Payments modernisation seen as top priority for banking industry

I can well believe Banks see this as a top priority, however, it's not a simple fix.

Are banks going to invest in an "open loop" type of environment, using the old card infrastructure (can't really see how they move away from that without regulators and customers getting annoyed) or are they going to look to close the loop in someway. Obviously closing the loop will reduce costs and provide the opportunities to do more than just a payment, however for banks, they cannot be that disruptive.

IMHO payment innovation will, and is happening, outside of the banks, and I don't see how that can change. It makes more sense for the banks to invest in getting involved and working with disruptive forces to deliver better experiences back to their customers, but banks are so reluctant to work in this way, even with other regulated businesses.

High time to realise that e-invoicing (payment proposals in structured form) is a part of payment services. Only then will customers be able to low cost automation of procurement and approval processes (up-stream) - and VAT-reporting and account-statement-integrated automatated accounting (data-extraction for down-stream.

Yesterday's announcement by the Reserve Bank of Australia that it is yet again delaying a real-time payments system due to lack of support from big domestic and international banks appears to show the dramatic difference between what banks tell researchers like Ovum and what they do in the real world. Bottomline - the Too Big To Behave Banks have no interest in improving the payments system as they make money capitalizing on the system's innefficiencies. 

It will be interesting to see the "how" in all this, especially the mobile payments side where there continues to be confusion about where the real threat lies:  http://www.prairiecloudware.com/blog/full/the-real-threat-to-financial-institutions-in-the-digital-age

Before a bank can innovate it needs to modernize 30 years of old legacy fixes and patches using new architectural approaches. This is heavy lifting and requires a well thought out plan; otherewise, failue is almost guaranteed. Any payments transformation plan also requires the addition of new capabilities such Big Data, analytics, cloud, social, security and mobile.

We have been waiting for "The straw that broke the camel’s back" for many years now. 

With each new innovation, payment method, channel, mobile, etc., there are predictions that the banks legacy systems will collapse under the pressure.

We have indeed witnessed some high-profile failures, and even a £14m fines to punish one guilty party, but there still no evidence of the major work needed to modernise the whole infrastructure.

Solutions do exist, but the bravery to "grasp the bull by the horns" and implement them is lacking.

The cost of payments modernization is a lot less than the recent fines that some banks have incurred recently. I have experienced many large transformations in the past 5 years. Most of the banks justified their transformation projects on the ability to comply with new regulations; hence,  banks developed solutions that satisfied regulators, bank line of business and technical leaders, and shareholders.

From the Ovum perspective, whats really telling about this latest data is that it seems to be marking a shift away from a 'lets just wait and see' approach to payments innovation to finally beginning to move on long gestating roadmaps. This of course isn't a uniform action and Id expect to see alot of bumps along the way, with some banks and regions really dragging their heels while others go a bit gung-ho and scattershot in their approach. There's always some methodological issues in asking enterprises what they intend to do in the future rather than what they have done, but the data shows they're at least thinking about payments more seriously. Will they put their money where their mouth is though is probably still up for debate.

One thing that we keep seeing however, and we keep advising all our clients to focus on is legacy modernization. Placing bets on any individual payment technology is to some degree risky, but investing in your infrastrcuture, to allow you to enable whatever type of payment in future really needs to be the focus now. There's alot of infrastrcuture out there older than me still chugging away and how can that keep up with the pace of payments diversification? I don't think it will collapse in some glorious mobile revolution anytime soon, but it will become more expensive to maintain and less functional/flexible and the business case for modernisation will become alot clearer. For alot of banks this is going to be somewhat piecemeal rather than a big bang approach.

Repeating what I said. The new payment infrastructure should look at end-to-automation - especially for the SME-sector. Front-end mobile payments  deserve action and get publicity - but the new value is in the full value chain.

Cannot agree more with Ovum comment. Discussing innovation cannot be disruptive for banks, we have seen too many failures of the "must change everything" approach. Regulations  are becoming a huge motivation for innovation : the European Sepa experience,  as well as the UK Faster Payment one are  actually showing all their potential. The central point nowadays in undoubtedly to modernize the overall payments underlying infrastructure to be "enabled" to innovate.

I disagree as to innovation being 100 pct tied to platform renewal. White label cloud services enable innovations with single sign on - very small investments.

I am more in agreement with Gilles and Daniele, I can't see how you can continue to add functionality and provide the joined up processes and data needed to offer such things as Bo is suggesting without modernising the payments infrastructure.  However that’s does not mean you have to renew the entire platform, its more about orchestrating the services and accessing the data already available within the bank to offer better services.  This is still a major project and needs good, enterprise level approval and planning, but it is far easier, cheaper, less risky and much more achievable than a full replacement project and can be phased to prove success and value along the way.

