25 June 2010 Features

 

Payments: the hub of the matter

Tom Groenfeldt

One approach banks are taking to streamline their payment processes is the adoption of a hub model providing a single point of access to corporate clients that offers improved liquidity management and other services.

"We are giving the client the ability to have increased visibility into the payment life cycle regardless of the channel or how the payments are initiated," says Milton Santiago, senior vice president for portal strategy and Treasury eCommerce Solutions at Bank of America Merrill Lynch.

Santiago describes the model that the bank has adopted as a hub and spoke that aggregates, consolidates and processes routing downstream and to Swift, the Federal Reserve or the settlement system in the country where a client is conducting business.

"Before this, we had multiple hubs and multiple spokes - it was a lot more complicated with many platforms that were doing translation and augmentation for settlement. Now they can work with Bank of American around the world. It simplifies their experience," he says.

Although the model is simple, it can become confusing as definitions of payment hubs vary from vendor to bank to vendor. Mary Knox, research director for banking and investment services at Gartner prefers the term payment services hubs.

"Essentially they are in-house platforms that allow for the consolidation of the processing of payment types on a single platform," she says. Traditional payment engine providers such as ACI and Logica are coming at the hub by reconfiguring their existing systems while newcomers such as Clear2Pay and Dovetail are building on new technology and moving into the payment arena with entirely new approaches.

Fundtech, which powers the Bank of America hub, is another that has rebuilt its software to provide a payments hub. Santiago describes it as Web 2.0, which in this case seems to mean that the system replaces files with screens that prompt, or require, users to fill in all the relevant information.

George Ravich, executive vice president at Fundtech, calls it STP at the source - any problems are identified and corrected before the payment can be processed rather than fixed after the payment fails. Internet users who have stumbled over the *(Required field) indicator in a web site registration or subscription form, or in an order at Amazon, will recognise the methodology and perhaps wonder why it took banks so long to apply it to payments.

Bank of America has clients of all sizes using its hub, says Santiago: "Multinationals may have host-to-host connections with us, while large corporations and mid-market may be doing bulk uploads to our web site or keying their information in field by field to a real-time screen."

The account format is appropriate for the country where the payment is going and will indicate when an intended delivery date is a local holiday, and the system also allows invoice and other information to accompany the payment details and provides an automated connection to a corporation's ERP system.

Knox said hubs provide such business process management functionality in order that users can create customised workflows, but while banks' clients are interested in hubs - they are definitely the future - the model hasn't entirely arrived yet.

"Nobody has what we consider a complete payment services hub," she said. "A number of vendors are supporting the development of one and some banks are pursuing their own. Europe is ahead of the US here."

Banks that are the products or mergers and acquisitions may find themselves with multiple overlapping payment systems and duplication connections to custodians, ACHs, Swift and clearing banks.

Paul Morris, senior vice president for global sales and marketing at Dovetail, said the key to a payments hub is to provide a similar set of services regardless of the type of payment instrument and whether it moves by the Fed, CHAPs, ACH, Target 2, BACS or SEPA, or even a retail credit card or ATM transaction.

"Big corporations want to give their bank a bunch of payments and based on characteristics such as date, size of the payment, the bank decides whether to send it by wire, ACH or printing a cheque." By combining its payments in a single hub, the bank can create a single repair function rather than having one for each payment type. And when payment regulations change, as they are apt to do, the bank can make the change in one place rather than roll it out across multiple independent payment systems.

Fabien Vandenreydt, head of product development at Swift, sees hubs' flexibility as a big advantage:"Standards and protocols change on regular basis, and the cost of implementing and testing them is not low for large institutions or for institutions that are active in various markets. Internally hubs can speak one language and the hub can populate the message going out with proper syntax depending on the destination. Then whenever you want to disconnect or add a link, you don't have to start from scratch. That's the benefit of middleware and a single data model."

Deutsche Bank uses Dovetail for high value payments in the US, through the Fed and CHIPS systems and in Europe, while JP Morgan Chase is implementing it for payments outside the US, Morris said. Dovetail built from the ground up in Java and J2EE so it doesn't have issues of converting old systems to new technology.

Morris said one large bank was faced with a corporate customer who wanted a later cut-off date for payments or it would move to another bank. That was impossible with the legacy system, but with Dovetail the bank could give the corporation another hour. ROI was in months, he added. International payments are not just for the largest corporations, he added.

"I think the US banks are underestimating the pent-up need from not just their large corporations but mid and small for international payment services. The amount of global trade going on because of the Internet, which lets you open a storefront in any country in a matter of hours, has created a staggering amount of foreign remittances. A lot of small businesses are afraid because they can't get can't get that service from their current bank."

In Europe, payment departments are using the introduction of the Single Euro Payment Area to argue for new systems, Morris added: "You get a regulatory change which enables the payment guys to say that since the bank has to spend a couple of million, why not put it on moving to a payment service hub rather than upgrading legacy."

Payment hubs offer tracking so corporations or banks can see where payments are, just the way they can track FedEx packages - a standard comparison among critics who like to point out how much easier it is to follow a physical package from drop box to plane to delivery truck than it has been to figure out where an electronic payment is.

Clear2Pay offers a single platform for everything from high value payments over Swift to credit and debit card transactions, says Doug Gross, vice president of sales and alliances for the company in North America.

The company's system, built on SOA and J2EE when the technology was still in its infancy, separates the business logic from the presentation layer, he says. Payments break down into four bits of information - from, to, amount and date and with Clear2Pay banks can process any payment type, although it has taken the company a long time to get its performance tuned, he added. Now, however, the Commonwealth Bank of Australia can process card transactions with a 20 millisecond response time and run Swift payments from the same platform.

Payment hubs are also playing an important role in liquidity and risk management. Dovetail's Morris said regulators are concerned about payment flows, currencies and counterparties, adding that as "regulators start to drill deeper into the bank, they realise that the banks need controls over all the payment instruments, not just one".

They have also identified a need for more real-time information: during the financial crisis banks often didn't know until the end of the day what funds had come in, what had gone out and what had settled, or not.

Gross said banks also have clear business benefit from knowing their positions. If a bank has a $10 million limit for a corporation and doesn't know a $5 million payment has just come in, it misses the opportunity to lend to its limit, and risks losing business. BT