Pay back time

NCR Corporation’s Alan Chow, Fidelity’s Randy Fluitt and Jon Armstrong of Accenture on the win-win possibilities of new payment channels.

The act of paying for goods has changed beyond all recognition since the days of physically handing over your notes or coins to the shopkeeper behind the counter. If a suspicious fellow, he may have held the dollar up to light or given the coin a tentative bite to determine its validity before tossing it into the till with a wink or a nod of thanks. It was a simple win-win situation – we got our groceries or our petrol and the shop got our hard-earned cash.

But today, we want more from the transaction than a simple exchange. We demand, and will actively seek out, new routes of payment that provide us with additional functionality, extra security and reassurance, and even rewards for our custom. In response, financial institutions are meeting the challenge of these migrating trends in order to provide the best possible service for their customer, and hence the edge in a highly competitive market.

To find out more about just how new payment channels are giving something back to the customer and the benefits that financial institutions are realizng in return, FST sought the insight of three experts in the field, Alan Chow, NCR Corporation, Randy Fluitt, Fidellity, and Jon Armstrong, Accenture

FST. Consumers are continuing to migrate towards diverse payment methods. What trends do you see and what is driving this migration?
AC. Convenience, reward programs and security seem to be the key drivers diversifying payment methods. Consumers want choice but will not compromise security for that choice of payment mechanisms. Moving forward, I see more stored value cards and other micro-payment mechanisms, such as cellphones and PDA/Blackberry, to provide that level of convenience. However, the top off for stored value has to be easy, and the stored value card/micro-payment program must be accepted in many different places; there were an estimated 354 billion transactions under US$5 last year. It should also allow the consumer to give money to others through an easy transfer. Add a reward program to that and you have a payment vehicle that consumers will easily take to.

In addition, given the need for security, I see an opportunity for secured internet payments – an intermediary, if you will – that will make the consumer’s purchase risk free.

Lastly, consumers want value wrapped around a transaction; secured transactions are critical, but more valuable if you can provide record-keeping, for example, on a stored value card or other micro-payments. Banks need to start providing more value and targeting their offers to customers, rather than commoditizing each payment stream.

Payments have been caught in siloed operations for too long and convergence is inevitable – perhaps not amalgamation of all the technologies into one, which would be costly and cumbersome – but into some common touchpoint or hub, if you will. In the meantime, new payment methods are being introduced through new technologies as the old payment silos are not easily modified to support these new payment methods. The infrastructure on which the payments are transferred should be reused but the processing within the banks needs to be modified. Companies (and banks) are using these new payment methods to pull market share. Face it, the market is pretty well saturated – the only way to drive revenue is to pull market and banks must find ways to differentiate themselves.

RF. Many of us remember the days when there were only a couple of payment methods – currency and checks, which were processed manually for many years before eventually being automated. But, over the decades, our industry has created more and more payment methods to not only reduce expenses, but also offer convenience to customers to gain their loyalty. First came credit cards, telephone banking and ATMs. Later, came debit cards as well as ACH, which enabled the electronic deposit of consumer’s paychecks and business payments.

The latest is electronic bill payment via the internet, an option rapidly gaining wide acceptance. With this payment method, more choices abound. Consumers and business owners may access their financial institution’s website and conveniently pay multiple bills from one place, or they may go to the various payees’ sites to pay their bills.

The result of this ongoing proliferation of payment options is that we’ve created an extremely complex system made up of multiple silos operating somewhat independently, with none of them going away. Most consumers and business owners use most if not all of these options at various times and for different purposes, depending on which offers them the greatest convenience at the moment.

FST. How well are financial institutions currently managing the growing demand for e-payments, remote branch deposits, etc? What challenges do they face in doing so?
AC. Banks have been reactionary in this changing market – thus allowing others such as PayPal to move into the payment franchise. There is a growing threat that the merchants will begin to control the payments due and offer payment methods based on cost. Banks need to regain control and the most successful are doing so through the use of ‘payment czars’ – who look at all the payments within the organization holistically. To succeed, these czars must be accountable to clear objectives and have the authority to make significant change – this has been a challenge in the past.

The trend will be to a holistic view of payments within the banks, common KPIs to measure payments and decisions based on the true value of the payment transaction. The existing silos, while efficient within themselves, are too brittle to be modified to handle multiple types of payments and until there is an equal processing playing field, decisions around payments will be made on a micro-level instead of a macro level.

