Improving Visibility of Payments Value-Chain part 1 / 2
By Sanjeev Sharma on Dec 14, 2011
Payments processing is a central activity for financial institutions, especially retail banks, and intermediaries that provided clearing and settlement services. Visibility of payments processing is essentially about the ability to track payments and handle payments exceptions as payments flow from initiation to settlement. The business imperative for financial institutions, especially retail banks, for improving visibility of their payments processes stems largely from the following:
- Lowering time and cost of fraud detection, risk management and compliance by applying these efforts in a centralized manner across lines of businesses, payment types and payment channels
- Gaining real-time visibility of their cash-flows to optimize working capital by improving effeciency in borrowing and lending and negotiating appropriate SLAs with intermediaries such as clearing houses and payment channel providers such as credit card providers
While automation has improved capacity of existing payments systems to cope with ever-increasing volume of payments traffic, there remain several hurdles to improving visibility of payments processes. Payments processing is a complex businesses for largely the following reasons:
- Large and growing number of channels for payments initiation. This includes non-electronic channels such as in-person and post, and electronic channels such as ATM, KiosKs, Point-of-Sale (PoS), Online, Mobile etc.
- Multiple payment types including cash, check/draft, card (credit / debit), Electronic Funds Transfer (EFT), Wire transfer etc.
- Payments initiated as a particular type could be cleared and settled as another type. For instance, a customer may pay a merchant using a check and the merchant's bank may scan the check and send it as an electronic payment type through a clearing counter-party.
- Varying governance requirements across payment type, clearing intermediaries, governments and industry standards
- Loss of control due to separation of payment processing function across different entities e.g. initiation of card payments is handled by a retail function in a bank whereas clearing of card payments could be handled a card provider such as VISA
In addition to the above there are the following operational hurdles faced by a retail bank:
- Out-dated payment systems that rely on batch-processing thereby making it incredibly difficult to report status of individual payments.
- Multiple payment systems, each with their own fraud, compliance and risk systems, that are not integrated thereby increasing time, cost and complexity of fraud detection, compliance and risk management
- Multiple external interfaces to clearing intermediaries e.g. SWIFT, ACH, FedWire, Card providers, each with their unique security and message exchange requirements
- Structural silos, internal to a bank, aligned to payment types and systems thereby hampering enterprise-wide view of payment activities
In the next post, I will explore some approaches to achieving STP and improving visibility in payments processes that span front-office initiation channels, ancilliary back-office systems and external interfaces.