Tpi   Business Of Payments   Wickenden & Kettell 13 Jul2011
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Tpi Business Of Payments Wickenden & Kettell 13 Jul2011

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A number of major business and economic concepts surrounding payments

A number of major business and economic concepts surrounding payments

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Tpi   Business Of Payments   Wickenden & Kettell 13 Jul2011 Tpi Business Of Payments Wickenden & Kettell 13 Jul2011 Presentation Transcript

  • The Business of Payments Chip Wickenden Tom Kettell© 2011 NACHA — The Electronic Payments Association®. All rights reserved. No part of this material may beused without the prior written permission of NACHA. This material is not intended to provide any warranties, legaladvice, or professional assistance of any kind.
  • Breaking News – UK Cheques back from the Brink Slide not included in Handouts The Payments Institute – July 10-13, 2011 – Washington, D.C. 2 © 2011 NACHA — The Electronic Payments Association®. All rights reserved. Source: Finextra.com
  • AgendaBasic Premise – it’s all about economics Major Market Concepts Affecting the Payments Market Scope and scale of the market Market Equilibrium; Growth Markets; Contracting MarketsThree tiers of the payments market The Network EffectChannels / order management Disruptive InnovationProcessingNetworks / Gateways / Core Regulation climateInformation aspects Dodd Frank, FFIECRevenue Models Others Item Fees Value Pricing - interchange Risk Aspects and Models The Promise to PayCost Models Fraud Capital Allocation – Enterprise Solution Operational Risk Expense / Outsourced Solution Building a Business CaseRoutes to Market Marginal or incremental change vs Aggregate change Market share change Payment System Architecture (Enterprise vs. Outsource) The Payments Institute – July 10-13, 2011 – Washington, D.C. © 2011 NACHA — The Electronic Payments Association®. All rights reserved. 3
  • Scope and Scale of the Market 2009 US transactions 2009 US dollar flows C2B 219 billion USD 84,097 billion B2B • 0% 107.5 (49%) Cash $1,871 (2%) 1% 15 37.9 (17%) Debit Card $1,421 (2%) 14 -7 24.5 (11%) Check $31,599 (38%) -5 4 21.6 (10%) Credit Card $1,917 (2%) 4 12 19.1 (9%) ACH $37,164 (44%) 8 14 7.7 (4%) Prepaid $173 (0%) 12 20 0.4 (0%) Book Entry Transfers $34 (0%) 42 1 0.2 (0%) Wire Transfer $9,919 (12%) 9 33 0 (0%) Other $1 (0%) 30 %SOURCE: McKinsey U.S. Payments Map, Release Q2-11 CAGR ‘04-09 The Payments Institute – July 10-13, 2011 – Washington, D.C. © 2011 NACHA — The Electronic Payments Association®. All rights reserved. 4
  • If Forrest Gump Looked at the Payments Market . . . He could say it looks like a wedding cake • The top part – the smallest – is what everyone looks at – that’s the customer interactions and order management – the services – the routing – the innovation – the razzle-dazzle • The middle part is what most people eat – and that is the operations and gateways – the factories of payments processing • And the bottom part – bakers often add extra tasty ingredients to the bottom layer – and that’s where there are hidden goodies to be found in payments too – the information aspects of payments, including loyalty The Payments Institute – July 10-13, 2011 – Washington, D.C. 5 © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • The Problem of Payments ACH Check Wire Cash Cards Vault Operations Item Processing Image Deposit Customer File Teller Drawer POS Network Online / CNP Check Image EBPP Facility Mgt/Online Wire Desk Treasury Lockbox Facility ATM Syntax Edit Cash Letter Syntax Edit Counting / Authorization Prep Strapping OFAC Check Enrichment Inventory / Balancing Switching Safekeeping OFAC / PEP Warehouse Checking General Clearing and DDA Deposits Ledger Settlement DDA Interface DDA Interface Returns and Network Network Returns and Delivery Exceptions interfaces Gateway Exceptions Bilateral Agreement Clearinghouse Third Party Fed Interface CHIPS SWIFT Fedwire Armored Trucks Recyclers Other Netwk JCB Discover American Exp MasterCard Visa Direct Send Endpoint Exchange Fed Interface Payments are processed in silos based on the transaction format and clearing method - developed in response to operational, not business needs The Payments Institute – July 10-13, 2011 – Washington, D.C. © 2011 NACHA — The Electronic Payments Association®. All rights reserved. 6
