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?

Read More

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.

 

Read More

NPP benefits to come from added services, not 'plumbing'

Mention in the Banking Day publication

Click here to view Banking Day

Read More

Will Data be the next payment method?

I was talking at the FST Conference in Sydney last year on Next Generation Customer Experience. Majority of the questions I was asked were around the ROI on big data analytics, which set me thinking on how do you identify the part of the value chain to focus for highest benefit realization. A lot has been written around the use of unstructured data in driving targeted one-to-one offers helping generate higher revenues at better conversion rates. But, the ROI is increasingly skewed with very few organizations able to harness the true potential. So, where in the value chain do you focus?

The answer lies in focusing efforts around forming stronger relationships with a wider consumer base through a greater insight around transaction data. The entity which controls this aspect of the value chain stands to gain the most in terms of monetizing the transaction data for greater revenue share and retention. The battleground will be checkouts (physical and online) in a bid to control access to consumer spending patterns. Thereby, Unlocking insights around Payment transactions will be the epi-center of the next analytics boom. This could lead to a new payment method – consumer data. Both organizations and individuals in the future will be able to pay through this new method trading off insights on spending patterns.  

According to a Wall Street Journal story, consumer data and similar intangible assets could be worth more than $8 trillion. MasterCard is packaging insights on consumer spending patterns and trends gained through analysis of payments transactions selling them to banks, governments and retailers. What stops super market chains from working with individual brands within their store to on-sell anonymous information of spending patterns on associated complementary or even competitor products? Imagine Walmart through data analytics discovers that 70% of the consumers of diapers in a locality of nappies buy baby food in the same transaction. How valuable will this information be to Heinz who can then use this information to co-market their baby foods with Huggies? What’s more, even bigger value if Walmart can trade off that insight to the account payable to Heinz.

We are not far from the day when online retailers will choose a subset of ‘one-off’ buyers to fill out their personal details and preferences (outside of the normal) and trade that off as a discount against their product.  They can get these customers to waive off the privacy restrictions and trade their personal data to other channel partners and retailers.

Banks, traditionally being away from the consumer, lack a good understanding of their customers shopping habits and sometimes location data to target & customize their offers. This presents an opportunity for telcos and retailers, who are touch-point advantaged to trade off that data as a payment method with bank fees. This provides many benefits. First, they can reduce their liquidity requirements for a greater rate of return by offsetting with the customer’s other services in return. Second, it serves as an alternate currency and investment vehicle, which can be independently traded and valued, bringing in extra revenue at greater convenience.

As an illustration, Rite Aid and CVS who are part of the MCX consortium recently blocked mobile NFC payments specifically targeted around ApplePay as Apple masks customer data thereby robbing them of consumer insights to analyze spend correlations and patterns. Their own mobile wallet technology, PaymentC, aimed at reducing credit card usage and pushing for lower transaction fee structures is not out until mid-2015.

What do you think? Feel free to leave comments and feedback

Read More

Surviving the Payments Squeeze

Payments in financial services is becoming very fragmented with disruptive innovation through new business models occurring across the value chain taking the share away from the banking industry. Next generation technology players and non-financial institutions through a combination of innovative products, data analytics and open APIs have exploited market discontinuities. So what's the future of bank payment? How should the banks respond to survive this squeeze? 

Read my point of view published in the Nov 2014 edition of the Australian Banking & Finance. Please feel free to leave your comments. 

Payments initiation (consumer facing part of the payment value chain) is increasingly getting fragmented with highly competitive technology-led platform players, non-financial institutions and crypto currencies (operating as wholesale currency), taking the share away from financial institutions. Consolidation in the payments clearing space with players like EFTPOS in Australia and crypto-currencies is also slowly gaining ground. Some players will provide a shared service cross border and white labelled clearing and settlement capability at a lower price point through greater economies of scale across the industry. This will compress margins further and likely drive smaller financial institutions out of the market unless they can provide additional value-added services and capabilities.

If banks do not act fast enough within the next 3 to 5 years, this squeeze from market participants across various facets of the value chain will confine them to at best, being efficient, cost effective payment processors. To transform themselves, banks will need to reassess their engagement and participation to the wider e-commerce and m-commerce value chains.  

What should banks do?

·        Move from a ‘transaction managed efficiency’ paradigm to a ‘rich, data flow’ e and m-commerce paradigm. Today, the payments value chain does not commence when the consumer is deciding on the method of payment but commences when they think about what to purchase, where and when. The traditional benefits of greater insight around customer spend patterns banks have enjoyed are slowly getting diluted. Technology firms (Apple, Facebook, and Amazon) and telecom providers have circumvented the advantage banks have held through a deeper insight into location specific and consumer behavioural patterns. To respond effectively, 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 will lie in the experiential partnerships they build with retailers or large businesses to understand customer behaviour demographics, items of interest, and spending correlations.

