ACI Worldwide's Payment Industry Media Centre

Reflections on Toronto

2011-10-04T10:34:00.000+01:00

As we're wrapping up the loose ends from Toronto, the thing I keep coming back to is how different the conversations were than they have been in the past.

I spoke to a lot of people, primarily from financial institutions, and it almost didn't matter what technology they were talking about - they all had the same concerns. Rather than fancy ideas or demos, they were all concerned about the practicalities. They are looking at technology investments that they can do now, and that will deliver real benefits quickly.

They all wanted to know how it would work, what it would cost and how many times we have done it before. Everyone wanted proven systems that they could predict how long it would take to implement and what ROI they could expect, rather than to be a guinea pig.

It felt like we were having mature conversations about complex systems - nobody seemed to want to gamble on something that isn't proven.

The downside to this, of course, is that a lot of innovation will be a gamble - every time you spend money doing something that hasn't been done before then there is a chance that it might not work. But innovation is essential for the industry to move forward.

I wonder how these two attitudes will balance out over the next few years, they seem quite contradictory but perhaps once banks have a solid foundation of proven systems, they will feel able to take the chance of building innovation on top.

Paul Thomalla
SVP & Managing Director EMEA
ACI Worldwide

The double gold for Financial Institutions – Loyalty and Profitability

2011-09-29T09:30:00.000+01:00

There are two issues that always come up when you get a large number of bank executives in the same room – loyalty and profitability. How can you maintain and grow your customer base, and how can you maximize the profitability of the services you offer those customers?

Loyalty and profitability are both underpinned by innovation.

Innovation on the front end of what you deliver to your customers, such as mobile or contactless for example, comes with one particular challenge – it isn’t enough for one bank to launch a new offering. True success will only come with standardization. (Imagine the global card landscape if we didn’t have Visa and MasterCard setting the standards for example). Compatibility mustn’t be allowed to become a barrier to adoption – so we mustn’t fight over the technology, instead we need to agree on standards and then add value to them with customized offerings. (Credit cards that award loyalty points for your favourite football team anyone?)

Innovating for profitability is very different. It is behind the scenes on the back end – taking a fresh look at your technology infrastructure and ensuring it can deliver the highest levels of efficiency. It isn’t enough to rely on siloed, legacy systems – to see real profitability, and reduction in duplication and redundancy, financial institutions have to consolidate systems into one solution that can deliver the processing and scalability it needs.

I know that innovation can be a difficult word in some banks – innovation may be seen as ‘expensive’, ‘risky’, ‘a waste of time and resources’ or ‘delivering no real value’. But I think it is something different. Innovation is simply part of what everyone has to do. It wasn’t that long ago when not all current / checking accounts offered debit cards – now you wouldn’t consider it. Mobile services will be the same. It also wasn’t that long ago when accounts were reconciled manually – again, inconceivable now. Innovation isn’t risky – it is essential.

Mitch Armstrong
Director of Solutions Consulting
ACI Worldwide

Innovation meets old fashioned banking at EFMA

2011-09-29T09:26:00.001+01:00

What better way to spend a glorious late summer's day in Paris, than to be locked in the basement of the Marriott hotel for EFMA Cards & Payments 2011. But I can honestly say the day was lit up with some impressively juxtaposed sessions and interactive controversy.

Visa's Peter Ayliffe and PayPal's Laurent Le Moat warmed up the audience with impressive presentations of their respective ubiquitous payments infrastructures, with Visa firmly focused on the future, with a vision of the "Mobile as remote control for financial services", and announcing the launch of Mobile P2P payments in Oct 2011, while PayPal cheekily claiming that they did all that last year and are now extending their reach beyond payments right to the heart of the retailers relationship with their customer trough a series of acquisitions.

This mood of innovation and optimism was quickly grounded in by reality the following panel session where three real bankers discussed their most important issues, which after repayment of state aid, included: risk and limit setting, customer acquisition, cross selling, fraud, cost reduction and other stuff that generally contributes to a banks P&L.

However innovation is still seen as key, but tempered with realism and pragmatism and summed up by the comment that "Only 5% of innovations come from banks, but innovations that survive will be adopted by the banks"

Unfortunately we then turned to the ivory towers of the regulators and legislators

While I would dearly like to report a breakthrough, again there is nothing new. However the following Q&A session was very lively with the audience less than supportive of the view that the regulators were helping the payment market in Europe.

After lunch Discover presented how it is building a global acceptance network for their Discover and Diners Club cards, by partnering with local networks like JCB and CUP. Not only do they now have more acceptance points in China than Visa, they also seem to have done the SEPA cards thing on a global scale in only 2 years.

Other highlights from the day:

- Peter Ayliffe describing himself as the "Poor sad old guy" when told "We don't accept phones".

- PayPal's claim, "Not disintermediation - but a better user experience"

- The Chair (Annich McIntosh) asking the audience for comments on how to "get around SEPA".

All in all it was a good start, but I still hope to hear a greater focus on delivering both convenience and value to our end customers?

Paul Love
Solutions Consultant
ACI Worldwide

The customer is always right

2011-09-21T12:52:00.001+01:00

It’s a fact that when it comes to banking and payments, customers have high expectations of reliability, efficiency and dependability. This has not changed over the decades.

What makes it more challenging for banks today is the speed at which transactions occur, along with the sheer growth of the number and complexity of payments. More and more payments are being executed in real time as more customers use online services and mobile banking, moving away from ACH to immediate payments.