From 1995 to 2005 I tried to persuade the banking community, retailers, and even the Fed to modernize the retail payments  system.  Universally they were opposed.  The cost would have been less than their losses from fraud. It takes a very strong outsider or heavier losses to convince this entrenced mindset to move.  Now, years later, they are moved to action.

The Nordic experinence is that you can add 2.0 services (e-invoicing etc) as whitelabel cloud service without having to invest in the infra - or disturb infra upgrades. And my point is that massive new value can be created for all customers by moving down the value chain e-invoice>dataextraction or ISO20022 account statement-integrated automated accounting and VAT-reporting > ISO20022 payments - and much more. Compared to this most other innovations are small fry..

In my experience you can add in as many new services as you like via cloud or on premises to add new products for customers, but the main issues remain time to market and maintainability, to me this is a very short term approach unless you already have a modern payments infrastructure.  If you have to link your new cloud based e-invoicing system to several back office systems you have a large integration project, which is costly, time consuming, takes a lot of testing and adds to the all too familiar spaghetti.  You are simply building on instability, you have to maintain these new interfaces, adding cost and reducing budget for future innovation. 

Ideally when you add these new services you should also start the process of implementing a strategic orchestration layer and build the interfaces once and properly through the orchestration layer, this ways it’s not a big bang project, time to market is faster, testing easier and you have started the process of modernising your payments infrastructure.  Although this is not a new approach I still find it very rewarding when a banks architect after stating something like ‘we have an ESB, why do we want another’ and doing a Proof of Concept openly change their minds once they see the power of a purpose built payments orchestration solution. 

I often think the confusion is down to the misuse of the term payment hub, in my mind you don’t buy a hub, you build one, whether you start with a new engine and integrate it (and if you don’t use a payment orchestration layer you are just building more point to point spaghetti which immediately becomes legacy) or you use a new payments orchestration layer to speed up time to market for new services and start the process of integrating your existing assets in a far more efficient and sustainable architecture.  

The beauty with e-invoicing is that you do not have to link it to any - or very few legacy systems.

I´m curious to the responses/answers to the following question :

Which new payment scheme is expected to get the reach and mass adoption so that it can become a real thread for the established (legacy) ones?

Gilles, is the full report available please?

On the face of the above, much of the change could be seen as new overlay - cf mobile wallet, NFC, QR; payment switching and authorisation - rather than the long-awaited re-engineering of the backoffice. For example Paypal has created a fast and convenient experience without needing a rewrite of the whole interbank clearing and settlement system; iDeal too.

Which suggests it may be possible to capture the benefits available across the whole value chain - I agree with Bo - without massive capex.

Just wondering whether your survey supports the view that re-engineering the infrastructure is a pre-requisite to capturing the value, or whether the latter is seen as possible without the former.

I cannot see why the massive new value (income potential) created with the obvious nearfield whole-value-chain approach would need integration worth mentioning let alone massive capex in payment platform renewal (which as such become necessary - but for other - not new-customer-value - reasons).

Emperors clothes? Bankers, vendors and regulators get overexcited ... Do we really need to invest billions now for a real-time customer experience and (near) real time funds? Isn't the internet already delivering this to us on top of today's infrastructures? What does real time C&S do with the security model and all compliance checks? Agree with Bo and Neil!

Much can be done for real time business, financial and government reporting transactions (extended payment services) with simple snap-on cloud services. Payments between accounts in the same bank have been real time already for ages in most Nordic countries. This is why most enterprises alreay in the M-sector have accounts in all major banks. Now it is time for banks to study how also x-bank payments can become realtime. A step-by-step approach can make it manageable and more economical - but of course customers will have to pay also for these investments - hopefully in a transparent way.

Interesting debate. Bo and others are not wrong, but there side step the elephant in the room. The key fact the banks have known for years; their legacy infrastructure, ownership model and support of it all is screwed now and getting worse. Bad press happening all the time due to payments failures. The cost burden alone is diverting their funds to maintenance tasks and away from Bus Dev leaving the gate open for more nimble market entrants, amidst a dagger filled room called "increased regulation". The cost to compete is way to high for them, the speed of change too slow. Their dinner is being taken away slowly but surely. Low hanging fruit initiatives always worthy for a quick injection of ROI, but fixing the enterprise architecture can only be applauded if they want to be relevant in 10 years too.

