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A payments revolution is on the cards

Payments are increasingly being viewed as the staple diet for many banks, as financial institutions turn their backs on years of developing exotic products and go back to basics. Yet, a number of obstacles stand in the way for banks looking to generate further revenues from payments.  Old business models and legacy systems are likely to need an overhaul if payments are to be transformed into a greater source of revenue for banks.

Top of the priority list for banks looking to make the most from their payments infrastructure is the need to reduce costs. Cost reduction is always on the agenda but it is particularly pressing at the moment as a result of the economic climate, the downward pressure on revenues and the rise in M&A activity. Even those banks which have recently announced a rise in first half profits have looked to the more successful parts of their business to ‘absorb the consequences of the economic downturn’, according to Barclays chief executive, John Varley. Cost reduction will remain on the agenda for the foreseeable future.

What’s more, as new players enter the payments business with newer architectures and systems with lower costs, traditional financial institutions are further feeling the pressure to become more efficient. This drive towards cost reduction goes hand-in-hand with a general need to simplify the process of handling payments.  Payment silos remain a barrier to efficiency and good customer service. Greater industry consolidation is also exacerbating this problem.

I believe that these dual challenges of cost reduction and a siloed payment infrastructure will act as principal drivers for a revolution in payments which is needed to develop a simpler and more efficient payments processing infrastructure.

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Comments: (3)

A Finextra member
A Finextra member 10 September, 2009, 08:29Be the first to give this comment the thumbs up 0 likes

Just a remark to "new players enter the payments business with newer architectures and systems with lower costs" ...

Newer isn't always better, and lower cost may be just a perception resulting from only looking at the price tags of cheap hardware boxes. Those newer architectures usually lead to more complexity and higher system management cost, while at the same time affecting the reliability of the system. And last not least - those highly praised new architectures do come with a high number of potential vulnerabilities, and not all of them get fixed ...

While those new architectures may be a good fit in a number of cases, payments systems are a very particular breed - and well worth thinking twice about risk and total cost of ownership for running business-critical applications.  

 

Keith Richbell
Keith Richbell - eftpos Payments Australia Ltd. (ePAL) - Sydney 14 September, 2009, 23:04Be the first to give this comment the thumbs up 0 likes

In reply to Gerhard, I suspect the reference to "newer architectures and systems with lower costs" was more a reference to next generation software rather than hardware, although it is true that one no longer needs the expensive top end hardware anymore to run reliable payment systems.

A Finextra member
A Finextra member 14 September, 2009, 23:50Be the first to give this comment the thumbs up 0 likes

Segments such as international retail payments, B2B collections and remittances have grown big in recent years – but traditional payments systems haven't adapted to service them. Re-engineering systems and processes with only a cost-reduction goal risks missing out on changing market opportunity. And big system change takes time, can absorb all available change resource, and often moves slower than innovation.

Many of the ‘new entrants’ are not new entrants at all, they are long-standing payments service providers, and have proven, optimised business models. The 'new' part is their regulation; the PSD provides a governance regime that gives protection to their customers, and hence makes their services more readily adoptable. Some of these models are quite different from the way traditional financial institutions have designed their systems. They give traditional financial institutions new options to source their payments services, and hence to increase share, and associated fee income, with barely any investment and with short time to value.

So we may see payments transformation developing on a twin-track – increased adoption of alternative models to grow share and revenue, the income from which can then support the necessary longer-running legacy systems transformations.