on its journey. The conference sessions had a mix of topics that included ACH, pre-paid, mobile, gen-Y and other subjects, along with check processing, while the exhibit floor was dominated by image based check products and services.

Debbie Bianucci, BAI's president and chief executive officer, aptly set the tone for the times we live in by evoking the memorable opening lines from Dicken's Tale of Two Cities, "It was the best of times, it was the worst of times/ it was the epoch of belief, it was the epoch of incredulity/ it was the season of Light, it was the season of Darkness/ it was the spirit of hope, it was the winter of despair/...in short, the period was so far like the present period".

Dr. James Canton, the futurist emphasized how consumers drive adoption, and enterprises follow later. He shared interesting facts- 2 billion Internet users, 4 billion cell phones, total world population 6.5 billion, 5 billion You Tube videos per month, 150 million active Facebook users, 900% growth in Twitter users in one year etc.. You do the math- somewhere in that mind boggling array of statistics is a case for a collaborative, device independent future where payments will play a part.

Dave Stewart from McKinsey & Company had a more earthbound perspective on the $282 billion payments industry, suggesting that the winning financial institutions will be those who proactively focus on competitive advantage, using the capital base from the historic growth in deposits as consumers flee from risk.

The eminent author and business expert Ram Charan painted a picture of our descent into madness from the repealing of the Glass-Steagall act to facilitate the Citibank-Traveller's merger, through the secured derivative hall of mirrors, to the deft transfer of risk from financial institutions to investors. His take was to cut costs deeply now to create cash reserves to fuel the innovation that is imperative to pave the way out of this crisis.

FiServ had two interesting takes on payment convergence. Denny Carreker and Dave Robertson presented a vision of a "silo-busting" platform that spanned from transaction initiation to settlement for multiple payment vehicles. Mike Reagan came at it from the perspective of exceptions management through common case tools and data repositories.

An engaging panel discussion on mobile banking with representatives from Amazon, Clairmail, and Wells Fargo addressed questions regarding revenue sharing between the wireless carriers, and banks. Notable quotes: "AT&T is the largest bill payment company in the world", and "What the carriers want is like saying, 'If you use the phone to order pizza, I want a piece of it!'" Other points included the need for relevant and personalized text alerts, like bill payment reminders as due dates approached.

Romina Abel and Beth Costa from Edgar Dunn presented insightful research on pre-paid cards use by the unbanked. I found it interesting that 25% of the unbanked had a standard credit card (High, I thought- versus 54% overall), and 18% had pre-paid cards (almost the same as 17% overall). The main reasons for pre-paid use were ease of use, wide acceptance, use of own money, safety and security, and control over finances. Notable quote: "Pre-paid as an alternative to The National Bank of the Mattress!"

Putting formal research and industry perspectives in sharp relief was an enjoyable dialogue between four 'generation Y' youngsters, and the audience of (significantly older!) conference attendees. For me, the defining moment was this interchange: Question, "Do you have Direct Deposit?"... Answer, "I don't know what that is". As you create tomorrow's systems, keep in mind that this is what you're up against.

On the exhibit floor, there were a few vendors that caught my attention...

At the top of my list is Clear 2 Pay. This is the first transformation that I have seen of payment convergence from an idea to a product. While convergence is a journey and not an event, these folks have cut their teeth on SEPA (Single European Payments Area) integration in Europe and are getting set to penetrate the Americas. The white papers on their website spell out an intriguing vision. As they say in the billboard business, watch this space.

In the vein of convergence, Mitek had their mobile check image capture application in view. While the jury is still out on how widespread adoption might be, their announced integration with mFoundry's mobile banking application, and their relationships with J&B Software and RDM Corporation for remote deposit capture suggest promise. There was also research recently from FiServ that indicated that one third of their financial institution survey respondents showed interest in offering mobile deposit capture to their business customers. Taking pictures of checks with cell phones, and sending them for deposit...who would have thought?

The folks from Alogent, now part of Goldleaf, have an approach to tailoring the user experience to match the needs of various market segments for remote deposit capture. Their Payment Web Services toolkit allows financial institutions to offer user experiences appropriate to the needs of consumers, merchants of varying size, and corporations. "Yes, so what's new in having different products suited for markets?" you say. But that is precisely where the uniqueness lies; this is a single infrastructure that can be configured to effect flexibility. It should help the total cost of ownership in not having to manage multiple products- each with its set of features, and product release calendar. With this toolkit that also allows integration with cash management systems, Goldleaf may have a compelling case for a look under the hood.

In the days prior to the passage of Check 21 in 2004, exhibitors at this show used to bring reader/sorters, which were electro-mechanical monsters that took up much space, and made a lot of noise. While those sorters have gone the way of the buggy whip, their place has been taken by desktop scanners. Panini launched their latest Ideal scanner at this conference. It is targeted for small businesses at a low MSRP of $299, and has a compact form factor that would fit a crowded point-of-sale counter. I found the automatic alignment capability where a check could be fed in at odd angles, and yet have the sensors and feed rollers line up the document for a good image scan an eye-catcher.

I'll go back to how Debbie opened the conference, "It was the best of times, it was the worst of times...". Given the ideas I saw and heard, and the will to prevail that I sensed from many, I am inclined towards the former disposition.