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The intelligent hub:
A blueprint for the payments industry


At last, thanks to mature internet-based technologies, banks can sort the back office and move away from legacy dependency. And they can do it at a pace that suits them.

If the internet revolution has taught us one thing, it is that businesses must innovate to survive. And if the dot.com downturn has a lesson for us, it is that the fundamental rules of business have not changed: we let processing costs get out of hand at our peril, and a quality revenue stream demands repeat customers who want more and more of what we can provide.

Banks learned these old economy lessons some time ago. Ask any banker and he or she will tell you it costs three times as much to find a new customer as it does to retain an existing one, that not all customers are profitable customers and that cross-selling of services via ever more channels is an imperative.

But these mantras of total customer profitability, cross selling and channel management have not, so far, really paid off for banks. Many banks have embarked on a spine-chilling strategy of choosing their customers and retreating from non profitable market sectors, only to find the customers they want have beco- me more deman- ding and less loyal.

Banks have never had it less their own way:

n The internet revolution has lowered the entry barriers for non-bank competitors who aim to cherry pick profitable customers and services. Banks, meanwhile, struggle to make legacy environments deliver new-style services.

n The existing payments systems infrastructure is fragmented and costly for participants in terms of membership fees, transaction costs and liquidity requirements. But customers expect technology to deliver the same services at lower cost.

n Just as the internet economy started to take off, bank budgets were diverted to systems remediation for euro and Y2K compliance. In the meantime, new entrants were learning to deliver the value-added services and leave unprofitable processing to the banks.

n In a more competitive environment, profitable customers have started to recognise and exercise their buying power, driving revenues down.

n As banks compete for market share by providing outsourced processing services to other banks and FI's, they help to drive processing costs down further; while assuming ever increasing levels of systemic and operational risk.

The result of all this is clear to see. Consolidation in the industry is all too evident as banks seek the necessary scale to make transaction processing cost effective. Only a handful of banks are now able to provide a truly global service and at regional and national levels too, competition is intense.

The demand to innovate
Against this background, banks have been struggling to apply the new economy lesson; innovation. New delivery channels via the web and, most recently, wap and even digital t.v. have been welded onto the existing processing infrastructure; new products (electronic bill presentment, for example) and new ways of working (like digital signatures) have been introduced.

In the rush to keep up with the pace of change (and also to accommodate myriad alliances and mergers) tactical solutions have forced short term fixes in the back office. In fact, a whole new software industry has developed to provide the banking industry with the middleware to get from there to here quickly in a legacy environment. Unfortunately, the result is often extra interfaces and new compromises in the back office that drive the organisation still further from the clean, straight-through processing environment that must come if costs are to be contained and transactions processed efficiently, every time.

and innovate again!
If tactical solutions risk escalating internal costs in the short term, in the medium term they will likely also fail to satisfy customers.

Firstly, when customers re-engineer their supply chains and start to shift all their banking business to new channels, these tactical solutions may simply not be robust and scalable enough to meet the required needs.

Secondly, by their nature, tactical solutions lack the flexibility to accommodate the next round of innovation, which will be driven by the deep organisational change now being called collaborative e-business. Like the corporations they serve, banks must break up traditional product 'silos' and break down the departmental barriers that have kept customers' data locked in disparate, proprietary systems. If they are not doing so already, customers will soon be demanding an end to multiple log-ins to different systems to perform different tasks. They'll want truly global account structures and services and a rules based approach that empowers them to effectively design their own banking channel, and; more; integrate their financial transactions seamlessly in their e-supply chain. And they will want this within a universally available, totally secure environment, at low cost.

We believe that the banks of the future will need to deliver that level of service to all their customers, at all levels of the value chain.

If this sounds fanciful, a quick glance at the retail banking world shows the direction things are moving. So called life-style accounts were unheard of just a year ago. Now many institutions are offering their customers not only a single view across all their accounts and commitments (current account, savings, credit card, mortgage etc) but also the ability to move value across those previously distinct accounts, so that a positive balance in the current account can work to reduce interest due on the mortgage, and so on.

Intelligent transaction processing; a new blueprint
The fact cannot be ignored: existing legacy banking environments are ill-equipped to deliver a level of innovation that is more than skin-deep. The next generation payments architecture is overdue; but within reach.

In this new payments architecture, a single, integrated system supports multiple banks, currencies and clearing methods. Web-capable graphical user interfaces deliver transactions to an intelligent transaction processor which handles and monitors all customer transactions, and carries out the necessary liquidity monitoring, automatically. This intelligent message brokering hub not only manages the workflows - sending, queuing and tracking messages between different systems and applications - but also maps, enriches, renders and takes responsibility for them, ensuring that funds are transferred quickly, reliably and securely into the optimum clearing system.

It is not so much a case of streamlining the back office; more of replacing it, since in this new processing environment, minimal human intervention is required.

What makes this blueprint achievable is the thorough application of new but now proven 'open' technologies, that put an end to costly custom interfaces and frustrating software 'fixes'. Enterprise Java Beans servers, which offer the best hope of long-term, multi-vendor support and broad user acceptance, and XML (eXtensible Mark-up Language), the data exchange standard for internet-enabled communications, are examples. Advanced time-stamping techniques are also critical to effective straight-through processing solutions.

This blueprint for an intelligent transaction hub really is the great leap forward the banking industry has been waiting for.

Progressive renovation
But the best news of all is that the intelligent messaging capabilities of the hub can be used to migrate existing legacy applications gradually, at the pace of the business, a process we call progressive renovation. Simply put, the intelligent hub can communicate with a legacy application as long as you need, processing the data received and sending it off to other applications. But, once that application or market segment has been moved into the hub, the old service or system becomes redundant and can be switched offy; so no more choices between the risky "big bang" on the one hand, or complex parallel running, on the other.

Time to move forward
The vision is there, and the technology to back it up is now mature. A safe and manageable transition path is available. So what is holding the banking industry back from implementing a payments architecture that really will solve many of its greatest headaches? The two biggest inhibitors have probably been culture and timing.

As we saw at the outset, banks have had a lot on their plates: euro, Y2K, globalisation, ever-present regulatory change, in fact, ever-present change! Yet the very issues that make it difficult to change make it imperative to do just that, in order to gain the flexibility the business demands. The biggest timing issue is probably the simplest one: these technologies are now mature; it is time to seize the competitive advantage they offer.

Culture is a harder nut to crack. Breaking down departmental barriers, sharing knowledge and data not just within the organisation but also with partners and customers, is, we all know, necessary and desirable. But it is still scary and difficult to achieve.

But the challenges and opportunities have never been greater and banks simply must change. E-business predictions, even after adjustments from many analysts, remain staggering. (For example, in September, The Boston Consulting Group gave an estimate that US-based B2B e-commerce would grow from $1.2 trillion this year to $4.8 trillion in transaction value by 2004.) Banks certainly want to protect their existing franchises in these new markets as well as building valuable new ones. The fact is that in five years' time, every bank still in business will have implemented a new payments architecture to support new ways of working. It's the banks that do it sooner that stand to gain the most.

Barry Tooker
Senior Vice President, Product Management
Dovetail Systems, Inc.




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