Real time processing for customers means real time everything—real time status information, real time settlement, real time balance positions, real time response to questions, real time resolution to problems – especially in the light of regulations concerning liquidity such as Basel III that demand a intra-day view of liquidity.

Adding in the development of more payment destinations, more settlement paths and more originating channels increases the complexity of the transactions – and the information that accompanies them.

However, banks can differentiate themselves in the amount and timeliness of the information around the payment itself, and it is this that will help one or two banks stand out from the crowd in the future. The question is – which banks will it be?

Craig Ramsey
Wholesale Solutions Lead

Hubs. Time to make them work

2011-09-20T11:30:00.001+01:00

Payments hubs have been a talking point for a number of years now. Once envisioned as the 'silver bullet' for payment system consolidation, the reality has become somewhat different.

I've talked to a lot of different banks over the past few months, including some at Sibos, about the status of the hub projects they have undertaken. The overwhelming message I'm hearing is that many banks have built their hubs from the 'technology up', so to speak.

They have consolidated systems and data because the technology will let them do it, rather than to meet their specific business functionality. They then have to bolt on additional components to let them actually manage the payments and add value to the entire processing chain. This has resulted in unnecessary complexity and has decreased resilience and manageability of the environment. I hear of banks having to rethink or even abandon their hub projects because it has either proved too difficult, too expensive or the business benefit has simply not materialized

Now, don't get me wrong, this certainly isn't the case everywhere - there are some banks who have delivered the hub concept successfully and are providing real value to the business. But they do seem to be the exception rather than the rule.

I know there has been debate in the industry recently about the future of hubs, but I don't think they are going away. And nor will the debate. But, I do think there will be a rethink about how these projects should be approached and the business side of the bank will need to have greater input to make sure the finished solution really does make a difference.

Craig Ramsey
Wholesale Solutions Lead

A conflict of interests?

2011-07-25T09:18:00.002+01:00

I've been thinking a lot recently about the different pressures that banks in Europe are facing. It's a tricky business working in payments in a bank today - trying to decide on strategy and how the bank should move forward. Every bank exec I have spoken to recently is having to balance many different challenges and work out which ones they should prioritize.

Obviously there are legal and regulatory updates, or mandate requirements. No question - these have to be met.

But what's next? Round every corner someone telling you to 'be a good EU citizen' - embrace European initiatives and help drive the critical mass to make them a success. Or perhaps you are being told to be a ‘good country citizen’ and focus on local initiatives - 'most payments are domestic - that's where volumes and revenues are so that's where you must focus'.

And then there are the banks-specific projects - especially if your bank is part of a much larger global organization you could have challenges of becoming a good international player, or working on specific technology projects that are dictated from above. I'm sure if this were a conversation rather than a blog we'd come up with a whole list.

So how do they balance all these different pressures? There are lots of things I believe can help, and absolutely I am confident that with the right technology in place the bank will have the systems that give them the flexibility to meet changing demands from customers, regulators or internal. But actually it is more than that. Technology can only do what you want it to do, it can't tell you what you should do.

Therefore the conclusion I have come to is that communication internally is the answer. It is essential that all the different champions and stakeholders come together to agree what they all need and to jointly prioritize what order things should be done in. Often, when these conversations happen, we actually find that there's more overlap and duplication of necessary functionality than anyone expected.

Once you know what you want to do and have got buy in from the people who care, it is essential to review the priority list on a regular basis, and to keep everyone updated on progress. If you decide that the first step has got to be consolidation of existing systems before you can roll out your country specific initiatives, but in doing so it will tick the boxes for the EU advocates, then keep telling them how things are going, and when you will be delivering what they need.

It isn't an easy job (but hey - nobody said it would be) but I definitely think that it doesn't have to be too difficult as long as everyone internally understand that it isn't who shouts loudest who wins, it's what is best for the bank in the long term.

Paul Thomalla
SVP & Managing Director EMEA
ACI Worldwide

Combating Online Banking Fraud - A Top 10 List

2011-06-23T11:53:00.003+01:00

For many financial institutions, the recent ruling in the US holding a bank responsible for fraudulent losses from business accounts has raised a few eyebrows because, traditionally liability has remained with the customer for business accounts. However, the court ruled that the bank has a responsibility to protect its customers through the use of fraud detection mechanisms.

For most banks this just means doing what they do already. The fraud detection systems used today are comprehensive - looking at payments from different organizations, across different channels, all day every day, and spotting anything that seems even slightly out of the ordinary. As an industry we share information about types of fraudulent attacks, or even the IP addresses used by criminals to try to gain access to online bank accounts, and the fight never stops to stay one step ahead of the fraudsters.

If banks want to check that they are promoting reasonable efforts to prevent and detect online banking fraud protection for their customers, here is a checklist of ten of the most important features of successful fraud prevention and detection:

1.Apply multi-factor logon authentication for online banking systems - such as tokens with one-time password or Adaptive Authentication (risk-based authentication).
2.Utilize real-time analytics - monitor transactional behavior to determine whether activity is standard or anomalous for that customer. When high-risk activity is detected, action can be taken in real time or near-real time to stop the transfer of funds from the customer's account. Funds can also be held until customer validation can take place (see #4 below).
3.Employ profiling - include non-financial information (IP address, login activities, and device characteristics) to build customer profiles which can be stored to monitor ongoing behavior.
4.Make use of out-of-band notification methods- utilize phone call, text message, e-mail, etc to confirm activity with customers before transactions can be completed.
5.Maintain anti-virus software - Be sure to recommend your customers keep it current on end-user machines. While not fool-proof, it can stop lesser forms of intrusion.
6.Maximize password management - Ensure password management best practices are enacted (e.g. change password every ninety days, minimum length, combination alpha-numeric, varying history, etc.).
7.Leverage dual approval and limit management capabilities in your online banking tool -End-users with transaction initiation or approval entitlements should not also have administrative rights.
8.Implement token management at ACH or Wire release - this approach provides another layer of authentication prior to finalizing the transaction.
9.Employ a prescriptive, layered approach to security - utilize security tools within your online banking solution (e.g. multi-factor authentication, limit management, etc) with a fraud prevention and detection solution (e.g. profiling, analytics, etc.)
10.Education - keep it simple but constant. Partner with your customers to ensure they are aware of today's threats and know what tools are available today to protect themselves.