Also, we have found from experience with remote deposit capture, that the epiphanies have been business rather than technological issues – managing change and help desk services, training tellers, software deployment, and security within the bank. One of the biggest issues banks face is ensuring their lines of business are connected – retail operations, branch operations, back office, risk, treasury management. That’s a key challenge I believe they will face in remote deposit capture.

RF. In actuality, financial institutions are responsible for creating the demand; consumers simply responded. After developing the technologies, they aggressively marketed them, often giving them away to attract business and garner loyalty. We see this in bill payment, with smaller institutions following the big players in offering it at no charge.

With branch capture, there is an irony in that small institutions were at the front of the line. They quickly recognized the cost justification because they often have branches in remote locations and areas with challenging terrains, which means courier costs are a greater issue. Also, their core systems are more nimble as compared with the large institutions’ legacy systems that require longer development time and more complex implementation challenges.

Merchant capture has leapfrogged to the forefront because businesses are clambering for it, and the advantages are there for the institutions, too. We see instances every day where clients are moving these projects up ahead of others.

The main challenge has been that when the early adopters encountered bumps in the road, others adopted a wait-and-see approach, which has had a slowing effect. But all in all, we feel our clients are handling the demand well considering the speed with which the industry is changing.

JA. North American banks have been quick to react to some of these trends to drive short term benefits. Specifically, they have been very effective at driving growth in proven products that the consumer are demanding, and are proactively trying to improve the transaction quality and reduce the cost of processing check based products inside the four walls of the banks through image enablement. Banks have also been very proactive in taking RFID card based products to market and are investing US$100 millions of dollars in the next few years to achieve this.

However, a number of these trends are only now emerging and non-banks have been more effective in specific areas at responding to the market opportunity. Paypal continues to dominate online P2P transactions. Emerging technologies such as biometric authentication and mobile payments have not yet been embraced by the banks. Western Union continues to control the largest share of the cross-border remittance market which is one of the most profitable payments transaction types. Finally, there are a number of merchant focused payments companies that are developing payments solutions that leverage ACH in innovative ways at the point of sale.

FST. How are market-ready and emerging technologies better enabling banks to adapt to these demands and to manage these payments methods?
AC. They are allowing banks to invest in their current payment franchise. RFID, contactless, biometrics – they are all facilitating the changes. The key here is for the banks to develop common touchpoints and matrices to measure the different types of payments. Value can be added through data mining, loyalty programs and event-based marketing.

Remote deposit capture is no longer emerging – it is reality, including at the ATM, and it channels into the existing check processing and clearing systems. This channeling is actually a constraint in the US, where the system is predominately batch. Internationally, this technology is enabling immediate presentment and clearing as the check processing systems are not constrained by an existing implementation. Clearing cycles are measured in minutes not days, and short decision timeframes are systematically enforced. This is driving risk out of the check processing system and bringing it on par with real-time electronic systems.

RF. In the case of Fidelity National Information Services (FIS), we have developed web-based, thin-client remote capture products because they are easy and economical to deploy and much easier to implement and support than thick-client software programs that have to be loaded on the PC. With our Commercial Capture Xpress merchant capture solution, all the merchant needs is a PC with an internet connection and a scanner provided by the bank. With that, the merchant is in business, benefiting from the full range of efficiencies and cost savings.

Likewise, in the area of bill payment services, FIS is investing heavily in the research and development of options that represent growing convenience for accountholders, helping our clients continue to earn the loyalty of the people they serve. We make it possible for our customers to proactively pay their creditors, and we now support bill presentment, a growing trend in which bills are presented to the customer via e-mail. We also enable them to establish payment rules. For example, if the electric bill is under US$100, pay it, but if it’s over US$100, I want to see it.

JA. We believe that the next generation consumer and wholesale banking payments capabilities will exhibit two key attributes: increased differentiation on the outside, and simplification of capabilities both inside banks and between banks. Emerging technologies will be critical to achieving this.

The key to differentiation will be the ability of banks to ‘embed’ payments solutions in a broader consumer, merchant, and corporate process or value proposition. For example, leveraging next generation portal and ERP integration technologies to enable accounts payable and receivable integration will be critical for corporate payments. Similarly, the banks’ ability to develop merchant specific payments processing solutions that deliver merchant cost reduction and an enhanced consumer experience.

