Is cost cutting harming instant payments’ transformative effects?
Much has been written about the growing need for banks to adopt Instant Payments (IP), but what of the view from the trenches? What do banks value and consider when choosing to implement a solution? And most importantly, what do they plan to do with IP?
EBAday, the gathering of the world’s foremost payments experts, was the ideal place to find out. At the recent event, held in Munich, Germany, InstaPay asked attendees and our own Community, what their motivations were for moving to IP, what they looked for in the ideal solution and what challenges they felt they faced. The responses came from senior bank executives at institutions across the globe and the results of the survey uncovered some surprising trends.
The onward march of Instant Payments – up to a point
An encouraging 77% of respondents were on the path to implementing IP. Of this, 52% were already live, 15% were in the process of implementation and 10% were still in the planning phase. Nearly half (48%) were doing this to offer new products and services to their customers.
Despite IP being rolled out apace, as we’d expect given its strategic importance, the survey raised some interesting questions when we look at how and why IP is being implemented.
• Whilst 45% of those implementing IP were doing so in order to offer new products or services, only 30% of whom had concrete ideas on which new products were to be offered.
• 48% said that they were implementing an IP solution using in-house resources
• 58% said that cost effectiveness was a deciding factor in technology partner selection
• 48% said that the biggest problem they faced was integration with existing systems, 22% said it was a lack of internal resource
These statistics show an industry trying to implement IP to a budget using scarce resource and ageing infrastructure, whilst unsure how to monetise it.
Implementation without understanding
As noted above nearly half of banks are looking to create new services with IP, but many have not yet decided what these products will be. Indeed many of the responses were broad categories such as “new digital experiences” or “deeper integration into customer business systems” which suggests that there is a lack of clarity around how to derive value from IP.
Some are more prosaic about the potential uses citing “faster loan payouts” or “liquidity management” as potential services, but there is still a lack of clarity around use cases. Despite numerous papers and conference sessions dedicated to the issue, many commonly cited use cases were not referenced. For example, none of the respondents said they were implementing IP to enable the digital economy in conjunction with Open Banking.
It may be that potential services will be driven by customer demand, and by the successes of competitors, but it would seem that few have a clear idea of why they are implementing IP. Only 30% of respondents that said their bank was offering new products were able to give concrete examples of these. Perhaps an overly internal and cost (rather than profit) conscious community needs to look externally for assistance in leveraging the power of Instant Payments? Waiting for the few visionaries to lead the way and betting you can catch up is perhaps a risky strategy.
Almost half of banks surveyed said that they were using in-house resources to implement a solution. The reasons for this becomes clearer when looking at what criteria are used to select an implementation partner. Cost efficiency was chosen as a deciding factor by almost 60% of respondents. Internal resources can often appear more cost efficient in the short term, but when banks are struggling for the business ideas, perhaps investment is best placed there whilst the technology enablement can be worked through in conjunction with specialist experts?
Experience shows that treating such an inevitably complicated and visible (24/7) system development more like an internal project, can be an ill-advised approach. In-house resources are unlikely to have deep rooted IP implementation expertise and this can lead to unexpected difficulties and delays from extended testing cycles. And with one in five banks also claiming to be struggling to find relevant internal resources available for implementation, a picture emerges of an industry putting itself under unnecessary risk to implement business critical and strategically key solutions using both limited resources and budget.
This is brought into sharper relief by the main difficulties faced by nearly half (48%) of all respondents, who reported that integration with existing systems was the primary challenge that they face. This is even more concerning when, in many cases, implementations are being carried out by internal teams who may have limited exposure to up-to-the-minute technologies and best practice in relation to IP integration.
Co-operation is the key to success
The survey uncovers a market at odds with itself. On one hand IP is rightly being regarded as the engine room behind new digital services and, together with Open Banking, has the potential to drive digital transformation for banks. On the other, banks are under pressure to adopt this new technology but are unable to do so efficiently due to cost pressures and a limited of understanding of exactly how IP can transform the business.
If IP is to have the transformative effect that has been promised, technology vendors and banks need to work hand in hand. Cost pressures faced by banks need to be recognised by vendors and banks need to use vendors’ expertise to get the best out of any solution.
Many banks appear to be reluctant to engage externally due to the perception of high costs but this needn’t be the case. Open source technology is already in use by banks – the survey found that 40% use it in some capacity – and IP systems based on this have the potential to address cost efficiency concerns. Failure to work collaboratively (and to coin a phrase “openly”) to address the shortfall in IP capability could be a significant constraint for banks and their ability to serve customers.
What banks are saying is clear – cost efficiency and flexibility to build new (currently unknown) services is a key priority.
With banks’ current attitudes to IP systems, the digitally-driven payments future seems some way off. Indeed, with the emergence of advanced, leading edge technology providers that are able to implement quickly, at low cost and with global expertise, greater focus should be placed on finding the right partner to ensure effective deployment of instant payments.