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The traditional payments processing model for account-based payments is under unprecedented strain amid diminishing profit margins, increasing competition from fintechs, and rising costs. These challenges are only set to compound in a fragmented ecosystem marked by economic and geopolitical uncertainty, increasing regulatory demands, and rapidly emerging and converging technologies. The disruptive impact of evolving customer demand requiring scale, speed and personalisation also adds to the sense of urgency for banks.
Amid this increasing pressure, the time has clearly come to reimagine payments processing. One strategy gaining increasing popularity and traction within banks as a means of regaining control is ‘decoupling’ the payments value chain.
Why banks should consider decoupling the value chain
A fundamental constraint facing many banks is the design and implementation of payment processing flows based on the conception of specific payment types as individual products (e.g., a SEPA Instant or BACS payment). These flows run ‘horizontally’ end-to-end through each stage of the value chain, spanning payment initiation management (variously known as order management or pre-processing), execution, and clearing and settlement.
While this approach has historically made sense, the problem today is that it slows change. When an update is required and needs to be implemented, every aspect of the payment flow is impacted – instead of the specific area that it relates to. A simple regulatory or scheme update subsequently becomes onerous and resource-intensive, driving up the cost base and slowing time-to-market. The risks of operational and compliance issues are also raised.
Banks are also facing challenges from fintechs who are targeting specific segments of the value chain. This competition is spurred by the ongoing digitisation of economies, which is transforming traditional linear value chains into open ecosystems.
What’s more, banks’ ability to create and deliver value-added services that can unlock new revenue streams is inhibited. This is because transactional data is tied up in the end-to-end flow, limiting the potential for it to be truly leveraged across different payment types as part of broader, personalised services.
Given these limitations, decoupling is arguably the only way that banks can take control of their costs and drive innovation.
Regaining control in a fragmented world
The general idea of decoupling is relatively simple and can be defined as separate activities that are traditionally linked together.
The benefits are immediately apparent within the context of payment processing. Banks can identify the highly commoditised aspects of the payments value chain, such as execution and clearing and settlement, and work to drive down costs by factors, not percentages (Payments Processing as a Commodity).
Opportunities can then be realised in areas such as payment initiation management where there is far more scope for differentiation and the delivery of value-added services (Payments Processing as a Business). For example, by building a payment type-agnostic layer that is decoupled from the actual execution clearing and settlement, banks can orchestrate the transaction data to meet individual customer requirements and needs, realising new revenues.
How to decouple the payments value chain
But for this strategy to be effective, it is imperative to re-think and re-organise the way that payment processing flows are designed and implemented. Put simply, horizontal and end-to-end flows must become vertical and modular (with banks thinking more in terms of a Data Monetisation Manager than a SEPA Product Manager, for example).
This presents challenges. It requires a holistic approach that fully aligns business, IT and operations. Legacy, monolithic architectures must also be transformed to increase flexibility, reduce vendor dependency, and put banks back in control of their change calendar.
The key question then becomes – how can banks overcome these hurdles to realise the full potential of decoupling?
It starts with a clear vision and strategy that is truly focused on transformation. Banks need to understand their current capabilities, the role they want to play in each part of the payments value chain, and what they need to do to run payments as a profit centre instead of a cost centre. Once a strategy is defined, it must be underpinned by an architecture that can support it. This could include outsourcing complete parts of the value chain or implementing a modular, low-code technology framework that supports a flexible and agile decoupled architecture. Through this combination of strategy, services and solutions, banks can take control of payment processing to significantly reduce costs and restore payment margins.
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