Michael Grillo
Senior Product Marketing Manager
ACI Worldwide

Knowledge-based innovation

2011-06-20T11:47:00.002+01:00

All banks benefit from improvements to the payment market’s efficiency. This is where experienced software professionals can help the payments community achieve more in less time, particularly in complex global markets. Software partners are in a position to help deliver innovative services with their available proven solutions and tools. When a bank has a question, there is often a good chance that a global solution provider already has the answer, or has gone some way to finding the solution. In this space there is little reason to go it alone, or take on the risk of re-inventing the entire payments infrastructure.

The latest stage in the evolution of the payments business is the development of fully functional payment services hubs that enables agile payments processing from common components across payment types. These hubs enable banks to offer new products, services and customer channels, safe in the knowledge that they have the back-office processes and functionality to meet customer demands, whatever they may be. Any roadmap in wholesale or corporate payments innovation is likely to direct financial organizations towards the adoption of a payments hub.

By providing core services on time and in the most effective way, banks can ensure that customers remain happy to do business with them. They should avoid going after the latest whim or technical fashion without ensuring that they can continue to deliver the business basics.

The payments industry has changed dramatically over the past few years and, like any other evolving business, will continue to change in the future. Innovation is what keeps the industry moving, but it is all too often regarded as a major step forward in terms of technical capabilities, without due consideration being paid to the business models and operations that were the initial source of competitive strength. In reality, innovation is about ensuring that products and services that the customer wants now and wishes to have tomorrow can be delivered at the time that they want them and at a price they are willing to pay.

Craig Ramsey
Wholesale Solutions Lead, EMEA
ACI Worldwide

Innovating to better compete with existing and new players

2011-06-17T10:06:00.001+01:00

The need to develop new customer propositions has become more important recently because of the new market entrants that many claim are eroding the traditional bank’s business in the payments space. It is a common topic of conversation at industry conferences, but in reality these new entrants invariably work with banks to deliver final settlement. The far more pressing concern is that these new entrants are talking directly to customers. What’s more, as new players push harder to offer competitive banking services, we can expect legislative demands to be increased and the playing field to be leveled. To ensure innovation, it is important to explore and establish ways of working alongside these new players.

Part of the challenge here is that banks are not often regarded as innovators or leaders of innovation. New entrants find it much easier to adopt these titles, and are able to move with greater agility and come up with unique propositions. Traditional banking houses are still thought of as being the safest environment to move money in, but this level of trust needs to be seen alongside innovation.

Small value cash and card retail payments between consumers are the target, and person-to-person (P2P) payment service providers like PayPal and now Facebook are already strong competitors in this space. However, as already noted, revenues are low for these types of payment.
Remittance services are also popular among a significant consumer cohort, and payment companies are keen to offer services that front-end the traditional banking systems. The key target of international payments – those with high value and strong revenues – are the ones that really need protection. Critically, that will only happen if the banks provide the products and services that customers want to buy.

Thus, banks should not shy away from working with these new players, particularly as they can still take the most important role, that of settlement. Since settlement must be performed in a secure, risk-free and guaranteed manner, traditional banks are still best placed to provide it. Currently, only the banks offer that platform, alongside the legislative constraints of doing business. Banks should provide exemplary settlement services, ensuring that the new players are treated as well as any other customer. In this more diverse marketplace, banks need to ensure that their innovation is directed towards providing a seamless service to all existing and potential customers, regardless of the nature of the contact point.

Craig Ramsey
Wholesale Solutions Lead, EMEA
ACI Worldwide

Innovating the customer proposition for true differentiation

2011-06-16T12:19:00.001+01:00

A broad range of activities – and not just cost cutting – must be adopted if a financial institution’s market share is to be maintained and managed, and are imperative if market share is to grow.

Consider a scenario in which every organization provides the same processing to ensure regulatory compliance. In this situation, there is little a customer can do to determine which bank is deserving of his business, other than price. Conversely, a bank that is able to clearly differentiate its product offering has a unique selling point that can attract and retain lucrative customers. Banks also offer value-added services to their clients as a means of moving away from commodity pricing and into accurate pricing for the real value that has been added.

Innovation in payments is invariably not about how the payment is processed. Ancillary services to payments are frequently more important to corporate customers: the provision of loans and liquidity, availability of data in real time, or pooling services and general cash management. It is the total offering that creates a fully rounded customer proposition, and whichever is chosen, the role of payments is to support these activities. Banks should therefore ensure that their payments service is able to facilitate these key areas.

Craig Ramsey
Wholesale Solutions Lead, EMEA
ACI Worldwide

Driving innovation in a cost-cutting environment

2011-06-15T14:39:00.001+01:00

An ongoing squeeze on budgets, combined with unprecedented levels of external scrutiny of both operations and performance, has created a situation in which improving the cost base has become paramount for most banks. Nonetheless, cost cutting need not be an insurmountable obstacle to innovation. Indeed, it may be a key driver of it.

