A bank-wide centralized payment services hub: Will it be just a dream or reality?

Payments have been an integral part of banking services ever since the advent of monetary system and this has been evolving along with the number of services and channels banks have kept adding over the years. With the transition and increased acceptance of electronic cash over the years with multiple channels at its disbursal like Mobile banking, Internet banking, Cards, it has become an increased necessity for banks to have an enterprise wide payment services hub (PSH) to effectively monitor the flow of cash and thus to provide transparency and traceability of monetary movements which will help in measure of its risk exposure. Banks are also hard-pressed to find the most efficient means to fulfill payments and to provide the best customer experience possible.

Currently, more than 40% of payment services hub projects are at large financial institutions with assets exceeding $100 billion, and nearly 56% are in Western and Northern Europe, based on data provided by nine leading PSH vendors. However, banks of all sizes and from all geographies are starting to consider how to adopt PSH concepts in their payments businesses, according to the Celent report, “Payment Services Hubs: The Bank’s Perspective.” 

To have a standardized and simple solution has brought in the initiative amongst banks towards transitioning to a unified enterprise-wide payment solution. The focus is on creating payment hubs which will serve as a single platform that operates across all customer relationships, channels of interaction and payment alternatives. But few financial institutions actually have implemented a true, single global payments hub.

What's holding back banks from making an infrastructure improvement that could create value for their payments operations while improving the customer experience for clients? The reasons cited are many which holds back banks from making an investment in payments modernization or rather say payments consolidation are like the huge onetime cost, the region or country specific regulations and business complexities, the limits of legacy systems and finally the uncertainty of the end result or success rate of implementing a Payment Services Hub (PSH).

Defining a Payment Services Hub (PSH):

A PSH is “the centralisation of payments services within a bank to support processing all types of payments through all payment mechanisms globally,” according to Richard Davies of Finextra.

A PSH is an intelligent central engine that uses workflows to capture, map and route payment information through clearing, settlement and risk mitigation, according to Gartner.

Current State and the Need for Change:

Most payment infrastructures today consist of two main components as defined below:

§  Customer Interaction Channels – Any system used by a customer to deliver payments to a bank is defined here as a Customer Interaction Channel. These channels may be interactive or file based. Examples of an interactive channel include a retail Internet banking site where a customer is paying his or her monthly bills and a teller entering a remittance payment to Mexico on behalf of a branch customer. A file based interaction would be one in which a collection of payments is sent to the bank via a file transmission, such as a corporate customer sending a file containing payroll, wire transfers, and International payments for processing.

§  Payment Execution System – An execution system is system used by the financial institution to actually process the payments sent to the bank through the Customer Interaction Channels. These systems are connected to the payment processing network, and each bank typically has multiple Payment Execution Systems that correspond to different types of payments. Examples here include a US Wire Transfer System (connected to FEDWIRE), an International Wire Transfer System (connected to SWIFT), and a UK low value payment system (connected to BACS).

The past ten years has seen a proliferation of Customer Interaction Channels. Payment instructions can now be received by the financial institution through a myriad of routes, including Retail Internet Banking, Corporate Internet Banking, Remote Capture Check Truncation, and “on behalf of” customer service payments. Typically, each of these interaction channels has had to connect directly to a Payment Execution System, creating a ’spaghetti effect’ of integration complexity. In addition, many components of the payment processing workflow have been buried in the Payment Execution System code, preventing reuse across different payment types. For example, processes like duplicate checking, OFAC checking, AML, and IBAN validation are not centrally located.

The requirement for modernization of this existing payments infrastructure is driven by need to handle a changing payments world efficiently and cost-effectively with a clear focus on improving customer service levels. Payment infrastructures need to support new initiatives such as the Single Euro Payments Area (SEPA), Pan-European ACH (PEACH), and UK Faster Payments. Adaptation to new regulatory and risk management practices (OFAC, AML, IBAN Validation) need to be made in one location and apply to multiple payment types to save both the cost of initial implementation and future maintenance. In addition, customers demand better visibility into the end to end payment process, as well as increased straight-through processing and the ability to repair and resolve issues independently.

A payment services hub addresses the current issues in a number of ways. COST; by focuses on industry standards hardware and software one can reduce costs. By focussing on the commonalities across all payments and spread investment across all payment types rather than making card investments then duplicating them to an ACH investment and then an international payment investment. In a nutshell, we can make a considerable difference in terms of cost savings by standardizing payments through a PSH. PSH can reduce the COMPLEXITY by bringing the multiple systems / environments that banks presently run to process their payments into one single environment thereby reducing cost and better monitoring. Adopting a PSH approach really enforces the need to look at payments as whole rather than across business types. As HYBRID payment systems like Faster Payments, PayPal and iDEAL becomes more endemic in banks, a PSH can be brought in to reduce the complexity.

Payment Services Hub Vendors:

In evaluating PSH software vendors to support payment services hub implementations, banks must align the strengths and weaknesses associated with the vendors market for coming up with a decision on choosing a particular vendor as payments remain the backbone of any banking organization.

It’s the bank’s decision what type of software service provider they would like to choose to partner with. Payment Services Hub (PSH) vendors can be broadly classified into three types based a their industry focus: a). Payments/transaction banking focus - examples includes Clear2Pay, ACI, Fundtech and Dovetail b). Broad Financial services focus - examples include Polaris, Misys, and c). Broad industry focus - examples include Tata Consultancy, Logica, Infosys to name a few.

According to Celent, majority of PSH implementations are to be seen in Europe and North America with Asia following the latter two as per the diagram below.

It’s now to be seen that these payment services hub long talked about that were considered just a dream is turning into reality with a few successful implementations across the globe. What distinguishes a hub from just another payments component is genuine flexibility. It’s being able to fit into a complex environment and talk to other systems including the legacy applications. It’s using data from these applications to enrich the payments process. And it’s making what banks already have in place work more effectively – improving payments services. This level of flexibility means the hub can work in conjunction with processing, accounting and reporting systems, while also linking to other services, such as FX.