31 March 2011
Understanding Payment Services
Hubs
Zilvinas Bareisis, Senior Analyst, Banking
London
A recording of today's webinar and copy of the presentation will be available
to Celent clients on our website at http://
reports.celent.com/login.asp.
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Copyright 2011 Celent, a division of Oliver Wyman, Inc.
Before we start
A recording of today's webinar and copy of the presentation will be available to Celent clients on
our website after the event at http://reports.celent.com/login.asp
You can obtain more information about subscribing from Steve Nawrocki [email protected]
For questions about the content please contact Zilvinas Bareisis [email protected]
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
This webinar is a summary of three recent Celent reports on payment services
hubs
1
PSH definition
Terminology clarification
Different types of hubs in
practice
Evaluation of 9 PSH vendors
ABCD methodology and
evaluation criteria
Detailed vendor profiles
Drivers for PSH projects (why?)
PSH project approaches (how?)
PSH market (who?)
Selected case studies
November 2010
28 pages
December 2010
134 pages
March 2010
40 pages
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
Contents
1. Defining a Payment Services Hub (PSH)
2. Drivers for PSH Projects
3. PSH Market
4. Developing a PSH Strategy
5. PSH Vendors
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
Section 1
Defining a Payment Services Hub
Payment services hub a vision for payments architecture
Ability to
manage, on a
single platform,
any
and deliver
core payment
functionality
under key
conditions
Instrument type
Standard/ scheme
Credit transfers
Direct debit
Credit card
Debit card
1 Instruction receipt, 2
payment object
creation and
prioritisation
SWIFT
ISO 20022
Domestic RTGS
Domestic ACH
SEPA Direct Credit
SEPA Direct Debit
Validation,
compliance,
repairs and
storing
Customer
Channel
Branch
instructions
Online
Mobile
ATM
Clearing
preparation (CSM
selection)
Transaction types
Corporate
Retail
Other FIs
Bank internal
departments
5
Authorisation
Outgoing payments
Incoming payments
Batch
Single real-time
Refund
Rejection
6
Execution
Customer
notification and
reconciliation
Delivered as services, drawn from and available to either within the PSH or other areas in the bank (SOA)
with ability to customise workflow by any dimension of A or payment characteristics (BPM)
and with sophisticated monitoring and alerting capabilities (BAM)
reliably at large volumes and throughput
with appropriate security, access control and audit trails
Source: Celent
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
Banks are implementing one of four types of payments services hubs, often
starting with a channel integration (1) or a CSM integration hub (2)
1. Channel integration hub
Online
(corporate)
Host-tohost
Treasury
(bank)
ATM
Online
(retail)
Online
(corporate)
ACH
SWIFT
Card
networks
STEP2
RTGS
ATM
Treasury
(bank)
STEP2
Cards
Core banking
Low-care engine
High-care engine
Payment
processing
platforms
Cards
Core banking
Low-care engine
Payment
processing
platforms
RTGS
Host-tohost
Channel integration
High-care engine
Online
(retail)
2. CSM integration hub
CSM integration
ACH
SWIFT
Card
networks
Source: Celent
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
with the goal to ultimately reach one of the two potential end states
3. Payment orchestration layer
Host-tohost
Treasury
(bank)
ATM
Online
(retail)
Online
(corporate)
Channel integration
Host-tohost
Payment processing
platforms
ACH
SWIFT
Card
networks
Cards
Low-care engine
High-care engine
Core banking
Cards
Low-care engine
High-care engine
Payment
orchestration
layer
CSM integration
RTGS
Channel integration
Payment processing
platforms
Payment
3 orchestration
layer
Treasury
(bank)
ATM
Online
(corporate)
Core banking
Online
(retail)
4. Vertical payment services hub
CSM integration
STEP2
RTGS
ACH
SWIFT
Card
networks
STEP2
Source: Celent
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
Additional terminology considerations
The first two types of PSH can be implemented without exposing payment functionality as
services, in which case use of the term payment hub is appropriate.
Celent favours reserving the term payment factory for payment hub implementations within
corporations.
The solution does not have to be a multi-entity (multi-bank) implementation to qualify as a
payment services hub.
