How to Leverage #NewPayments Transformation in Transaction Banking
Market pressures including new regulation, evolving customer demand, and competitive threats are transforming the payments ecosystem. New kinds of competitors are emerging, from start-up backgrounds, but also well established businesses are entering from non-payment industries. These new competitors are leveraging new technologies to offer new experiences to traditional banking customers. And not just in the consumer payments or retail banking space. It’s just as important for banks servicing corporate customers to adapt to survive and thrive in this New Payments Ecosystem.
The hierarchy of payment needs teaches us why we need to build a path to transformation that rests upon a strong foundation of #sleepatnightability. A successful evolution means fast and open payments that don’t break the bank.
To guide your journey to the New Payments Ecosystem, here are 10 ways transaction banks can follow the hierarchy of payment needs to jumpstart their digital transformation projects today.
1. Future-proof Your Foundations
Many of the most discussed new payment trends have been more closely aligned to retail banking. But change is coming to the banking industry as a whole that will effect both retail and corporate customers. One of the biggest changes for banks will be increasing transaction volumes across the board, combined with the convergence of payment types.
The rise of real-time payments without value limitations will drive a change in the way your customers, including corporates, want to be serviced. They will look to make more frequent real-time payments to improve their own liquidity standing, and take advantage of least-cost routing for their payments balanced against the associated service level agreements. Corporate customers will look to leverage increased choice when it comes to their payments, while continuing to require the same levels of security and availability.
To meet these evolving expectations, banks need deployments that can scale to that as yet undefined growth in corporate real-time transactions, without major Capex investments, and continue to service their existing business. Cloud-enabled hybrid models mitigate the risk around overestimating, or underestimating, the rate of growth. Implementing a solution with linear scalability that leverages your existing hardware helps reduce the cost to operate per transaction, providing a benefit for both you and your customer. With a hybrid model, you can "get in the game" now, without over-provisioning in your own environments, to be ready to capitalize on the opportunity the moment your customers demand it. You also protect the #sleepatnightability of your existing solutions by avoiding unpredictable transaction volumes on your existing mission-critical systems.
Global Non-Cash Transaction Volumes Experienced Their Most Rapid Growth in the past Decade, Growing 11.2% during 2014-2015 to Reach $433.1 Billion Increasing Pressure on Systems to Scale.
18% of Banks in the Americas Are Increasing Their Concentrated Investment in Modernizing Payments Technology to Meet New Demands; an 18% Rise from 2016.
2. Create Certainty in Your Payments
Corporate customers are exacting, and now they are demanding better transparency in order to manage their own customer feedback. Banks need to create certainty in payments, so that corporate customers can create certainty in their business. Customers are looking for in-flight tracking and information of their domestic and international payments; they want to know where their payments are in real time. Current services might satisfy your most important customers, but in this customer-centric era they need to be modernized to delight customers, or they will quickly be viewed as a disappointment.
Different service level agreements typically exist across domestic and international payments, but how can your customers be expected to remember this? They are high-value customers, and therefore expect a seamless experience across their dealings with you. Banks need to make payments initiation and processing as simple as possible. For your corporate customers, payments are the result of the business that the customer is transacting. That transaction must be smooth and simple.
There are two responses to this need to exceed customer expectations; the tactical or the strategic. A tactical fix might be just enough to deliver a new service today, but if it doesn’t provide the same #sleepatnightability as previous offerings then it will destroy customer confidence in the new rails. You need a scalable, available, reliable payments solution to meet new payment types, and quickly. And you need to augment your existing solutions with ISO 20022 and SWIFT gpi capabilities as a strategic move for your corporate customers to create certainty in your payments. You can make a quick tactical solve with hybrid deployments that leverage the cloud and "in-a-box" solutions to provide a rapid response to customer demands around new payment types, such as immediate payments, without impacting current solutions. At the same time, you can invest strategically in upgrading your existing solutions to be built upon modern technologies and messaging standards for access to the latest schemes, easy integration with your existing robust engine and other payment solutions, alongside the same level of NFRs.
