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Making Payments Convergence Pay 6/23 banknews.com Electronic payments are overtaking checks for the first time, taking the topic of ‘payments convergence’ from theory to reality. Core processing systems, which evolved in siloed fashion to handle distinctly different payment types, are no longer ideal in the current environment in which checks are being converted to images or ACH transactions, sometimes even in customers’ back offices. The goal is to achieve seamless, integrated convergence of payment processes. But how will banks get from here to there? Although payments convergence has many interpretations, in this context let’s define it as the opportunity to: Support the processing of multiple payment & deposit instruments with fewer systems, which reduces costs & provides new revenue-generating offerings. Merge like back office operations to improve customer service & gain economies of scale. Provide a dashboard view of payment activity from a holistic enterprise perspective. For the purpose of this article, we’ll narrow the payment types down to check & ACH; 2 payment instruments that have real, immediate convergence opportunities. The consequent migration from paper to electronic payments has been transforming the US payments landscape. According to the 2007 Fed Payments Study, the number of electronic payments grew to 62.7b transactions, which is a 12.4% annual growth rate. With electronic payments comprising of more than two-thirds of all non-cash retail payments, US financial institutions will need to adopt check electronification & integrate electronic payment information to retain competitive advantage. Various confluences of external factors can provide new efficiencies to executing payments. The introduction of Check-21 has made check processing easier & less expensive for the financial industry. Because Check-21 allows banks to process all payments electronically without physically sending the check from point A to point B, check electronification allows a merchant, credit card company or financial institution to extract information from the check & process the check electronically. Nacha changes such as ARC, POP & BOC have allowed business to convert eligible checks to ACH debits right in the back office. Back office conversion, which went into effect on March 16, 2007, enables businesses to accept eligible paper checks at the point-of-purchase or at a manned location & then convert those checks to ACH debits, which can be processed electronically for increased efficiency. Nacha estimates that the banking industry could save $320m during the first 5 years of BOC adoption, due to improvements in processing efficiency. Check conversions are estimated to save the banking industry between 3c & 5c for every check converted to ACH debit, according to Nacha, & with data digitization & ubiquitous internet access, new integrated technology solutions can help banks streamline back office processes. Customers are faced with more choices than ever before at the point of transaction. They can choose from an array of payments options, such as debit or credit, cash or RFID, check or PayPal, & E-check. Importantly though, the most telling boost to an acceptance of payments convergence is the shift in customer behavior. Customers have shown willingness to accept depersonalized payments, demonstrating a preference for fast, convenient payment options. With various options available to customers, the distinction between payments has become marginalized & reduced the need for physical contact. Customers have come to expect consolidated reporting from their receiving banks. Even as payments convergence is openly accepted by customers, banks risk fueling customer disengagement, as they will have less opportunity to know their customers. Non-converged pieces within regulations & settlement paths still pose a challenge for banks, as the overall payments industry has yet to reconcile differences in regulations, such as Reg E versus Reg CC, & settlement paths for different payments types, such as check, ACH & card. Particularly for small banks, current operational structures are not conducive to maximizing the opportunities of convergence. While some have begun to merge check & electronics from a reporting perspective they still have a way to go to leverage operational efficiency. In this new environment, payments & risk must be managed from an enterprise perspective, particularly with the rise of check conversion to electronic imaging. Streamlining the payments process is imperative for financial institutions challenged by competing needs such as dramatic cost reductions, increased compliance costs & generating new customers. Today, reliable payment processing is an essential service, yet one that no longer differentiates one bank from another. Future growth opportunities lay in the information services that will help corporations manage their businesses more actively & profitably. It is the information about the payment, rather than the payment itself that will drive revenue opportunities for financial institutions in the future. To provide a more holistic view of business & customers, the bank must align its approach to the market with key customer points of convergence. By aligning payables/transactions & receivables/deposits, resources will be in place to compete cost effectively in payments market. In addition, banks can integrate the following methods to facilitate a payments convergence environment: Alternative deposit capture. Dispute resolution. Payments origination. Consolidated reporting to the customer. New payments vehicles. Float maximization. Non-bank alternatives. In other words, payments convergence is here & will continue to permeate across all areas of the bank. Traditional organizational models will not maximize the opportunity afforded by convergence, as they are too slow to market. Banks that choose not to align with the market will likely miss out. Non-traditional entrants can capitalize on the changing customer or corporate patterns so banks must respond to the environment shift or lose market share. It is important to continue to provide opportunities for community & mid-tier banks to have input into the consideration of any change that would so greatly affect the industry. At the end of the day, small banks want to offer many of the same products & services that their larger competitors offer, just at a cost affordable to them. It will be by embracing these electronic opportunities that small banks will be able to compete outside of their traditional footprints. Business customers will continuously demand greater payment flexibility & choice. For banks that have made considerable investments in their payments infrastructure, the only way to deliver these in a cost effective manner is to efficiently leverage their existing core payment systems rather than replacing them. By converging payment information without disrupting current processes & systems, banks will be able to address the urgent challenges of improving efficiency, mitigating risk & growing revenue. By leveraging a payments convergence approach, banks can integrate their check processing & ACH silos to execute payments convergence strategies faster with less integration & customization effort for the bank. As bank executives demand greater access to payments information, a pragmatic payments approach should be leveraged to balance business needs with greater efficiency & profitability. With a seamless, integrated view of payment information, banks will be able to consolidate their multiple silos & take payments convergence from a theory to reality.