1. finance
2. bank

31 March 2011
Understanding Payment Services
Hubs
Zilvinas Bareisis, Senior Analyst, Banking
London
A recording of today's webinar and copy of the presentation will be available
to Celent clients on our website at http://reports.celent.com/login.asp.
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Copyright © 2011 Celent, a division of Oliver Wyman, Inc.
Before we start…
 A recording of today's webinar and copy of the presentation will be available to Celent clients on
our website after the event at http://reports.celent.com/login.asp
 You can obtain more information about subscribing from Steve Nawrocki [email protected]
 For questions about the content please contact Zilvinas Bareisis [email protected]
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
2
This webinar is a summary of three recent Celent reports on payment services
hubs
1
2
3
• PSH definition
• Terminology clarification
• Different types of hubs in
practice
• Evaluation of 9 PSH vendors
• ABCD methodology and
evaluation criteria
• Detailed vendor profiles
• Drivers for PSH projects (why?)
• PSH project approaches (how?)
• PSH market (who?)
• Selected case studies
• November 2010
• 28 pages
• December 2010
• 134 pages
• March 2010
• 40 pages
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
3
Contents
1. Defining a Payment Services Hub (PSH)
2. Drivers for PSH Projects
3. PSH Market
4. Developing a PSH Strategy
5. PSH Vendors
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
4
Section 1
Defining a Payment Services Hub
Payment services hub – a vision for payments architecture
A
B
C
Ability to
manage, on a
single platform,
any…
… and deliver
core payment
functionality
… under key
conditions
Instrument type
Standard/ scheme
Channel
Customer
•
•
•
•
•
•
•
•
•
•
•
•
• Branch
instructions
• Online
• Mobile
• ATM
•…
•
•
•
•
1
Credit transfers
Direct debit
Credit card
Debit card
…
Instruction
receipt, payment
object creation
and prioritisation
X
2
SWIFT
ISO 20022
Domestic RTGS
Domestic ACH
SEPA Direct Credit
SEPA Direct Debit
…
Validation,
compliance,
repairs and
storing
3
X
Clearing
preparation
(CSM selection)
X
Transaction types
Corporate
Retail
Other FIs
Bank internal
departments
•…
4
X
5
Authorisation
•
•
•
•
•
•
•
Outgoing payments
Incoming payments
Batch
Single real-time
Refund
Rejection
…
6
Execution
Customer
notification
and
reconciliation
1
Delivered as services, drawn from and available to either within the PSH or other areas in the bank (SOA)…
2
… with ability to customise workflow by any dimension of A or payment characteristics (BPM)
3
… and with sophisticated monitoring and alerting capabilities (BAM)
4
… reliably at large volumes and throughput
5
… with appropriate security, access control and audit trails
Source: Celent
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
6
Banks are implementing one of four types of payments services hubs, often
starting with a channel integration (1) or a CSM integration hub (2)…
1. Channel integration hub
Online
(corporate)
1
Host-tohost
Treasury
(bank)
ATM
…
Online
(retail)
Online
(corporate)
2
ACH
SWIFT
Card
networks
STEP2
…
RTGS
ATM
Treasury
(bank)
…
STEP2
…
…
Cards
Core banking
Low-care engine
High-care engine
…
Payment
processing
platforms
Cards
Core banking
Low-care engine
Payment
processing
platforms
RTGS
Host-tohost
Channel integration
High-care engine
Online
(retail)
2. CSM integration hub
CSM integration
ACH
SWIFT
Card
networks
Source: Celent
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
7
… with the goal to ultimately reach one of the two potential “end states”
3. Payment orchestration layer
Host-tohost
Treasury
(bank)
ATM
…
Online
(retail)
Online
(corporate)
Channel integration
Host-tohost
ACH
SWIFT
Card
networks
Cards
Low-care engine
4
High-care engine
Payment
orchestration
layer
…
Core banking
Cards
Low-care engine
High-care engine
Payment processing
platforms
CSM integration
RTGS
…
Channel integration
Payment processing
platforms
Payment
3 orchestration
layer
Treasury
(bank)
ATM
…
Online
(corporate)
Core banking
Online
(retail)
4. Vertical payment services hub
CSM integration
STEP2
…
RTGS
ACH
SWIFT
Card
networks
STEP2
…
Source: Celent
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
8
Additional terminology considerations
 The first two types of PSH can be implemented without exposing payment functionality as
services, in which case use of the term “payment hub” is appropriate.
 Celent favours reserving the term “payment factory” for payment hub implementations within
corporations.
 The solution does not have to be a multi-entity (multi-bank) implementation to qualify as a payment
services hub.
 Typically, “payments engine” refers to a dedicated solution to provide end-to-end payment
