November 4, 2014

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Surviving the Payments Squeeze

Financial institutions are increasingly losing ground in the payment initiation domain. With an increasing number of players providing payment consolidation, and clearing and settlement capabilities at lower prices in the industry, smaller financial institutions are likely to be driven out of the market unless they can provide additional value-added services.

If banks do not act fast enough, this squeeze could confine them to being, at best, efficient and cost effective payment processors. As a result, banks need to reassess their e-commerce and m-commerce engagements.  

What should banks do?

  • Move from a ‘transaction managed efficiency’ paradigm to a ‘rich data flow’ e and m-commerce paradigm. Banks need to move from playing the role of a payment processor to being an influencer or advisor in the e-commerce value chain. The future of bank payments lie in the experiential partnerships they build with retailers or large businesses to understand customer behaviour demographics, items of interest, and spending correlations. Banks have the capacity to increase the number of conversations with their customers and get a better insight into buying patterns.

  • Open-loop wallets. Banks should create an open-loop digital wallet which is device, channel and bank product agnostic - providing merchant localization where necessary, to enable convergence and greater convenience. Additionally, tying open-loop wallets to loyalty programs will benefit both banks and merchants by providing a greater understanding of consumer behaviour, which can be used to roll out location specific offers for a combination of goods and payment methods.

  • Use the information opportunity presented by real time payments. Real time information opportunities will help banks deliver value-added services more effectively.

  • Embrace Bank Payment Obligation (BPO) trade flow to effectively integrate the trade flow and the supply chain business processes with the payments value chain.

How do they get ready for this?

Since the evolution of payments is difficult to predict, it is important for banks to embed certain key considerations and design principles in their technology implementations, to prepare for the next wave of change.

  • Flexible/generic definition of payment flows. Banks will need to adapt their systems to being more channel and product stream agnostic by building generic payment flows to achieve platform stability and efficiency while ensuring faster product introductions.

  • Message agnostic configuration and abstraction of risk and fraud services from channel and product systems, is a prerequisite. Risk and fraud business rules embedded in the product systems will need to be extracted for horizontal integration, to ensure financial crimes stay within manageable limits.

  • Open systems API-led payment services design will enable banks to progressively expand their role into the e-commerce or m-commerce value chain by allowing for better service commoditization instead of being confined to the role of a payments processor.

  • Pre-defined platforms and systems supporting multiple integration points across devices and channels with ERP, finance and accounting and treasury systems will improve straight through processing rates and enable real time fraud and risk management along with RT liquidity and cash management.

The industry is going through substantial disruptive innovation and will undergo a shake-up in the next three to five years where only a few will survive.

Will your bank survive the payments squeeze?Read more about payments services provided at HCL Technologies to gain insights on payment solutions.