Tag Archives: business process automation

The $64 Thousand Interface

Justifying Payments Management Investment:
The $64 Thousand Interface
– Maggie Scarborough

In banking, significant investment in new centralized payments capability known as hubs or payments management has begun at the largest financial institutions. These new centralized payments systems can provide better competitive execution as well as cost reduction through the elimination of many redundant systems and processes across the siloed payments infrastructure.  The common wisdom is that only the big financial institutions have the scale to invest in sophisticated payments hub and management systems. This isn’t a true assumption. Consider the invisible costs of an existing custom application program interface, $64 thousand a year.

You have to see it to save it. To make the business case for investment, most bankers want to use a direct cost elimination model – it’s easier to sell to senior management than a “squishy” new product sales model. That’s why scale is important. But even mid-tier banks have more scale than they realize, especially in the custom interface department. The reason the business line doesn’t see or understand integration costs and maintenance? – IT maintains custom APIs and doesn’t usually bill the business unit except during the implementation of a new system, where it is expensed as implementation costs.  Poof! Costs gone? Not really, the costs continue as the custom API must be maintained and changed as the IT infrastructure changes. There are also continued (“squishy”) opportunity costs as it becomes too expensive and time consuming to change the interface in order to advance product and services capability to keep and attract customers.

The $64 thousand interface. For illustration purposes (not that you would really do this), if you amortized the costs of a custom API over 3 years, just like a software license fee, and spread upfront outlays and ongoing maintenance fees, IT development costs, vendor charges, and change control and testing costs, the cost of a simple wire interface would be $107 thousand/year over 3 years or $64 thousand/year over 5 years.  Therefore, reducing costs by eliminating the $64 thousand interface can be significant, especially for payments where there are anywhere from 40-100 custom interfaces to/from wire transfer, ACH, check processing, card.  To be conservative – let’s say we only eliminate half of the 40 interfaces $64 thousand X 20 = $1.28 million in savings for a mid-tier regional bank. That amount would make a significant contribution to investment in centralized payments capability.

How do you know which way you’re going, if you don’t know which way you’re facing? The opportunity to reduce cost and gain better market execution requires “visibility” of IT costs combined with business line costs and a team approach that includes the business line, IT, finance, and procurement and vendor partners, so that the right cost benefit picture can be derived. There are banks doing this, now. Encouraging cost visibility and allocation can be a scary situation, I know, I experienced it while working for an institution with a fully loaded cost accounting model. It worked because of leadership that encouraged collaboration. But if you can’t see your cost and revenue structure, it’s difficult to know which way you are going, or even if you have had any success.  It might be worthwhile to ask some questions. How are your IT costs allocated to your business line? E-mail Maggie@FinservStrategies.com

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Nomenclature: Why a Payments Hub Isn’t Necessarily Payments Management

Byline: Maggie Scarborough, Managing Director
(c) 2010  FinServ Strategies. All rights reserved.

It’s a pet peeve I share with several people I know, the idea that a Payments Hub can truly effect business process change within an organization.  I believe you need something bigger, Payments Management.  So, I am going to split hairs –  there is a big difference.

A Payments Hub is Tactical, A Payments Management System is Strategic
There are a number of Payments Hub solutions out there that have a simple set of processes that allow some centralized control of amalgamated payments processing. It is operationally focused, system process-centric – more tactical in nature:

The Hub
Any payment or format in, any payment or format out (e.g, to the client)
Transformation and normalization on data and messaging layers
Logical routing; business logic for dynamic routing
Interfaces for distribution
The Database
A basic data model and management reporting
Administration and Permissions
Shared Services
Anti-Money Laundering, Terror and Fraud
Currency conversion

A Hub – Not bad, eh? But Payments Management is Strategic.  If you can perform this type of centralized processing, you will further reduce costs, but only to a point. The next step is strategic –  to execute better in the market from Risk, Liquidity/Credit, Business, and Market perspectives.  So what do you have to add?

Risk Analytics
Understanding attack vectors and solutions
Learning transaction patterns indicative of fraud

Liquidity  Analytics
Understanding  liquidity flows and solutions and settlement patterns
Knowing when and how your partners and customers are using liquidity

Business Process – Work Flow Centric, Not Simply System Process-Centric
Use f Analytics and work flow to detect payment issues in flight and cure them before they leave
Cure or resolve exceptions between all of the parties in process
Allow customer self service and reconciliation management

Business of Payments
Understanding processing concentrations and flows and normalizing customers and use
Learning where you make money or leak it.
Discovering intersections of customers and counterparties and leverage the relationships for services that are not only end-to-end for the initiator, but also across her business and partners

Management Console
Enables roles-based reporting and modeling, including process modeling

Stay tuned for more. Is this a realistic vision? We’d love to hear what you think?

–end, please comment

Maggie Scarborough, Managing Director
Maggie@FinServStrategies.com, +1 410.685.2324

www.FinServStrategies.com

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