Real-Time Payments Gathering Pace

A number of you will know that I’ve been working on real-time payments with many clients around the world, and will have seen previews of some of the information in my forthcoming reports. One chart I have shown regularly is the likely adoption curve for real-time payments. This takes a classic innovation adoption bell curve. The top of the curve is where the market has reached 50% adoption. Of course, the question then becomes how many and of how many to plot where we are today. Many of the conversations I have with clients often start with a belief that there are only a handful of schemes globally. The truth is rather different. A good but not exhaustive scan showed that there were actually 35 systems globally. Using a set of criteria, such as levels of GDP, maturity of electronic payments, presence of an RTGS system, we estimate that there are 115 countries which we believe could adopt a real-time systems. That actually puts us just over 30% market adoption. At this point, I ought to point out that there are a few fudges to this figure. For example, note that we say systems, not countries, as some countries actually more than one real-time system (India for example). But it doesn’t detract from the underlying trend. Indeed, the use of the past tense was deliberate, as yesterday saw the announcement from the Finnish Federation of Financial Services of an RFI for a real-time payment system, bringing the total to 36. We also hear rumours of several other countries in advanced discussions. This also supports our other hypothesis. A study of the adoption of RTGS systems globally proves remarkably similar to both the shape of the adoption curve but also to the timelines. If we take that adoption pattern and project forwards, it would suggest that the next 5 years will see a flurry, if not significant numbers, of other systems being announced. It would seem that we are on the cusp of a revolution in payment processing – are you ready?

Real-time Payments: Different questions, funnily enough, get different answers.

Bob recently posted some views on the same day ACH – as always, great points, well made. Somehow, in Twittersphere, some of the comments got attributed to me, and from that some of those have got re-interpreted as me being anti real-time payments. As my daughters would say, whatever! That’s not the point of this blog. What really struck me was the fact that some saw Bob and I as having different opinions. I would say that I don’t believe we do (at least not in the majority of the issues), but that we were addressing different questions, and, unsurprisingly, end up with different answers. To crudely paraphrase Bob’s post, he quite rightly points out that the business case, based on today’s business, doesn’t stack up. Secondly, he points out that consumers don’t really want real-time payments – how many of us wake up with the urge to make a payment?! Let’s pose a different question, the one I’ve been primarily discussing. If you were starting with a blank piece of paper, would you replicate what we have, or would you build something better and faster? A no brainer. Second question. The current system is roughly 25 years old – do we think that the same system will still be good enough in another 25 years? The answer is again obviously no. No-one in the industry who’s close to this thinks that this isn’t going to happen. The questions we’re really asking are when, what is the trigger, how quick and how soon (i.e. incremental improvements or big bang)? Interestingly, there seems to be less discussion on how, with ACH seeming to be the default. Whilst I’m not suggesting that ACH isn’t an option or even where the majority of other systems have developed worldwide, it’s interesting in that there are already real-time systems in the market, running primarily on card backbones. The answers to those questions are still much for debate. And who gets to answer them even less so. One noticeable difference compared to some countries is the governance of payments in the US. I believe – and please correct me if I’m wrong – that there is no single body who could regulate and dictate such a change. Equally, there is no body managing the future direction of the payments industry. Which, considering that in revenue terms, the US payments is bigger than both the US hotel and US airline industry *combined*, is both remarkable and perhaps something of a risk to the industry. As the US faces more regulation in the same way as many other regions around the world already have, a joined up, united front would seem an absolute need. We may not all agree when we need real-time, but I’d be curious to know whether we agree on the need for an overarching payments body to protect our interests going forward. This blog is written on the eve of Nacha Payments, and the real-time topic is already dominating the discussions before the event has even started. The Nacha announcement has been met with a wide range of responses, but with more than a few suggesting that Nacha has both over stated their position, and that the solution misses the point. The week is shaping up to be very interesting.    

