Mike Eaton, Managing Partner for Financial Services and Gerry Heard, Head of Outsourcing Solutions
Should be read in conjunction with How can we make substantial cost reductions to Europe’s Payments?
For a different perspective on Payments and Outsourcing HowBanksWork.com talked to Unisys, in particular, Mike Eaton, Managing Partner for Financial Services and Gerry Heard, Head of Outsourcing Solutions.
What is the position of Unisys in Outsourcing for Banks?
A strong one, for two reasons:
- Because of our heritage we have a good range of skills encompassing design (business and technical), build and run.
- We have some core software assets that can form the basis of a BPO deal; notably UFSS for mortgages, PIE/PIA for cheque processing, URBIS for electronic payments and Unisure for Insurance processing.
As a result we have major outsourcing arrangements with many large UK financial institutions such as IPSL, a Joint Venture in which Unisys is the major shareholder and is the operator for. It handles cheque processing for Barclays, Lloyds-TSB and HSBC and most other UK cheque issuers.
How do you feel about Outsourcing for Payments?
Well you have to break it down because payments is a very broad church. We believe that the area of high value payments (foreign and CHAPS in the UK) is a good candidate because:
- It is “relatively” easy to disaggregate from the rest of the banking operations.
- It is an area that has not had investment by most banks for years, with a result that STP rates are as low as 25% in most institutions.
- It is not a competitive differentiator; in general it is just something a bank has to do, but do well
- The regulatory burden is increasing, in particular the single European payments area requirement to offer next day cross border Euro payments at 10 cents a time (much higher than the average cost of such a payment today) will provoke change.
However, our vision for providing this service to banks is not through traditional outsourcing. We believe that a Utility model is most suitable. In the utility, multiple banks would use a, generally, common service. They would share the costs of its operation and in its upkeep, e.g. for regulatory change, but additionally it would be a common platform that has benefited from the inclusion of the essential utility-type features of operational excellence – high STP in this case – best of breed components, a service culture – SLA’s with real teeth – and low cost to the users of the service.
So why has no UK Bank done it yet?
A mixture of factors. The first is that no two banks handle payments the same way, particularly when it comes to software. Each bank has some operational units and software components shared between multiple payment types. For example there is a UK bank that bought an ATM switch which over time has had debit card processing, internet banking transactions, SWIFT payments and BACS interfaces incorporated.
Another important factor is that even a “relatively” separable payment type such as high value payments will have many interfaces which make for a major implementation challenge. One of our prospective customers has said our approach is very attractive but what will we do about the 138 interfaces to our legacy systems.
Finally there is the fear of being first. In outsourcing deals there is a lot of learning both by the bank and the outsourcer which can result in complex change requests and missed expectations. These risks diminish as the industry gets the hang of the thing. However, through iPSL and our Insurance administration company, UISL, we can demonstrate that we can manage these risks and several banks are now showing a genuine interest in shifting from talk to action.
How do you expect to get over these problems?
First and foremost you have to start with a working platform. Bringing a brand new piece of software, no matter how good it is, is too risky. Secondly, we expect to do a deal with a bank or group of banks where there is some real room for improvement. This will give everybody, including us the outsourcer, an opportunity to make money by reducing costs. Longer term benefits such as cost avoidance and improved customer service will come but during the early days you need the confidence building of process re-engineering.
Unisys has recognised that re-engineering is pivotal but it also recognises that with it comes the risk of a “domino effect” in which process change of whatever nature can create adverse knock-on effects to other parts of the bank. For this reason, we have invested in building the 3D-Visual Enterprise (it has taken us 4 years to complete). What 3D-VE gives is a method for predicting the cause and effect of change in terms of both process implications and costs before any changes are made. It’s a fascinating topic that’s worthy of more discussion and explanation, but maybe that’s for another day.
We at HBW think banks should re-engineer first then outsource
Well, if they haven’t done so for 10 years why will they do it now? The fact is that re-engineering is an expensive process, particularly in the Payments space. The banks’ margins are tight now and are getting tighter so how do they build the cost/benefit model that would get Board Room approval, particularly if the choice for investment is between non market differentiating areas such as Payments administration and the more high profile services of new business generation, customer service and upselling?
What Unisys is saying is “avoid capital expense and the risk of re-engineering and come together with banks in the same situation and reap the benefits of a utility service in which all members share the cost of change”. We think this is a far more compelling business case.
What do you believe the boundary for a Utility offer in high value payments would be?
To make such an offer work for both banks and the utility a number of features would apply:
- Firstly it would have to include changes to get customers input of instructions correct, e.g. changes in Electronic Banking. Garbage in was never more true than in Payments.
- A set of offerings to allow customers to track for themselves where their payments are (e.g. akin to UPS’s “Where is my parcel?”)
- Some level of controlled authority delegated to the Utility to make decisions on whether to pay or not, obviously based on bank-prescribed rules and balances etc, but the situation of having to refer everything must be avoided. (This essentially means Credit Risk but the overall liquidity risk position would still remain with the bank).
How do you believe the Regulators feel about outsourcing key areas such as high value payments?
They have not made any public announcements and until they get a specific proposal to evaluate they will not, but informal contacts suggest they will be well disposed towards it.
- They would have fewer people to communicate, interpret and explain regulatory change to.
- They would like greater separation between payments operators and banks (see Competition Commission findings).
Any other points?
The only other points we would make are that these deals are long term deals with long periods of negotiation, typically a couple of years so you have to be committed to the sector. We are, and in particular we are in the UK which is one of the leading countries in Europe in being open to outsourcing in FI’s. We think Outsourcing for Payments is a major opportunity for banks and ourselves.