processing. A traditional payments engine is, however, a monolithic software package with limited
flexibility and functionality hard-coded rather than delivered as services.
– Having said that, a solution shouldn’t be dismissed just because it might be called “payments
engine.” Some of them might be fully capable payment services hub solutions.
Source: Celent
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
9
Section 2
Drivers for PSH Projects
It is important to distinguish between the fundamental drivers behind the PSH
projects and a business case justification
Business case
justification
Fundamental drivers
Presence of a
“burning platform”
Presence of a
large related programme
• Technology-driven, when e.g.
an existing payments engine
becomes obsolete or no
longer meets the bank’s
requirements for functionality,
capacity, flexibility etc;
• Core banking system
replacement programme
exposes how much of
payments functionality was
embedded in a legacy core
banking platform and
presents an opportunity to
extract that functionality into
re-usable payment services.
• Business-driven, when the
bank becomes concerned
about losing customers and
market share, unless it
upgrades its offering(s);
• Regulatory, when new
regulations require new
capabilities and investments;
• ... or quite typically, a
combination of the above.
• Core banking system
programme can also force a
bank to consider the overall
technology roadmap and
seek to identify enabler-type
projects for the overall
transformation.
Benefits
(quantifiable + “strategic”)
vs
Implementation costs
Risks
Source: Celent
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
11
PSH benefits framework
ILLUSTRATIVE, NOT EXHAUSTIVE
Benefit drivers
Relatively easy to quantify
Relatively difficult to quantify
Cost reduction
 Lower cost of IT development and
maintenance
 Reduced architectural complexity
 Reduced cycle-time and manual
processing due to increased STP
 Reduced FTE’s due to centralised
operations
 Reduced cost of transaction execution
(e.g. more On-Us)
Revenue retention
and enhancement
 New chargeable services for customers  Accelerated client onboarding
 Payment processing insourcing
 Improved customer service - uniform
channel experience, more information, etc.
Risk and liquidity
management
improvement
 Improved fraud and anti-money
laundering management
 Improved payment flow visibility and liquidity
management
 Reduced error rates
 Improved controls
 Increased system resiliency
 Improved payments analytics
 Speed-to-market for new products or
channels
 Improved ability to integrate acquisitions
Increased agility
 Improved ability to respond to regulatory
requirements
Source: Celent
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
12
PSH contribute to revenue retention and increase through increased customer
satisfaction and by enabling new services for the bank
Revenue per
customer
4
Charge for new
services
1
Retain existing
customers
3
2
Attract new
customers
Insource
from FIs
Number of
Customers
Client satisfaction drivers
• Single interface for corporate clients to the bank for all types of
payments, without having to think about the payment types,
values or underlying clearing infrastructures and choose a
different banking payment product for each.
• Ability to send a single file containing all sorts of payment
instructions, as generated by their ERP systems and let the bank
take care of processing that file. In some cases, direct integration
to the bank’s corporate customers’ ERP/EDI systems are
possible, thereby reducing cost of integration from the corporate
side and time of customer on-boarding.
• Ability to enrich payment instructions with additional data, such as
invoice or remittance information.
• Ability to add customer-specific user-defined fields that would help
those customers later on with e.g. reconciliation.
• Ability to enter and store the transactions for later date execution, as
well as set-up regular payments.
• Having an opportunity to repair the payment (or help to ensure that it is
entered correctly the first time) upfront rather than deal with rejects
afterwards.
• Advice on (and automatic routing to) the most appropriate CSM based
on the customer-defined criteria, such as cost or urgency of payment.
• Guarantees, often backed up by SLAs, that the customer payments will
be delivered accurately, on time, with agreed FX rates and at an
agreed and transparent cost.
• Having good visibility into the payment flows, in and out, and the
intraday liquidity position.
• Instant (or as defined by the client) notification if anything goes wrong.
• Ability to advise beneficiaries from within the payment system.