The new market landscape has caused financial institutions to look for ways to reduce the time required to see a return on investments, which in turn has driven demand for a more agile business environment that is able to bring new services and products to market more quickly. As a result, improvements to the operational framework have become essential, and many banks’ IT departments have begun the process of seeking out ways in which technology can be improved to achieve these ends. A number of common themes and strategies are emerging that can be viewed as useful starting points for bringing an innovative approach into the organization.

1. Leverage existing assets: perhaps the most obvious place to start is exploiting existing assets more efficiently and effectively. This can be achieved, for example, by making the most of vendor-supplied systems where new functionality is often provided for the modern market
2. Scrutinize new technology carefully: a number of IT departments are also choosing new middleware toolkits to bring existing solutions into the new architectural view, but care must be exercised here. These kits often promise to simplify the complexities inherent in the existing integration environment while maintaining the same level of payments processing. But this is not always the case, as some banks are now discovering
3. Use the consolidation opportunity: consolidation will inevitably save more than making system environments more complex, and is a critical cost-saving action that a number of banks are undertaking
4. Look carefully at straight- through processing: improving bank operations is another important cost-saving measure under consideration
5. Tackle fraud effectively: a bank can improve cost efficiency through better fraud prevention of payments – not just to avoid regulatory fines, but to ensure that the payment is stopped in-house rather than at the next bank in the chain

Craig Ramsey
Wholesale Solutions Lead, EMEA
ACI Worldwide

Payments innovation in wholesale banking has never been more important

2011-06-14T15:19:00.001+01:00

Whether it is bringing new products to market or offering existing services at a lower cost, innovation in wholesale banking payments is now an important aspiration. Innovation is often seen as the means by which banks may protect current revenue streams and open up new income sources to replace those lost through regulatory change. As a consequence, it is innovation that has become key to maintaining a competitive position in a crowded market, ahead of projects that focus solely on cutting costs.

However, driving innovation is far easier said than done. Where do you start and how can you mitigate risks? A simple starting point can be to look at the way in which the world is changing and aim to meet the aspirations of your customers as their needs change.

For example, in a relatively short space of time, internet-enabled smart phones and tablets have become the dominant technology in the consumer environment, and are now causing traditional methods of access to retail and wholesale banking to be re-thought and reconsidered.

Just as smart phones have become wide-ranging communication tools, social networking sites are an increasingly important channel of communication. This is relevant to the payments businesses because they have become the chosen method of communication between consumers. This presents significant possibilities, of which the development of a Facebook payments subsidiary is perhaps the most obvious example. However, the developments in communication habits enabled by rapid advances in technology are also becoming increasingly relevant in the wholesale and B2B space as the expectations of a bank’s corporate customer are shaped by the daily experiences of its individual staff members.

The other critical factor in shaping the new payments landscape is inevitably that of regulation. Directives like SEPA in Europe and the Faster Payments initiative in the U.K. were intended to improve the retail customer’s experience, but have had a more dramatic effect in corporate banking where they have driven a number of technological changes.

The successful banking business will embrace this changing environment as an opportunity to innovate and provide a higher level of care and superior service to corporate customers. Without doing so, financial institutions will quickly be left behind.

Craig Ramsey
Wholesale Solutions Lead, EMEA
ACI Worldwide

How can banks tell if they need to review their payment systems?

2011-06-09T16:19:00.001+01:00

I have talked a lot recently about legacy payment systems, the problems they can cause within financial institutions and how to approach change, but I often get asked how companies can ascertain if they would benefit from evolving their payment systems. I think there are ten questions they should ask themselves:

1. How do you compare with your competitors when it comes to the sophistication of your offerings?
2. Are your customers happy to stay with you, or is the flexibility on offer from your competitors overcoming their loyalty?
3. Are the services you are providing to your customers giving them greater value, and are they willing to pay for it?
4. How far can you tailor the services you deliver to your customers? Are you offering a fine-tuned Ferrari or an assembly-line Model T Ford?
5. Do your customers get the services they want when they want them?
6. Do you know what your customers’ overall positions are? Are you able to tell them?
7. Does information get used and shared by the whole financial institution? Or is your customer talking to three different businesses?
8. Can you take on board white labeled products from third party specialists and use them to efficiently expand your range of services?
9. Are you able to provide your own specialist services to other parties for them to white label?
10. Do you know whether you would benefit from in-sourcing or out-sourcing payments services – and are you in a position to do so?

I believe that honest answers to these questions will make it clear if an organization should start seriously thinking about moving their payment systems into the future.

Louis Blatt
Chief Product Officer
ACI Worldwide

What do payment systems of the future look like?

2011-05-26T16:44:00.000+01:00

As financial institutions review their payments infrastructure, it is likely that many will decide that they need to start to consider how they evolve current systems in the future, if they haven’t started already. But where should they aim to get to?

If today’s payment systems are siloed, non-compliant, inflexible and uncommunicative, the payment system of the future is the diametric opposite. Whereas legacy processes and architectures can throttle new initiatives, and strongly limit the ability of any financial institution to be proactive, advanced systems and architectures facilitate the achievement of both revenue-raising and cost-reducing strategies.

