Platforms can be a bad strategy

It’s the in thing, the most widely spoken tenet of business strategy – Platforms. To the extent that if you are not talking about it, you are from the stone ages.

Successful platform stories are all around us – i.e. Amazon, eBay, Facebook, Pinterest and Apple. Want to embrace the model? Think again. Hidden in these examples are different dimensions of what makes a successful platform.

Category 1: Amazon and e-bay offer a platform bringing buyers and sellers together and then pairs them off to create value for themselves.

Category 2: Facebook and Pinterest play the role of providers of a platform (essentially features), but don’t own or create value on it. The value is created in the enablement of conversations by users of the platform who ‘manage’ and ‘transact’ through ‘conversations’ on the platform, facilitated by communities.

Category 3: Apple through its Apps Store provides a platform for other third parties to build on it, but in a way prescribed by the interfaces exposed by the platform.

In summary, you needs to bring a network of buyers and sellers, create a community that leverages your platform to engage in conversations and open it up to other third parties to create value. Easy? But what happens if you have a traditional, conventional business model built around proprietary products and services, marketed through channels that you own, manage and govern? How do you migrate to the open world of platforms from there?

Well, for a start, you need to think about whether you want to be the platform provider or integrate your products & services into another platform provider? Being a platform provider gives one better control and leverage over the customer or consumers of the platform. Even though value is created by third parties who choose to bring their products and services onto the platform, the value for the provider is disproportionately and exponentially higher than the parties who choose to transact on it. eBay and Amazon’s valuation is multi-fold compared to the millions of buyers and sellers that contribute to it. The proximity to the customer brings deep insight of buying patterns and behaviour, unmatched! Which is why some players (esp. banks) have so far been very wary of integrating their products and services into a platform provider. By doing so, they become in some ways further removed from the customer and thus receive little insights on buying patterns. Also, there is this inherent fear that the platform provider can themselves offer competing services at some point. Inside banking board rooms, the one thing bankers fear the most is threat of competition from unexpected & tangential platform players like Facebook and Google than direct competition. It is the trust or lack of it that discerns them from being platform players or advocates of it. On the other hand, becoming a platform provider is not easy especially if you are yourself competing on the platform. Attracting external market participants can be a big challenge and not everyone can become one in the first place.  

I am not for a moment saying there is no value from a platform strategy – organizations need to think hard about their approach or else it can severely backfire. The answer lies in the problem!  

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NPP - 8 Technology speed breakers for real time payments

The New Payments platform offers the potential of plenty of business advantages to the retail and corporate customer segments, however it presents significant technology challenges in its adoption and implementation. In this last installment of the three part series, I discuss the technology impact of the move to NPP.

1. 24*7 nature of Real time payments will mean greater operations / technology costs to maintain fail over tracking teams and enabling manual intervention to process the transactions. While majority of the transactions are expected to be STP, but given the legacy nature of back office processing systems, banks will need to maintain business operations and technology teams to manage exceptions or failed transactions to ensure they maintain the SLAs under the new payments regime. Over the period of time, banks will have to re-engineer their technology processing and process flow logic needs to be more products and channel agnostic. This generic flow concept will help reduce the time to market for new products as well as reduce implementation costs for any changes to existing product schemes.  This re-engineering should also improve overall payments system resilience and efficiency in general.
2. Integration between online banking and the real-time payments platform will need to occur at multiple levels. Mobile payment processing platforms (e.g. Zapp or ApplePay or proprietary bank apps like Barclays PingIt) with online banking platforms for account balance and processing requirements.  There are others like Sofort in Germany which integrates online banking with the e-shopping experience to provide convenient, faster and secure transfers. Additionally, payments processing will also have to be integrated with real-time cash & exposure management and ledger systems to seamlessly manage the real time, online and batch platforms for unified experience.
3. 'Scagile' Sight Applications – To fully harness the benefits of NPP, enterprises will need to build Scalable, agile and insightful applications not only to handle the load of real time payments data required, but also to harness the value through process / customer insights.  
   
