Banks and financial services providers are facing a more and more competitive business within the retail banking as well as corporate market. Increasing productivity and efficiency by decreasing operational costs is very often one milestone on the strategic business roadmap of a bank or financial services providers. The payment area is usually seen as a cost intensive, but necessary part of the business and information technology (IT) landscape. Many banks and financial services providers do still follow a best-of-breed approach within the system payments landscape, which ends up in high operational and maintenance costs as different payment processing platforms are serving different business purposes. The establishment of a single globally centralized payment hub cannot be only the solution for the ending of a heterogeneous payment processing landscape, but also for supporting the strategic management roadmap by decreasing system complexity and increasing the efficiency of the payment platforms and thus decreasing operational and maintenance IT costs. Furthermore it can support banks to establish a far more flexible technological implementation approach for an entire core banking transformation program. This paper is analyzing the challenges and issues banks and financial services providers are facing with the establishment of payment hubs in their enterprise system landscape from a management as well as IT point of view.
Payment Hubs, IT Management, IT Architecture
Financial Institutions all over the globe are currently focusing on increasing their efficiency in payment processing. At the first glance this is more than sensible as most retail customers don’t want to pay for any kind of standardized transaction, especially domestic transactions. Regulatory changes like the unification of the European transaction market by introducing a Single European Payment Area (SEPA) strengthen the customer’s position and are not limited to private retail customers. Even corporate customers are now eligible to initiate pan-European payments using the SEPA payments scheme without getting charged any fee—or at least at much lower fee rates [
However, banks do not only face the challenge of a profit source break-down [
Replacing any kind of a core banking system is always a challenge for banks. Besides the transformation of different banking business domains from an IT point of view, the impact and the following business-related consequences are much more significant and extensive. The most common related and affected domains are account management, financial accounting, risk management and lending, but there is one domain, which links all these different business domains together or at least these domains rely on one centralized business cluster: Transactional Banking or Payments. In order to stay competitive in the current banking market, a reliable, scalable, highly flexible and agile system landscape and software application architecture can be one of the main business success drivers [
hypothesis, that a payment hub can support banks and financial services providers to gain operational efficiency and serve as an initial project phase for a core banking transformation program.
Banks as well as financial services providers need to stay competitive in the current banking market and thus they need a flexible and highly resilient system architecture. The design of the landscape itself should follow an integrated infrastructure design approach and be aligned with the corresponding business processes in order to provide a high quality of service [
In order to run the bank with a payment infrastructure consisting of different payment applications (see chapter 1, Introduction) you are facing several issues on an operational level, especially reconciliation. Besides that, the even bigger challenge is to get rid of this kind of system landscape and transform the bank to a less sophisticated payment processing architecture by streamlining all payments into one single payment hub. As easy as this sound, banks and financial services providers usually face 3 common issues.
In order to transform a point to point—or metaphorically speaking Spaghetti like—payment processing architecture, the IT and business division have to design and align to a common roadmap strategy. Due to the fact, that the processing of payments is crucial in any kind of financial institutions a big-bang transformation approach is usually considered as high risk strategy and thus not common. However, the transformation itself will take time and is not a cheap endeavor. On the other hand you’ll increase the operational efficiency, react quicker to market challenges and changes as well as regulatory requirements. But the business benefits are marginal as the end user or the customers will benefit only marginally. Thus it will be hard to convince high level managers and CIOs/CEOs for the support of such a transformation phase in order to sponsor it, but their support is crucial for a transformation success. According to Matt Cohn, Partner in Capco’s Banking practice in North America, the transformation phase is not only a simple project, but a multi-year program:
“Most organizations are trying to sort out how to take on the transformation. Many of them see the value of hubs, but getting there in the current environment with their existing legacy infrastructure is a challenge. They have to navigate what can be a fairly complex transition and break it down to logical pieces to form a multi-generational program. [...] The regulatory environment is making it that much more difficult—there’s an internal competition for resources and dollars. [...] For example, we worked with a financial institution that recognized it has lots of redundant payment executions, and they wanted to know if there was technology to help reduce that complexity and save money. The unequivocal answer is, ‘Yes, there is.’ But unfortunately it fell down their list of priorities. The focus on regulatory compliance is one reason for that. So you have to show that there is a compelling business case to make the investment [in payments hubs]” [
Payment Hubs are designed to be located at the heart of a core banking system landscape. All channels are streamlining their payments into one single processing application, which is validating, enriching and distributing the transactional payment data. In order to provide a functional feedback to a multi-channel architecture, the payment system has to provide business related information regarding the processing and posting status of each payment. This kind of architecture implicates a direct coupling of the frontend channels, the payment hub and the corresponding account management systems in order to provide a functional respond real-time or at least near-time. However, a service-based integration architecture is usually based on the philosophy of a de-coupled system integration without any direct coupling and inter-system dependencies, which contradicts from a very first point of view with the establishment of a single payment hub. The solution could be an asynchronous service behavior using a request—confirmation pattern (see
Due to the fact, that every single payment request triggered from all different kind of channels—real-time as well as bulk based—will be sent and processed via a centralized payment hub, the volumes in this system will be significantly higher than for a “normal” payment processing platform (e.g. payment processing platform for domestic payments only). This ends up in a demand for highly scalable and extremely flexible application
platforms in order to handle these numbers of payment requests.
Once a single payment hub is established (see
Within this formula the number of interfaces f(p) are depending on the number of payment applications p, the number of channel based interfaces c to the payment applications and the number of interfaces from the payment applications to the account management systems a.
Banks and financial services providers have to face the new reality of a more and more competitive banking market situation as well as break-downs of once reliable revenue sources due to regulatory requirements, customer demands and new competitors in the industry. In order to boost their business capabilities, revenues and thus stakeholder value, banks have to provide new business strategies, cut down operational costs and increase agility. From a payment point of view Payment Hubs seem to provide a solution for these issues and challenges, but not without an investment and implementation risk as a Big-Bang approach is not a real suitable transformation strategy for most banks. As easy as it seems, unwinding Spaghetti pasta isn’t always as simple as it appears at a very first glance, but it can support the bank’s core banking business and IT strategy from a long term approach point of view.
I would like to express my special appreciation and thank you to my advisor Professor Dr. Ing. StojanRussev,
you have been a tremendous mentor for me. I would like to thank you for encouraging my research and for allowing me to grow as a research scientist. Your advice on my research has been priceless.
A sincere thank you to my family, my partner and her family. Words cannot express how grateful I am for all of the sacrifices you have made on my behalf in order for me to focus on scientific research besides my job.