The answer lies in payments hubs. These have been enabled by new service-based software technologies that have matured and opened the door to creating a central, unified platform for payments. The accepted vision of the future for payment systems is one or more payments hubs, built on modern technology and using open standard concepts. A hub is a central platform that breaks down internal, vertical barriers to integration. Rather than having multiple systems for different channels, payment types or business units, mature payment hubs can provide a centralized processing service for multiple channels and payment types.

Some banks may aim to consolidate everything onto one hub, but more realistically, at least in the medium term, will be consolidating possibly dozens of systems onto a smaller number of hubs, perhaps one per department for example. The hub processes input data and then routes it intelligently to the relevant downstream application such as check clearing networks, ACH networks or DDA systems. At the same time it provides a single feed to all centrally managed utilities such as risk management, settlement and reconciliation and customer services, as well as value-added capabilities such as data analytics and product enhancement. As a result, hubs can integrate all payment types onto one or more platforms. They can also concentrate business processes such as customer service, fraud prevention and risk management into single service units that are shared by the entire enterprise.

Payment hubs may take one of a number of forms. But the essential characteristic that underpins them all is agility: the essential combination of speed and efficiency that enables financial institutions to realize their strategic imperatives without compromise.

The vision of a truly agile organization will have all forms of payments integrated on a consistent payment system that will handle each phase of the payments process. But agility is not just about the underlying platform. Agile financial institutions have the tightest focus on the customer regardless of channel, payments type, system, or business silo. Everything the financial institution does regarding payments, including channels, processing, product development, sales, marketing and systems, is geared to the needs of its customers. That often requires a significant change in thought processes and business operations to accompany the new flexibility and capabilities of the underlying IT platform.

Payment hubs enable financial institutions to update or replace functionality on a service-by-service basis. They generate a return on investment by decreasing total cost of ownership and improving the ease with which new services can be introduced. In particular, they can significantly reduce the costs of implementing and operating IT management processes and tools because the associated labor costs are much lower. Financial institutions can focus on growing their business.

Louis Blatt,
Chief Product Officer
ACI Worldwide

Let’s hear it for the payments big boys

2011-05-25T10:30:00.003+01:00

Since the financial crisis, supervisors across the world have been trying to work out ways of dealing with banks deemed to be ‘too big to fail’. The most obvious solution (and the most simplistic) is to chop them up into manageable bits so none are too big or interconnected to be allowed to fail, because the current received wisdom seems to be that banks that are smaller and more modular are less of a risk.

But from a payments perspective, there are two counter-arguments to this approach.

Firstly, the big banks that operate, and offer payment services, internationally are actually made safer by their geographical spread – there is no concentration of risk on any one particular economy. And that’s an important element in terms of regaining customers’ trust.

And the second point is that the banks that operate and provide payment services internationally offer clients something that others cannot:
- A consistent level of service across all points of contact,
- The benefits of payments’ best practice from their widespread experience,
- Better management of their clients’ cash across borders.

So there are good and sound reasons to applaud the big banks’ revival of interest in the unglamorous business of taking deposits and processing payments. We need big banks to do this. Mind you, they’d better have the right systems in place to do it properly...

Paul Styles
Solutions Consultant

Taking action against the burden of legacy systems

2011-05-19T11:34:00.000+01:00

We know that most financial institutions are burdened, to a greater or lesser degree, by siloed legacy payment systems. Part of the problem is that the limitations of this architecture of legacy infrastructure are not immediately obvious. Individual systems function, and function well for the most part. But although they serve their individual purposes now, there is little to suggest they will be able to work together to support financial institutions as they adapt their business models to the demands of a new decade.

The sheer volume of transactions that these legacy systems are expected to handle continues to grow – placing ever growing pressure on already creaking infrastructure. The financial crisis has dramatically accelerated the pace of change and has placed acute pressure on legacy systems. It brought about unprecedented levels of consolidation and tremendous regulatory change, and is accompanied by a fast-paced revolution in technology and a changing customer demographic.

Furthermore, the payments industry is no longer the exclusive domain of established financial institutions and traditional payment processors. New entrants from non-financial industry sectors are making their presence felt and challenging long-held notions about the payments business. These new entrants have been enabled by customer-friendly regulations and fast-emerging technologies, and are gaining ground in traditional B2B and B2C spaces as well as creating and fulfilling an electronic P2P payments environment.

These new entrants come without the baggage of years in the payments space. They offer new products and services, carefully targeted and often fulfilling a niche demand, without having to compromise because of their technological limitations.

The convergence of payments and consumer technology favorites is indicative of another critical factor facing financial institutions. Consumer’s lives are increasingly digitized. Customer expectations are therefore changing rapidly. Younger customers in particular are used to services delivered online and in real time and expect similar levels of service from their financial institutions. Traditional banking brand strengths, like reliability and security have less meaning for the next generation of customers for whom speed and convenience are the key brand values, with reliability and security considered hygiene factors. And legacy systems cannot always meet these expectations.

The payments industry is therefore at a tipping point. Financial institutions need to be more proactive in the payments evolution while managing crisis-driven business pressures and new regulatory and compliance imperatives. First of all, they will need to make some prompt decisions about how to redesign or accelerate their revenue-focused and cost-focused payments strategies. New pressures threaten to overwhelm the legacy systems on which the payments business has been built.

Louis Blatt,
Chief Product Officer
ACI Worldwide

The heritage of legacy payment systems

2011-05-05T11:39:00.001+01:00

The past 30 years has seen billions of dollars spent on payments systems – with financial institutions building up a plethora of different systems and technologies designed to meet specific needs and develop competitive advantage. However, as the payments infrastructure gets more intricate and unwieldy, the harder it is for financial institutions to realize the potential benefits of technology.

