Build, buy or outsource: What is the future of payment systems?

By Darren Busby | 26 October 2016

All payments businesses share the same objective – to increase their bottom line, but in a marketplace where everyone looks the same, how can financial institutions (FIs) stand out from the competition? With an ever-increasing choice of tier one, challenger and niche FIs competing for a customer’s business, it is important for organisations to demonstrate tangible differentiators in order to show their customers that they mean business.

Whilst for many, payments solutions are simply a means to an end, they can be powerful enablers and should not be overlooked by FIs striving to stand out from the crowd. However, when implementing or upgrading a payments business there is plenty to consider, not least whether to build, buy, or outsource.

Build

The main driver behind the decision to build a solution from scratch is the flexibility and control it affords.  If designed correctly, a system can be easily adapted as both the company’s strategy and market requirements evolve. This choice is especially attractive for companies with their own in-house IT team as not only will development costs be cheaper, but having their own system will increase the business’ valuation.

However, building a payments system from scratch could be seen as trying to reinvent the wheel, with added regulatory burdens, investment in man days and money to build something that might fundamentally already be in place. The time taken to implement a ‘build’ solution can be significant; the analysis of in-house requirements and resources, agreeing and signing off on everything and then, of course, implementation. Companies also need to work out how ‘right’ they need to be first time so they are not backed into a corner – imagine having invested months into building a solution then finding fundamental flaws in its design that now have to be lived with for years going forwards.

Buy

Then there is the option to buy an off-the-shelf solution. Not only will the solution be tried and tested, companies will have the opportunity to see the solution running in an environment similar to their own and can lean on the supplier’s experience. A much quicker option than buying, there is also the opportunity to adopt and adapt; for example, adopt a solution if they don’t want customisation and adapt their processes to suit the solution, or adapt the solution to suit the business’ processes by requesting changes from the solution provider.

Whilst this might seem like the most suitable option for many businesses, buying an off-the-shelf solution is unlikely to give a business exactly what they need. There will be unnecessary features that are not required, or features that are required but not supplied. This could result in being dependent on the vendor to invest in research and development to ensure they keep up with market trends. There are also potential integration issues with in-house systems, and costs around hardware and maintenance.

Outsource

Another option is outsourcing all or some of their payments business to a processor. This allows a company to focus on their core business by outsourcing non-core areas, resulting in lower operational expenses and more predictable cost forecasts so that businesses don’t need to spend extra on infrastructure or technology. The additional benefit is that if working with an international processor, the support staff should be available 24/7/365.

However, like with the build and buy solutions, there are issues. If going down the managed services route, a business will have less control as they are putting their customer relationship and quality of service in the hands of their processor. They also depend on the processor to keep up with the market trends that are relevant to their business; for example, a small start-up may not be able to exert enough pressure on the processor to make changes or develop new features as opposed to a tier one FI whose business is more lucrative. In a multi-tenanted system, whilst customisation may be possible, some businesses may just have to live with what they are given and adapt to it.

The future

The payments industry is continuously evolving so it is important for a company to invest time in working out which approach is best for their business. Whilst building a solution from scratch provides the greatest ability to differentiate, it is tempered by the sheer workload imposed on the staff. Buying and outsourcing make sense when innovation isn’t core to the business, and vendor selection is crucial for both. To work out which is the right route, a business should look at their vision and objectives, think about what they want to do in payments, and what they’re going to offer as part of the service. Strategy is integral – not just what works today, but what will work in three, five and 10 years’ time, and how their decision to buy, build or outsource will impact the business.

This doesn’t have to be an a, b or c decision. Organisations can combine the benefits of two or all three approaches to enable complete differentiation for the future. A company can buy a pre-built system on open development technology delivered as a turnkey solution, which also provides the business with the tools to make it their own. This kind of system will be architected to allow a business to take advantage of enabling increased differentiation, but also shift the responsibility of complying with card scheme mandates, PCI DSS, etc, to the vendor. By using an open development buy/build hybrid model, a company can move their resources away from external pressures and focus on their core business – the technology platform becomes the enabler for the business to innovate on.

By Darren Busby, Associate VP & Business Development Director, Compass Plus