Dean is naturally having a point and I am not saying that there would not be case for moving from spending too much on legacy maintenance to spending more on modern - soon cloud-based infra. Some can - and should still stretch. But no bank should fail to see the opportunity and actually also responsibility from introducing new massive value especially for SME-customers by moving down- and also up-the-value-chain from ISO20022 payments and ISO20022 account statements (starting from e-invoicing and automated accounting). It does not take much investments - and should in no case be excluded for infra-improvement reasons.

It would be interesting to see commercial justifications for ‘re-architect’ v ‘overlay’. Incumbents need a stronger business case than the well-worn ‘You can’t do the latter without the former ’ and ‘you have to else you won’t be here 10 years from now’;  see the Innovators’ Dilemma.

In the meantime the survey hopefully reveals what banks are actually going to do.

It looks from the data presented that respondents are leaning more towards overlay i.e digital wallet, mobile proximity (NFC, QR), immediacy, (tho’ not to the exclusion of re-architect).

That may be a reaction to the changing market. A new ecosystem is developing, as a consequence of consumers now having far more computing power than banks; 50 years ago the reverse was the case. Today, 100% of world wealth has a smart device; consumer purchasing and buying behaviour is changing fast. If a consumer gets e-receipts as standard, how long until that same person, a corporate treasurer between 9-5, demands e-invoicing?

When faced with fundamental change, ‘doing the old thing better’ is rarely a formula for long-term success, though it may be necessary short-term.

E-invoicing was made mandatory by law for the public sector in Denmark in 2005. E-invoicing is defacto mandatory by now in most large enterprises in the Nordics. 85% of enterprises use structured e-invoicing in Finland (PDF does not deliver structured data properly). Of course this demands that your e-bank has the send- and receive e-invoice functionality..

There are obviously no simple solutions but I see this as a question of architecture - design choice and implementation that will support the bank to build in a way that competitively supports the multi-channel, multi-service, consumer centric capabilities for the future. Not a big-bang approach but a focus on platform and process and a staged handover.

So there are elements of both arguments that would work together to get the final solution. One could thus start with an application that is top priority for the bank, let's say for argument Bo Harald's e-invoicing that could deliver real value. Build that up end-to-end with architecture appropriate for the new world rather than the silo platforms of the past. Design in security for the cross-over areas. If the new platform is robust and extensible enough, over time other applications could be added on and migrated.

Critical reusable elements that must be highly extensible yet highly secure, for instance payment gateway functionality could start to be built into common reusable services available to the old and new.

However such a strategy needs concerted, focussed long term commitment and strategic thinking. If plans are changed every time the legacy system needs fixing or management changes, obviously this can't happen ..

Thank you Charmaine. The good thing with extended payment services like e-invoicing - and data extraction services built on it (for VAT-reporting, automated accounting and cash flow estimates) - is that there is very little need (hardly any) to integrate these into legacy environments. This also means that these can easily be delivered as white label cloud services from external sources (cheaper, better,  in-cloud innovative and global connectivity ready). This also means that legacy renewal is not disturbed - single-sign-on link in e-bank e-invoicing is not a big deal. 

Why banks do not rush into this is difficult to understand - it is high time to defend the all-important payment business - and that is not possible without a full value chain approach.

Thank you Charmaine. The good thing with extended payment services like e-invoicing - and data extraction services built on it (for VAT-reporting, automated accounting and cash flow estimates) - is that there is very little need (hardly any) to integrate these into legacy environments. This also means that these can easily be delivered as white label cloud services from external sources (cheaper, better,  in-cloud innovative and global connectivity ready). This also means that legacy renewal is not disturbed - single-sign-on link in e-bank e-invoicing is not a big deal. 

Why banks do not rush into this is difficult to understand - it is high time to defend the all-important payment business - and that is not possible without a full value chain approach.

Let's pause and ask what needs to be modernized. The payments business is a $1 trillion plus a year business from a revenue perspective. The cards piece of it is at least $500 billion. I do not see $500 billion being disintermediated to disrupters. But, the card business can become more efficient with new Big Data, Analytics, Social, Cloud, Security and Mobile capabilities to enable a more digitally connected world of commerce. There is a lot room for all the players. But, at the end the day remember that the banks will still hold the keys to the empire since they own the loans and deposits.

To me it is clear that good payment services open doors to deposit business and from there to loans. If you want to have more deposits - natural funding - you need to offer more value (up- and down the value chain from payments). If you do not - you risk to lose shares both to market entrants (and then it is too late to react) and to banks who have realised that the networked and cloud service environment opens up new opportunities.