   

   
4. Implementation issues especially involving batch and non RT back end systems for greater efficiency and reduced costs will be important to address. Real-time settlement and reconciliation will present its own challenges. Banks currently manage non-availability / upgrades to systems through batch and maintenance windows at the end of the day, which will no longer be available. Enterprises and businesses will retain Batch / bulk processing of payment transactions especially for schedule payments and payroll processing as they are more cost effective. However, real-time clearing and settlement will put more pressure on system resilience and availability of payment platforms as processing will need to be done outside business hours with availability stretched to 24*7. Platform upgrades and changes will need to be made with little to no down times to ensure customer convenience is maintained which will be a challenge for systems not designed for minimal planned downtime and it is a considerable challenge to retrofit these capabilities into existing heritage systems.
5. ‘Agile’ Business Activity monitoring (BAM) will be a critical component of a real time payments implementation. This has some significant implications -  
   1. Investigating incidents raised by online merchants and enterprises, especially those involving manual interventions and transaction research by technology or business operations teams
   2. Proactive alerts to help limit and manage critical events or transactions which have a significant impact on customer satisfaction
   3. Identifying and measuring performance bottlenecks for continuous cycle time improvement and historical comparative analysis.
6. Elastic Payments Store – Richer data due to the NPP enhanced messaging capability will necessitate maintenance of payments data within a dedicated payments data store to ensure traceability, acknowledgment and reporting of transactions and detailed analysis within real-time performance requirements. Also, this will drive the creation of differentiated overlay services bringing additional revenue opportunities for ADIs. The data architecture around the data store will be critical in search and retrieval activities and should be designed to utilize modern “big data” technology.  
7. Increased pressure on completing the AML/CTF checks within seconds to enable real-time payment clearing and settlement. This will be particularly important given the non-reputable nature of NPP transactions. Banks will have to prioritize the essential business rules required before the payment is processed within the real time settlement window. Also, they will need to manage a mechanism for after the fact checks and processes. 
8. Reconciliation utility – As complexities increase with real time processing, reconciliation will be a key focus area and abstracting all aspects of reconciliation from channel / products systems will be critical to the overall success of the NPP.

Designing and implementing resilient and flexible payments platforms to extract the benefits of NPP will be critical to the success of the program at each participating financial institution.  This will separate the winners from the losers.

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What will it take to implement real time payments/NPP?

This is part 2 of the 3 part series on the New Payments Platform (NPP). Subscribe via email or get added to Google Circles to receive an update on future posts. 

The focus of the New Payments Platform is to provide an infrastructure for a versatile and data rich, real time payments infrastructure for low value everyday payments. But few organisations understand the challenges in the implementation of real time payments system, so, I attempt to uncover the key considerations - functional and technical for the program. NPP will also facilitate an enhanced customer experience through the introduction of an Addressing Service which will allow payments (particularly mobile payments) to be “addressed” or “routed” by using an Alias which will enable payments to be directed to a specific account using either a mobile phone number or an email address. The email account option will be particularly important to businesses and people with multiple accounts. 

The introduction of the NPP will create many opportunities for participating financial institutions (ADIs) as well as their customers through provision of overlay or value-added services, particularly if the introduction of the NPP is viewed as more that a “simple” compliance exercise. There are some important considerations ADIs need to meet to be ready for NPP.

Functional Considerations

There are a number of key requirements to be considered as a consequence of the introduction of the NPP.

1. Message standardization, transformation and acknowledgment into a format compatible with the central message format. The rigor associated with payment enrichment and repair for incomplete or missing information will be much higher with NPP. Even the clearing process with acknowledgement of messages between gateway/clearing house/bank, including handling and integration of settlement messages needs to be robust.
2. Payments reversal – For rejected payments, given the real time nature of clearing & settlement, the reversal and transaction research and reconciliation process will need to be drastically streamlined. Impact on payments and GL balances for unhappy path situations will be extensive and the resultant changes will need to be comprehensive.
3. Payment routing – based on least cost and load balancing of the payment processing access to an alternate option and gateway will need to be automatic, instantaneous and dynamic.
4. Audit trail of transactions along with journalizing – Tracing the payment transactions through various platforms, interfaces will be extremely critical in not only ensuring compliance but also for AML/CTF purposes. The provision of a single comprehensive view of payments and hence, the ability to do a drill down of transactions and fees will be a critical feature and differentiator.
5. Liquidity management and settlement will, given the real-time nature of the NPP, need to be examined closely to ensure that from a participant and participant customer perspective a very clear real-time understanding of their position at any point in time. This will also need to include the ESA position for Participants, particularly when acting on behalf of other participants.
6. Comprehensive configuration, fee management and reporting will need to be NPP specific and will be critical to ensuring accurate product pricing can occur and correct cost allocation can be done. Fee and Billing – at a minimum, the break-up of the charges by product/customer/segment/account/channel.