Source: Celent
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
13
Besides costs, PSH programme also needs to consider the risks, both
implementation as well as “steady state” risks
Implementation risks
“Steady state” risks
 Project risks - a meaningful PSH project is
going to be a large programme and as most
transformation programmes will carry
vendor, implementation and change
management risks among others;
 “Business as usual” risks - as more
payment types migrate to a PSH, the
importance of reliability and the risks
associated with processing concentration
grow exponentially.
 “Side effects” - a PSH project is likely to
touch not only the payments systems, but
many other systems, including core
banking, posing potential operational risks
to day-to-day operations;
 Having said that, a bank with ambitions to
grow their payments revenue and to provide
payment services to their corporate
customers, has also to assess a long-term
risk of not undertaking such a project.
Celent firmly believes that this long-term risk
should be a key component of the benefits
side in creating a business case for a PSH
project.
Source: Celent
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
14
Section 3
PSH Market
Over 40% of all PSH implementations, live and ongoing, are at the large financial
institutions with assets exceeding $100bn
Market share of PSH implementations
(by bank size based on assets)
<$1bn, 6.5%
$1-5bn, 11.5%
>$100bn, 40.5%
$5-20bn, 20.2%
$20-100bn,
21.3%
 Payment services hub
implementations are usually large
and expensive projects; it is only
natural that large, mostly
international banks with strong
corporate franchises have been
able to see the potential gains
faster and at the same time
appreciate the size of task that
they were taking on.
 Tier 2 and 3 banks like the
concept of the PSH but frequently
have payment volumes that, todate, has made it harder to justify
the investment.
Source: Celent
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
16
Similarly, nearly 56% of all PSH implementations are in Western and Northern
Europe
Market share of PSH implementations (by geography)
Central and Latin America,
3.1%
Eastern Europe,
3.3%
Other, 6.2%
 One of the barriers at the Western
banks is the procurement practices
which sometimes fail to take into
account that a hub is a solution not a
product.
Asia/Pacific ,
14.9%
Western and
Northern
Europe, 55.6%
North America
(US and
Canada), 17.0%
 SEPA has been a major driver stirring
banks in Europe into action.
 Having said that, the level of
understanding and appreciation of
PSH concepts among the Western
banks appears to be higher than that
of their Asian counterparts. The Asian
market remains fragmented and quite
'product' focused.
 The PSH space in general remains
open to interpretations and confusion
over terminology
Source: Celent
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
17
Selected examples of payment services hubs projects around the world
Bank
Focus Area
Geography
Core Vendor
ANZ
Low value payments
Asia Pacific
(New Zealand)
Logica
Bank of America
Corporate treasury management
Global
Fundtech
Commonwealth Bank of
Australia
Cards, retail and wholesale payments
Asia Pacific
Clear2Pay
Co-operative Financial
Services (UK)
All UK payments
Europe (UK)
Clear2Pay
Deutsche Bank
High care payments
Global
Dovetail
Deutsche Bank
SEPA payments
Europe
Logica
Deutsche Postbank
Retail payments
Europe
SAP
JP Morgan Chase
International ACH; Low and high value
payments
Global
Dovetail
Santander
Corporate treasury management
Global
Polaris
Societe Generale
Pan-European payments
Europe
TCS
Standard Bank of South
Africa
High value SWIFT payments
Africa
Logica
Standard Bank of South
Africa
International and domestic online
corporate payments
Africa
Clear2Pay
Swedbank
SEPA
Northern Europe
Tieto
Source: Celent
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
18
Section 4
Developing a PSH Strategy
Key decisions for a bank during the strategy and planning phase of a payment
services hubs project
ILLUSTRATIVE
ILLUSTRATIVE
Direct
Credit
transfers debits
Cards …
• How many technology
vendors? For what roles?
• What capabilities are you
looking for from a
technology vendor?
• How many
implementation partners?
How many
Orchestrate
hubs and
vs
where?
upgrade?
Value and
risk
assessment
Partners?
Build vs
buy?
New
Other
systems
vs
Payments
engine
Domestic
Orchestration
Other
systems
International
Payments
within Core
banking
Payments
engine
Orchestration
Payments
within Core
banking
Multinational/
regional
Legacy
Build
internally
Buy from
vendor
Buy and build
(framework
and SDK)
Source: Celent
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
20
Examples of other lessons learned

