In part I of this entry, I discussed the need to significantly transform the world's digital payments infrastructure to support the emerging evolution toward univeral mobile digital money. This transformation is a very complex an undertaking that will require significant research and innovation, and will likely play out over many years. Let me summarize some of the key challenges and opportunities.
Payment Hubs and Clouds
There is near universal agreement on the need for new payment hubs. As McKinsey's Payment Hubs: Redefining the Industry’s Infrastructure observes: “Banks are struggling to cope with transaction platforms that no longer serve their needs. A legacy of silo IT architecture combined with the need for data integration is leading these institutions to investigate payments hubs as a solution. There seems to be little consensus, however, as to what a payments hub is (even among those who are building them) and where it sits in the overall payments system.”
The study identifies three major kinds of consolidation or aggregation payment hubs.
They will also be able to collect lots of new real-time information that will be useful to consumers trying to find the best possible prices, to merchants trying to find new channels to reach their potential clients and to governments trying to get a better handle on their economies. Many of the productivity benefits associated with digital payments will be a result of all the new information that can now be gathered, analyzed, and transformed into innovative new insights, services and apps.
Back-end hubs sit in front of all the various platforms that process and analyze payments. They aggregate transactions and information and route them to the appropriate back-end platform for processing. Lots of reconciliation and post-processing functions are performed in these back-end hubs.
Over time, we will see the rise of new digital payment clouds to consolidate both the front-end and back-end processing of transactions and associated information analysis. These payment clouds will be needed in order to efficiently handle the much larger volumes involved at significantly lower costs and higher quality, reliability and security, as well as the flexibility needed to deal with changing markets and regulations.
All these approaches will co-exist with each other and evolve over time.
Over the past thirty years, the industrial sector of the economy has achieved remarkable improvements in productivity and quality. Before that time, most manufacturing plants were fairly inefficient by almost any contemporary measure, and were turning out products of varying quality. Then, driven by the success of Toyota and other companies around the world, the industrial sector and academia discovered the merits of applying engineering discipline as well as a holistic, systems-wide approach to manufacturing processes.
More recently, companies of all kind have significantly improved their overall productivity. They have done so by leveraging the Internet and other advanced digital technologies, by reengineering and streamlining their business processes, and by fundamentally transforming just about all aspects of their organizations to become more effective electronic businesses.
But as McKinsey’s Outlook for the US Payments Industry points out: “Compared to leading manufacturers and retailers, U.S. banks have only scratched the surface when it comes to deploying sophisticated productivity improvement tools like lean manufacturing or integrated supply chain management. . . Can a new payments “back office” be envisioned that is dramatically cheaper, yet offers greater value, flexibility, and convenience to customers? The answer . . . is yes.”
“The biggest challenge - and opportunity - will be attacking the cumbersome design of the payments system itself. Looked at end to end, the U.S. payments system resembles a national highway system designed mainly by state and county planning commissions. To date, banking industry leaders have proven far better at proposing new roads than developing a national plan for rationalizing the old ones.”
The situation is better in other countries around the world, which generally have fewer legacy payment and banking systems, but even then much work remains to be done to achieve the required productivities.
“Many countries have formed umbrella national payments associations - like APACS in the U.K. and the CPA in Canada - to drive cross-industry payments systems initiatives, standards, and infrastructure investments. Others have relied on governments or central banks to play this coordinating role. As the U.S. payments industry consolidates, senior bankers and regulators should seize the opportunity to modernize the nation’s payments infrastructure - rationalizing redundant platforms, promoting greater standardization, reducing the risks and costs associated with needless complexity, and allowing greater “speed to market” for new payments innovations.”
Money and payments are so central to all aspects of business, government and society in general, that a major transformation of the world’s payment infrastructure will invariably require an extensive ecosystem and close collaboration among all the key industries involved. The same US Payments McKinsey study strongly recommends that banks and others in the payment industry need to work more constructively with regulators in order to achieve the necessary efficiencies and innovation. “At the end of the day, though, bankers, not regulators, should be shaping the dialogue on payments system regulation. They should propose bold, industry-led solutions to make the system safer, better, and more efficient, and should look for fairer and more equitable ways to share the costs and benefits.”
Merchants are increasingly concerned with the impact of card acceptance costs on their profit. The study urges banks and credit card companies to address these concerns by engaging in a dialogue with the merchants. “They need to include merchants as true partners in the payments dialogue - much as purchasers and suppliers have done in other industries - and make the economics of payments acceptance clearer and more understandable. . . Better yet, perhaps win-win solutions can be devised that will create higher value for the merchant and the bank - whether through customer loyalty programs, outsourcing of point- of-sale services, faster customer throughput, or simplification of their back offices.”
The emergence of public digital payment clouds will be a great enabler of regional payment ecosystems, in which governments, banks and other companies in a region collaborate to offer cloud-based financial services to mobile money consumers and merchants. As this IBM study Deconstructing the Mobile Money Value Chain through Cloud to Create New Business Opportunities points out:
“[The] benefits of cloud interoperability can drive business transformation and innovation . . . we believe the interoperability benefits of the public anchor model [or regional payment clouds] will help accelerate customer adoption and shorten payback periods . . . for the most part, markets are fragmented (largest provider with less than 50% market share) and would benefit from cloud enabled collaboration. With emerging markets individuals still conducting over 90% of all transactions in cash, mobile money is poised to be a multi-billion dollar industry in the next three to five years. The ability of providers of mobile financial services to optimize the value chain through symbiotic partnerships and effective use of technology will be the single most important success factor in this space.”
The transition to universal mobile digital money and other forms of digital payments has already started, along with the global, digital infrastructures needed to handle the explosive growth in payment transactions and related services. This promises to be a historical transition, enabling billions of people to become part of the world’s digital economy, and offering all kinds of innovative services to individuals - from the wealthy to the poor - and to institutions - from the largest to the smallest. But realizing the promise will require the close cooperation of governments and companies around the world.
The development of such a 21st century payments infrastructure will likely be among the most exciting, important and challenging projects the world will undertake in the years ahead.