Core Payments Modernisation: Managing the Speed of Change to Ever-Growing Complexity and Demands

The payments industry has been in a state of flux for more than a decade. The confluence of changes mandated by the various industry initiatives, growing list of client demands, and the competitive landscape has not only set the foundation for disruptive and inclusive innovation but also increased the complexity of the platforms that support the movement of value. Going back to 2008 when the financial industry witnessed recession, the financial services industry had attributed the slow pace of adaptability to change, due to the complexity of change of the legacy architectures that powered the transfer of value. Fast-forwarding to the current day business scenario where almost every industry has been faced with an unprecedented and unanticipated business climate, the ability to respond to change has been tested, specifically in the context of payments, given the imperative for ‘digital-first’ approach.

The global payments industry has made significant strides in instituting the foundations for the new reality over the last few years;

1) Focus on increasing competition, reducing entry barriers, enhancing payments efficiency, digital-first, competitive pricing, reducing risk and exploring journeys to increase customer stickiness through innovative value-added services continues to make great progress;

2) Instant payments are now the norm for consumers and corporates while open banking is now been explored for disruptions, inclusive innovation, and laying the foundation for collaboration in payments. The extension of domestic real-time payments to facilitate cross border real-time, reduction in cross border pricing and improvement of cross border payments efficiencies, new prospects for a common multi-currency clearing and settlement utilities at the regional level with potential for replication to the rest of the world;

3) The global standardisation initiatives, modernisation of real-time gross settlement and instant payment schemes, cross border harmonisation of industry-wide digitisation initiatives such as in the West African and ASEAN regions, the transformation of the central clearing and settlement mechanisms to offer the state of the art payments processing and real-time liquidity management.

With the multitude of strides made in bringing the foundations for new reality over the years, the global payments industry has demonstrated its stewardship to reduce inefficiency, eliminate risk, increase competitiveness and innovation, and lay the foundation for the borderless-hyperconnected commerce world. With multiple initiatives commanding almost the same priority, some are becoming inevitable, such as the transformation of paper money into digital form, that will break several decades-old legacy of physical money, the prospects of open data, and the transformation of retail payments in Europe. At the immediate priority, the Peoples Bank of China is on the verge of launching major trials of its digital currency dubbed DC/EP (Digital Currency Electronic Payment) in multiple provinces, with several ride-hailing, retailers, and video streaming platforms. The launch of the digital currency in China is likely to attract heightened attention, not just within the central bank community, but also with the private sector and commercial banks on launching similar forms of retail digital currency. This will introduce further complexity to the legacy platforms and increased cost of ownership and management of these platforms at traditional banks. Hence the need to reduce cost, provide the speed of change, respond to clients and internal needs across touchpoints, and permit inclusive innovation becomes the key for traditional banks.

With the view to reduce complexity, the vision of enterprise payment hubs was enunciated several years ago with the fundamental objective of providing a centralised-shared services form of utility, with the ability to handle any type of payment (payments agnostic utility). The centralization of payments into a was anticipated as the best approach to reduce cost, complexity and provide full transparency to internal & external stakeholders. It was conceptualised as the foundation where new sources of revenue could be created, unlocked, monetised, and usher entry into data business considering that payments processing was becoming (and has) more of a commodity.

While the consolidation into payment hubs was indeed the right approach, unfortunately, many payment service providers are either still yet to implement, or have implemented partially, or are still at the early stages of design and implementation. It would be right to state that despite the payment’s community making deeper strides, the challenge to move away from the legacy continues to be daunting and this will be compounded further with the arrival of new forms of digital payments and digital currencies.

Several banks are currently in the process of building out the payment processing utilities (aka. Hubs) in several different forms, but the pace of modernisation has been constrained for multiple reasons – resistance to change, replication of as-is capabilities on the target without simplification, choice of approaches, lack of commitment from top-down, alignment on the design – service granularity and architecture choices, organisational changes and culture, lack of continued collaboration involving business – risk – operations and technology stakeholders, lack/inadequate skills, reliance on unproven solutions and high cost and time for change, etc. Another important reason for not having a consistent and coherent effort to modernisation is, that the financial services industry continues to navigate without the availability of an established-common-industry standard reference blueprint unlike other industries such as Telecommunications (e.g. TM Forum) or the Automobile sector. The non-financial industries have a very well-established set of common practices, design constructs, and principles for the industry to thrive, compete harmoniously, and reference architectures to building out new services for the respective industry.

Although the financial services industry has made progress in establishing the standard to reduce complexity and to provide for a common reference architecture (e.g. the Banking Information Architecture Network), more work needs to be done to increase adoption. With the lack of availability of a universally accepted reference model to modernising payments architectures, that are adaptable to the test of times, current modernisation approaches (i.e. whether based on the product, in-house or cloud-based) may need to be re-engineered, thus adding to rework and loss of investments. therefore, there is a need for the payments industry is to align on a common framework, that lays out the transition paths from the legacy to modular, service-oriented and cloud-native software orchestrated payment services, that can be composed and orchestrated by the business community to cater to the complexity and diversity of global value chains.

However, achieving this level of common alignment at the industry level may be possible with standards bodies such as BIAN taking further lead and stewardship, the traditional banks should act fast not losing the competitive edge to new-generation players. Core payments modernisation unlike other domains is not amenable to big-bang approaches. Given the incremental drive to modern architecture, there needs:

1. Strong alignment between lines of businesses and lines of technology(pre-requisite), backed by top-down/management commitment, with strong oversight, guidance, and governance,
2. The availability of clear, well defined and published roadmaps and strategic outcomes, that are evangelised within the organisation and with the clients, reinforcing transparency and firmness to achieve the modernisation outcomes,
3. Ensure that the chosen approach to transition from the legacy considers a business reference blueprint (e.g. business capability model, services model, business ecosystem collaboration model etc.), design principles and characteristics that focuses on the capability to deliver on-demand and composable services orchestration, that is adaptable to customer demands, interaction within and across ecosystems of global value chains, and changes to product portfolios,
4. Instituting dedicated payments enterprise architecture practice, that builds, maintains and is guided by instituting payments reference architecture, business capability models, ecosystem models, business architecture, business services catalogue, etc, to drive ongoing simplification and drive payments modernisation roadmaps. The payments enterprise architecture group should collaborate with business and cross-functional groups to create various business scenarios and disruptive trends to create architectural design approaches that can navigate through the scenarios. This should be an ongoing exercise and not limited only to addressing the needs of modernisation, and,
5. Empowering the Payments architecture group to drive investment decisions, exercise governance and be the custodian of roadmaps and design principles, and work intricately with the lines of businesses and collaborate to building of business resilient, adaptable, and purpose-driven architectures.

The mix of right design choices, alignment to guiding principles, empowerment of the payment’s enterprise architecture group, management commitment, and cross-functional collaboration are the key ingredients for success. While the opportunities from the new world of payments are immense, getting there on time and in elegance is prime. Continuous change is inevitable, but the ability to respond to change at speed, low cost and continue to deliver to the everchanging customer requirements requires undertaking modernisation at speed and to the target state sooner. Therefore, payment service providers must act fast to accelerate their ongoing modernisation programmes.