As banks look to deliver consistent, high-quality services that differentiate them from their competitors, they often look towards hub technologies to help solve this. But new payments call for more than a hub. You need API manager capabilities to layer on an intuitive interface to move the payments to the background through the integration and orchestration of Open APIs. This enables you to deliver a consistent customer experience regardless of payment type. A better experience supports your customers to create certainty in their business and thus differentiate their own services from their competitors. Real-time information, reporting and certainty of beneficiary delivery supports your corporate customers to better service their merchant, micro-payments and instant service delivery markets. The good news is corporate customers will pay more for the bottom-line improvements that this quality of service drives; your investment will generate a return.
64% Of Corporate Treasurers Want for Real-Time Payments Tracking
47% Of Corporate Banks Say They Are under Significant Pressure to Increase the Amount of Remittance Data That a Payment Can Carry.
3. Protect Yourself and Your Customers
New payments are centered on customer experience, and security is a critical element in customer experience. Customers of all kinds, including corporates, will choose banks that provide better security for their payments because they will receive a better overall experience. To build market share, you need to build on security.
Secure payments are even more important in an ecosystem that is experiencing new fraud threats, operated by fraudsters at a global level. Open payments have the potential to create weak access points to the ecosystem, if not enabled in a payments-centric fashion. Real-time payments mean the window for fraud checks is shrinking. This is combined with heightened regulation around security, increased fines for failure to identify illegal payments and poor fraud-prevention practices.
But your corporate customers value the security that improved fraud protection brings to their business. A major driver for corporate banking is the reduction of risk and liability. Therefore, you must protect your corporate customers and your own banking business for mutual benefit. Banks can deliver value to corporate customers through improved security.
The equation is simple: Protect the customer from fraudulent payments + Protect the bank from illegal payments = improved customer experience and loyalty.
By investing in advanced analytics that support real-time operations, across KYC, AML and OFAC checks, transaction banks can leverage the wealth of relationship data (GDPR aside) from corporate customers for security services. With new security technologies you can identify threat trends at the macro and micro level by creating your own "consortium data" to augment your customers’ historical transaction and behavioral profiles. To effectively protect your most valuable customers, and yourself, ensure that your fraud prevention solution includes the latest technologies built for the modern payments environment. Machine learning, predictive analytics, behavioral profiling or even the creation of a custom neural network can be woven together for end-to-end fraud protection on every customer transaction. It’s about minimizing risk to maximize the business value for both parties.
4. Augment Your Authentication
The latest real-time payments rails will now be the standard for payments in the short-to-medium term. Banks are already realizing some of the use cases for instant payments. Combined with this we have an ever-increasing rate of technological change. This creates a challenge in developing security measures at speed to stay ahead of the fraudsters. These security measures also cannot impede the customer experience. Corporate customers are accustomed to authentication and authorization management processes, but they still want a smooth service. That means that for transaction banking, it’s about friction-right, not frictionless, payments.
New innovations in payments do not change everything when it comes to security, as long as they continue to run over the established real-time payments rails. Innovations will not change the way that payments are settled, but will change the rules for fraud checking. Irrevocable payments mean that fraud prevention must happen ahead of a payment, without adding unnecessary friction to the customer experience. This is complicated in a corporate setting. Many of the new delivery channels in the consumer payments space lend themselves to new methods of customer identification, e.g., biometrics built into smartphone hardware. But these developments are less suitable for the corporate environment. You need to be able to define new kinds of authentication, that suit your corporate customers and even tailor them to the technological developments they are embracing within their organization. Some of your corporate customers may be embracing more advanced employee recognition technology that you can wrap into their payments authentication.