Sibos Recap #1

So that was the week that was Sibos. Dan has already shared some of our thoughts from Sibos, but I wanted to add some additional insights and flavour. I’m going to split the posts in two. The second is a more informal view of the week. This post is more around content, and is based on what struck me as interesting, rather than what was necessarily spoken about most or was most profound. Those of you who know Sibos well will know the challenges of getting good dialogue in the sessions, and so it’s as often as what is not said that is interesting. Innovation 4 years ago every conversation was around innovation. This year, the “I” word didn’t come up once in any conversation I had. That’s not to say banks no longer want to innovate, but that they have a very clear view of what they need to achieve, and don’t feel they need to “dress” it up. Setting up an innovation team (again) costs money and will be slow to happen, but reducing “cost to serve” by 10% or improving STP by 5% makes a material difference to the bank, and will get funded. As a result, whilst there is innovation taking place, it’s very much rooted in the process and ways of working, rather than being called out separately.  Many of the activities we’re seeing continue to focus on the customer client interface – and rightly so. It may of course be that all the conversations around innovation took place in the Innotribe discussions – but that in some ways, that would be worse, as it would mean it was confined to its own little cocoon. I think the answer lies in what counts as innovation and to whom. There is a ripple backwards from those at the leading edge of things. For example, the closing plenary this year talked about the impact of mobile, but in effect replicated the Innotribe discussions of 2009 (as several in the audience were quick to point out in tweets). Yet the Innotribe discussion of 2013 replicated conversations we have been having around BitCoin and virtual currencies for over 18 months now. I guess my take away is that innovation is something rarely that you find at conferences, but the conference agendas act as a useful barometer to see how far that bow wave of innovation has travelled into the mainstream. Big data, little progress Big data is another recurring theme over the last few years, but that many believe that little is actually happening. Indeed, the title above is a soundbite from one of the sessions. I think it’s a classic hype cycle, with many firmly in the trough of disillusionment. But we are, I believe, seeing a number of smaller, successful projects that are having significant impacts. Many discussions around big data focus on combining the vast variety of data. Whilst not an area I follow closely, the examples I’m hearing are focusing on one of the other attributes – velocity. Being able to process data in real-time to influence outcomes is where progress in particular is being seen. It may not be sexy, but big data projects to provide teller prompts to guide the conversation is having a big impact in some banks. Whilst there was much talk about real-time at the conference, it was focused on real-time payments. In reality, real-time is a much broader topic, and will have far more profound impacts than many are planning for. Regulation It was the 5th anniversary of Lehman’s whilst we were at Sibos. Those of us who were at Sibos in Vienna will remember the events unfolding in front of us, and the palpable tension in the air, with many of us thinking Is This It? Roll 5 years forward, and the number of conversations about it were…well, zilch. A few mentions here and there, but pretty much it. What was talked about was the impact of the regulation that has happened as a result of it. We would expect much discussion about how to respond to the avalanche of new requirements, but two themes really stood out. Firstly, there is no co-ordination. Banks are feeling stretched by the regulation, and there seems to be a clear feeling that neither the banks nor the regulators have a clear view of the big picture. Regulators I can see, but the comments from banks, about banks surprised me. I don’t disagree, but then why aren’t they doing something about it? Secondly, that the regulation (or perhaps more accurately, regulators) is facing the wrong direction. Much of the regulation is about fixing the problems we have so we don’t have a recurrence of what just happened. But most agree that something else will happen, and just as we failed to foresee the circumstances that caused the last crisis, that there is little in place to identify what else could be the trigger for the next one. Real-time As alluded to in the big data section, real-time payments were all over the agenda. Australia is currently going through a large programme to implement such a system, and in the week before Sibos, the US Federal Reserve issued a consultation about the future of payments in the US. The preferred outcome of the paper was obvious – the creation of a real-time payments system. I’ve just finished a research project on real-time payments, and what is very clear is…well, it’s not very clear. Some of the systems held up as real-time, simply aren’t real-time, and even which bits need to be real-time need to be real-time for whom is not clear. As such, whilst the sessions were good, it’s clear that few are starting from the same position of understanding, resulting in some very different views of who needs to do what. Needless to say, I intend to write on this topic in the near future.