  • The Business of Payments Outbound Payments Gateways Channels Counterparties Customers Networks Inbound Payments Gateways Channels Business Logic Execution Gateways Opportunity for: • Differentiation Cost of: • Operations • Innovation • Support • Revenue Strategic Tactical • Capital The Payments Institute – July 10-13, 2011 – Washington, D.C. © 2011 NACHA — The Electronic Payments Association®. All rights reserved. 7
  • The Different Worlds of Payments AreNothing Alike Keys to Revenue Generation Levers of Bottom Line Management • Customer experience • High volume / Low fixed cost • Speed to market • Minimization of errors and exceptions • Integration across products and • Minimize operational risk channels • Delivery arbitrage • Leveraging market forces • Consistent operational excellence • Collaboration and innovation Opportunity for: • Differentiation Cost of: • Operations • Innovation • Support • Revenue Strategic Tactical • Capital The Payments Institute – July 10-13, 2011 – Washington, D.C. © 2011 NACHA — The Electronic Payments Association®. All rights reserved. 8
  • A Component Based Approach to Payment ServicesHubs Enables Rationalization and Transformation ACH Check Wire FX Cards Item Processing Image Deposit Customer File POS Network Common Instruction Management Online / CNP Check Image EBPP Facility Mgt/Online Mgt/Online Operations FX Trading Wire Desk Treasury Treasury Lockbox Facility Syntax Edit Cash Letter Syntax Edit Validation Authorization Prep OFAC Check Enrichment Balancing Warehouse Switching Payment Execution/ PEP Management OFAC and Warehouse Checking General Clearing and DDA Deposits Ledger Settlement DDA Interface DDA Interface Returns and Network Counterparty Network Returns and Exceptions interfaces Clearing Gateway Exceptions Bilateral Agreement Clearinghouse Third Party Fed Interface CHIPS SWIFT Fedwire SWIFT DDA Other Netwk JCB Discover American Exp MasterCard Visa Direct Send Endpoint Exchange Fed Interface Payment Networks and Gateways The introduction of a common order management system creates opportunities for improved routing and customer interaction, while also providing the buffer necessary for banks to rationalize their payment management and gateway functions The Payments Institute – July 10-13, 2011 – Washington, D.C. © 2011 NACHA — The Electronic Payments Association®. All rights reserved. 9
  • The Network Effect ―The value of a network to it’s members increases exponentially with the number of users‖ 2 V=N• Theodore Vail, president of Bell Telephone, 1908 Annual Report• Robert Metcalfe, Metcalfe’s Law 1980, focusing on devices• Rod Beckstrom, Beckstrom’s Law, focusing on the value of transactions within the network• Bernard Lunn, Reverse Network Effect with Scale• Rahul Tongia, The Cost of Network Exclusion The Payments Institute – July 10-13, 2011 – Washington, D.C. 10 © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • Adjacent Markets Trade P2P Finance Market Market Retail Payments Credit Store Market Market Market Analytics Developing solutions that target adjacent markets, rather than the current market offer appealing ways to tap net new sources of revenue, rather than simply battling competitors. The risk, however increases, since the bank will be outside of it’s core areas of expertise. The Payments Institute – July 10-13, 2011 – Washington, D.C. 11 © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • Disruptive Innovation ―The Innovator’s Dilemma‖• Disruptive innovations are generally not • A market incumbent is incented to invest only to acceptable for the mass market when they are sustain current returns introduced • Additional incumbent investment requires a• Only the fringes of the market pick up the higher rate of return innovation in the first iteration • A market insurgent will invest to reduce the risk of• As the innovator continues to refine their product not achieving critical mass the utility value to the market increases • In this context the telecom providers are market• While incumbents improve their product insurgents performance over time, disruptive innovators are • The more complex the market, the higher the forced to improve faster in order to survive stakes For much more on this, refer to the works of Harvard professor Clayton Christiansen. His website is: http://www.claytonchristensen.com/ The Payments Institute – July 10-13, 2011 – Washington, D.C. © 2011 NACHA — The Electronic Payments Association®. All rights reserved. 12