Architectural Considerations

There are a number of architectural implications that need to be considered as a consequence of introduction of the NPP.

• What aspects of payments enrichment, scheduling and monitoring should stay in the channel or product systems and what should be centralized? This will particularly have an impact around recurring and future-dated payments and consideration should be given to a centralized data store which would facilitate processing as well providing both the Participant and its customers with a complete view of upcoming payments, it will also help facilitate liquidity management.
• What non-functional requirements should the Participant build towards? Having a clear and unambiguous understanding the payments flow becomes even more critical with the NPP as it will run 24*7 and its availability (or lack thereof) will have high visibility not only with the participant’s customers but also with regulatory authorities and other Government agencies. This requires a good understanding of expected volumes, response and repair times within and outside the enterprise boundary.
• Business Activity Monitoring capability – abstraction of the processing and idle times for various sub-segments of the business process; real-time payments dashboard and reporting; real-time fraud monitoring will significantly improve an ADI’s ability to meet and exceed their customers’ expectations as well as providing a firm baseline of performance across the payment systems of the ADI..
• Supporting Rich Data through a centralized payments data store to facilitate comprehensive reporting and transactional research as well as providing a foundation for enhanced reconciliation capabilities across product and channel streams.
• Real-time Fraud monitoring will be an essential component of any NPP implementation particularly due to the non-reputable nature of NPP payments once the payment is complete. AML capabilities will also need to be considered, again due to the finality of the payment.
•  Rich remittance data that will be present in NPP transactions will need additional consideration as it will create the potential need to interface new internal and external systems by allowing ADIs to introduce new value-added products and services particularly aimed at small-to-medium enterprises thus improving customer acquisition and retention as well as introducing new income streams through fee-for-service offerings.
  Some of these considerations would involve ADIs to progressively revamp their payments systems infrastructure necessary for them to guarantee higher levels of stability.
  Are you ready for it?

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NPP - More than just compliance

This is part 1 of a 3 part series on New Payments Platform (NPP). Please subscribe by email or get added to Google circles if you wish to get informed when future series are published.

The introduction of the New Payments Platform has seen some very diverse reactions from financial institutions. Some see it as a huge burden on them to comply with the regulations – an unnecessary cost which could be avoided especially in times when credit growth is slow and margins under pressure. Others see it as an erosion of their competitive advantage, built-up over the years through systematic and long term investments in the overhaul of their payments and core platforms. For these institutions, NPP threatens to level the playing field through lowering the barrier to entry via investment in central infrastructure ensuring greater competition in real time payments anytime, anywhere which, of course, is one of the RBA’s intentions with the NPP’s introduction.

However, worldwide experience has proven that there will be a select number of institutions which will convert this into a substantial business opportunity to consolidate and grow their revenue and market share. In the first installment of this three part series, I uncover some of the potential business opportunities stemming from the program.   

Improved Cash management and Liquidity: Overlay services can help improve cash management, liquidity and traceability of payments along with convenience through mobile initiation of payments.  – An example of overlay service could be e-invoicing coupled with end-to-end payments manager, providing corporates with the ability to schedule, prioritize, authorize, track, get acknowledgement and reconcile payments in real time through a single interface leveraging the central payment infrastructure. This service integrated with an expense manager to help corporates, SMEs and consumers with better cash-flow and liquidity management. Through better spend analytics and traceability there is a significant opportunity to improve cash-flow & liquidity management and better integrate these capabilities with external customer platforms.

