The introduction of Instant Payments in Europe and the launch of Open Banking/PSD2 have undoubtedly disrupted payments. Increased connectivity means finally moving away from 9-to-5 batch based, fire-and-forget processing to 24/7, real-time processing with track and trace capabilities. For businesses and governments, the ability to connect goods and services to real-time payments anywhere and at any time is hugely transformative, as it reduces friction in supply chains and global trade. But this poses challenges for banks, who are struggling to keep up with increasing requirements while trying to lower costs. How are they adapting? Many are already overhauling their infrastructure. Others are turning to mergers and acquisitions in order to modernize their stack and scale at a lower cost. Still, consolidating two distinct payments platforms with their own business rules and their own history is a major undertaking. Outsourcing payments is an interesting alternative. In this article, we explore the benefits and downsides of outsourcing, and offer guidelines for vendor selection.
Outsourcing pros and cons
Partnering in this transformation offers the bank major advantages. Outsourcing frees up internal capacity, allowing banks to focus on staying competitive rather than tending to non-differentiating compliance tasks. Another benefit is the ability to capitalize on external talent and industry best practices. Typically, an outsourcing partner has vast experience in implementing a new payments platform. This helps the bank reduce risk and speeds up implementation.
When properly done, transferring the payments processing functions – or part of them – to a third party minimizes complexity, costs and risk. What about the disadvantages? Outsourcing often comes with an important trade-off. In exchange for an efficiently managed service, the service is typically shared and therefore standardized across multiple clients. This limits the ability of a bank to offer tailored services to customers. It can also be difficult to efficiently integrate the outsourced service into the bank’s existing application landscape. The service provider often dictates the payments process flow. Sometimes, it dictates the interfaces to be used by the bank and even business rules, in extreme cases. Standardization to this degree does increase the bank’s integration effort and may hamper its ability to compete. This greatly diminishes the benefits of outsourcing.
It is possible to gain the benefits of scale and lower costs, while retaining flexibility. To do so, banks need to perform due diligence on the offered service. So what should you consider when choosing a vendor to partner with?
Guidelines for vendor selection
A recent KPMG publication offers insights for banking institutions looking into payments outsourcing. The following considerations stand out:
- Customized and personalized products and services, using advanced data analytics to curate products that are more relevant to each individual customer
- A focus on platforms and ecosystems, engaging with a networked ecosystem of customer-focused value propositions
- Focusing on collaboration as much as on competition, offering incumbents an opportunity to develop an ecosystem of partnerships
- Technological agility, using a modular, micro-services architecture that enables them to use data to drive actionable customer insight
When evaluating the vendor’s architecture specifically, banks should consider the following criteria:
- Reusable business services: functionality within a payments platform needs to be broken down into small business services, which are reusable across different payment products and payment flows. An IBAN validation, for instance, should be designed as a single function, which is reused where it is needed. When the IBAN validation needs to be updated as a result of a rulebook update, this only needs to be done once. This ensures not only predictability, but also minimizes the resources needed for maintenance and testing.
- A distinct connectivity layer and message transformation/mapping: in order to integrate the payments platform into the bank’s environment seamlessly, the platform needs to be able to easily support new message formats and new message protocols, without impacting core processing. A clear separation between application logic and message transformation, combined with standardized central data storage, is key.
When a payments processing service is designed with these two criteria in mind, it is easier to define the payments processing flow at a bank level, while reusing standardized business services. For example, it would be possible to perform an AML (Anti Money Laundering) check for Bank A when the payment is received, while performing the check for Bank B right before the payment is sent to the clearing house.
The second big advantage is the ability to implement specific interfaces and messages without impacting the core data model or business logic, through a distinct message transformation layer. This greatly alleviates the implementation effort for the bank, and allows for easy migration of bank-specific components in the future.
Besides these considerations, it is vital that the insourcing party has the capability in place - both from a technology as well as from a process perspective - to integrate new customers and support their specific requirements, while realizing and maintaining economies of scale.
The new platform needs to support 24/7, real-time payments processing, with a redundant setup of the underlying infrastructure (i.e. an active-active setup across two data centers) and operational processes that work around the clock. This comes on top of continued compliance to new rulebooks and regulation.
Collaboration between financial and non-financial organizations is key to keep up with the fast pace of change in the payments ecosystem. Traditional banks are increasingly looking at these types of partnerships as a cost-effective and accelerated method to bring new capabilities and experiences to market. It’s key for banking incumbents to evaluate potential partners’ flexibility and scalability to benefit from payments outsourcing.
At Visma Connect, we are implementing a new payments platform which is designed according to the latest requirements: real-time at its core, with a clear split between interfacing and application logic and built up from business services. Contact us and find out how you can outsource the hassle and insource agility.