8 minute read 28 May 2019
Customer paying contactless payment system in cafe

How the payments function can adapt for a digital future

By

Hamish Thomas

EY EMEIA Payments Leader and UK Advisory Banking Technology Leader

Transformation leader in payments and open banking. Passionate about technology’s potential to create opportunity and manage risk. Optimistic runner. Film enthusiast.

8 minute read 28 May 2019

Learn about considerations for banks as they adapt to meet changing stakeholder expectations in a new digital age.

This article originally appeared in our #payments newsletter - volume 23.

The payments function – the operations and technology capabilities within banks and other financial institutions that process the payments of individuals, businesses and governments – is the beating heart of banking, moving money around the financial system to support all financial transactions.

Traditionally, the payments function has been deep in the back office, unnoticed except when something goes wrong, and the impacts are felt by all who use banking services. Now, as financial services adapt to the digital age, payments functions must adapt. Pressure is on to meet increasing customer expectations, satisfy intensified regulatory scrutiny, take on more competitors and use technology to change how services are delivered – all while maintaining the security and stability that underpins trust.

The multi-layered drivers of change for the payments function

Future of emerging payment technologies

In particular, customer expectations are shifting, with consumers looking less for products from a bank and more for the support needed to achieve desired outcomes. Individuals are looking for help to move into their new home, rather than just “getting a mortgage.” Businesses may be seeking support to grow through better access to working capital and improved cash flow management, or to run a more efficient business by being able to move money in real time on a global basis.

And everyone wants to make more confident decisions by knowing exactly where their money is, and how hard it is working. 

Meeting the needs of different stakeholders

Customers

Customers – individuals, businesses, governments, charities, etc. – expect their payments function to be:

  • Stable and reliable: Customers must be confident that money will arrive where it should, when it should – without interruption. Payments failures can have major consequences, from individuals’ inability to access funds to economic consequences across markets. Stability has always been critical, but recent high-profile technology issues have heightened scrutiny.
  • Secure: The ability to respond to the latest security threats – from channel to back-end processing – is critical. Here, banks have a trust advantage over new entrants which must be protected, even as innovation is embraced.
  • Easy-to-use, flexible and customizable: Today’s customers expect intuitive, convenient, easy-to-use mobile and digital products, which can be challenging for banks when building enjoyable experiences that also address security considerations.
  • Immediate: Real-time payments are increasingly expected from all stakeholders – from individuals making peer-to-payments to corporate treasurers seeking dynamic cash flow forecasting.
  • Available: Today’s digital economy has created the expectation from both corporate and individual customers that financial services are available whenever, wherever and through multiple channels.
  • Accessible and transparent: Even as customers expect payments services to be available across channels, particularly mobile devices, they also demand greater levels of transparency, including a new level of control over transactions and support that suits their needs.
  • End-to-end visibility: Historically, payments functions were ring-fenced with limited recognition of the end-to-end flow within which they sat. While operational stability still requires clear lines of responsibility, these functions need to recognize the wider context in which they operate, to better provide the transparency that customers demand, and track the health of the service for business and operational leaders. This is an increasingly complex task as more third-party providers enter the flow.
  • Low cost: More competition in financial services, including payments, is pushing customers to demand lower-cost, more efficient services from payment providers whose margins are being increasingly squeezed.
  • Invisible: Customers demand confidence that payments services should “just work,” without being noticeable.

Business customers have some additional expectations of payments functions:

  • Easy access to business management information (MI): Businesses seek meaningful insight to help better understand customer behavior and tap into new business opportunities.
  • Support to create new revenue generation opportunities: Businesses expect payment services to both directly and indirectly support their ability to boost revenue; for example, by enabling rapid customer onboarding to improve experience, or helping bring new products to market more quickly. 
Regulators

Regulatory expectations have increased significantly, with recent developments including the second Payment Services Directive (PSD2), Open Banking, the second E-Money Directive, and the Single Euro Payments Area. These are complicated by other non-payments-focused regulation, including anti-money laundering (AML) and sanctions measures, which also impact the sector.

Transparency and fairness to customers are at the heart of these changes, along with unwavering expectations for control and reporting. In essence, regulators expect payments functions to be:

  • Stable, resilient, secure
  • Easily accessible
  • Adaptable to changing customer needs
  • Free from abuse or misuse by criminals and terrorists

How should payments functions adapt?

For leaders of payments functions, the question is: how does the payments function need to change to better meet stakeholders’ expectations?  

The demands can be seen as some “more of the same, but done better” and some “new capability delivered well from the start.” Success will require focusing on several areas of change:

Operations

Future payments functions will be highly automated, with fewer people. Smaller teams will focus on higher-value activities which either cannot (yet) be automated with confidence, or which the business has decided will not be automated as part of a wider strategy, for example, some aspects of customer service and customer interaction.