Software vendors and financial institutions have a lot to answer for when it comes to the complexity of payment systems. We have often seen financial institutions racing to be one of the first to market with new services. More often than not, the industry has bolted on a new platform for the new service, rather than spend extra time building new functionality into existing systems. The lack of maturity and adoption in service based software development methodologies resulted in the inability to bring to market a unified solution. This has led to complex and siloed systems that have become a burden.

The technology that prevails in many financial institutions is a combination of old and new, dating from the 1980s, 1990s and 2000s. There is little room for scalability or agility in older systems, which are not designed for flexibility or the need for real-time processing. The result is an imperfectly integrated blend of old and new technologies that compound the tangle.

Consolidation has also driven complexity. The number of independent financial institutions has decreased rapidly over the years, as larger institutions seek growth and expansion through a wave of mergers and acquisitions. But along with new markets, new customers, and new revenue opportunities, financial institutions have also acquired additional systems to add to their own rambling infrastructure.

Another driver of system duplication and complexity is globalization. Facing diminishing returns from domestic markets, established financial institutions in North America, Europe and Australia have turned to Latin America, the Middle East and certain countries in the Asia-Pacific region, where the prospects are much more attractive. Regional institutions have been acquired and in the process their existing systems, designed for local requirements and legislation, have been added to the payments landscape of the bank.

Finally, the regulatory landscape is changing rapidly, bringing with it new demands for compliance, audit, transparency and control. Financial institutions will need to update platforms and processes necessary to issue and manage cards in this new environment.

As a result of all of these factors plus customers’ constant demand for new and more convenient methods of payments such as mobile, technology has become all-pervasive: it has multiplied through all aspects of a financial institution’s payments operations and replicated across channels, payment types and business divisions. Many organizations are, in effect, a series of separate mini banks that simply operate under a unifying brand, but with a completely independent view of external customers and internal resources. But at some point, the development of monolithic systems that increasingly consume the development and support budgets at banks has got to stop, and financial institutions need to take a long-term, cross-organization view for the future of their payment systems. The need to move to the next generation system is no longer disputed but how that migration should occur is the key question. Banks must develop a plan to migrate to a more modular and unified system that offers the business agility required but does not compromise the availability, reliability, and scalability of the legacy systems.

Louis Blatt,
Chief Product Officer
ACI Worldwide

IPS in review

2011-03-25T15:27:00.001Z

As the IPS conference in London drew to a close yesterday one theme was coming through loud and clear: there are plenty of new payments methods emerging into the mainstream, such as mobile, and lots of new ways to interact with customers. The innovation in the retail banking sector is impressive, but it seems not to be met by an equal level of innovation in the area of settlement. It remains a question as to where the real innovation will come from for new settlement methods. Perhaps next year’s IPS will provide an answer.

Another industry issue vexing delegates was Basel III. This piece of regulation will undoubtedly have a huge impact on the payments sector. It will require banks to hold enough assets to deal with a re-run of the financial crisis, thereby increasing the need to have better liquidity monitoring and management in place. Yet there was a worrying lack of ability amongst those polled at the event as to whether they had the information needed at their fingertips to achieve this. The data is there to ensure banks can deal with Basel III, but it needs to be accessed real-time and be useable to get anywhere near achieving compliance in a cost-effective way. The data needs to be reported to whoever needs it, immediately.

It is also important to note that real-time information and data availability can lead to much more than just compliance with regulation. It can also help financial institutions provide better product offerings to customers. With real-time information about customers, financial institutions can offer products and services based on current activity – therefore maximising sales opportunities. They might even get to that elusive position of being able to charge for intraday liquidity.

Craig Ramsey
Wholesale Solutions Lead

Saying goodbye to the old…

2011-03-23T08:58:00.001Z

I blogged earlier this week about the importance of payments and banks adding value for their corporate customers, which is being highlighted at IPS. Electronic payment volumes are still increasing and banks have to look at how they are being managed and processed.

But for many institutions this can be easier said than done. The past 30 years have seen literally billions of dollars spent on payment systems, and the payments infrastructure within many financial institutions is siloed, with different payment types often having their own systems, information, processes and people to support them. It isn’t uncommon for a medium to large financial institutions to have between 60 and 100 individual systems to process payments.

However, the cost of maintaining these systems; the downward pressure on the per-transaction fees that banks can charge; and the need for speed in responding to innovation in the market, is leading many banks to look at their payments landscape and start to consider how it can be evolved to become more consolidated and efficient.

We’ve heard lots of talk about payment hubs in the past few years, and while I agree that consolidation is key, it end goal isn’t just about getting all of your payments onto one system, it must be about intelligently and effectively bringing together processes and technology to reduce inefficiencies and increase flexibility. It doesn’t really matter if you go from 100 systems down to 5 or ten rather than just one, if you have delivered significant benefits at the same time.

But getting there isn’t easy. In most financial institutions it isn’t a case of throwing out the old and bringing in the new, it is a more gradual evolution , but the end goal is still the same – efficient technology and infrastructure on which the bank can deliver the processing functionality, flexibility and scalability it needs today and into the future.

Craig Ramsey
Wholesale Solutions Lead

Will transaction banking please step forward?

2011-03-22T09:25:00.000Z

The provision of payments is a fundamental function of banking, practically as old as money itself. But since the introduction of cheques more than 350 years ago, the payments landscape has been evolving continually, due to changing customer requirements, competition, legislation and technology.