Banks can allocate budget to develop agile security responses to new authentication requirements. This means they can deliver a solution that enhances the customer experience in a way that is tailored to their individual corporates. And the agility required to tailor these solutions can also be applied to innovate at speed, ahead of the fraudsters. Win-win.
Doubled from 2014
$500 The biggest U.S. banks are responding to the cybercrime epidemic with some of the biggest security budgets, spending around $500 million in 2016, more than double the $250 million spent on cybersecurity in 2014.
The U.S. Financial Institutions Cyber Security Market Is the Largest and Fastest Growing Private Sector Market. It Is Forecasted to Exceed $68 Billion by 2020.
5. Make Everything Real-Time, All the Time
Real-time payments are the new normal. The next challenge is to become a real-time bank, and this means breaking out of the siloed mindset. When a bank’s entire operations are real-time, this necessitates protecting the core, raises liquidity considerations, and changes authentication and authorization processes. This is where the industry is headed, as indicated by the real-time clearing and settlement capabilities built into Australia’s New Payments Platform, and SWIFT’s announcements that it is testing a homegrown distributed ledger technology to support real-time liquidity monitoring and reconciliation. So far, the focus for real-time payments has been in domestic settings, but SWIFT gpi is pushing towards instant cross-border payments across existing SWIFT rails. The industry as a whole has a lot of work to do before we reach truly immediate clearing and settlement, but real-time information is beginning to flow.
Banks must be ISO 20022-ready to manage complex data structures and take advantage of the major benefit of real-time payments; more data. Differentiating from competitors based on the quality of fraud services can be achieved through the intelligent analysis and application of real-time data in a real-time bank. ISO 20022, the modern immediate payments standard, is going to be critical to creating a real-time bank. For corporate banks, leveraging SWIFT gpi will help them achieve faster clearing of correspondent transactions. This is a very current opportunity to keep pace with competitors; over 2 million gpi messages have already been sent.
There is a series of manageable steps to true RTP that banks can start by implementing proven technologies, today. As the traditional boundaries of RTGS and RTP payments blur, so too will the operational boundaries. We are headed to ubiquitous real-time payments, and to get there banks need greater alignment between their RTGS and RTP workflows. And this will only further increase the drive to a true, single payments hub.
For example, we know that some countries in Europe, such as the Netherlands, are actively driving SEPA Credit Transfers away from their ACH silo into the new real-time world. But their German neighbors are treating real-time payments as a premium service, and charging as such. It’s likely the Dutch model will be seen as the way forward with the race to zero cost, resulting in increasing real-time payments volumes. The benefit of "going Dutch" is that the bank can remove a silo of payment processing, meaning cost savings.
Step one is to invest in a solution that can meet the current diverged market, as well as the future converged market, through least-cost or SLA-driven routing of the payment. Once banks achieve step one in the real-time digital transformation, they can look to extend value-added data services for corporate customers, including invoicing and financing, based on the rich seam that is the real-time standard.
58% Of Transaction Banks See Benefits from Instant Payments for Their Business Customers, and Are Actually More Optimistic on Revenue Growth than Their Retail or Merchant Counterparts.
6. Construct Agility
Faster payments is just one fuel injection in the acceleration of the New Payments Ecosystem. The speed at which a bank processes transactions, manages operations and innovates is increasing. It’s not enough to set full-speed ahead; banks need to be able to rapidly change direction. It’s the survival of the most agile. Agility enables a bank to meet the growing pressures from customers, regulators and competitors. Banks need to invest in fast innovation through the development of an agile business. This is so much more than DevOps. Your corporate customers pay for a consistent, accessible level of speedy service. They want visibility and transparency on their real-time payments, anytime. They also expect to be offered the latest and greatest services from your bank, before your competitors bring them to market. This requires your fast and open payments strategies to be developed in lock-step.
As always, this tracks back to the customer experience. It might seem counterintuitive, but you can simplify the customer experience and your digital transformation strategy with the addition of another layer. An intelligent integration and orchestration layer across payments and the business.
