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