In the early 2000s, when global banks were re-engineering their core systems, payment hubs were seen as the future of payment infrastructure. However, the hub offerings available at the time failed to live up to banks’ grand visions. This disconnect forced banks and solution providers to start over in order to design hubs that banks could feasibly adopt, given the state of IT systems and operational change management capabilities at the time.
Now, payment hubs are re-emerging as a key strategic platform for payment processing for banks of all sizes. Banks have figured out how to deploy hubs in their payments IT stacks in ways that more closely align with solution providers’ current products. As a result, nearly 160 banks worldwide have successfully deployed payment hubs, with another 120+ new banks expected to deploy hubs in the next several years. These hubs have taken different forms, including enterprise hubs that support global connectivity, targeted hubs that connect disparate platforms to simplify end-to-end payments processing, and payment gateways. A typical large bank play – the development of an application service provider (ASP) model for payments hubs – may very well open the door for midtier, small, and community banks/credit unions to deploy hubs in a unique way to realize the same benefits large banks realize through hub deployments.
Legacy payment platforms suffer from a well-chronicled set of issues: they are fragmented, siloed, antiquated platforms that no longer work for a digitized customer experience.
The reasons for implementing a hub are many, but the business case is typically driven by a significant event – the introduction of a new payments system or the need for centralized data for analytics purposes, for example, or an impending threat to the delivery of customer service. The emergence of real-time/instant payments capabilities is one such significant event. Much as SEPA (Single Euro Payments Area) drove the first wave of payment hub installations in Europe, real-time/instant payments are inspiring many banks to redesign their IT architecture for payments and even for core banking services – on a truly global scale.
Opportunities for Hubs
Every transformation in the payments industry is driven by a watershed event that forces the industry to adapt to changing customer expectations and to seek greater efficiency. The introduction of the Check 21 law in the U.S., for example, forced change in the check-clearing business.
What is spurring the current transformation of the payment industry? Disruptions in the payment system are common these days, but four changes related to the digitization of payments and the evolving customer experience are occurring:
- The emergence of real-time/instant payments. The aggressive rollout of real-time/instant payments initiatives around the globe (currently in 51 countries) – along with the introduction of same-day Automated Clearing House (ACH) transactions – is pushing banks to quickly evaluate their payment infrastructures. As customers expect faster money and improved information flows, a hub solution to enable real-time/instant payments is at the forefront of bank CIOs’ and payment architects’ thinking.
- New opportunities for operational efficiency and effectiveness at banks. Historically, disparate legacy systems and platforms – many of which are monolithic and antiquated – have hampered banks’ operational efficiency. But evolving customer demands and the need for more integrated platforms and channels are spurring banks to make significant investments in IT upgrades and/or replacement. The demand for real-time data and information is driving banks to improve their data and analytical capabilities; some are even realizing that they are best positioned to operate in a real-time environment if they go a step further and undertake an extensive platform integration. The resulting straight-through processing capabilities allow banks to determine least-cost and least-time routing while dynamically deciding how to disburse a payment.
- Commercial clients’ demand for integrated solutions. Both retail and corporate customers are now requesting user-friendly, controllable interfaces with digital devices. Commercial offerings continue to follow person-to-person (P2P) trends, and Venmo’s P2P payments app provides an example of how the industry will adopt innovation when it meets customer demands. It’s worth noting that Venmo’s exchanged value increased from $906 million in the fourth quarter of 2014 to $3.2 billion in the first quarter of 2016. With these and other integrated solutions, banks can gain a holistic view of customers and their payment activity while providing them with transparency. Corporate customers also are seeking to satisfy complex demands for integration, data, and analytics as consumers’ expectations change. In this, banks see the value of harnessing the power of real-time data and analytics, but typically struggle to integrate the various source platforms and databases required to drive real-time information flow. Among a host of other benefits covered throughout this discussion, hub solutions are also enabling banks to: (1) integrate databases into a single data source that meets these demands for information while also providing critical customer insights and analytics in real time, and (2) integrate disparate solutions across multiple channels, significantly reducing cycle testing and improving the speed to market for new products and innovations.
