Faster payments won't run on 'Band-Aids and bubble gum'
Banks, payment processors and merchants have long used IBM hardware or software to handle card or personal data, and the global technology company has continued to position itself to offer, or coexist with, advancing innovation.
Its recent mainframe upgrade to speed data encryption to the tune of 12 billion transactions per day, and the new Blockchain Founder Accelerator, indicate that IBM fully understands the opportunities and challenges of digital payments.
In his role as director of worldwide payments at IBM, Rajesh Venkatraman has seen how the financial institutions using IBM equipment have progressed to this point, and the types of issues they must address in the wake of faster payments, SEPA, PSD2, Swift messaging codes, the Internet of Things, and open application programming interfaces and networks.
With industry reports consistently indicating retail banks have increased investment in payments technology in 2017, Venkatraman did an interview with PaymentsSource that provides insight into the fast pace of payments technology and what sort of priority list banks should be following.
It seems the major change for banks in the past few years has been the advancement and adoption of faster payments, whether it is ACH or P-to-P, or the bigger picture of a Federal Reserve or European initiative. What are banks asking you about most related to this?
RAJESH VENKATRAMAN: On the surface, the immediate payback on ROI for immediate payments is minimal. They want to know how they can improve that ROI if they make the investment in faster payments. It is part of every client discussion we have.
In that regard, they would be reluctant to spend the money to advance their technology. Is that the case with most banks when studying their payments infrastructure and revenue generation?
People that have in the past continued down the path of Band-Aids and bubble gum in holding up their infrastructure and overall payments growth strategy just won’t cut it anymore. This is something they have to focus on now. Payments has always been a key contributor to banks for overall revenue performance, but it is now becoming a key business focus area for our banks. One of our clients says more than 40% of their revenue can be allocated to payments, much of it corporate or wholesale, but retail is not far behind.
So, I'm a bank contemplating faster payments investments. Where do I start? Is there a formula for knowing what the right thing to do is?
It's coming down to what a bank's core competency and target market is, and making sure they cater to their customers' needs. It is in the bank's best interest to keep up at the very least with customer requirements, while also testing new technology and that means considering working with disruptors and fintechs as potential partners.
Not every bank is going to take that to heart, right? You must see various strategic approaches to the vast number of payments innovations and initiatives taking place that have a direct effect on financial institutions.
Clients that have an understanding of their business and got started a few years back in adopting new technology are probably better off now. Others have waited for the first movers and adopters, and have chosen a different trajectory, but are not far behind. Then others are still scratching their heads about this stuff. Those with set strategies are just retweaking as new technology evolves, others are waiting but plan to follow the playbook, and others are just trying to get out of the starting blocks.
Let's say a bank has made the investment for faster payments technology. Are there specific revenue drivers that the faster payments system creates that banks can use to drive up ROI?
We try to help justify the investment in faster payments and have our clients think of new business models and exciting ways to better serve customers with faster payments. A client in south Asia knew that many of its corporate clients were holding overnight balances, so they offered a system in which they would be paid interest on those overnight balances when sent to the bank, which could make an immediate payment the next morning back to the corporation. It was immensely successful for the bank in capturing new accounts.
With faster payments, there is a corresponding faster compilation of data. That has to be a valuable resource as well.
Very much so. You can leverage data models to figure out client behavior and create an attrition model to detect when a client has a certain set of red flag behaviors, whether volume patterns or demographic changes, and how they interact with the bank. If you can score and leverage that, it helps reduce attrition, and that is very exciting for banks.
One thing we hear often is faster payments equals faster fraud. Is there a better way to combat fraud in this new environment?
Fraud reduction is definitely an area in which the data models help. It can help reduce losses by more quickly making the right payments and processing all of the data to make sure the payment is going to who they say they are. It also gives you a view into quality and possible ways to reduce costs.
Still, faster payments and the positive payback on it won't come easily for everybody.
Once you start to peel back the way a bank or group of banks operates, you are able to come up with an ROI in each of those high-priority areas and come up with a view of how to support those initiatives. But still, the initial costs for smaller banks can be daunting. But if they do some good soul-searching and look across these areas, the ROI does appear.
What's the key consideration of adopting APIs to work on top of legacy systems, or diving into open networks?
Some want to leverage their overall API connect strategy to allow them to leverage services internally, finding the best way to offer services across multiple platforms to different businesses, but also share internally. Others leverage external innovation, determining when to partner with external parties or fintechs. They determine what they are really good at, and what a potential partner is really good at, so as to form a partnership that can help shorten time to market with a product. That is what it is all about now, creating the best functionality or the best mobile pay experience for customers. A lot of industry investments are going into this. The true frontier is leveraging digital capabilities to become a truly cognitive bank that leverages machine learning and adapts.