BoVA, for example, helps the car purchase lifecycle by providing customers with an estimate of the sell price of a car. By playing in the non-financial part of the buying process, BoVA increases the number of conversations with its customers and get better insight into buying patterns. Garanti (a Turkish bank) has a free M-app for personalized offers based on location and past spend, and estimates balances at the end of the month.

·        Open loop digital wallets. The digital wallet will increasingly become a reality. Some banks have responded to this trend through proprietary bank controlled apps. This however, fragments the digital experience, making it inconvenient for consumers to transact through multiple wallets. An efficient response would be to create an open loop digital wallet which is device, channel agnostic and bank product agnostic (incorporate products of various banks) - with merchant localization as necessary, to enable convergence and greater convenience. Additionally, tying open-loop wallets to an ‘individual’ merchant loyalty program will benefit both banks and merchants by providing a greater understanding of consumer behaviour. This insight can be used to roll out location specific offers for a combination of goods and payment methods. This can be done through a simple and configurable methodology, improving speed to market and allowing unique value propositions to be developed.

·        Use the information opportunity presented by real time payments. On the payments clearing and settlement side, the advent of regulation around real time payments infrastructure will strive to remove discontinuities in the payments value chain around low value payments, remittances and trade finance by reducing time for funds in transit and improving straight through processing rates. Along with that, the real time, information rich capability will help banks deliver value added services more effectively. Take for example the requirement for an enterprise-wise cash position for a corporate organization for better inventory and working capital management, or additional remittance data being provided with the payment to allow the recipient to automatically apply the payment to the appropriate invoice(s) in their accounting systems.

·        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 you get ready for it?

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. Currently, the payments landscape is dominated by a legacy IT infrastructure. There are different payment processing systems for individual products and channels like credit, debit, cross border, ACH, and cheques that reduce time to market for new products and bring in payments resilience issues. 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 whilst ensuring faster product introductions.

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

·        Open systems API-led payment services design where banks need to commence exposing services like execute payment, balance enquiry, etc., for better service commoditization. New regulations like PSD2 for payment services are being proposed to open customer bank accounts and payment services to third party developers and providers. This will enable banks to progressively expand their role into the e-commerce or m-commerce value chain instead of being confined to a payments processor role.

·        Pre-defined and pre-configured platforms and systems to support multiple integration points across devices and channels with ERP, finance and accounting and treasury systems. This will improve straight through processing rates as well as 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 3 to 5 years where only few will survive.

Will your bank survive the payments squeeze?

Read More

IT Services Disruption in Financial Services

Disruption in Financial Services technology - Interview with Len Rust (Click Link)


Feel free to leave your comments and thoughts
 

Read More

The Innovation Paradox

A common concern of customers is that their sourcing partner has failed to deliver innovation over the life of the contract. When I go into a presentation with a prospect, I am often asked – how will you be different from our current supplier in driving innovation into the engagement. There could be one of several answers why this is the case -

·     Current partners lack the capability or are culturally inept in bringing innovation to their clients

·     The customer has squeezed the partners so hard that they only  commenced making money  in Year 3 or Year 4 of a 5 year contract. Profitability or lack of it is the issue

·     Customer organization / stakeholder interest prevented an innovation culture

·     Complexity in sourcing makes idea generation difficult because of the lack of complete visibility of the business value chains

While all these are valid justifications to the conundrum, there may be a completely different perspective of the source of the issue. Let me explore the root cause by explaining the potential dimensions around innovation value zones -

The perception of innovation influenced and delivered decreases as we move from Zone 1 through 4. There are three reasons why technology sourcing partnerships fail to deliver innovation.

Firstly, more often than not, I have seen cases where the customer intrinsically expects the technology sourcing arrangement to deliver the Category 3 or Category 4 innovation given the competitive pressures or evolving business models contracting or threatening their market share. For them the innovation value zone is them and their consumers, while most technology sourcing partners understand their influence to be in a different value zone – between them and the customers division they influence or the overall customer process chain. The partners positioning of their innovation attempts lie predominantly in Category 1 or at best Category 2 innovation. Though these may have an indirect influence towards Category 3 or 4 innovation themes, most customers fail to appreciate their partner’s contribution and are dissatisfied with their performance on this dimension during the lifetime of the contract. This may stem from either a lack of understanding of the impact or more so a fundamental dichotomy in expectations between that parties involved. The further a technology partner’s offering is to a Category 4 value zone, the greater is the probability of disconnect on innovation delivered or influenced due to expectation mismatch.

Secondly, technology partners have a limited understanding of how to deliver parameters of success to help their customers excel in their innovation zones across the four categories. Most providers are unable to understand the impact of their services across various innovation zones coupled with a limited capability in how to engineer value creation for their customers.

Third, customers do not have scorecard metrics in place to measure engagements to periodically monitor alignment to the innovation zones. It’s important to define the impacted value zone clearly for the right outcome. This creates ambiguity between the customer and the partner in the quantum of innovation influenced and delivered.  

Read More