Digital Payments

Digesting The Payments Modernization ‘Elephant’ — Bite By Byte

As the old adage goes: The best way to eat an elephant is one bite at a time.

As financial services firms and banks grapple with the tsunami of digital payments, many companies must modernize their infrastructure and back-end processes.

In a virtual roundtable discussion with Karen Webster, Vincent Caldeira, chief technologist, FSI, APAC at Red Hat, and Mick Fennell, head of payments at Temenos, said modernizing those functions and embracing new consumption options, such as payments-as-a-service, can pay dividends in terms of top line and returns on investment (ROI) — while helping financial institutions (FIs) get ready for major regulatory and standards migrations on the horizon.

As they told Webster, the pressures of the current pandemic have only exacerbated the urgency to modernize payments functionality. There are any number of regulatory issues with global and regional standards changes looming for the financial services industry that will create a “new normal” for the industry.

Caldeira noted the sudden need to let financial services employees work from home has shone a light on a pressing issue: “Many of the back-office functions, used to support the payments processes, have been constrained with the current situation.”

Back-office tasks, as currently conducted, were not meant to be done remotely, he said. Although the consumer may not notice any issues with getting transactions done, said Caldeira, “that doesn’t mean that the bank is not struggling” with inefficient processes and poor integration with their legacy platforms.

As Fennell said, “There’s been an acceleration of the entire processing chain, and this has impacts on infrastructure, on scalability and on performance.”

The distributed nature of how we work nowadays, the executives said, is spurring a mindset shift at FIs that recognize that not everyone has to be in the same place to get things done.

“I think quite a number of banks were hiding inefficiencies in their processes by having large teams work in close proximity together to manually address exceptions,” Fennell said.

But in a world that is becoming increasingly digital, where high levels of straight-through processing (STP) are key (in automated fashion), these teams need to step in when there are “unhappy flows” across the back end, where transactions are rejected, recalled or canceled.

Banks are also examining new ways to save operating costs, and whether it’s indeed necessary to have thousands of people in tangible brick-and-mortar settings.

Caldeira said that even as FI budgets are being pressured there’s still focus on automating processes performed by people, and on data security.

This examination, Caldeira said, is among the first steps in the journey toward digitization. Banks must think about changing internal cultures and processes before they actually transform technology.

If the end goal is to become more agile, Caldeira added, “you can actually start to break down your organization into smaller units of people, who get enough power and responsibility to actually effect change at their own level.” This includes breaking your code functionality into smaller units for faster iteration and delivery, and also giving your delivery teams end-to-end responsibility over not just the code, but also the data and integration strategy.

Beyond COVID-19

Delving into the other factors beyond the pandemic that are forcing a reckoning in how banks are preparing for the great shift to digital, Fennell said that “the basic factors that have been driving payments modernization for the last five years still remain.”

That includes the migration to ISO 20022, the global and open messaging standard for the financial industry (which he likened to shipping “containers” that house payment information) as they exchange data electronically. Fennell noted that ISO 20022 has been on a slow but steady adoption curve for years, but that is now accelerating due to the SWIFT Cross-Border Payments and Reporting Plus (CBPR+) migration taking place between November 2022 and November 2025.

In the next five years, said Fennell, the standard will dominate high value payments businesses, supporting 80 percent of the volume and 89 percent of the value of transactions worldwide.

“In addition to the impact of these ISO 20022 migrations, if you have to also implement support for real-time payment processing, it can affect your whole environment, such as liquidity management, account servicing — and your customers become 24/7,” he said.

Quicker international payments, SWIFT gpi and open banking application programming interfaces (APIs) also demand that FIs place renewed emphasis on core payment infrastructure modernization.

Many FIs, he continued, have had to triage their infrastructure systems to get ready for new messaging attributes.

“Each market is coming up with different variants of the ISO 20022 standards,” he said. “And that means that in modernizing your payments system, you need to be able to cope with that data set, cope with new validations, cope with new process flows and be agile enough to handle those variations across markets.”

Caldeira said the timeframe to get new integrations and new process flows in place has been drastically shortened. In the past, it may have taken 18 months to two years to test new integrations and fix problems tied to back-end functions, but now firms have to deal with complex data that are being streamed in real time. Cloud native integrations, he said, can help FIs get the agility that is needed to handle those changes and support the ability to release business logic changes at a much faster pace with delivery cycles as short as three to four weeks.

Fennell said Temenos has embraced the distributed, componentized computing principle, which can replace processes in a piecemeal fashion, which avoids negative back-end system impact and allows FIs to move to scalable architecture over time.

Agile foundations can also be established with DevOps, said Caldeira, which combine software development and IT operations, which beyond just systems can also help to automate security and compliance. This is required to address concerns such as security risks proactively. Here, the concept of DevSecOps and approaches categorized as Compliance as Code provide the organizational capability to automate the implementation, verification, remediation, monitoring and reporting of compliance status for the newly implemented technology, to speed up its adoption.

As Fennell stated of the FIs, “you’ve got to make it easy for them to take on that new functionality.”

With that agility in place, he said, payments become consumable service — and not just a product.

Measuring ROI

As payments modernization takes shape, the measurements of ROI change as well, said Caldeira and Fennell. STP rates, said Fennell, can be a good benchmark for ROI. He said STP rates of over 90 percent can generate eight times more revenue per customer and result in a 60 percent lower churn rate.

“Those efficiencies in payments processing with straight-through automation have a real impact on the bottom line,” he said.

Remarking on the current trends in payments modernization and the ones still to come, Fennell mused that “COVID-19 made people sit up and think about the world we live in because it has just changed all our lives. Maybe that’s given people a bit of freedom to think about their current infrastructures and their processing capabilities.”

In a bit of advice for FIs, Fennell said, “if you’re not going to make these changes now, when are you? We know the technology’s there to help. So, don’t miss the boat.”

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The PYMNTS Cross-Border Merchant Friction Index analyzes the key friction points experienced by consumers browsing, shopping and paying for purchases on international eCommerce sites. PYMNTS examined the checkout processes of 266 B2B and B2C eCommerce sites across 12 industries and operating from locations across Europe and the United States to provide a comprehensive overview of their checkout offerings.

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