Typically, payments engine refers to a dedicated solution to provide end-to-end payment
processing. A traditional payments engine is, however, a monolithic software package with limited
flexibility and functionality hard-coded rather than delivered as services.
Having said that, a solution shouldnt be dismissed just because it might be called payments
engine. Some of them might be fully capable payment services hub solutions.
Source: Celent
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
10
Section 2
Drivers for PSH Projects
It is important to distinguish between the fundamental drivers behind the PSH
projects and a business case justification
Business case
justification
Fundamental drivers
Presence of a
burning platform
Presence of a
large related programme
Technology-driven, when e.g.
an existing payments engine
becomes obsolete or no
longer meets the banks
requirements for functionality,
capacity, flexibility etc;
Core banking system
replacement programme
exposes how much of
payments functionality was
embedded in a legacy core
banking platform and
presents an opportunity to
extract that functionality into
re-usable payment services.
Business-driven, when the
bank becomes concerned
about losing customers and
market share, unless it
upgrades its offering(s);
Regulatory, when new
regulations require new
capabilities and investments;
... or quite typically, a
combination of the above.
Core banking system
programme can also force a
bank to consider the overall
technology roadmap and
seek to identify enabler-type
projects for the overall
transformation.
Benefits
(quantifiable + strategic)
vs
Implementation costs
Risks
Source: Celent
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
12
PSH benefits framework
ILLUSTRATIVE, NOT EXHAUSTIVE
Benefit drivers
Relatively easy to quantify
Relatively difficult to quantify
Cost reduction
Lower cost of IT development and
maintenance
Reduced cycle-time and manual
processing due to increased STP
Reduced FTEs due to centralised
operations
Reduced cost of transaction execution
(e.g. more On-Us)
Reduced architectural complexity
Revenue retention
and enhancement
New chargeable services for customers Accelerated client onboarding
Payment processing insourcing
Improved customer service - uniform
channel experience, more information, etc.
Risk and liquidity
management
improvement
Improved fraud and anti-money
laundering management
Reduced error rates
Increased system resiliency
Improved payment flow visibility and liquidity
management
Improved controls
Improved payments analytics
Increased agility
Speed-to-market for new products or
channels
Improved ability to integrate acquisitions
Improved ability to respond to regulatory
requirements
Source: Celent
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
13
PSH contribute to revenue retention and increase through increased customer
satisfaction and by enabling new services for the bank
Revenue per
customer
4
Charge for new
services
1
Retain existing
customers
3
2
Attract new
customers
Insource
from FIs
Number of
Customers
Client satisfaction drivers
Single interface for corporate clients to the bank for all types of
payments, without having to think about the payment types, values
or underlying clearing infrastructures and choose a different
banking payment product for each.
Ability to send a single file containing all sorts of payment
instructions, as generated by their ERP systems and let the bank
take care of processing that file. In some cases, direct integration
to the banks corporate customers ERP/EDI systems are
possible, thereby reducing cost of integration from the corporate
side and time of customer on-boarding.
Ability to enrich payment instructions with additional data, such as
invoice or remittance information.
Ability to add customer-specific user-defined fields that would help
those customers later on with e.g. reconciliation.
Ability to enter and store the transactions for later date execution, as
well as set-up regular payments.
Having an opportunity to repair the payment (or help to ensure that it is
entered correctly the first time) upfront rather than deal with rejects
afterwards.
Advice on (and automatic routing to) the most appropriate CSM based
on the customer-defined criteria, such as cost or urgency of payment.
Guarantees, often backed up by SLAs, that the customer payments will
be delivered accurately, on time, with agreed FX rates and at an
agreed and transparent cost.
Having good visibility into the payment flows, in and out, and the
intraday liquidity position.
Instant (or as defined by the client) notification if anything goes wrong.
Ability to advise beneficiaries from within the payment system.
Source: Celent
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
14
Besides costs, PSH programme also needs to consider the risks, both
implementation as well as steady state risks
Implementation risks
Steady state risks
Project risks - a meaningful PSH project is
going to be a large programme and as most
transformation programmes will carry
vendor, implementation and change
management risks among others;
Business as usual risks - as more
payment types migrate to a PSH, the
importance of reliability and the risks
associated with processing concentration
grow exponentially.