Simplification will rely on breaking down the payments silos within banks (e.g. ACH, Wire, Check) and implementing new multi-payment product capabilities to drive significantly reduced cost (20-40 percent), lower operational risk, and the ability to drive enhanced capabilities for differentiation (such as real time processing, client driven decisioning at the transaction level, enhance data analytics and delivery and multi entity processing). The technology vendors in the payments space are just now developing these new enterprise payments architectures jointly with the leading banks.

FST. How are they leveraging these new technologies to improve efficiencies in their payment systems and provide a better service to their customers?
AC. Internationally rapid clearing cycles are providing earlier funds availability to their customers. This phenomenon is creeping forward in the US and cross-country clearing is faster (out of Fed district). Banks are also providing later close times in their branches to their customers, resulting in fewer holdovers. Commercial customers are benefiting from remote deposit capture through later deposits more in tune with their business day rather than the bank business day.

RF. It all comes down to speed and accuracy. The electronic payment of bills is obviously faster and more efficient, and the technology enables the customer to maintain enormous control through the use of alerts and user-defined rules. All these new technologies make it possible to facilitate payments on the day they are due, which could potentially eliminate float.

The institutions doing the best job of leveraging technologies are open to and actively using the entire gamut of options – internet banking, cash management, ACH, branch capture, merchant capture and, of course, ATM, debit cards and credit cards. These are the institutions that will excel, because it’s been proven that customers will stay with an institution that meets their need for convenience and flexibility.

JA. Banks are leveraging these industrialization concepts of simplification and differentiation to lower transaction costs by up to 40 percent. For example, check imaging technologies are being used to reduce the bank check processing costs in the US from approximately US$8 billion to US$4-5 billion by reducing transportation costs, paper processing costs and reducing fraud and losses. At the same time these technologies will enable consumers and corporates to get more online and up to date information on check deposits and payments and improve the ability of banks to manage exceptions.

Similarly, ACH and Wire platforms are being rationalized and upgraded to drive STP across existing payments operations groups. This will both significantly reduce the banks processing costs of these payments but also enable enhanced data services (such as alerts on transactions) to be proactively pushed out to corporate and consumer customers.

FST. What do you believe the payment landscape will look like in 10 years’ time – what are the factors likely to determine that?
AC. I see a mix of options still; consumers will continue to enjoy niche/tailored approaches. Harmonization will begin to occur as checks and ACH begin to converge and complement, rather than compete. The major processors will look to harmonize as much as possible in order to standardize processing, but no payment types will truly disappear. Rather, I see that the continued introduction of new payment mechanisms, including biometrics, RFID, new wireless technologies, and even implantable payments (don't laugh, this will be coming).

Technology will not be outstripped by transaction volume so real time will become the norm – batched or delayed transactions will be decision-based for the convenience of the originator (i.e. to match transaction flow/ cash flow) and originators will pay.

The European market may set a commonality standard for us through SEPA and cross-border payments. Banks in Europe will be forced to harmonize their payment structures due to regulation especially around fee structures, which will drive a next generation of mega-processors.

Check volumes will be almost non-existent but will still remain – although the clearing will be instantaneous. Contactless will be the norm and with the pervasiveness of cellphones will be the standard person-to-person payment mechanism.

It will be possible to collect groceries and walk out of the store. RFID labels on the products will be read and the payment chip in your cell phone will be activated – it will also be tied to a biometric identification in order to provide security over the transaction. Speed and convenience are the criteria of the future. Technology will be accepted as a solution for payments, and biometrics as a solution for security.

RF. We will certainly begin reducing the number of payment methods. Currency will decline, and chances are the forces of pricing will all but eliminate checks. Whatever checks remain will be transmitted via ACH, and we could even see billers and banks banding together to form networks of their own where they settle on each other. We also expect ACH to allow customers to transfer funds from one institution to another. While banks may initially resist this, they will be able to discourage the transfer of money out of their establishment by imposing fees on such transactions, and in the long run they will be in a better position to establish themselves as their customers’ primary financial institution.

Internet bill payment will increase, with more bills and other documents such as tax returns presented online. We expect debit cards to increase, with credit cards possibly holding steady. As for the ATM, it’s likely to still be with us, but its main focus will shift away from dispensing cash and toward higher-level uses.

