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By Andrea Klein, vice-president, Global Financial Services, Oracle

When it comes to modernizing payments systems, banks have long clung to an “if it’s not broken, don’t fix it” attitude. That mentality appears to be changing, however, as banks face a near “perfect storm” that makes the timing optimal for them to rethink and, more importantly, move forward in redesigning their overall approach to payments and the technology infrastructure that supports this vital profit center. Banks that seize this opportunity will be well positioned to capitalize on new opportunities and remain competitive in the rapidly transforming payments sector.  

Banks, today, face an unprecedented convergence of challenges in the battle to remain competitive in the payments space. First, non-bank entities, such as eBay, Google and Starbucks are transforming the payments playing field and forcing banks to consider new business models to avoid profit erosion. 

At the same time, many banks’ IT infrastructures are making it harder for them to compete, when it matters most. Aging hardware and payments software systems are increasingly expensive to maintain and do not provide the agility and return on investment (ROI) required to support new business models or payments volumes, which have increased at a steady rate of 15.7% from 2001 to 2007, according to a Capgemini report. Additionally, the credit crisis has forced banks to look at risk across the enterprise and by customer. Having to go into scores of payment systems—an average of 45 in many larger institutions (so not the worst case scenario)—to extract risk-related data is not practical, cost effective or easy, and points clearly to the need for consolidation.

Further, the payments discussion has elevated to a new level of urgency recently as many financial institutions face the impending 2011 sunset of ACI’s BASE24 payments software, which currently runs a large percentage of tier one global banks.

The message is clear. The time to act is now. Banks that seize the opportunity to create a new vision for payments will be well-positioned to continue to compete ably while driving innovation moving forward. This transformation must extend beyond replacing outdated automated teller machine and point of sale systems. By migrating to a modern, integrated payments infrastructure system that integrates and manages core functions such as check images, as well as supports sophisticated cash demand, supply chain and customer relationship management, banks can gain the increased operational and customer insight necessary to boost profit margins while strengthening defenses against threats of fraud or unauthorized access. And, thanks to the recent emergence of flexible technology solutions, banks can now easily transition legacy solutions and collapse previous data silos across payments systems at their own pace and without disrupting service. 

Detailed transaction data gives insight
A modern, integrated payments structure is a key to bank competition and profitability because it provides banks with a comprehensive view of customer data. This increased insight into critical behavior data arms banks with the information needed to tailor specific products and service offerings to individual customer needs. In addition, banks can easily analyze each customer to determine the potential profitability or cost of the account. When combined, relationship pricing based on individual customer interests and accurate price optimization based on potential customer profitability help banks to improve profitability and overall customer satisfaction.

Increased analytical capabilities afforded by an enterprise-wide approach to managing payments are key to optimizing customer relationships and profitability. By eliminating data silos, banks can better understand how customers utilize their payments products and services. Specifically, they can gain access to details, such as the velocity, time of day, denominations and location of transactions. In addition, banks can better understand the relationship of the party initiating the payment process to the other parties and devices involved in the transaction. Such comprehensive use statistics provide banks with the insight to develop and deliver new products and services to meet customer needs and remain competitive in the increasingly diverse payments market. 

Price optimization is also becoming a more critical component of profit strategies for banks, as regulators begin to cap overdraft and other historically profitable fee structures. A modern payments environment provides the predictive analytics capabilities that enable banks to find the right price for each customer based on channel, segment, geography, market and product details.  In addition, banks can account for customer elasticity—the extent to which demand falls as prices rise—which was not possible in legacy payments environments.

To further expand revenue opportunities, banks can leverage the modern capabilities of an integrated payments structure to cross-sell to non-customers. Banks can capture data at ATM/POS locations via magnetic strip or chip for all users, including non-customers. By gathering, aggregating and integrating data collected across multiple touch points, banks can synthesize comprehensive market information to create competitive, compelling offers for non-customers and increase market share and revenue at a lower cost.

