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Virtual Account Management

27 June 2017

Virtual Account Management

Paul Stoddart,


The payments business for banks is changing – rapidly. In part, this is being driven by evolving customer demand for convenience and control. Another key driver is regulation of course, in particular the revised Payment Services Directive (PSD2), which requires banks to rethink both their technology and business models in relation to payments. Technological advancement – and the effectiveness of fintech new entrants in leveraging it – are also setting the pace, and underpinning the inexorable rise of instant payments across the globe.

In the face of speedy technological development, more demanding regulators and customers and new entrants hungry to gain new business, the imperative for banks to increase the efficiency of their payments operations has never been stronger. In addition to taking out costs, banks also need to build in additional capabilities to stay relevant in the far more intensely competitive payments landscape being shaped around them.

The convergence of historically separate payment networks is, in this context, a critical development. As we all know, during the past 40 or so years, two payments networks have been built up – one for card-based payments and one for ACH payments. Broadly speaking these networks have started domestically and spread outwards to offer cross-border and international capabilities – but the two worlds have remained separate from each other.

The next phase of evolution of these infrastructures is the convergence of major global card-based networks and real-time ACH networks, with the goal of creating a global, real-time payments network that leverages the best of both the card and the ACH environments.

We know that customers – both consumers and businesses – do not care about how their payments are made, as long as they get what they want, but in the background, the seamless bringing together of card-based networks and ACH networks enables the creation of real value for banks and their customers.

For banks, it opens up the prospect of being able to work with a single partner to meet all their payments needs. Banks need to be able to offer both card based and ACH payments capabilities through their retail banking apps and their corporate cash management solutions, and being able to leverage a single, primary relationship with a strategic partner clearly creates the potential for improved efficiency and effectiveness.

Of course this requires some rethinking by banks about how they view their payments function, where – and how high up – in the organisation responsibility for payments systems sits, and how to break down existing silos within the bank to leverage the convergence on offer. However, we are already seeing front runners absorb this, begin the move away from siloed thinking, and reflect the changing role of payments by appointing executive level leadership to the function.

There is clear evidence that these leaders are acquiring the ability to both rapidly reduce costs and increase revenues, helping to shift payments away from being a pure cost centre back towards revenue generation.

Converged technologies enable banks to conceive of – and actually offer – complete straight-through processing (STP) to all customers, from the biggest to the smallest. The opportunities for elements of the payments process to go awry is vastly reduced, leading to fewer errors, less need for costly exception handling, reduced chargebacks and misdirected payments and lower levels of fraud. Together these improvements significantly increase the efficiency of payments operations.

Convergence also makes possible the consolidation of internal technology systems – the replacing of siloed systems for card-based payments, business payments, domestic ACH and cross-border ACH payments with a single technology solution for all payments. The prospect of deploying a single technology stack is a massive cost reduction opportunity.

On the revenue side, the banking industry has so far only scratched the surface of the new business opportunities made possible by a global real-time payments infrastructure. For consumers, the emphasis has to be on digital, and making services fast and slick. For businesses, banks can leverage real-time to do vanilla payments more efficiently, and can then develop value-added retail and B2B services using the data layer capability of a modern ACH infrastructure.

It is natural for banks to be concerned that they might be foregoing existing revenue streams through these developments, and the pragmatic answer to that question is that yes, they probably will be in some areas – but it will be less than they fear and better for them to disrupt themselves than wait for new entrants to snatch revenues away from them.

In our conversations with banks globally, a consistent request is for assistance in developing a platform to underpin the innovation that will protect them against the new entrants and enable them to compete more effectively, by creating new services to drive new revenue streams.

Convergence of networks is a critical component of this platform. Banks are coping with the global rise of instant payments and the implications for their technology – and their business models – of the move to open banking underpinned by open APIs.

Convergence of networks provides a solution to today’s technology challenges and creates a platform for renewed payments efficiency – leaving the banks free to focus on those all important strategic decisions about new products and new revenue streams, as they carve out roles for themselves in the evolving digital ecosystem and seek to remain relevant to customers of all types in the future payments landscape.

This article was a part of ‘Mastering today’s challenges: Harnessing tomorrow’s opportunities’, a report by Finextra. You can download the full report on their website, available here:  

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