The web-based products in development today will continue to make it possible for smaller institutions to offer sophisticated services, which will help small business compete more effectively.

JA. There are three key scenarios that we believe are likely in the next 5-10 years. First, one in which the banks are successful at continuing to differentiate their payments capabilities by ‘embedding’ their payments solutions in corporate, merchant and biller processes. In addition, banks will have simplified their internal and bank-to-bank payments franchises. We believe that if the North American banks are successful in this scenario they will be able to increase payments revenues by around 50 percent in the next five years. Key drivers of this scenario will be the banks: aggressively investing in next generation payments capabilities, developing a balanced payments value proposition for merchants, continuing to work with regulators and payments bodies to drive rationalized payments infrastructure, and banks organizing to enable new payments solutions across traditional operational silos.

The second scenario is one in which the banks achieve a differentiated, ‘embedded’ payments business but fail to simplify the payments infrastructure. We expect that the drivers of this lack of simplification will be the banks: not investing in core legacy system replacement but ‘layering-on’ new technologies to core payments systems, inability to manage inter-bank governance structures and influence regulators, not organizing their payments business internally to enable accountability for simplification across existing organization silos.

The final scenario is one in which banks fail to differentiate their payments products but are successful at simplification of their payments businesses to drive out operational efficiencies. The key drivers of this loss of differentiation will be: the banks inability to develop a balanced payments proposition for merchants and billers, technologies and payments standards continuing to commoditize the corporate and consumer to bank relationship, emerging competitors effectively establishing consumer payments brands that drive payments to lowest cost banking products (e.g. ACH), and the lack of banks investing in next generation capabilities to enable data rich embedded payments solutions.

Alan Chow
Alan Chow is vice president of NCR Corporation’s Payment & Imaging Group and one of the original Teradata database software engineers that pioneered the development of the data warehouse industry.

Randy Fluitt
Fidelity National Information Services’ gained its current Evecutive Vice President of Payments, Randy Fluitt, following the acquisition of InterCept in 2004. Fluitt is a senior-level leader with proven abilities to maximize the results associated with delivering outsourced products and services.

Jon Armstrong on trends in the payments market
The North American payments market is growing relatively slowly (3-5 percent transaction growth per year) but continuing to restructure rapidly. In terms of consumer to business payments they are a number of key trends that will be important in the next 3-5 years for banks:

• Continued growth in use of electronic payments types (10-15 percent per year) e.g. credit card, debit card, ACH to replace cash and checks.
• Emergence of debit (both offline and online) as the key driver of this electronic growth going forward.
• Consumer demand for new payments form factors and technologies such as RFID enabled card transactions, server-based payments types using new authentication technologies (e.g. Peppercoin and Pay By Touch solutions), and the early emergence of mobile payments.
• Increasing demand for fraud and security solutions built into payments on-line, at the point of sale and for recurring transactions.
• Continued prevalence of loyalty, reward and co-brand schemes to drive consumer preference and benefits.

There are four key drivers of these changes. First, legal and regulatory challenges to the payments market that will impact banks ability to deliver innovative new payments types and potentially impact the price they can charge merchants for them. Second, technology and business model enhancements in the point of sale environment, payments form factors, authentication technologies and payments standards (for example internet enablement of POS terminals could be used by the email based P2P payments providers to compete at the merchant point of sale). Third, evolving consumer, merchant and biller buyer values (for example the ongoing push for merchants to optimize their cost of accepting payments will push new payments types and technologies to drive consumer preference to lower cost payments types as we have seen with PIN prompting for debit in the last few years). Finally, competition between banks and also emerging competitors that are looking to drive innovation in payments (e.g. Google, Paypal, Pay by Touch, Debitman)

“Banks have a number of significant challenges to overcome to respond to market changes,” Jon Armstrong. These include:

• Need to migrate revenues from one profit center to another over time (i.e. cannibalize some existing revenue pools)
• Overcoming the historical perception of not being merchant friendly
• Timing the investment in yet unproven scalable payments technologies that are unlikely to drive significant profits for the next 3-5 years but will be required to have a “right to play” in the 5+ year time frame
• Complexity and fragmentation in the inter-bank clearing and settlement market to enable innovative new payments solutions and information based payments services
• Managing large scale investments in new technologies within the banks to overcome legacy environments
• Overcoming the inertia in the point of sale environment to provide an incentive for merchant and billers to invest in new and emerging technologies