Payment Processing Transformation: How to Support Customer Facing Innovations and Adapt to Increasing Regulatory demands – PART 1

This article is in two parts.  Part 1 focuses on the needs and challenges surrounding payment processing transformation, and provides advice on how to refreshing your payments strategy, vision, and business case.  Part 2 will discuss the best way to achieve the long-term vision: by breaking it into manageable short-cycle projects, each of which deliver value along the way.

  • Deborah Baxley, Global Cards Consulting Practice Leader, Capgemini
  • Jeroen Hölscher, Head – Global payments practice, Capgemini

Most payments innovation has focused on the on boarding and capture parts of the payments value chain or on the back-end value added services.  These innovations include mobile wallet, virtual accounts, tokenization, corporate payment hubs, an, payment analytics. In the mean time, the commodity middle of the value chain, comprising authentication, authorization, transaction capture, processing, and clearing and settlement, must keep pace with the innovations in the customer facing pieces of the value chain to enable ongoing innovations.

Entry of non-banks and channel convergence raise customer expectations and drive the need for payment processing Innovation. These expectations include ease of use, value-added services and usable insights from payments data. Retail customers are asking for real-time, anytime-anywhere, ubiquitous payments across many modes and channels.  On the corporate side, customers demand enterprise-wide visibility of cash and working capital, efficient cost-effective processing, and risk management.

There are a number of constraints to transforming payments processing, such as siloed inflexible legacy system and pressure to implement myriad regulatory and industry initiatives such as security and data privacy. General over-capacity in payments processing leads firms to compete for volume and seek revenue from sources besides volume growth.

Take a step back – now is the time to review your payments strategy.  As complexity continues to mount, firms can no longer delay a strategic review of payments processing.  This review should consider key business objectives, the core objective and strategic intent of the payments function.  A useful exercise is to diagnose your current level of maturity across the following eight dimensions: 1) scale, 2) speed, 3) efficiency, 4) channel coverage, 5) geographic reach, 6) insights, 7) price, and 8 ) product coverage.

Three prominent strategies include 1) “Feeder” – support your front-end strategy, 2) “Capacity” – maintain current capacity, and 3) “Competitive” – differentiate your back-office.  Each has implications in terms of sourcing, spend mix, cost and profit pools.  For example, a Feeder strategy may steer one toward strategic outsourcing while a Competitive strategy dictates the need for a very mature and efficient internal processing capability.  The Capacity strategy is likely the lowest cost while Competitive strategy is very high cost. A Competitive strategy has its own P&L, while a Feeder embeds its profit into the front-end innovation P&L.

Your business case is directly linked to your strategic drivers. If you are driven by a compelling ambition to protect revenue and achieve a dominant future position, then your business case should be built around the pillars of your vision-led framework.  If you are driven by the need to renew and refresh creaking, siloed legacy core systems, then the business case would be built around renewal levers such as cost and/or time to market improvements. Finally, if you are driven by compliance/market infrastructure, then your business case would be primarily cost focused for achieving milestones like SEPA, real-time payments or interchange compliance.

It’s also important to determine which profit pools are you are targeting.  These pools might include payment analytics, security services or payment process revenue.  For retail payments, profit might be centered on virtual currency, lending, currency conversion, prepaid or money transfer products.  For corporate, profits might come from risk management, information value added services, trade/supply chain management or treasury management.

As 2015 continues, we predict more bottom-line and top-line pressures on the payments function, a greater push for real-time payments, horizontal franchises seeking more ground and increasingly vulnerable positions resulting from inaction.