Banks also need to generate more revenue from existing customers and attract new ones to raise capital organically. Leveraging the latest GPS technology for marketing with merchant partners is one example of a new revenue-generating service banks could implement with a modern ATM system. For example, banks could use GPS technology to make offers for nearby merchants via channels like ATM receipts—generating additional revenue for themselves and their merchant partners.

Beyond customer engagement, banks can leverage enterprise-wide data access to optimize profitability with more strategic cash and delivery planning. Many banks are looking to upgrade their physical cash management processes, which may currently be limited to spreadsheets and mainframe batch technology. Expanded cash management analytics capabilities help forecast cash use at specific ATM, branch or cash point locations at specific times of day. Advanced analytics can even predict usage peaks, such as ATM use around a sporting venue on game day. With this information, banks can optimize the amount of cash left in ATMs, branch and cash points overnight to maximize the sum remaining at the central bank to earn interest. In addition, with a fully-integrated payments solution, banks can combine physical utilization data with inventory management facility data and notes and coin manufacturing system data to optimize, vaults, deliveries and pickups of cash, enabling a comprehensive, efficient approach to managing the flow of physical cash across the financial institution.

Strengthening security
With an eye toward managing risk, banks also benefit from the increased security that an integrated payments system affords. Numerous high-profile fraud and money-laundering scandals have heightened consumer awareness of these omnipresent risks. As the media continues to shed light on recent criminal incidents, customers are requesting additional authentication, verification and security measures. Eliminating data silos, and implementing second factor authentication is an effective way for banks to strengthen security and mitigate fraud. A logical place for many banks to start is at the consumer payments switching and authorization systems that support ATM/POS channels. 
In today’s market, it is common for banks to employ legacy systems for switching and authorization that are more than 30 years old. These systems typically have unique device drivers and handlers for each endpoint. A multi-channel, integrated approach that is agnostic to the transaction endpoint, whether in person or online, provides banks with a single communication approach and ensures consistent access and security. To maximize the flexibility and value delivered by an integrated approach, banks should empower users to define and activate the message formats required to communicate with external devices, systems and payments networks using simple point-and-click graphical user interfaces.
This user interface should also function as the means for banks to incorporate new authorization and routing logic. Banks require accurate authorization processes for both issuers and acquirers of various payment types, including prepaid, debit, credit, mobile and contactless payments.  Additionally, they require the flexibility to act as the switch for issuers and acquirers, or a combination of both parties. A flexible, integrated approach to systems communication supports more transparent authorization processes and eliminates the need for IT specialists to program changes, so that banks can quickly adapt and maintain the security and accuracy of their authorization processes.
New technology enables real-time core upgrade
Cost-effective, flexible payments solutions are emerging at an opportune time for banks, many of which have legacy systems that are fast-approaching the end of their lifetime. To implement or upgrade with similar solutions would be slow and costly for banks. In addition, the legacy technology typically requires staff resources with specific programming knowledge, such as Common Business-Oriented Language (COBOL) or Assembler Language Code, to support the solutions. These resources are becoming increasingly scarce in the modern market and, as a result, are expensive for banks to maintain in-house. Migrating to a modern, integrated payments approach allows banks to minimize in-house programming requirements by facilitating the capture, transformation and routing, and delivery of transactional data in real time across heterogeneous databases and operating systems—eliminating duplicate processes and empowering individual users to make changes within the system.
Despite access to innovative technology, many banks have deferred modernization of their payments systems because of fears that the process would disrupt the availability of systems and data during the transition. To allay these fears, technology vendors and system integrators now offer solutions that enable banks to execute their transition while the system is live. Real-time change data capture and logical data replication capabilities eliminate downtime requirements during the system migration. After the transition is complete, banks can continuously update and post changes to their legacy system without requiring downtime. 

The time is right for banks to reconsider their payments infrastructure. Organizations that wait too long to upgrade outdated technology and integrate information run the risk of a competitive disadvantage. Banks that seize the opportunity to collapse data silos and leverage the expanded data access, analytics and reporting capabilities stand to quickly deliver greater value to both their businesses and their customers.

[This article was posted on February 25, 2010, on the website of ABA Banking Journal,, and is copyright 2010 by the American Bankers Association.]


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