Appendix 3: Low Value Payments – Cost Saving Opportunities
Should be read in conjunction with The Outsourcer’s View – An Interview with Unisys and How can we make substantial cost reductions to Europe’s Payments?.
This example is based on the kind of payments that are made by an Automated Clearing House. There is no uniformity in Europe as to exactly what is in the scope but there is a high degree of convergence on the ideas that it would include:
- bulk files of payments; i.e. not individual payment messages;
- high volume, retail payments, including payments with low monetary value and cost, typical cost should be a few cents per payment;
- would not be real time, albeit the number of days to clear varies by country;
- would include direct credit and standing order payments;
- payments are processed against customer accounts as part of a batch run.
The current architecture for such payments is shown below:
Let us analyse the cost saving opportunities according to the three classes of rationalisation described in How Cost Savings Can be Achieved.
A. Rationalisation of Hubs
There is obviously an opportunity for hub rationalisation across Europe, however it is utterly dependent on convergence of inter bank, low value payments standards as far as file formats, cycle times and return/recall processes. This is turn is dependent on a common set of legal payment instruments.
B. In Country Rationalisation of Bank Functions
The main functions that are labour intensive for this type of payment are:
- Error handling, even though ACH type payments achieve phenomenally high STP ratios, the sheer volume of such payments means that there are many thousands of errors a day such as unapplied items, account number unknown, customer deceased etc. There is also a lot of manual work associated with tidying up the returned payments and claims from other banks. This is largely “behind the scenes” work that can readily be centralised and/or outsourced.
- Static data maintenance, in particular regular payments records such as Standing Order instructions based on customers’ phone, fax, post and email instructions is a major use of labour. Again this is a very “behind the scenes” process which lends itself to outsourcing and centralisation economies of scale.
- Practically every bank has written its own software for the above functions, as well as for interbank ACH payments file formatting and the generation of accounting entries. There is considerable scope for some packaged software and/or outsourced services to replace this functionality. This would be greatly facilitated by the payment interface points generating standard instructions, as a minimum the national payment standard but ideally an international standard.
C. Cross Border Rationalisation of Bank Functions
The savings illustrated above can only be extended internationally if there are international standards for the file formats, cycle times, returns and recall processes for the payment instruments. These in turn are based on the legal rights and responsibilities for the payment instruments. If such convergence occurs, then all of areas mentioned in Section B could reasonably be expected to yield international levels of scale economies as they are all “behind the scenes” activities, not requiring customer communications.
The target architecture for low value payments cost reduction would look like the following diagram:
Its physical realisation within country can be achieved inasmuch as a payment processor function can be created using the In Country hub as a router. To make serious inroads into cost requires cross border rationalisation, which as has already been stated requires real drive on the European standards front. Even within country, standards for payment interface points’ files of transactions would be extremely helpful.