Monday Dec 19, 2011

Improving Visibility of Payments Value-Chain part 2 / 2

In my earlier post I discussed the business imperative for improving visibility in payments processes and the factors (demand, organizational and technology) creating impedance in realizing the vision of Straight-Through-Processing. In this post, I will outline some approaches of improving Straight-Through-Processing in payments processes to improve visibility in them.

Visibility in payments processing is fundamentally about knowing the status of payments as they flow from front-office initiation channels, across mid-office fraud, risk and compliance systems , through the payments application i.e. AR,AP and finally through external interfaces with clearing providers and financial network providers e.g. SWIFT, ACH etc. From a technology standpoint, payments straight-through-processing requires streamlining the integration across all these inbound channels, outbound interfaces and ancillary systems.

One approach is to consolidate all of the existing payments applications with a payments hub. Payments hubs are packaged applications that consolidate interfaces, both inbound and external, and offer full-fledged payments processing capabilities including AR, AP, treasury, exception management i.e. payments repair and reporting. In principle, centralization of payments processing with payments hubs provides real-time cash flow visibility by eliminating manual / semi-automated reconciling across multiple payment application stove-pipes, enables single-source-of-truth audit reporting and streamlined governance. It is important to note though that such application consolidation with a payments hub does require serious investments in time and effort, potentially being a multi-year effort and may be cost prohibitive depending on the comprehensiveness of the payments hub in terms of payment processing capability.

An alternative to application consolidation is interface consolidation with a payments gateway. Payments gateways streamline the number of integration points for payments applications by serving as a common pipe through which all in-bound and out-bound payment traffic flows. Unlike payments hubs, payments gateways do not replace core payments processing that’s undertaken by the payments applications. They offer connectivity to internal applications and external interfaces through pre-built adapters. This approach improves visibility in terms of being able to offer an aggregated view of the payments traffic in terms of volume and type of payments. Sophisticated gateways offer the ability to introspect the payments traffic, which could comprise of different message formats, there by offering a real-time snapshot of payments inflow, payments outflow and exceptions.

A hybrid approach is to use BPM in conjunction with the above technologies. Here, a lightweight abstract process is created to represent the end-to-end journey from the time a payment enters the organizational boundary to time it leaves the organizational boundary. This enables a chronological view of the payments workloads thereby giving insight for improving business operations by eliminating the bottlenecks for a specific line of business or initiation channel or payments application. Such abstract processes could be modeled as events driven processes that are triggered / invoked by different systems as payments flow through them. This BPM layer could also serve as the single-source for tracking payments. Below is a graphical depiction of how a BPM layer can be used to gain end-to-end visibility of payments.

Wednesday Dec 14, 2011

Improving Visibility of Payments Value-Chain part 1 / 2

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:

  1. 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.
  2. Multiple payment types including cash, check/draft, card (credit / debit), Electronic Funds Transfer (EFT), Wire transfer etc.
  3. 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.
  4. Varying governance requirements across payment type, clearing intermediaries, governments and industry standards
  5. 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:

  1. Out-dated payment systems that rely on batch-processing thereby making it incredibly difficult to report status of individual payments.
  2. 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
  3. Multiple external interfaces to clearing intermediaries e.g. SWIFT, ACH, FedWire, Card providers, each with their unique security and message exchange requirements
  4. 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.


A business centric perspective on Private Cloud, Data-center Modernization and EAI.

Sanjeev Sharma
Twitter: @sanjeevio


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