Banks have been discussing payments hubs for at least a decade. Promising improved efficiency and enhanced service, payments hubs, in the broadest sense, provide a centralized platform -- or hub -- designed to process all types of payments, regardless of payment mechanism. But few financial institutions actually have implemented a true, single global payments hub.
What's holding back banks from making an infrastructure improvement that could create value for their payments operations while improving the customer experience for clients? Many of the reasons are the same, familiar challenges that limit technology innovation perennially: the limits of legacy systems, shrinking IT resources and a growing compliance burden.
But another, more fundamental issue exists. Despite being an industry buzzword for several years now, there continues to be disagreement over what exactly constitutes a true payments hub. "There are a number of banks that claim they have one, but the biggest problem is how we define them," says David McLeod, director, financial services industry, for Palo Alto, Calif.-based HP's NonStop enterprise division.
According to McLeod, while many banks have implemented some aspects of hub technology, very few have a true single hub that processes all types of payments globally. "What I've noticed is that it's more talked about than done," he says, adding that there are, however, "a few examples of banks running genuine single [payments] hubs on a global basis."
McLeod points to one bank -- an HP client that he describes as a top-120 global financial institution -- that took a big-bang approach, implementing a single hub for all payment types at one time. The effort, he relates, took a large financial investment, not to mention commitment from the business operations side. "What they did took a tremendous act of courage -- not to do it bit by bit, but all at once," McLeod says. "But it's been a tremendous success. You have the obvious benefits, such as long-term cost reductions and efficiencies, but you also get a single view of your risk and liquidity."
Payments Evolution, Not Revolution
Nonetheless, most banks that have incorporated hub solutions usually don't do it all at once, McLeod adds. Rather, they often follow what he calls the "evolutionary" approach. With this approach, McLeod explains, a bank addresses particular operational problems with payments as they occur, applyng a combination of software and hardware to "pick off" various payments streams piece by piece and feed them through the hub.
Wells Fargo ($1.3 trillion in total assets) is among the banks that has followed an incremental path to building a payments hub. According to Keith Theisen, EVP, director of product management, treasury management group, the bank views its payment services hub as part of its overall architecture.
"We don't look at a hub as a one-time thing you build and it's there forever," he says. "It's constantly evolving, and we always look at how it fits into our architecture. We can leverage our hub technologies and take payments streams and route them to appropriate payment channels, whether it be check, ACH, wires or anything else."
San Francisco-based Wells Fargo's hub architecture also helps the bank address risk and security concerns, Theisen adds. The hub architecture allows the bank to leverage various risk controls, such as Bank Secrecy Act (BSA) compliance monitoring, and other types of fraud detection services across all of its different payment streams without having to plug each solution into different channels, he explains. That approach "makes it seamless to monitor and keep track of all these things as regulation changes," Theisen says.
The next priority for Wells Fargo, according to Theisen, is to roll out the hub services -- the bulk of which the bank built in-house -- globally. "We have to go out and see how we can do this across the globe," he says.
In order for more banks to commit to and invest in payments hubs, they have to understand the long-term value hubs create and see an efficient path to get there, suggests Matt Cohn, head of the payments practice and a partner at New York-based consultancy Capco. "Most organizations are trying to sort out how to take on the transformation," Cohn explains. "Many of them see the value of hubs, but getting there in the current environment with their existing legacy infrastructure is a challenge. They have to navigate what can be a fairly complex transition and break it down to logical pieces to form a multi-generational program."
Much of the reluctance to invest in big hub projects, according to Cohn, is rooted in the fact that banks have to spend so much time and money on compliance issues, including new Dodd-Frank regulations. "The regulatory environment is making it that much more difficult -- there's an internal competition for resources and dollars," he says.
"For example," Cohn offers, "we worked with a financial institution that recognized it has lots of redundant payment executions, and they wanted to know if there was technology to help reduce that complexity and save money. The unequivocal answer is, 'Yes, there is.' But unfortunately it fell down their list of priorities. The focus on regulatory compliance is one reason for that. So you have to show that there is a compelling business case to make the investment [in payments hubs]."
According to Cohn and HP's McLeod, however, in the long run, implementing hubs will help banks deal with compliance issues by allowing them to monitor all their payment streams more accurately. "You can look at your payments and see if anything is breaking U.S. or European law," says McLeod. "It's a lot harder to do if your payments are happening on multiple systems in multiple countries."
Matthew Friend, head of payment services in North America for Accenture, says payments hubs will gain more traction in the next few years as the economy bounces back and banks begin to invest again in IT. "In the payments space, innovation is key," says Friend. "Payment hubs allow financial institutions to pull together previously independent aspects of their business and to operate them as one cohesive enterprise system."
As the economy begins to pick up, and as hub technology continues to evolve, Friend continues, more financial institutions will recognize that the business case for implementation is strong. "A confluence of events is coming together that will make payment hubs grow and prosper," he says.