- Regulation, compliance, and risk pressures. Regulatory and compliance requirements coupled with the growth of a global e-commerce economy are putting pressure on banks to streamline and integrate related platforms – e.g., know your customer (KYC), know your customer’s customer (KYCC), anti-money laundering (AML), Office of Foreign Assets Control (OFAC), etc. Real-time/instant payments are fundamentally changing fraud, risk, and compliance needs; for example, credit decision and fraud operations must now be real-time and operate 24x7x365.
The Need for Integration
All of these changes require greater integration of payment platforms and channels. But legacy payment platforms suffer from a well-chronicled set of issues: they are fragmented, siloed, antiquated platforms that no longer work for a digitized customer experience. As real-time payments systems proliferate, and as customers increasingly expect an integrated, cross-channel, digital experience, banks are recognizing the need to reprioritize their payments IT stack to meet these demands.
Real-time payments already are positively changing the customer experience in 30 countries and soon will do so in another 21. Banks must hurry to catch up.
Banks should consider putting a payment hub at or near the top of that stack. As they design their future-state payment architectures, banks should integrate as much as possible to ensure they have the flexibility needed to innovate quickly and nimbly with both traditional and nontraditional partners. Beyond their known benefits to transaction processing, payment hubs facilitate streamlined integrations across internal systems and external networks and platforms. The resulting flexibility will allow banks to offer the entire spectrum of real-time payments capabilities – from the digital onboarding of customers to real-time authentication, confirmation of good funds, and transaction clearing.
Real-Time/Instant Payments Schemes
For the past few years, payments experts in the industry have discussed the advantages and capabilities enabled by real-time payments, which include authentication of customer and device, confirmation of funds, clearing, notifications to both payer and payee, availability of funds, movement of data, fraud prevention, and more – all in real time. But understanding the delivery method is just as important as understanding the capabilities.
Real-time payments around the world are not a one-size-fits-all proposition. Consider the various real-time payment models currently in use:
New Payment Rails
- Real-time payment (RTP) systems around the globe are often believed to leverage existing payment rails because they come from brands associated with legacy payment instruments. For example, Singapore’s RTP system and the RTP system currently in development by The Clearing House in the U.S. were both developed with Vocalink, an ACH provider. Neither system, however, is ACH-based; in fact, RTP rails are entirely new.
- Zelle and other mobile P2P apps likely will leverage mobile capabilities to originate payments and ultimately connect with a new rail, such as The Clearing House’s.
- Payments can now be sent using just an email address or mobile phone number, with funds credited to recipients’ accounts within minutes.
- Other RTP rails leverage the traditional card networks to drive the flow of information and the processing of transactions.
- Examples include global platforms such as Mastercard Send, Visa Direct, and Mexico’s SPEI.
- Future RTP systems could be based on distributed ledger technology (DLT) and cryptocurrency. While no implemented RTP scheme has leveraged DLT or cryptocurrency as its core component to date, banks have not ruled out these technologies as viable options.
- The current thinking in the industry is that DLT is best positioned to initially support the cross-border transaction space.
The point of calling out these archetypes is to paint a picture of variety. As e-commerce continues to shrink the marketplace, and as customers expect expediency, multiple channels, and many access points, banks must support several schemes if they wish to compete effectively. Hubs provide an integration point from which banks can plug in channel solutions, customer-facing applications, and back-office processing platforms to better meet customer experience requirements, create efficiency in introducing new products and services, and increase straight-through processing times.
Banks’ RTP systems should not only support more than one scheme but also be able to integrate with innovative technologies from the bank itself, from trusted service and platform providers, and from FinTech and other innovators and disruptors. Here again, payment hubs come into play. Application programming interfaces (APIs) are likely the most efficient way to deliver these capabilities, and offering API integration through a payment hub is far more expedient than building an API layer in a legacy environment.
