Tag Archives: payments hubs

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

IBM to Buy Sterling Commerce: Good News – Good News

IBM Plans to Acquire Sterling Commerce for $1.4 Bn: Good News – Good News

Byline: Maggie Scarborough, FinServ Strategies
May 25, 2010

In a good news-good news announcement on May 24, IBM announced its plans to acquire Sterling Commerce from AT&T in a deal valued at $1.4 billion. Former and new parents will remain friends. Sterling Commerce will benefit from new parent, IBM, keenly focused on B2B and banking spaces and in need of applications. IBM, with a ready cloud computing model, gets much needed business applications from Sterling Commerce that extend  across all major industry verticals including financial services.

Big deals don’t always have a big impact in financial services, but in this case the potential is large. The proposed IBM acquisition of Sterling Commerce from AT&T has a lot of good news in it for IBM, Sterling Commerce, and financial services.  Instead of a prior mis-aligned and fruitless partnership deal with ACI to get into the payments business, this time, IBM is betting on cloud computing, business process management, and applications to put smack dab in the middle of B2B commerce, including banks, which are in the middle of the business relationships – the virtuous 4-corner model, with IBM in the cloudlike middle enabling all. Sterling Commerce has a combination of tools including a budding bank payments hub system and well established B2B commerce transactions software and services that will allow them to extend services further into the business processes of the customers, partners, and institutions.

In the bigger competition between IBM, Oracle, and HP, this acquisition gives IBM an advantage over Oracle, which has been spinning in the core market of financial services, and gives the company added application power when competing with (or facilitating) with newly extended services of companies like SAP, which recently announced its $5.8 bn acquisition of Sybase, which hinged on mobile applications.

Why buying Sterling is a good deal for IBM:

1)     Gets IBM lift across all industry segments, not just banking. Sterling’s foundational supply chain and B2B commerce business reaches 18,000 customers across the globe in financial services, retail, manufacturing, communications, and distribution.

2)     IBM also gets a direct connection into global payments through Sterling Commerce’ SWIFT solutions and MEFG.

3)     IBM has a cloud foundation ready to go and recently tested with SAP.

4)     IBM’s Global Services needs both cloud and integrated business applications to better sustain growth.  In the age of an “app for that,” IBM needs applications for its cloud and Sterling has plenty of core B2B applications that need a cloud facelift – something IBM can do and better do if it’s their own assets they can control.

5)     IBM can leverage Websphere’s business process management and middleware assets including orchestration, and analytics capability with Sterling Commerce’ trading partner network and B2B supply chain capabilities to build collaborative cross channel applications.

Why this deal is good for Sterling Commerce:

1)     Although AT&T has been a good parent for Sterling Commerce, its new parent better understands and is closer to the business process management and collaboration needs of the Sterling customer base.

2)     IBM will provide sustained investment in Sterling’s product and network portfolio needed to complete its modernization of B2B commerce applications and network products.

3)     Sterling Commerce’ B2B network will ultimately have a home in the cloud, which should enable the firm to more quickly execute in the marketplace and extend applications into the mobile cloud. IBM has a cloud foundation ready to go and recently tested with SAP.

This deal between IBM and Sterling in Commerce makes sense. IBM will help bring Sterling Commerce into the bank at the highest strategic levels and Sterling will help bring IBM into the applications market in a cloud market where there is an “app for that”. At the deals center, though, is the idea of cross collaboration (B2B), bank to B, B to bank) is a critical need for institutions wishing to keep their largest corporate customers happy and the mid-market stickier, and the small business market more engaged and a source of new revenues. We have been talking about the integrated financial supply chain for years, this combo may work.  But like everything, the devil is in the execution.

—end of document

Please comment

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

www.FinServStrategies.com
Read  the blog at   http://FinServStrategies.wordpress.com
www.Twitter.com/Finserv

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

http://FinServStrategies.wordpress.com

http://www.Twitter.com/Finserv