The speed of change has increased in recent decades, putting more and more pressure on the banks, but the function of making and receiving payments has never really had its time in the limelight. But now things are changing, with a renewed focus on payments and the revenues that can be generated from what is a stable and relatively predictable business line, with growing volumes. However, legislation such as SEPA is driving down the per-transaction revenue that can be generated, so to be successful and stand out from the crowd, banks need to apply their expertise on their customers and the market to create propositions that add value to basic payment processing.

One key example of this is in the corporate payments world. For businesses, payments are of little interest in themselves, they are part of a bigger picture of transactions being completed, and also the wider liquidity position of the organization. Banks need to find ways to add value to their customers, for example by making payments easier to initiate and available at short notice; by providing real-time reporting and management information; and by offering a consistent payment experience globally – and many banks are looking externally for an experienced partner to help with this process.

Anything that banks can do to add value to their corporate customers, and build a relationship that is more akin to a partnership than a customer/supplier, then the greater the opportunity for the bank to continue to run its payments function as a revenue generator.

Craig Ramsey
Wholesale Solutions Lead

Card fraud increases 60 per cent in 18 months

2011-03-10T12:54:00.002Z

ACI’s 2010 Global Card Fraud Survey has been making a splash in the media over the last few weeks. According to our research, approaching a third (29 per cent) of consumers across eight major economies have been victims of card fraud in the past five years. This is up from less than a fifth (18 per cent) in summer 2009. However, the good news for financial institutions is that 79 per cent of these card fraud victims were satisfied with the response from their financial institution, up from 75 per cent in 2009.

The UK has a higher instance of card fraud than most other countries surveyed, with a third (33 per cent) of consumers falling victim in the past five years, up from just 27 per cent only 18 months ago, which means an estimated 14.6 million UK consumers have been the victims of card fraud in the last five years. However, these results vary significantly by country – for example nearly half (43 per cent) of people in China have been victims of card fraud, compared to only 11 per cent in the Netherlands.

The research also showed that 50 per cent of consumers worry about card fraud over other financial threats. Yet the survey of 4,200 consumers across 14 countries also showed that too many people fail to take basic precautions for protecting themselves from financial crime. In the UK for instance, nearly one in ten (nine per cent) consumers break the cardinal rule – never carry your PIN number with your card. On average, this figure rises to 12 per cent globally.

There are clearly a lot of stats to take in here. But in essence, what they are telling us is that fraud is a growing issue – and as an industry tackling it remains a major priority. Reassuringly, financial institutions and processors are working tirelessly to combat the crime and protect their customers – and this is paying dividends in terms of customer satisfaction.

But there is also a clear need for further customer education. Banks need to continue to inform consumers about how they can protect themselves against fraud. For example, by driving home the message that you should never carry your PIN with your card.

Interestingly, the UK Cards Association has this week announced that UK card fraud is at a 10-year low. At first this may look at odds to our research, but that may not be the case. Their stats show that the value of cash being stolen is getting lower. This means whereas you might have lost £100 previously, you now only lose £50. But the incidence of fraud is obviously on the up – even if less is being taken each time.

So, as we all work together as an industry to combat this crime, the key thing to remember is that fraud is constantly changing and, looking forward, the industry will need to increase focus on customer education, remedies to safe guard customer identities, verification and authenticating customer payments to improve the overall customer experience.

Andy Morris
Risk Business Solutions Consultant

Mobile NFC - The Chicken and the Egg arrive together!

2011-01-27T11:06:00.003Z

The full scale launch of a new mobile phone payment solution by Orange and Barclaycard, marks a sea change for electronic payments both in the UK, and a wider afield. We have seen many successful mobile NFC pilots with consumers loving the speed and convenience, but until now no commercial roll out of this technology.

The fact that two of the UKs largest banks and MNOs are working together answers "the chicken or the egg" question that has been holding back wide scale adoption of contactless and NFC payments. The technology and user acceptance has been proven, and now we see that banks and MNOs starting to make the investment to make mobile payments widely available to consumers.The use of an NFC enabled SIM should mean that Orange can make this available to its customers quickly and without having to replace all their handsets.

Some other countries, such as Poland, are now actively rolling out a contactless infrastructure, and all newly installed POS devices will have contactless capability by default. As these all use the established MasterCard and Visa Standards, Orange customers will shortly be able to use their phones to pay there too.

This is good news for the economy, banks and payments processors. Cash is very expensive to handle – it needs counting, storing and physical security – whereas electronic payments can all be handled automatically. Furthermore, electronic payments provide a strong source of revenue for banks and payments processors at a time when there is more pressure than ever to focus on “back to basics banking” rather than high-risk activities.

The key for other banks wanting to offer mobile payments will be to ensure that they have agile payments systems equipped to handle payments from any source. Without putting these types of systems in place, they could find themselves struggling to handle the increasing payments volumes in the future.

Paul Love
Mobile Payments Consultant

Direct debit fraud at an all-time high

2010-11-23T11:59:00.003Z

It is worthwhile remembering that there is actually more than one victim involved in Direct Debit fraud. The Paying Bank executes the payment against a fraudulent direct debit mandate, and the Collecting Bank receives the fraudulent payment, whose customer provides goods and services – for simplicity let's assume they are in fact legitimate in the first place.

Under scheme rules the Collecting Bank is obligated to indemnify the Paying Bank up to a specific threshold limit where payment has been made by mistake (including fraudulent payments). So the actual victim here is not just the Paying Bank’s customer whose details were stolen, but also the Collecting Bank and their customer who in good faith provided goods and services to the criminal against a fraudulent payment instruction.