Transforming the Customer Experience
Real-time payments already are positively changing the customer experience in 30 countries and soon will do so in another 21. Banks must hurry to catch up. Their legacy payment architectures are not equipped to support and process the information required by real-time payments, nor are they constructed to operationally support the real-time movement of money. Specifically, legacy architectures can’t support the following in real time:
- Customer authentication in multiple channels from myriad devices
- Confirmation of good funds
- Availability of funds to the end user
- Fraud prevention
- Compliance with KYC, KYCC, AML, OFAC, and BSA requirements
- Capturing and storing the necessary data and information during the onboarding process
- Capturing, accessing, and interrogating data for advanced analytics.
A look at how real-time payments are being leveraged around the world sheds light on what a payments IT architecture needs to support. While much of real-time technology development has focused on P2P mobile payments, these use cases demonstrate that addressing businesses’ needs in receivables and payments may yield the most business value. The opportunity to curb the use of checks and cash could significantly reduce expenses for banks, corporations, and small businesses, but even more importantly, real-time account-to-account payments capability could enable a range of new experiences for customers. Consider a handful of use case examples:
- Business-to-consumer (B2C) capabilities. Potential new customer experiences in B2C include: insurance policy sign-ups (enabling car insurance to be activated at the point of purchase, for example), emergency insurance payouts, payday lending, and instant financing of large-ticket point-of-sale purchases.
- Small businesses. Every day, small businesses struggle to align incoming and outgoing cash flows so they can pay for delivery of goods. Real-time payments can support products that facilitate improved cash flow for these businesses – such as invoice-to-payment and supply-chain financing – which could reduce days-from-outstanding-sales receivables, increase working capital, and align cash flow with cash needs.
- International corporations. A single-process model that supports the distribution of funds to recipients in real time in each jurisdiction would allow corporations to provide global, consistent customer experiences. A globally consistent model for real-time payments will become more feasible as more countries adopt real-time systems. Eurozone countries will begin instant payments in November 2018, with Australia following quickly thereafter.
- Government agencies. Hundreds of thousands of U.S. citizens who have been displaced by recent natural disasters (such as hurricanes Harvey, Irma and Maria) may soon experience the benefits of real-time payments.When government agencies such as FEMA disburse funds, those funds will be immediately available to recipients.
- Service businesses. Travel, tourism, hospitality, and urgent medical care are just some of the vertical markets where immediate access to payments, refunds, or payments on behalf of another party could offer new experiences and thus play a critical role in a business model’s success.
- Supply chains. Already operating on thin margins in an increasingly real-time production environment, supply chains will become prime candidates for real-time payments. In several countries, the food-service industry and the fast-moving consumer goods sector are benefiting from real-time payments in the distribution of perishable goods, where chargebacks can cause significant issues.
As customers come to expect these new experiences, banks will be under direct, constant pressure to position their payment IT stacks to support everything that comes with each experience.
Enabling a bank’s legacy infrastructure to support RTP without an integration point between disparate systems is nearly impossible. Any attempt to do so will drive up costs, exhaust IT staffs’ limits and capabilities, significantly delay the introduction of new products and services, and likely perpetuate an environment that is a patchwork of short-term fixes. The effort would be akin to using balsa wood to build a house: It may work for a while, but eventually the balsa will break under the house’s weight.
Supporting real-time payments and new customer experiences requires integrating the back-office payments IT stack with customer-facing platforms and ancillary systems such as KYC, AML, and fraud prevention. A payment hub makes integrating all the necessary systems and platforms much more efficient, timely, and cost-effective. A critical part of the future-state payments IT architecture is the ability to leverage third-party platform providers and FinTech disruptors through an API layer; today’s payment hubs are thus designed as integration layers, with a clear eye toward API compatibility.Although banks can navigate the future of payments without deploying a payment hub, these hubs are constructed to give banks the flexibility needed to adapt to the transforming payments space and ever-changing customer demands. Skeptics may choose to play the future payments game without a hub. But a hub is like the queen in a game of chess: among all the pieces, the queen offers the greatest flexibility and opportunity to win. Banks should think carefully about whether to enter real-time payments without their most versatile game piece in play.