Can post-crisis internalisation provide a much-needed Shakabuku?

Shakabuku, a fundamental concept used in the propagation of Buddhism, can be thought of as a swift, spiritual kick to the head that changes common perceived wisdom. In the immediate aftermath of the financial crisis many banks looked inwards, intent on cost-cutting and finding areas that could be outsourced or otherwise from the bottom line.

Estimates show that the European non-cash payments volumes are set to grow with a CAGR of 9% through to 2020 – where they typically constitute a third to a half of most banks’ total revenues  – and EU card transactions to grow from 35bn to over 110bn. Also, according a RNCOS report, published in January this year, the global smart card industry is set to post a CAGR of 12% during 2011-2013. The research firm says it sees huge opportunities for payment card players in the near future due to a rise in EMV migration. Despite this growing importance, cards and other non-cash payments have traditionally been an area where most banks struggled to make savings without a drop in performance or service. The reason for this has generally been
the organic growth of banking services over time and a long-term failure to  control infrastructure across entire organisations.

Many banks battled their way out of the recent crisis by shelving infrastructure investment plans, internalising focus through a series of reviews and cutting wherever efficiencies and savings could be gained. What many of the payments architecture reviews found was the ever-presence of obsolete legacy systems, a fractured and siloed infrastructure managed by multiple departments with growing, fixed cost-base. Grinding, rattling COBOL mainframes managed by an ever-shrinking (and ever more expensive) pool of developers creating a costly time bomb eating cash with every tick. And this
legacy appeared not only in single departments, but across each team handling some form of payment, credit and debit cards, retail credit transfers, direct debits, cheque processing, bulk transfers, RTGS systems all suffered to a greater or lesser extent from the legacy problem. Many of the issues have been compounded by increasing regulatory pressure across all of these fronts and convergence of messaging standards across multiple systems towards more dynamic XML-based formats. The net impact of this is costly overheads for core banking systems and a consequent undilutable cost base for the organisation.

As a resulting conclusion from this internalisation process, many banks choose to continue to accept this situation as a difficult reality of our industry, eating into revenues from revolving credit and other cash cows. However, some have received their Shakabuku, the fundamental realisation that a transition to a multi-dimensional approach to payments is not only possible, but a necessary reality for future profitable banking. This becomes exceptionally pertinent in the quest to displace cash in low value payments where margins are particularly tight or non-existent. The traditional approach of swapping out like-for-like systems in order to keep up with new regulatory, standardisation and customer demands merely perpetuates the legacy problem, whereas realising that the investment in technology that serves the bank across all areas of
payments not only breaks down the costly silos, but allows better response to these demands, a faster time-to-market for new services and a joined-up approach towards cards and payments. Implementing this type of payment hub technology also brings efficiencies with best cost routing for transactions, facilitating greater volumes of on-us within a multi-national, reducing use of costly real-time channels when next-day is good enough or allowing concatenation of volumes to achieve better prices from the schemes.

However, investing in a payment hub is not the only part of this transition. Taking apart the silos is a complex and difficult change management project that fundamentally rewires your organisation and equips it for the future. This kind of investment requires brave and forward-looking management as it is seldom popular with those profiting from the as-is situation but the long-term benefits are considerable. However, with many regulators pushing cards towards zero interchange and merchants pushing for ever-lower prices for core services it is only the most efficient banks that will be able to fully capitalise on the opportunities presented in a changing environment and those banks will be the ones that received their Shakabuku and transformed their payments infrastructure.

(This article was orignally published in CardsNow! magazine March/April 2011 edition)

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