  • Two Sided Markets• The number of participant of a given group create an attraction for members in a related group – Patients and hospitals – Electronic billers and bill payment service providers – Fraternities and sororities – Publishers using Adobe and consumers using PDF readers – Merchants and cardholders http://en.wikipedia.org/wiki/Two-sided_market The Payments Institute – July 10-13, 2011 – Washington, D.C. 13 © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • The Farther You Reach from the Data Required toPost a Transaction, the More Value is Uncovered Meta-Data Transactional Data -> Associated Aggregated Functional Payment Separated Related Data Payment Payment Detail Data Enhanced Data Data Data Data Information Provides insight Minimum data Additional line- Detailed data Financial gathered into market required to post item which needs to supply chain separately that trends and a transaction information on be associated data i.e. billing enhances the customer what was with the or invoice, FX insight behavior Accounts purchased and transaction, or capital costs provided by Amount the identity of component, payments data Date the parties ingredient or supply chain data The Payments Institute – July 10-13, 2011 – Washington, D.C. 14 © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • A Componentized Approach to Payments Services HubsAllows the Bank to Focus on Strategic Imperatives Industrialize Processing The Payments Institute – July 10-13, 2011 – Washington, D.C. 15 © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • Payment Methods • Generalized for the overall market, not specific to mobile payments General Use Payment Methods • The method of payment is different than the device or means of affecting payment • Franchise extends into mobile • Risks and cost of funds are well understood and managed • A major factor in the utility of a payment • Broad merchant acceptance method is the breadth of acceptance • Franchise may go beyond Closed Loop mobile Notional Account • Risk is managed based on program specifics • Program carries cost of funds • Merchants must subscribe • Simple and Easy Bill Through Third Party • Carrier holds risk & cost of funds (Provisional Credit) • Merchants must subscribe The Payments Institute – July 10-13, 2011 – Washington, D.C. 16 © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • The Gartner Group Hype Cycle Slide not included in Handouts The Payments Institute – July 10-13, 2011 – Washington, D.C. 17 © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • The Hype Cycle Can Also be Adapted to MarketDevelopment Slide not included in Handouts The Payments Institute – July 10-13, 2011 – Washington, D.C. 18 © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • Market Participants Behave Differently thanPundits Slide not included in Handouts The Payments Institute – July 10-13, 2011 – Washington, D.C. 19 © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • End Customers also Behave Differently Slide not included in Handouts The Payments Institute – July 10-13, 2011 – Washington, D.C. 20 © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • The Needs of Four Parties Had to be Addressed in Orderto Create the Credit Card Market Benefits Costs Benefits Costs • Carry less cash • Fees • Increased traffic • POS Equipment • Short term credit • Interest • Increased per • Interchange and • Status (early days) • Credit / fraud ticket spend Fees • Rewards (now) exposure • Decreased cash • Chargebacks handling cost The Card Associations Delivered Consumers Merchants • A means of sharing revenue - interchange • Standardized processes, rules and enforcement • Marketing to define the value to all participants • The NetworkIssuingthrough membership growth Effect Acquiring Bank Bank Benefits Costs Benefits Costs • Fee income • Issuing and • Fee income • Sales costs • Interest income Account Mgt. • Growth in • Processing costs • Retail account • Processing commercial • Credit risk growth • Credit / fraud risk accounts • Association fees • Association fees The Payments Institute – July 10-13, 2011 – Washington, D.C. 21 © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • Similarly, the Needs of 8 or 9 Players Must be Aligned toIgnite the Mobile Payments Market• In this new reality the role of • The new market entrants the card associations shifts view the payments market from market catalyst to as an adjacent space and an another vested interest. opportunity for new revenue.