Side effects - a PSH project is likely to
touch not only the payments systems, but
many other systems, including core
banking, posing potential operational risks
to day-to-day operations;
Having said that, a bank with ambitions to
grow their payments revenue and to provide
payment services to their corporate
customers, has also to assess a long-term
risk of not undertaking such a project.
Celent firmly believes that this long-term
risk should be a key component of the
benefits side in creating a business case for
a PSH project.
Source: Celent
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
15
Section 3
PSH Market
Over 40% of all PSH implementations, live and ongoing, are at the large financial
institutions with assets exceeding $100bn
Payment services hub
implementations are usually large
and expensive projects; it is only
natural that large, mostly
international banks with strong
corporate franchises have been
able to see the potential gains
faster and at the same time
appreciate the size of task that
they were taking on.
Tier 2 and 3 banks like the
concept of the PSH but frequently
have payment volumes that, todate, has made it harder to justify
the investment.
Source: Celent
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
17
Similarly, nearly 56% of all PSH implementations are in Western and Northern
Europe
SEPA has been a major driver stirring
banks in Europe into action.
One of the barriers at the Western banks
is the procurement practices which
sometimes fail to take into account that
a hub is a solution not a product.
Having said that, the level of
understanding and appreciation of PSH
concepts among the Western banks
appears to be higher than that of their
Asian counterparts. The Asian market
remains fragmented and quite 'product'
focused.
The PSH space in general remains open
to interpretations and confusion over
terminology
Source: Celent
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
18
Selected examples of payment services hubs projects around the world
Bank
Focus Area
Geography
Core Vendor
ANZ
Low value payments
Asia Pacific
(New Zealand)
Logica
Bank of America
Corporate treasury management
Global
Fundtech
Commonwealth Bank of
Australia
Cards, retail and wholesale payments
Asia Pacific
Clear2Pay
Co-operative Financial
Services (UK)
All UK payments
Europe (UK)
Clear2Pay
Deutsche Bank
High care payments
Global
Dovetail
Deutsche Bank
SEPA payments
Europe
Logica
Deutsche Postbank
Retail payments
Europe
SAP
JP Morgan Chase
International ACH; Low and high value
payments
Global
Dovetail
Santander
Corporate treasury management
Global
Polaris
Societe Generale
Pan-European payments
Europe
TCS
Standard Bank of South
Africa
High value SWIFT payments
Africa
Logica
Standard Bank of South
Africa
International and domestic online
corporate payments
Africa
Clear2Pay
Swedbank
SEPA
Northern Europe
Tieto
Source: Celent
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
19
Section 4
Developing a PSH Strategy
Key decisions for a bank during the strategy and planning phase of a payment
services hubs project
ILLUSTRATIVE
ILLUSTRATIVE
Direct
Credit
transfers debits
Cards
How many technology
vendors? For what roles?
What capabilities are you
looking for from a
technology vendor?
How many
implementation partners?
How many
Orchestrate
hubs and
vs
where?
upgrade?
Value and
risk
assessment
Partners?
Build vs
buy?
New
Other
systems
vs
Payments
engine
Domestic
Orchestration
Other
systems
Payments
engine
International
Payments
within Core
banking
Orchestration
Payments
within Core
banking
Multinational/
regional
Legacy
Build
internally
Buy from
vendor
Buy and build
(framework
and SDK)
Source: Celent
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
21
Examples of other lessons learned
Assemble the right team (internal and external) and align all parties
Agree common language and clarify terminology
Ensure the right mix of skills and dont underestimate the importance of the can-do attitude
Ensure clarity of roles - who is responsible for what
Align incentives
Establish governance with authority not just over the PSH project, but over any payments-related projects within
the bank to make sure that all projects go through an ROI prioritisation and nothing is launched which might
contradict the architectural vision and overall roadmap
Dont go for a big bang approach. Have the long term vision, but migrate in stages, building scalability and
extensibility.
Consider developing a Proof of Concept
Each step of the transformation should deliver ROI and tangible business benefit
Develop a retirement plan for legacy payments applications. Again, no big bang approach
Re-use - dont build what you already have, especially for common services, which are used by other applications,
not just for payments (e.g. FX)
Document thoroughly; also make sure to have training manuals/ instruction documents to be used either for clients
or internally.
