Payments convergence is coming - ACI Worldwide

With the pressures of increased competition and regulatory change, for example the EU initiative to combine national payments systems within its territory into a Single Euro Payments Area (SEPA), the business of payments is rapidly moving up the banking agenda.

What is payments convergence? Payments convergence is the inevitable rationalisation of payments instruments and operations to remove inefficiencies and maintain profitability.  It will result in the removal of functional duplication between payment system silos and the integration of the different payment types which include retail, wholesale, national, regional and international functions.

Why is it important? Banks are struggling with unacceptable risk exposure as well as an extremely poor cost to income ratio in their payment services. McKinsey has estimated that the processing of payments accounts for almost a third of bank-wide operational costs in Europe although only a quarter of revenues is derived from payments and bundled products, resulting in a mere nine percent of pre-tax profits. Equally, corporate customers are demanding greater levels of transparency and real-time efficiency. Lastly, consumer expectations are rising with increased frustration at specific payment processing limitations and costs, especially in respect of international transfers.

What is happening to payments? Electronic payment volumes are increasing both in terms of traditional payment methods, but are also driven by the new ways of replacing cash payments that are being introduced. At the same time, banks are steadily moving away from the batch clearing of payments towards real-time authorisation and clearing. Finally, increasing amounts of regulations are being introduced which are affecting payment processing and the associated costs and revenues. Examples of this include the Faster Payments initiative in the UK and the Single Euro Payments Area (SEPA).

How can banks address convergence? Banks will need to take steps to ensure internal systems can handle payments and services across multiple delivery channels, both wholesale and retail.

Andy Brown, director of convergence strategy, ACI Worldwide says:

"Payments convergence is coming as banks seek to improve their cost management and risk management while also providing improved services to their customers. Transaction growth, competitive threats, customer demand and regulatory pressure are all factors driving convergence. Indeed, we can see the first convergence buds in the banks' race to meet the 2007/8 deadlines for both the Faster Payments and SEPA initiatives. However, these two initiatives are just part of the bigger convergence picture.

"Banks will no longer be able to operate competitively if they continue to separate their payment processing by regions and have systems that only support specific types of payments within that region. Instead, from a commercial and regulatory point of view, particularly SEPA within the Eurozone, banks must have systems that are standardised across all the countries within which they operate and are also open and flexible enough to be able to cope with M&A activity.

"At the same time, banks are struggling to cope with the increasing volumes of electronic payments as they realise that payments can no longer be seen as a back office function but as a crucial revenue-driving activity. Their legacy payment systems may simply be unable to scale to meet demand and worse than that, have significant amounts of redundant functions that all amount to increased cost for the banks. A knock-on effect is that banks are exposed to far higher levels of risk than they should be, principally because they are unable to accurately profile their debit and credit risk, because the systems are siloed and lack adequate reporting functionality.

"Leading financial institutions are already starting to prepare for consolidation of consumer, corporate, retail and wholesale payment systems.  "Payment tsars" have already been appointed in some cases, specifically to deal with convergence. By moving along the path towards enterprise-wide payments solutions, ACI believes banks will not only save time and money, but also improve the cost to income ratio on payment transactions and make wider operational efficiencies."

If you are interested in talking to an ACI Worldwide spokesperson on any of the above points, please contact Sharon Brennan on 020 7608 4628 or sharon.brennan@hotwirepr.com