• In most developed economies, Wireless the situation is further • The earliest days of this Networks Consumers Merchants Payment Networks Point of complicated by the relative Sale market have been Handset maturity of electronic Providers characterized by fierce / SIM payments, particularly card Mfrs Issuer Acquirer domain defense; payments. Bank Bank collaborative efforts are just now emerging and a• The card associations’ network effect has yet to be situation is further catalyzed. exacerbated by pressure to reduce interchange costs. A catalyst is needed that will balance the benefits and costs for all of the market participants in mobile payments The Payments Institute – July 10-13, 2011 – Washington, D.C. 22 © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • Building a Business Case• Cost vs. Revenue• Cost vs. Compliance• Cost vs. Cost• Cost vs. Do Nothing The Payments Institute – July 10-13, 2011 – Washington, D.C. 23 © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • The Actual Cost of Doing Nothing Source: Clayton Christensen; Failed Paradigms of Financial Analysis The Payments Institute – July 10-13, 2011 – Washington, D.C. 24 © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • Things to Consider - Risk Impacts• Prior to implementing you should assess – Is the product/service strategic? – Have we identified and assessed all the risks to our organization? • Legal • Compliance • Reputation • Operational • Security of personal information The Payments Institute – July 10-13, 2011 – Washington, D.C. © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • Key decisions for a bank during the strategy and planning phase of a payment project ILLUSTRATIVE ILLUSTRATIVE Multi- national/ Orchestration Orchestration regional within Core within Core Payments Payments Payments PaymentsInternational systems systems banking banking engine engine Other Other vs Domestic How many Orchestrate Credit Direct Cards … transfers debits hubs and vs New Legacy where? upgrade? Value and risk assessment Build vs • How many technology Partners? buy? Build Buy from vendors? For what roles? internally vendor • What capabilities are you looking for from a technology vendor? Buy and build • How many (framework implementation partners? and SDK) Source: Celent The Payments Institute – July 10-13, 2011 – Washington, D.C. © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • Changing Regulatory Climate Issued January 14, 2009 Issued November 1, Addresses the necessary 2008 elements of an RDC risk management process in an There are 26 electronic environment, focusing possible red flags on RDC deployed at a customer that fall into five location, mobile banking categories FTC Red FFIEC automated clearing house (ACH) Flag check conversions Regulatory Assessment Dodd Rule •Check 21 Frank Making •Image Exchange Act Bodies •Regulation CC •Regulation J •State Law•Title X: Durbin Amendment •ACH•Title VIII: Payment, Clearing and Settlement •Regulation ESupervision •Agreements and Clearinghouse•Title X: Bureau of Consumer Financial Protection Rules •Interchange •Patriot Act •OFAC The Payments Institute – July 10-13, 2011 – Washington, D.C. © 2011 NACHA — The Electronic Payments Association®. All rights reserved.
  • Questions and Legal Disclaimer Chip Wickenden Tom Kettell Enterprise Solutions Emerging Markets FIS Global Epson America, Inc. Chip.wickenden@fisglobal.com tom_kettell@ea.epson.com 1-904-422-1321 1-952-906-3996 Unnamed lawyers make us include the following: The views expressed herein are the speaker’s personal views and do not necessarily reflect the views of NACHA – The Electronic Payments Association The Payments Institute – July 10-13, 2011 – Washington, D.C. 28 © 2011 NACHA — The Electronic Payments Association®. All rights reserved.