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Transforming payments into a profitable business

Transaction banking is now receiving the respect it deserves as a sustainable source of revenue and vital customer touch point. In fact, in 2009 global payments revenues were $900 billion – double that of our worldwide airlines.

However, financial institutions face significant obstacles on the path to profitability given that the global payments landscape comprises a collage of local payment systems and practices that have evolved over time. These legacy systems are costly to maintain and lack the flexibility to create new services quickly and efficiently. 

In addition, while legislative initiatives, such as SEPA, seek to promote harmony and competition, in practice they can actually increase the cost of doing business instead. The challenge therefore is to cut costs and increase business agility. To achieve this, financial institutions need to take a new approach.

In doing so, banks need to look at several factors such as how they can build economies of scale, the efficiency of processing and the extent to which a financial institution can wrap value-added services around core payment propositions. Focusing on the added-value aspects of payments that facilitate service differentiation are often a prime source of competitive advantage. Banks need to understand the detailed composition of their payment activities to ascertain those accounts that are likely to provide liquidity and those likely to consume it, which requires a thorough examination of all business processes and systems. It is also essential that systems be capable of meeting tactical needs and strategic objectives. While it can be difficult to address both simultaneously, bank risk producing ‘siloed’ systems environment that in the long run is unlikely to be commercially sustainable.

An increasingly common response to these challenges has been the deployment of payment hubs. An agile payment hub is flexible, processing transactions in real time and batch, across multiple payment instruments; and it enables monitoring, management and customisation, using standard processes and messaging.

Another opportunity to do things differently is through legislative initiatives, such as SEPA which can also serve as a great business enabler. Increased legislation and globalisation have challenged traditional business models and relationships. At a bank level, a standardised framework offers a robust transactions framework on which to hang other services that corporate clients are willing to pay for and in this sense, it is crucial for banks to understand how corporate customers use their services and how these services relate to the overall corporate strategy.  Take corporate liquidity management; customers expect real-time status reporting on payments in a multi-currency environment.

Over time, transaction banks must build flexible operating models that support a consistent global service level across all segments if they are to profit from transaction banking. The acid test for banks will be to rise to these challenges without interruption to existing business processes. However few banks can achieve this without assistance nor can they succeed by simply replicating solutions that have worked for others.  While banks can certainly learn a lot from each other, given the complex nature of today’s payments landscape, it will be the prime function of IT to enable a profitable business. In this sense, global software partners will provide a vital conduit through which to develop and implement best payment practices designed to help banks achieve their commercial objectives profitably and sustainably.

 

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Comments: (1)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 24 August, 2011, 19:04Be the first to give this comment the thumbs up 0 likes

CARD Act, Reg. E and now Dodd-Frank-Durbin are examples of regulations that mandate many banking fees to be "reasonable" - which means set at levels that reflect true costs. Most bank payments shops should have no difficulties in agreeing that your suggestions could help them acquire competitive advantage, enhance customer satisfaction, and so on. However, I am not sure if they would want to adopt them to cut costs because (a) They've gotten this far with these kinds of costs (b) Switching accounts is a pain and there's no guarantee that the next bank is any better than the previous one, and, most importantly (c) The next regulation around the corner could force them to reduce fees for payments to match their reduced costs, which means their revenues would nosedive from their current stratospheric levels.

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