Where PSH scope and benefits include improved corporate integration, train the internal people for customer onboarding to minimise reliance on the vendor.
Dont forget to align operating model changes, especially in key areas of payment operations and risk
management.
Source: Celent
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
22
Section 5
PSH Vendors
When evaluating vendors Celent uses a rigorous ABCD methodology; the best
performers in each dimension receive a corresponding XCelent award
Dimension
Indicator of
Factors included for PSH vendor evaluation
Advanced
technology
Level of technological Usage of SOA and degree of functionality available as services
sophistication and
Modularity of the solution (e.g., framework with building blocks)
flexibility
Extensibility of the solution (e.g., availability of Software Development Kit [SDK])
Openness of the platform (e.g., choice of programming language, supported
hardware, operating system, etc.)
Approach to orchestration (e.g., balance between fine-grain and coarse-grain
orchestration)
Breadth of
functionality
Range of
feature/functionality
set that is live and
able to be offered to
clients
Breadth of scope (i.e., supported payment types, clearing and settlement
mechanisms, etc.)
Orchestration layer capabilities (e.g., repair, special instruction type handling
[mixed files, returns], multi-entity capabilities, ERP connectivity, reporting, etc.)
Out of the box payment processing functionality (for vendors with full PSH
capabilities)
Customer base
Vendor experience
among its FI
customers
Depth of customer
service
Quality of companys
responsiveness and
support
Ability and willingness to provide client references available for interviews
vendors were required to provide two references each. Those that did provide
the references were further judged on quality and timeliness of the reference
and reference feedback
Servicing capabilities (e.g. global footprint, relevant size, degree of payments
focus and expertise, pricing flexibility and consulting and implementation support
capabilities (either own or through explicit partnerships)
Interaction with the analyst
Number of live customers globally
Number of ongoing projects
Geographic diversity
Size of clients (by assets)
Source: Celent
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
24
Celent evaluated nine leading payment services hub vendors, a diverse group
Taxonomy of key payment services hubs vendors
Firms industry
focus
Payments/
transaction
banking
focus
1A
Broad
Financial
Services
focus
1B
Broad
industry
focus
Broad range
of IT services
Product
focus
Firms
offering
Source: Celent
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
25
Tips (for banks) for a successful relationship between banks and vendors
Seek a partner with the right mix of the overall technical and functional quality of the solution, vision
for payments and product development roadmap and ensure fit with the banks vision
Consider your need and the vendors ability to advise on the banks payments strategy, architecture
vision and roadmap and ability to support implementation
Explore pricing options
While the industry standard is to charge a licence fee dependent on the expected transaction
volumes, some vendors also offer pricing which is dependent on the number of countries or
number of corporates being served, and others are willing to explore pay-as-you-grow options.
Expect to pay up to 4-5 times more for implementation than for the initial licence fee. The
implementation costs can be even higher if third party implementation resources are used.
The market average for maintenance fees is 21% of the licence fee. Some vendors offer a range
with the specific fee dependent on the service level agreements.
Align development roadmaps with those of vendors and expect to invest along with the partners.
Most vendors continue to enhance their solutions and many are co-developing them live with their
clients. The banks and vendors should carefully consider and agree the implications of such codevelopment for licence fees as well as intellectual property (IP) rights
The contracts are important, but so is the willingness and readiness to be flexible by both the
vendor and the bank. A PSH project is likely to take at least one parties into the unchartered
waters, so there likely to be times where trial and error should be expected. True partnership spirit
is essential, however, very difficult to capture in the contractual language.
Source: Celent
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
26
Thank you!
A recording of today's webinar and copy of the presentation will be available to Celent clients on
our website after the event at http://reports.celent.com/login.asp
This webinar is based on the following reports published by Celent in the last few months:
Defining a Payment Services Hub: Why Cant We Just All Agree?
Evaluating the Payment Services Hub Vendors: The Vision Is Getting Closer
Payment Services Hubs: The Banks Perspective. Who? Why? How?
You can obtain more information about subscribing from Steve Nawrocki [email protected]
For questions about the content please contact Zilvinas Bareisis [email protected]
2011 Celent, a division of Oliver Wyman, Inc. www.celent.com
27