Assemble the right team (internal and external) and align all parties
– Agree common language and clarify terminology
– Ensure the right mix of skills and don’t underestimate the importance of the “can-do” attitude
– Ensure clarity of roles - who is responsible for what
– Align incentives

Establish governance with authority not just over the PSH project, but over any payments-related projects within
the bank to make sure that all projects go through an ROI prioritisation and nothing is launched which might
contradict the architectural vision and overall roadmap

Don’t go for a “big bang” approach. Have the long term vision, but migrate in stages, building scalability and
extensibility.
– Consider developing a Proof of Concept
– Each step of the transformation should deliver ROI and tangible business benefit

Develop a retirement plan for legacy payments applications. Again, no “big bang” approach

Re-use - don’t build what you already have, especially for common services, which are used by other applications,
not just for payments (e.g. FX)

Document thoroughly; also make sure to have training manuals/ instruction documents to be used either for clients
or internally.

Where PSH scope and benefits include improved corporate integration, train the internal people for customer onboarding to minimise reliance on the vendor.

Don’t forget to align operating model changes, especially in key areas of payment operations and risk
management.
Source: Celent
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
21
Section 5
PSH Vendors
When evaluating vendors Celent uses a rigorous ABCD methodology; the best
performers in each dimension receive a corresponding XCelent award
Dimension
Indicator of…
Advanced
technology
Level of technological  Usage of SOA and degree of functionality available as services
sophistication and
 Modularity of the solution (e.g., framework with building blocks)
flexibility
 Extensibility of the solution (e.g., availability of Software Development Kit [SDK])
Factors included for PSH vendor evaluation
 Openness of the platform (e.g., choice of programming language, supported
hardware, operating system, etc.)
 Approach to orchestration (e.g., balance between fine-grain and coarse-grain
orchestration)
Breadth of
functionality
Customer base
Range of
feature/functionality
set that is live and
able to be offered to
clients
 Breadth of scope (i.e., supported payment types, clearing and settlement
mechanisms, etc.)
Vendor experience
among its FI
customers
 Number of live customers globally
 Orchestration layer capabilities (e.g., repair, special instruction type handling
[mixed files, returns], multi-entity capabilities, ERP connectivity, reporting, etc.)
 Out of the box payment processing functionality (for vendors with full PSH
capabilities)
 Number of ongoing projects
 Geographic diversity
 Size of clients (by assets)
Depth of customer
service
Quality of company’s
responsiveness and
support
 Ability and willingness to provide client references available for interviews—
vendors were required to provide two references each. Those that did provide
the references were further judged on quality and timeliness of the reference and
reference feedback
 Servicing capabilities (e.g. global footprint, relevant size, degree of payments
focus and expertise, pricing flexibility and consulting and implementation support
capabilities (either own or through explicit partnerships)
 Interaction with the analyst
Source: Celent
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
23
Celent evaluated nine leading payment services hub vendors, a diverse group
Taxonomy of key payment services hubs vendors
Firm’s industry
focus
Payments/
transaction
banking
focus
1
A
Broad
Financial
Services
focus
1
B
3
2
Broad
industry
focus
Broad range
of IT services
Product
focus
Firm’s
offering
Source: Celent
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
24
Tips (for banks) for a successful relationship between banks and vendors
 Seek a partner with the right mix of the overall technical and functional quality of the solution,
vision for payments and product development roadmap and ensure fit with the bank’s vision
 Consider your need and the vendor’s ability to advise on the bank’s payments strategy,
architecture vision and roadmap and ability to support implementation
 Explore pricing options
– While the industry standard is to charge a licence fee dependent on the expected transaction
volumes, some vendors also offer pricing which is dependent on the number of countries or
number of corporates being served, and others are willing to explore “pay-as-you-grow” options.
– Expect to pay up to 4-5 times more for implementation than for the initial licence fee. The
implementation costs can be even higher if third party implementation resources are used.
– The market average for maintenance fees is 21% of the licence fee. Some vendors offer a
range with the specific fee dependent on the service level agreements.
 Align development roadmaps with those of vendors and expect to invest along with the partners.
Most vendors continue to enhance their solutions and many are co-developing them live with their
clients. The banks and vendors should carefully consider and agree the implications of such codevelopment for licence fees as well as intellectual property (IP) rights
 The contracts are important, but so is the willingness and readiness to be flexible by both the
vendor and the bank. A PSH project is likely to take at least one parties into the “unchartered
waters”, so there likely to be times where “trial and error” should be expected. True partnership
spirit is essential, however, very difficult to capture in the contractual language.
Source: Celent
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
25
Thank you!
 A recording of today's webinar and copy of the presentation will be available to Celent clients on
our website after the event at http://reports.celent.com/login.asp
 This webinar is based on the following reports published by Celent in the last few months:
– Defining a Payment Services Hub: Why Can’t We Just All Agree?
– Evaluating the Payment Services Hub Vendors: The Vision Is Getting Closer
– Payment Services Hubs: The Bank’s Perspective. Who? Why? How?
 You can obtain more information about subscribing from Steve Nawrocki [email protected]
 For questions about the content please contact Zilvinas Bareisis [email protected]
© 2011 Celent, a division of Oliver Wyman, Inc.  www.celent.com
26