This is not a new theme. Those financial crime professionals that are old enough will also remember and be familiar will the old Direct Debit telegraphic transfer directory scam in the mid 1980s. However, Direct Debit and ACH fraud does need to be taken seriously This is also not just a domestic problem. Reg E in the US also exposes banks to fraud threats and requires careful management.

Fortunately there are a number of tools that banks can employ to help identify this type of fraudulent activity, possibly one of the most common and successful being ‘out of band’ communication – where the bank contacts the customer using a mobile phone call or SMS message for example, to confirm the new mandate instruction. This method can also be used as a verification tool for any type of transaction to confirm its legitimacy – including online payments or even debit or debit card transactions. For banks, the priority is identifying fraud accurately at the first possible opportunity, and stopping the criminals in their tracks.

Andy Morris
Risk Business Solutions Consultant
ACI Worldwide

What financial services can learn from manufacturing: part 3

2010-10-13T14:33:00.001+01:00

In my previous two blogs I have discussed different areas of manufacturing that financial services firms and vendors could learn from. In this final post in this series, I want to look at Supply Chain Theory and the factory model

Everyone in the United States remembers when the Japanese auto makers began to take over the U.S market. As a result, the large American car companies hired Ed Demming and Michael Hammer, who developed Supply Chain Theory. The basic principle was to include the suppliers in the manufacturing process. This required the development of a more integrated software system to drive such collaboration that gave rise to the development of MRP, ERP, and ultimately CRM systems. Supply chain theory combined with enabling IT systems reduced time to market, lowered costs and resulted in quality improvements.

The modern electronic payment systems needs something akin to ERP and CRM that links to the internet and cloud to optimize payment services across single and dual message formats. Through the web we can now include suppliers such as regulatory bodies, credit bureaus, statistical modellers, acquirers, issuers, payment processors, credit card companies, merchants, banks and end users into a single set of services that initiates, manages, secures and operates payments.

The financial services industry is under unprecedented pressure to lower the cost of payments, improve services, secure transactions, and simultaneously drive strategic innovation. Financial institutions, processors and retailers have bought many tools but still struggle to automate payment processes, gain business insight across their enterprise in a holistic fashion, protect consumers from financial crime, and quickly deliver compelling new and better services to customers.

The levels of waste in the payments industry are astounding and are only exacerbated by the mergers and acquisitions that have pervaded the industry in the last few years. The maturity of new technologies such as SOA, modelling, extreme transaction processing, SaaS, mobility, and collaborative technologies present the possibility to transform payments.

In reaction to these increased pressures the payments software market is moving away from the focus on monolithic, fragmented systems towards a more flexible and holistic solution. But this is challenging because of the complexity of payments and the need to transition to the future. But the current fragmented systems are what consumes resources and keeps payments as an expensive commodity rather than a strategic advantage.

Instead, a factory model approach is required, using the different techniques I have discussed, that will describe, control and automate the payment environments in the financial institution. By continually understanding the business conditions as well as the desired state of payment systems one can develop and deliver the repeatable processes required to automate the initiation, management, security, and operation of payment life-cycle within the context of the changing business conditions.

In conclusion, I believe that the new approach to developing payment services must be one that allows for the holistic and streamlined definition of a payment system that is sensitive to changes in surrounding environment and the market. Based upon these external changes the system can automatically make adjustments to system definition and the current settings to continually converge to a desired state. If we can achieve that then I believe the payments industry will be in the strongest possible position to face whatever the future holds.

Louis Blatt
Chief product officer

What financial services can learn from manufacturing: part 2

2010-10-06T15:14:00.001+01:00

In my last blog I looked at different revolutions that have impacted the manufacturing industry in the past, and what the payments industry can learn from them, specifically the use of interchangeable parts and mass production. In this piece I want to look at two more manufacturing trends, starting with Just-In-Time (JIT) manufacturing.

The basic principle of JIT is to get what is needed, when it is needed. This resulted in less defects and no excess inventory. Since software is less tangible than most manufacturing processes it hasn’t been viewed as something that can benefit from JIT, however, if we can relate the end business service to the elements that deliver that service, there is ample opportunity to improve payment solutions. For example, by defining the business services and mapping all of the hardware and software components it requires, we can prioritize issues better, purchase capacity as needed (on demand), and track quality from the end users point of view.

The evolution beyond JIT is Lean Manufacturing, in which the basic principle is to lower cost and improve quality through continual process improvement and collaboration. Taiichi Ohno, who developed the concept, created Kanban cards which describe the components in a particular assembly task and tell the assembler what to do next. Similarly, electronic payment services must be composed of sub-services that need to be developed, catalogued, and tagged with service level and processing instructions. Service Oriented Architecture (SOA) which utilizes Web Services Description Language (WSDL) to describe the services and Universal Data Dictionary and Integration (UDDI) to catalog and organize the services is the Kanban of IT.

Today, neither our IT teams nor business groups collaborate tightly enough. In the spirit of Lean Manufacturing everyone was encouraged to wear the same uniform. Today IT and business executives don’t wear the same uniforms either literally and metaphorically. But I truly believe that if we can get the business and IT to collaborate, together they would be able to define a set of business services comprised of lower level IT services that seamlessly integrate – delivering true efficiency and agility in their payment systems.

In my next blog I will pick up this topic once more, to see what we in the payments industry can learn from Supply Chain Theory and the factory model.

Louis Blatt
Chief product officer