Banks can start by consolidating their systems under a single orchestration layer that overlays hub functionality onto historically disparate systems and starts to share components. In this way they can quickly roll out updates, mandate deployments, and new services and innovations to respond to customer expectations. Even better if that orchestration layer can be leveraged through configuration, not customization at the code-base level. Improvements can be built once and then integrated across multiple systems, resulting in operations being more agile, secure and efficient. The orchestration layer also helps to limit the impact on existing business and your core, protecting the all-important foundations of the bank.
7. Opt for Co-Innovation
The New Payments Ecosystem is actually a sub-sect of a much broader digital ecosystem. A truly digital bank will be part of a broader digital ecosystem that includes non-banking services and partners. You can’t do it all if you want to do it well, and delighting your customers is the biggest differentiator in the future of payments. Therefore you need to decide what is your core business, and partner for co-innovation on the rest to build a customized, holistic ecosystem around your corporate customers’ needs.
Lu Zurawski likens the New Payments Ecosystem to the street food movement; “Great food is no longer limited to traditional providers, i.e., restaurants. Some of the best food in the world is served at food trucks, and the customers eat from all the food trucks in their area to create their perfect global-cuisine mix. These new pop-ups have low overheads, and are able to pivot to respond to the latest trends and customer demands, always generating interest in their latest offering. But there’s still a wholesale supplier behind the food truck making sure they get good ingredients, kitchen supplies and everything else the trucks need to sell their finished product. The banks can become the wholesale supplier for the pop-ups without learning how to make pulled pork!”
For your corporate customers, the actual payments themselves are not their business. They are a means to conducting their business, and a way for you to support just one part of their portfolio.
Loans and access to treasury funds are a key part of their ability to grow and gain market share, and the same goes for your bank. Both yours and your customers’ business really relies on the big picture. You can monetize that bigger picture if you prioritize your customers' business.
Leverage your powerful customer relationships alongside an excellent user experience to keep the new payment players in the background. Open APIs can be used to allow FinTechs to plug their white-labeled services into your portal, but all financial services are driven by your brand. Then the additional services you offer from your co-innovation partners enhance your customers’ perception of your bank. This relies on an Open API solution that integrates and orchestrates these new partner offerings to protect your customers, your customer relationships and your bank. But you can leverage partnerships to build a fuller relationship with cross-border, SME, liquidity management and invoicing solutions, all under your banner.
7% Only 7% of U.S. Payment Executives Feel Very Prepared for Open Innovation.
76% Of Banks in the Americas Are Investing to Deliver Value-Added Services with New Capabilities.
8. Manage, Connect, Simplify
In the Open API-enabled New Payments Ecosystem, the connect part of the equation is actually the simplest piece. It’s the management of these new models that poses the most risk, and the most reward if done right. With a modern, smart payments engine you will be connecting your banks’ systems to more than just payments. You need to be able to manage the flow of a variety of data across your systems, at high volumes, and high velocity; you need to manage Big Data. Your core banking systems probably aren’t equipped to deal with Big Data in real-time, so you need to protect the old to avoid impacting the #sleepatnightability foundations, while building for the new.
An API orchestration layer will reduce the risk that open payments pose to your legacy banking systems, while positioning you to turn open payments into new revenue streams. Work arounds to manage market changes are no longer viable due to the scope and complexity of the New Payments Ecosystem, therefore you need to implement a solution that allows you to enter a co-existence strategy, isolating and protecting your core, while innovating at speed. You can protect your existing business while reaping the benefits of transforming to modern systems, at your own pace.
It's more than just connectivity. Corporate banks must manage the exposure of services and the influx of transactions via Open API to limit the impact on existing business, protect their core and release capacity for innovation to secure their future. It’s balancing the #newpayments with continuing to deliver the necessary NFRs for your current customer services. You can’t halt operations while you rip and replace, so you need this coexistence strategy.