 

Reduce costs and improve operational efficiency:

·        Rich data flow can enable the payments flow and transactional data to be directly entered into the accounting system, increasing visibility and accuracy of payments data. A lot of small merchants today, expend significant time and costs in manually entering the payments transactions into their accounting system. This can also result in inaccurate data due to manual entry hence incurring further costs. The richer payments data will be an opportunity for standard accounting packages to build pre-fabricated interfaces with payments systems to ensure straight through flow right from payments initiation through to the accounting system.

 

·        Real-time payments should be cheaper for merchants, since they can reduce or eliminate higher cards transaction fees in favor of a direct money transfer between bank accounts at real time, whilst eliminating the credit risk normally prevalent in a non-real time environment. Though the exact savings will depend on the pricing structure for NPP payments.
 

·        Richer payment data can help in quicker and cheaper reconciling through itemized invoicing and enabling greater control over expense management. This can help in reducing the number of errors in payment processing as well as reduced exceptions optimizing back office operations costs. A good example of the value this can bring to a business is by having additional information relating to the purpose of the payment in the payment transaction itself which will then allow a business to understand which invoices are being paid, without requiring manual reference back to the payer, by a single payment and / or which specific line items of an invoice are being paid which will substantially improve the efficiency of the accounts receivable function of a business.
 

·       SME and Corporates will have the ability to generate real time cash flow statements and balance sheets.
 

Improved budgeting and traceability: Greater visibility of cash positions and control on spend management through rich data for both consumers and enterprises. PayPal for example, used the real time payments implementation in the UK to provide their merchants with real-time payments when consumers are buying online or in bricks-and-mortar storefronts. Additionally, retail consumers could find splitting bills much easier if ADIs were to provide overlay services around itemized invoicing, particularly when associated with smartphone apps on top of a faster, quicker real-time settlement. The ability for SMEs in particular to receive both funds and enriched data in real-time and to have the enriched data directly integrated with their accounting solution will of significant benefit. As an example being able to receive settled funds 24*7 will allow SMEs the ability to better ensure they are getting maximum benefit from allocating their cash to a high interest account as an example particularly those businesses that have significant cash receipts after traditional hours or over the weekend. This should also help ensure suppliers are paid more promptly.

Greater customer convenience

·       Cheaper, instantaneous international remittances at least for customers of multi-national banks who wish to transfer money between accounts in different countries. For businesses, this could eliminate the need for keeping idle ‘float’ or ‘liquid’ money, for better liquidity management.
 

·        Buying processes could be significantly simplified. E.g. The private car buying process which is quite cumbersome and time consuming today - involves either an electronic or bank cheque based money transfer into the vendor’s account which has an inherent level of risk associated with it, transferring and paying for the registration and post that at least third-party insurance and possibly additional insurance coverage. There is an opportunity to provide a car buying payment transaction service which could integrate these discrete sequential processes and complete the end-to-end transaction within minutes leveraging the irrevocable central NPP infrastructure for an enhanced customer experience.
 

·        Real time mobile payments – One of the biggest use cases for real-time payments is a flexible medium for mobile pay-anyone payments. As an example the UK Zapp payments allows customers to make real time payments from their mobile through a service integrated with their banking applications. The service doesn’t expose details of the bank accounts and allows consumers to select the banking accounts from which to make payment.
 

Supply chain efficiencies: Consider a scenario where an apparel manufacturer places an order for a weaving machine. It has to wait for a few days till the payment is cleared into the supplier account before the supplier ships the equipment. The advent of real time payments could help improve productivity of the apparel manufacturer and reduce working capital & storage requirements through quicker receivables management for the supplier.  In a real life consumer scenario, the consumer can electronically transfer funds to the supplier and the supplier can then ship the goods immediately and with the non-reputable aspect of the payment the supplier can be assured the chargeback risk is significantly lower or eliminated altogether.

Person-to-person payments: The ability to make a real time payment through aliases – mobile number or email, offers a transaction medium to the non-banked or under-banked sections of society. Immediacy and non-revocability of payment will reduce the credit risk and improve funds availability.

Can our banks counter the new entrants by leveraging the true benefits of NPP? Only time will tell.

 

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