19 February 2018


Gerard Hergenroeder - Payments Shark

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The payments industry is in the throes of a perfect storm

06 April 2017  |  12006 views  |  4

The payments industry is in the throes of a perfect storm – the traditional payments business is at risk from excessive rising costs and disruption which calls for radical payments transformation (Content for these thoughts are Gerard Hergenroeder’s solely, not his employer IBM)

Below are a list of proof points that bankers and payments people should be aware of as they think about their operational business models and future roadmaps. Today’s models are doomed for financial failure in the future. They just will not survive the test of time. It is time to chart a radical new course for banks to continue returning value to shareholders.

  • In mature economies check and ATM volumes are decreasing while costs continue to increase which implies much higher unit costs.
  • 3rd rails to support new Faster/Immediate payment schemes will increase total payment costs further and accelerate declines in existing channels and schemes
    • ATM and check declines will accelerate rising unit costs
    • Wire transfer and SWIFT revenue will be threatened due to new lower cost B2B alternatives.
      • Corporate treasurers will think twice about the costs and value of traditional of traditional payment schemes. Why pay $35 for a wire transfer Vs $1 for a B2B transaction?
    • ACH/SEPA growth will moderate due to new alternatives.
    • Traditional card volumes could decrease as new C2B payment models attack the high cost of traditional interchange.
  • New Blockchain technology and its subsequent productivity improvements will impact the cross border payments business.
    • McKinsey estimates unit revenue could decrease from $35 to $1 per item.
  • Ongoing regulatory change
    • PSD2 initiatives in Europe will give consumers new payment alternatives and will threaten existing payment revenue streams.
    • Traditional interchange models will continue to be threatened with extinction
      • Europe and Australia have already experienced regulatory actions to lower interchange revenue
      • In the U.S. debit interchange rates are now regulated.
      • Regulation of credit card interchange is still on the table for lowering the cost of traditional retail payment transactions globally.
  • Surprising disruptions via Fintechs
    • Fintech innovation is the wild card for disrupting retail transactions at the front end. PayPal, AliPay, Square and others have successfully captured consumers.
    • Perhaps one day banks will be paying Fintechs to source new accounts and transactions.

As a former banker who developed all of today’s payment schemes many years ago I’ve seen the rise of siloed IT applications and servicing operations. Just think if banks had one payments application with one servicing platform, my hypothesis is they could take out 75% of their payment costs. Now that’s a prize worth going after!

Now, the question is what should banks be doing in response to these trends, and just as important how should they transform their business models? What do you think? Radical application convergence? New digital servicing models? Cloud processing? API's everywhere?


TagsPaymentsTransaction banking

Comments: (5)

Shriyanka Hore
Shriyanka Hore - IBM - Mumbai | 07 April, 2017, 12:05

Interesting perspective

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 07 April, 2017, 15:49

"Just think if banks had one payments application with one servicing platform". Indeed, it'd be great. But I wonder if this will happen in my lifetime.

A Top 10 Global Bank kicked-off a project to do exactly this 10 years ago. When last heard, it hadn't completed the project. Some of the hurdles were:

  1. Difficulties in routing high touch and low touch payments in the same platform. A defective $100 retail payment can hold up a $250M FI-FI payment. No way to avoid this in a single platform.
  2. Incorporating changes to one payment type inevitably causes platform downtime, thus affecting normal operations of other payment types running on the same platform.
  3. Regulatory timelines are almost always very tight. Only way to meet them is to develop the impacted payment types on a separate track, which ends being a separate platform.

I haven't even raised the people and political challenges.

In a way, monolithic systems made way to distributed systems because of some of these issues. This happened in payments as well. Hard to imagine that payments would be able to buck the trend and get centralized. 

There's also a business issue that works against consolidation. I agree that consolidation will slash operating costs. But in a regulated space like payments, regulators / government always target banks to reduce payment processing fees and their arguments are inevitably based on "your costs are low, why are your prices so high?". We saw this in USA w.r.t Dodd-Frank-Durbin regulations for debit card interchange a few years ago. We're seeing this in India, where the government is keen on accelerating digital payments and is currently in a tussle with banks to reduce MDR for card payments. What is the incentive for a bank to spend the money and take the risk to consolidate all payment types into a single platform only to face regulatory / political pressure to drop their prices and see they revenues erode because their operating costs have come down?

Ten years ago, in a report on consolidated payment hub, TowerGroup had made a very strong case likening the technology to the opening scenes of the Samuel Beckett play "Waiting for Godot". Notwithstanding all the intervening technologies and other things that have happened since then, I'm not sure if the central theme underlying TowerGroup’s conclusion has changed even today.


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Gerard Hergenroeder
Gerard Hergenroeder - Payments Shark - Millersvile | 10 April, 2017, 13:56

I would like to respond to Ketharaman Swaminathan's comments. Convergence of payments applications is actually occuring. The Federal Reserve of the U.S. is implementing a single application for its check and ACH businesses. Also, IBM announced a single application that can handle Check, ACH, SEPA, SWIFT, Corporate Payments, and Faster/Immediate payments.

What's different today? Technology improvements and new standards have enabled new ways to do things. For example, the IBM integrated payments solution uses SOA based technology that enables multiple reuse of service components. Also, it uses ISO20022 as its internal messaging solution.

In summary, 10 years was a different time and place. Today, the reality is convergence actually occuring in the marketplace.

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 10 April, 2017, 14:23


What regulators / scheme operators and vendors do is not germane to this context. In any case:

  • I reckon that "checks processed via ACH" is a new payment type that's different from check or ACH alone. I suspect FED's new application is to support this new payment type. I doubt if FED would sunset its existing check processing system and ACH processing system after the check+ACH system is commissioned.
  • I don't know about IBM but I know enough tech vendors who have been trying to sell open-system CBS to replace mainframe CBS for 20+ years. From my experience of having worked with one of them, I know how hard it is to make banks give up their mainframe CBS and migrate to open-system CBS. Just today, I happened to read this article on how there's a major demand for COBOL in finserv because there are so many financial systems that are still running on COBOL. 

Your post is about your wish for what banks should be doing, my comment is about the reality of what banks have been doing. So, with due respect, what regulators / scheme operators and vendors are doing is irrelevant in this context.  

I'll believe that payment type convergence is real if you can name at least 10 Top 100 banks that have moved to a single payment hub for all their payment types and sunsetted the plethora of their individual payment systems they ran before the migration.

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 11 April, 2017, 13:11

Let alone consolidation of low care and high care payments, are there any Top 100 Banks that have migrated even Card and ACH/FPS/NEFT low care payments to a single payment platform?

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Former Global Payments Executive at IBM responsible for solution sales

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