The connectivity part comes second (once you have a management strategy), and it should focus on connecting securely to the new, broader payments ecosystem without limitations on your internal infrastructure. The critical thing for banks is to extend the ecosystem beyond payments for a holistic view of your customers, their business and your business. This will create opportunities for new services and revenue streams.
The addition of the API orchestration layer actually simplifies the digital transformation process. The simplification of payment processes and silos across the bank will lead to massive cost savings, which funds the digital transformation. And the resulting growth adds even more value to your bank.
57% Of Banks in the Americas Have a Clear Strategy around Open APIs for Third-Party Use.
65% Of Banks Believe APIs Open to Third-Party Developers Will Benefit Their Customer-Facing Proposition.
9. Accelerate Digital Transformation
As Moore’s law predicted, the rate of change is accelerating at an ever-increasing pace. His original theory might have related to computer processor chips, but its reflection can be seen in the modern banking space. Change is constant in the industry, and the challenge is to meet the current in a timely manner, without creating future hurdles; keeping it simple is hard.
Banks are required to handle all message formats and incorporate new development methodologies to improve availability lead times. This accelerated transformation is being driven by your customers, who want equivalent digital experiences from their consumer lives to be replicated in their corporate day jobs. But replicating the consumer customer experience on the front end has to be balanced with protecting the very corporate levels of scalability, availability and reliability on the back end.
A smart payments engine allows services to be exposed, as well as leverages standardized common processes across real-time and batch transactions to create economies of scale and speed in your innovation. As a corporate bank, your innovative offerings have to provide high value to your customers to merit the investment, whether home-grown or white-labeled. Then you can avoid cannibalization and disintermediation. You become more than a landing point for payments. The most effective step you can take towards this is to develop an enterprise-wide view of your bank, by integrating the multiple systems you have to give a single customer view that can be analyzed to drive the identification of that value. Invest in a payments hub enabled by Open APIs that can be integrated into that enterprise view, and that allows rapid configuration of those APIs to create new end-to-end payment processes across your systems. You need to rapidly identify and apply the insight back into innovative customer offerings in the accelerated digital transformation environment.
92% of U.S. Banks Say a Customer-Centric Business Model Is Important within the Banking Industry Today, and 92% Are Investing in This.
8% of corporate customers are pleased with the level of digitization their banks are offering. 60% openly admit that they would switch to another bank if it provided better digital tools.
10. Consider the Ecosystem
When we talk about the New Payments Ecosystem, it doesn’t only exist beyond the walls of your bank. Your internal ecosystem is an important branch that must be considered holistically in relation to any digital transformation project. New competition and changes in regulation have not yet displaced the role or function of traditional corporate banking payment providers, but they have disrupted the status quo. Banks are feeling the pressure to introduce transformative strategies based on multi-year plans, to deliver on the digital and open payments vision.
Going full "digital-native" is a different journey for every bank, and how you undertake it largely depends on your core value proposition. Especially when that value proposition differs between the retail and transaction sides of the house. The corporate banking team cannot make a long-term digital direction decision without considering the whole bank’s plans. Focusing on delivering front-end innovation is not a sustainable path, the implications for the back-end have to be considered holistically across the business to protect the foundations. A secondary consideration is how the traditional silos will work together to leverage transaction capacities, as they begin to overlap through the convergence of high and low value payment types. In other words, delivering high availability, transaction throughput, scalability and security needs to be protected as part of the journey. The hierarchy of payment needs reminds us that digital transformation is a multi-layered journey that has to be considered from the ground up, and with your existing payments business and solutions front-of-mind. Only then can we deliver on the opportunities of the #NewPayments ecosystem.
The need to solve for real-time payments is the most pressing challenge faced by many banks, and yet it also provides the perfect opportunity to start your digital transformation journey.
20% Less than 20 Percent of Corporate Banks Have Started Implementing a Digital Transformation Strategy.
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