New skills and adaptable teams
  • With operations teams increasingly working alongside automation technology, they will need to understand these technologies and how they are applied to support payments processes.
  • With smaller operations teams, people will need to understand and work across a wider spectrum of processes than they do today. This may extend to adjacent functions, such as financial crime prevention.
Different operational metrics
  • When people and automation work together, operational metrics will need to change. Traditional KPIs tracking performance will not always be appropriate for automated solutions. For example, productivity will not be seen on a spectrum as it is for people.
  • New metrics will focus on customer outcomes as well as operational health, e.g., improved customer experience or reduced risk. This requires staff to develop a deep understanding of the role of the payments function in delivering these outcomes across the end-to-end environment.
Revised location strategy
  • Location strategies require review when automation changes how many people – and with what skills – are needed in operations functions.
Operations and technology convergence
  • Automation and other technologies offer huge potential for payments functions, but maximizing benefit requires integration across operations and technology. Team members with the agility and skills to move across functions will allow for more opportunities to harness digital innovation.

Technology

Effective use of modern technology is critical in terms of the efficiency, efficacy and agility that is expected of payments functions:

Stability, resilience and security

These must remain top priority if payments functions are to keep the trust of customers. Cloud technology offers potential to provide this stable and secure environment, while reducing cost, as illustrated by new “cloud-only” entrants and moves by many incumbents to develop cloud-hosted offerings.

Increasing intelligent automation

Robotic process automation (RPA) already offers potential for repeatable high-volume tasks. When little judgment is required, simple RPA can be applied. However, intelligent automation, that applies artificial intelligence, is rapidly maturing, ready to be deployed across more variable tasks that require judgment and context.

Data as an asset
  • The wealth of data that is produced within a payments function is both a blessing and a curse. Significant operational, customer and business information can be derived from this data and from understanding money flows, but finding actionable insights from such high volumes of data is a challenge. Skills not typically found in payments, including data science, will be needed to support a big data agenda that recognizes data as a valuable asset.
  • The ability to provide easy access to meaningful business and operational MI, and enable simple, meaningful reporting and improved customer service will soon be considered a basic factor for successful payments functions.
Adaptable, flexible architecture
  • Technology’s rapid evolution is set to continue. A modern approach to architecture is needed to exploit micro-services and application programming interface integration that allows for a modular, “component assembly” approach that enables adaptability, flexibility and rapid-change delivery.
From batch services to real time
  • Many payment types and supporting infrastructure are delivered through batch processing, but the acceptance of these systems will decrease as real-time services increase. Future payments function technology strategies will need to consider this shift and accept the increasing expectation of extended cutoffs and, eventually, 24x7 processing for all payments.
Convergence of technology across payments types
  • It’s said that “a payment is a payment,” but today there is a wider variety of payment types, including cards, Automated Clearing House, Real Time Gross Settlement and emerging immediate payments systems, such as the UK’s Faster Payments Service.
  • The result has been a broad spectrum of technologies and operating models. However, technology is catalyzing convergence. For example, we see a drive toward common XML message standards, and programs focused on renewing national payments infrastructures, such as the UK’s New Payments Architecture, and the New Payments Platform in Australia.
A different approach to delivering technology change
  • New approaches to architecture both enable and demand new approaches to delivering change, with expectations that these will be implemented through agile, rapid release cycles.
  • The desire to support customer outcomes will influence investment priorities and the desired pace of change. This presents challenges within a dynamic payments environment unforgiving of interruption, which may have historically had a more “technology-led” approach.

Future success will hinge on deep payments domain knowledge

The future of payments functions will still center on the stability, security and availability that underpin trust in the system. But, the need to maintain these priorities cannot be an excuse to stand still.

The potential of new technologies should be embraced to improve customer outcomes, better manage risk and reduce cost. Payments functions leaders should develop strategic plans to assess and exploit the value of these technologies, which must include a different approach to operational management. They will also need to recognize the need to support and develop their people to work within a dynamic payments environment where operations and technology converge and a culture of supporting customer outcomes is embedded across the business.

But, even as changing expectations drive technology enablement and new approaches to operational management, a robust understanding of the payments domain and its role as the beating heart of the business will remain a critical pre-requisite for successful payments function teams.

This article originally appeared in our #payments newsletter - volume 23; The primary authors for this article are Jan Lettow, EY Innovalue, Director and Lars Putensen, EY Innovalue, Senior Associate.

Summary

Pressure is on to meet increasing customer expectations, satisfy intensified regulatory scrutiny and deliver technology change – all while maintaining the security and stability that underpins trust.

Leaders are now asking themselves how the payments function needs to adapt. 

About this article

By

Hamish Thomas

EY EMEIA Payments Leader and UK Advisory Banking Technology Leader

Transformation leader in payments and open banking. Passionate about technology’s potential to create opportunity and manage risk. Optimistic runner. Film enthusiast.