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Payments - Bank's breadwinner

The primary objective of any payment system is to enable the circulation of funds. Without a robust infrastructure enabling smooth flow of funds, none of the financial institutions can assume the role of a financial intermediary in the economy. Payment systems have encountered many challenges and are constantly adapting to the rapidly changing payments landscape. More recently, the proliferation of electronic payment mechanisms and advent of alternate payment systems coupled with risk elements in the payments process have focused attention on public policy issues related to the organization and operation of payment systems.

Regulators across geographies are enacting statutory controls to achieve the objectives of transparency, protecting rights of users and providing safe and sound payment systems from macro economic perspective. Abiding these dynamic regulatory norms and industry practices, Banks need to seriously research on customer preferences and requirements to launch Value Added Services on top of plain vanilla transfers, offered through various payments networks whether Global or Local.

Margins on payments business, which traditionally contributed around 40% of gross income to Banks, are on a squeezing spree with the integration of payments markets. Banks are exploring avenues to scale up volumes to match up the expected revenue loss. More focus is on corporate segment, with network providers has taken initiatives to expand first mile and last mile connectivity in payments chain, for crucial development of payments business. Financial Supply Chain Management is another area, where payments would be complementing the trade finance in an innovative fashion.

With a concerted effort to reduce paper based payments, electronic payments are bound to scale up its share. With the proposed end to end reconciliations through electronic invoicing services over Single Euro Payments Area (SEPA), automated Back Office Conversions (BOC) and thrust on higher Straight Through Processing (STP) ratios, banks need to concentrate on risk management frameworks to address the inherent risks associated with electronic payments, more so when operational risk is charged to Bank's capital as per Basel II norms.

Vulnerabilities of electronic payments, if not evaluated and effectively addressed, can offset all benefits derived through it. Banks need to closely observe and proactively respond in this phase of "disruptive innovation", to address the challenges when new payment models germinate with innovative payment products targeting changing demographic profile of clientele.



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This post is from a series of posts in the group:

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

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