Here’s a confession. By education, I’m a technologist, not a banker or economist. Let alone a visionary.  So, when confronted with the all too common conundrum of how to reduce the total cost of ownership (TCO) of payment systems, I need to first take a step back and analyze where the largest costs are generated. In my first blog on payment data centers, I likened them to the ‘gentle giant’ of bank IT systems – sizeable, reliable, and unchanging – but absolutely necessary in driving revenues in the new financial landscape. When examining TCO, if a payment data center is a gentle giant, we need to analyze the weight of that giant.

Over time I have seen several attempts at developing payments projects that produce a low TCO, which is always a key criterion in RFPs from payment processors.  An obvious request, until the question raised is: “What’s the cost of processing one payment today, and where does that cost come from?” Enter the gentle giant’s weight problem. 

What’s the breakdown of the cost of a payment data center?

A common statistic is that 85% of the infrastructure cost accounts for ongoing maintenance, as opposed to only 15% for innovation. Let’s assume a similar breakdown for payment projects, as well.  What does innovation mean in this context? Surely, the run rate of the mainframe that’s running outdated payments applications falls under maintenance. What about the resulting need to re-host these applications to open systems? Is that innovation or maintenance? What about replacing a Mint or Merva application with a more modern payments gateway that has similar functionality? Convergence of high- and low-value payments? Again, maintenance or innovation?

My view on innovation as it relates to payment data centers is one that was handed to me by a former manager. “Innovation is any initiative that results in new revenue streams. All the rest is maintenance. Maintenance that results in increased efficiency, lower costs, and faster time to market, at best – and maintenance without improvement, at worst. But maintenance, nevertheless.”

By that definition, 15% seems like a pretty good deal. But how do we move the needle toward greater spend available for innovation, as opposed to maintenance costs? I am a firm believer that modernizing payments by removing the ‘boring bits’ is key. Why should financial institutions spend time and resources stabilizing and maintaining infrastructure stacks – either for individual projects or for infrastructure farms – when the benefits of outsourcing the maintenance of, but not the control over, their infrastructure is so boundless? By outsourcing infrastructure management, IT leaders can ensure world-class IT architectures and performance while freeing time to focus on innovation.

Having been a Sun Microsystems employee, I’m also interested in the share that hardware infrastructure has in the cost of the payment modernization pie. Not long ago, I asked that same question to a panel of executives that focus on payments modernization initiatives. After some discussion, the panel concluded that about 10%-15% was a reasonable estimate. Surprising, indeed. So where’s the other 90% spent? Is it the license cost of the application and infrastructure software? Is the big chunk of cost the customization of the application’s software? And what’s the percentage of the ‘boring bits’ – such as defining the infrastructure architecture, and testing throughput and resilience?

What do you think? Where do the bulk of your payment modernization costs come from? What is the percentage of the so-called boring bits?

Does your ‘gentle giant’ have a weight problem?