chief product officer,
If financial institutions recognise a new dawn in their payments business, they are not alone. Plenty of non-traditional players are piling into the market, wooing customers who are looking for more than reliability and a steady job. Louis Blatt, chief product officer at ACI Worldwide, looks at how a changing customer base impacts on payments infrastructure.
Transaction banking in general, and electronic payments in particular, have experienced something of a resurrection. Back in the spotlight, they are now receiving the respect they deserve as a sustainable source of revenue and a vital customer touch point. The stability and reliability of payments-sourced income is a welcome relief after the rollercoaster ride of the past few years.
The payments business also represents a huge potential growth area for financial institutions. The provision of electronic payments is a global industry that has seen sustained growth for more than 10 years and the general trend is for increased payment volumes and the replacement of paper instruments with electronic transactions. In some developing economies like China and South Africa, payment volumes are increasing by more than 25 per cent a year. Even during the recent slowdown in international trade the rate of expansion in the payments industry has exceeded that of global GDP. As a relatively low-risk business and a highly visible point of brand engagement, there is much to excite and energise financial institutions when it comes to payments.
But that respect for payments felt by the banking industry is not reflected in the attitude of potential customers, particularly the new generation of young adults whose lives are increasingly digitised and automated â and influenced by word of mouth more than by big marketing budget or fancy campaigns. These customers are used to getting what they want, when they want it, and will soon shout out if they are unhappy. They are adept at arranging all aspects of their lives online, and receiving services in real time. They are firmly embedded in the 24/7 non-stop culture, pulling the TV shows, the music, the films and increasingly the professional services they want, rather than waiting for providers to push those services at them or fitting themselves to the vendorâs timetable. To gain brand kudos with these consumers, it is vital to react quickly to their expectations of payments.
For this generation, the traditional banking brand values like reliability and security â already tarnished by the financial crisis â have much less meaning. They are hygiene factors only. Speed and convenience are the major attractions, and even then brand loyalty is ephemeral at best. For this generation across the globe there is no lingering sense that payments should be handled by traditional banks. This is happening at a time when financial institutions are losing their monopoly position in the payments industry. The names that form the backdrop to our daily lives - Google, Apple and Facebook - are moving into payment services, and for younger consumers in particular, there are no obvious reasons to stick with traditional financial institutions.
And this is a problem. The well-worn truism that people change their banking provider in only the most extreme circumstances, and a student customer is a customer for life, will soon pass into the history books. A bankâs biggest competitor is not necessarily another bank: it is much more likely to be a smart phone app. Even older customers are becoming accustomed to the idea that buying goods and services, paying bills and arranging financial transactions can happen to fit their own timetable, not just that of their chosen bank. For financial institutions to head this off, they need to partner with telecoms operators. However, this means they will have to split the value created.
This new customer reality poses a serious threat to the potential margins that can be made from transaction and payment services. Although the most obvious manifestation of the change in customer attitudes is seen in individual customers, hints of it are already discernable among commercial customers. For example, payment information is a critical component of corporate liquidity management, so customers expect real-time status reporting on payments, particularly where there is a delay or a strong possibility of failure. Corporate customers also want real-time audit trails to track progress and tighten liquidity and risk management. They rightly need to know what is really happening to their payments, not just that they are somewhere in another bank system.
The provision of summary real-time reporting and management information can be delivered to mobile devices âthey are more likely to be BlackBerries than iPhones in a corporate setting, although Apple and Google are making progress in the corporate market. For all the discussion about mobile channels for consumers and developing economies, they are also an increasingly important customer touch point in corporate banking.
Financial institutions need to adapt and find new ways of engaging with a less dependable, increasingly demanding customer base. If they are to take advantage of the opportunities that payments now offer, they must be more proactive than ever and re-work their strategies accordingly.
To engage all their customers in the media-savvy, socially-networked, always-on 21st Century, financial services will have to deliver services that are focused on them as individual units, rather than representatives of a broad demographic or business group: the âmarket of oneâ. They will need to continue to develop relevant new services that meet real demand, launch them rapidly and seamlessly, communicate their value, enable them to take care of themselves, and position them as essential to the customers they are targeting. They also need to understand which services are core, profitable products and which are non-core and unlikely to be profitable.
But to put the individual customer at the heart of transaction banking and deliver a highly granular service requires paradoxically, a payments framework that is standardised as well as robust. To gain a complete picture of their customers and understand their immediate needs financial institutions need to be able to view them in the context of their complete relationship with the bank, not just one aspect of it. They need to take a global view: customers do not appreciate geographic boundaries and they donât expect their service providers to.
In doing so financial institutions have to ensure that the systems that support their payments business do not break under the strain: or at the very least do not serve as the insurmountable hurdle to new customer-focused strategies. Unfortunately, the pursuit of tactical gains over thirty years or more, at the expense of strategic aims, has already produced the siloed systems infrastructure apparent throughout the industry. Payments environments have often evolved through piecemeal reactions to market and legislative changes - this has produced a disjointed arrangement of software components sourced in-house and from a multiplicity of vendors.
This infrastructure is both technically and commercially unsustainable in the longer term. It consumes huge resources simply in terms of maintenance and, by lengthening the time it takes and adding to the complexity involved in developing new services and products, it actively hinders the innovation needed to compete effectively. It forces financial institutions to operate as several separate organisations unified only by brand and logo and, by not integrating valuable information, provides a resolutely single-dimensional view of customers. With this kind of infrastructure, more nimble and flexible players can easily steal a march by grabbing the attention of speed-addicted customers.
Financial institutions cannot expect to succeed by sticking with the existing, unplanned and complex infrastructure or by replicating solutions that have been applied elsewhere. In practice, implementing a payment system that can provide the flexibility and agility needed to secure more elusive customer relationships is as much about applying knowledge and expertise as it is about software. Banks need to turn such expertise into propositions that add value to basic processing in a way that reflects not only their own strategy and positioning but the desires of their customers. In this respect all banks set out from different starting points, and with different end goals in mind.
But whatever the end position is, there is little doubt that new payment systems are required to streamline processing and to add value to core payments processing. Without it, they can expect to see the most valuable of tomorrowâs customers disappear in the arms of new, more modern suitors - never to return.