International Payments Summit 2013 Recap

I was at International Payments Summit in London last week. I spoke on a panel on real time payments, the insights of which will be the basis of a later blog.  But here are the highlights for me: IPS may well be back I last attended IPS 5 or 6 years ago. I stopped going for a number of reasons. Firstly, cost. After Sibos it must be about the most expensive conferences on the circuit – the most expensive flavour is over £3,500 (although cheaper options are available). One doesn’t mind paying for quality, but at the time it failed to deliver. IPS suffered from a probably deserved reputation of, er, “over influence” from sponsors. Frankly, I’d heard some of the vendor pitches so often I could have given them. I don’t begrudge the vendors as they’d paid for that opportunity, but equally it didn’t add value. This year the quality of speakers and sessions was dramatically up. A few “usual suspects” appeared but who can generally be relied upon to say something, let alone something interesting. Indeed, one positive over Sibos was the willingness of the panelists to actually discuss things rather than read prepared statements that sometimes happens at Sibos. Based on this event, whilst it hasn’t gone back to “Must”, it’s certainly moved to 3rd slot behind EBADay and Sibos. It’s Catch-22. If this event can significantly increase the audience size, then its value will significantly increase as well. I wish Katie and her team well for next year.   SEPA With less than 12 months to go, you’d think that everything that could be said, has been said. Wrong. Even the experts seemed to be learning things, particularly from the panels with corporates. Key issues include the cost of compliance (one corporate suggested over 10m€); readiness of banks, particularly around direct debit; and the misunderstandings that pervade. On the latter point, it is worth pointing out that some of these are perhaps self-inflicted. For example, there is a belief that the regulation now means that the requirement for a BIC has been removed. Yet few – including myself – had realised that if customer arrangements put in place as a result of the PSD, the requirement for a BIC still holds. As a result, whilst the one party may not require a BIC, another may, and with no easy way of telling.   SEPA#2  Based on the corporate forums, and polling sessions, some things were very clear. Neither banks nor corporates see any benefit from SEPA, that they view it as a compliance issue, and that they, the corporates, will be worse off. Hardly a ringing endorsement, but equally not new news. But I think the level of terror and the antipathy from the clients still shocked many. One corporate estimated that they will receive approximately 15,000€ benefit from SEPA, but it has cost them over 400,000€ to achieve SEPA compliance.   Real time There is a real belief that real time is the future. But what is less clear is what that means. Some of the systems held up are real time, in the strictest sense, aren’t. They authorise the payment in real-time, and the client may access the money straight away, but settlement takes place later. Furthermore, many are conflating real-time with “always on”. The trend I certainly to have greater availability, but understanding the difference is important in understanding the impacts on the back-end systems in a bank.   Operating model Several conversations I had and a number of the presentations referred to the need for banks to address the cost of service/execution, with a number of banks undertaking significant projects to move to a different operating model. ING is one example, with Mark Buitenhek using an unusual but effective analogy of pasta! They’re moving from spaghetti (lots of long processes, interwoven and difficult to untangle) to lasagne (multiple discrete layers of service, creating building blocks of components).          

Are Spanish Bankers More Farsighted?

When Citibank announced they were moving from an internally developed core system to Systematics, I wondered why a bank would take all the trouble of doing a core banking migration, but not moving to a modern real-time system. http://bankingblog.celent.com/2010/02/citis-core-migration/ The answer was that there would be too much operational risk in both moving to a new core system and changing the operations of the bank from batch to real-time. I just attended an announcement from BBVA and Accenture describing the deployment of the Alnova core banking system at BBVA Compass, the US subsidiary. The news is stunning. BBVA Compass has gone live with an overseas, real-time, modern core banking system for all deposit products. While savings and loans and credit unions have been running real-time core systems for years, commercial banks have stayed on batch / memo post. This has huge implications on both the customer experience and back-office operations. Banks no longer have the ability to sort transactions because they are processed as soon as they arrive. This will change overdraft revenues for those banks that sort from largest to smallest transaction before processing in the overnight batch. Processing in real-time also dramatically reduces or eliminates back-office overhead. One and done is the rule. Celent has noticed that credit unions have dramatically lower efficiency ratios than banks of the same asset size, and one of the contributing factors is that the credit unions are running running real-time systems. Please see the Celent report EfficienCU: An Examination of Bank and Credit Union Efficiency Ratios by Asset Tier, November 2011 for more details. BBVA is thinking boldly about the US market. They believe that underinvestment by US banks in modern core banking technology has created an opportunity for them to exploit. Virtually every commercial bank in the United States has a batch memo post system with product siloed (as opposed to customer centric) architecture. Each channel is managed separately and plugs into the core independently. BBVA believes that by creating a business that is customer centric, multichannel, real-time, with straight through processing and related lower cost, they can make even greater inroads into the US banking market. The goal is to have an improvement in their efficiency ratios of 10% in the midterm. This is shy of the efficiency advantage credit unions have over banks:  

Credit unions enjoy an efficiency advantage over banks.

  They already have a top 25 US bank. If BBVA is able to reduce costs through real-time processing and better deployment of cost-saving channels, other banks will be in trouble. If BBVA can also develop customer centric pricing and use that to gain share, other banks will be in deep trouble. This announcement puts Accenture in the cat bird seat. They own the Alnova software asset and have demonstrated the ability to deploy the overseas real-time system in the United States at a commercial bank. This is not easy. There have been notable failures by other vendors in the recent past. Any bank looking to make the leap to a real-time customer centric system will likely look very hard at Accenture. Another bank, famous for its real-time core processing is Santander, BBVA’s Spanish competitor. They have an internally developed core system called Parthenon that they deployed quickly in the UK after acquiring of Abbey National, Alliance & Leicester and Bradford & Bingley. This rapidly drove down operating cost in the UK acquisitions. Santander owns Sovereign Bank in the US which is moving at least in part to the Parthenon system. It seems that these two Spanish banks understand the value that modern technology can play in making a bank cost effective and customer centric. They learn these lessons in Spain, but will be teaching them in the US.  

Theory versus practice

In the theoretical world of the analyst, we think about the perfect world and the perfect solutions. Regrettably, that isn’t the world that most of our clients live in. There are legacy systems, limited budgets, time to market issues, project risk, reputational risk, etc. This helps explain why established legacy systems are continuing to sell in the US market and those more perfect (modern) solutions aren’t. This helps explain why systems designed 30 years ago are continuing to sell in the US market. They are proven; they work. Some data points…. Celent wrote a case study on Webster Bank which moved from a real time system (Miser) to a batch system (Systematics). Isn’t this backwards? In theory it is; in practice it’s not. My theoretical thinking was, why move from real time to batch, when your business is becoming more and more real time with debit, internet, mobile, etc. In practice Webster needed deep business functionality and didn’t particularly care whether the system was batch or real time so long as it could meet the needs of the bank. Foreign vendors are trying to enter the US market, and failing up to this point. Oracle (formerly iflex Solutions) FLEXCUBE came into People’s Bank in Connecticut. The implementation wasn’t proceeding as planned and management ended the project. People’s United now runs FIS (formerly Metavante) IBS. Union Bank (formerly of California) selected Infosys Finacle. Implementation is not proceeding as planned. Citi announced they were moving their domestic deposits to FIS Systematics. Again, I asked myself, why go through all the trouble of moving to a new core system, and not move to a real time system? Citi viewed the operational and project risk much greater. They were already using Systematics in other parts of the bank, so they had familiarity with it. They also didn’t want to move item processing from a batch environment to a real time environment. Changing core systems was quite enough change, thank you. Restructuring operations on top of that added more risk to the project. The latest announcement is BBVA Compass moving to Accenture’s Alnova platform, a real time platform developed in Spain and deployed across the globe. I see opportunities for success here. Accenture brings a broad and deep base of US banking experience from their US consulting arm. Assuming they work in a non-arm’s length manner with their Spanish colleagues, meaning the Alnova team, things will hopefully come to a successful end. Many have underestimated the difficulties of a core banking migration.