Payments and Account Reconciliation

The latest RBI notification released to Banks in India partipating in RTGS and NEFT notified over the week end on Aug 13, 2010(RBI /2010 - 11/169), seeks to define standards for account reconciliation for return instructions of RTGS and NEFT transactions in India. This is another one in the series of regulations deviced to provide clear information on payment and payment status to the end customers. This notification deals with relating a returned instruction to the initial instruction and to reflect the same on account statement. A similar notification released a few months ago for NEFT created a new message for sending confirmation to the originating bank on the successful credit of a transaction at the beneficiary. This information has to be communicated to the originating party by e-mail or SMS if available.

When the payment system is designed, the people involved - the bank, software vendors, regulators and many others tend to ignore a key actor - the customer.

There are many such information that the customer needs to be aware of - the time when the payment will reach the beneficiary, the location where the payment currently is, cost, information of re-schedulement of a payment, time and date of actual delivery and more such. The information can be made available to the customer by default, by demand or on subscription. Rather than doing a piece meal deal, RBI can go the full length and standardize the communication requirements to the end customers of the bank.

This communication strategy is nothing new. There are standards defined as a part of PSD - The payments services directive in Europe that define among others information that has to be given to the customers. Payment Systems are vehicles that transport funds and are systemically important infrastructure for the economy. Defining certainty and transparency are crucial for transactions that these payments support.

Another issue to consider is the life of this information. One should not forget that this information could be required long after the transaction is completed. The account statement is perhaps the most important container of information to the customer. It is important to provide the customer significant handle on the account statement to address any subsequent query. Using the handle sufficient infrastructure should be provided to access further details.

For many in the software industry customer statements and advices are side players to the larger power horse being built. It may indeed be a by product of a process but for many this statement is the main actor and not just a bit player.

Payments - Centralized HUB- Regional Regulations

A payment hub has been a buzz word in the banking industry and in the corporate payment world for some time now. One of the objectives is to have a centralized location for defining payment processes, identifying cost due to scheme operators and for liquidity scenarios, regulatory compliance, identifying the best route among many others.

Banks and Corporates who have operations in multiple countries try to leverage their presence in different countries to save on costs incurred on international payments as also to streamline domestic payments and reconciliation. Banks in particular can create a central payment processors that route the payments to their operations in the countries in question for them to forward the payments further through the domestic networks to reach the end beneficiary.

It is none the less creates a very efficient mechanism for funds transfer but has the potential to fall foul of regulators who would want to track the source and purpose of funding, tracking imports, exports and remittances and ensure that the data of the citizens and their corresponding transactions do not reach unrelated hands.

Some of these regulatory requirements run in contraventions of the centralized processing that the banks and corporates would want. Apart from routing, centralization would include monitoring liquidity position of different entities and account along with different risk controls relating to non delivery and return of instructions.

There are different network topologies that can address these issues. Only the inter-bank accounting entries, a part of the complete payment can go to the processing hub or in some cases just the sufficient data for routing. The central hub can revert back with the confirmation of settlement or the route based on the bare bone structure to the source who can route the complete instruction to the intended recipient of the instruction.

The settlement can be effected by the central switch or can be a bilateral settlement depending on the nature of relationship between the banks or parties involved.

Bring Clarity first

When we were working on creating a solution architecture for a mid-sized regional bank we faced a fundamental problem. The various departments had been purchasing software based on their individual needs. Many of these departments were customer facing and almost every one of them had reports to produce that were regulatory in nature. There were different types of loans that were supported by different applications. We had fundamental issues to solve which application to migrate, how to bring about a uniform customer experience from among the variety of applications, how do we bring in the synergy between the personnel using the different applications. We finally managed to get a final list. The bankers had to again sit and work out a synergy between the products that they were offering and sit down and create a reporting and communication strategy. In the end the project was worth it - but the requirement phase extended and the project was delayed. There needed a lot of personal maturity in handling the situations.

I see such confusions in some IT firms too. A decision is centralized but the source of information is not. The end result is defined but the path is let to others to discover. While personal commitment will carry the projects to successful completion the journey will be tedious and at the expense of time that could have been utilized better.

A journey has to be planned when a goal is defined. A goal has milestones and has to be sponsored and measured on scientific numbers. For the starters we should bring in clarity on what we have and what is wrong. Get the data and problem right and then solve them. Don't solve the wrong problem.

IT Transformation - Simplifly

I was reading 'Simplifly' Capt. Gopinath's biography/autobiography. The issues that he faced with Deccan Airway's IT infrastructure caught the eye.

The speed with which the decision was taken to transform the platform and the execution associated with it is something that I have not seen in Banking that is as mission critical as Airlines that Capt. Gopinath is in.

IT investment is for a long haul. Migration to a platform has to address many issues. The migration in question itself could be due to the obsolescence of the platform or technology, loss of value for the changing Business requirements, expensive maintenance, issues with scalability, churning of vendors among many others. A migration should ensure the same issues should not recur post the activity over a projected period over which the return on investment is to be recovered.

A migration of an IT system is sometimes like child birth - the result is a new life and changes to all involved. The organization will have to re-invent itself, it's processes, organization structure, accounting and control structure, relation ship with end customers and many others. These are not small issues and requires thorough brainstorming and laying out. The plan has to be meticulous and despite the fact that too many people are involved all the people have to be consulted. A sponsor with a personal stake should take the ownership of the transformation and lay out the rules and take and assign responsibilities.

It is possible for a smooth migration to take place in the IT infrastructure. It requires building a check list, ensuring that nothing is consciously ignored. deliberate communication to stakeholders, explicit solicitation and confirmation of commitment, leadership, planned investment and execution, availability of experts and primarily assignment of responsibilities and tracking.

The New Normal in the Payments World

A payment system is a channel that enables the flow of money for business transactions. It is a river that gets sourced in myriad of ways and reaches various reservoirs and utilities.

In a futuristic payment world, money transfer would be sub-second at no cost to the end parties involved. There would be no barriers to access the accounts for money transfer, money could be transferred to virtually everybody and access to funds would be instantaneous. One would have full controls on date and time when the payment can be made or received and there would be a high level of transparency on availability on both the sending and receiving side. From the perspective of the regulators the money transferred would be accountable with a full view of the liquidity conditions in the market.

If this was the futuristic view a good deal of this is being realized in today’s world. Indian NEFT is promising a transfer within 2 hours for retail payments, UK faster payments promises a transfer in less than 10 seconds. Various RTGS systems across the globe permit real time transfer for large value transactions. In most cases these transactions are initiated by the end user on self help channels like internet banking or mobile banking platforms provided by their banks – corporate have automated integrated their payment process to their supply chain. The customers today have easy access to their accounts to perform instant transfers to fund their business operations. In Europe, trans-border, pan European payments are guaranteed by the next day post the full implementation of the payment services directive – and is expected to grow faster. With this the reach of a business transaction aided by a quick transfer is being expanded to reach the last mile in the region. It would not be far when the whole world would be in the reach of the quick transfer modes, none the less the steps have already been taken.

Mobile banking is aiding retail fund transfers immensely. When the full impact of mobile banking is realized a customer in a grocery shop can transfer funds between accounts held by the parties in the bank and associated with mobile numbers – and the confirmation received instantly. We have already seen this being touted in TV ads and in discussions in mobile technology forums. Access to an account at a channel closer to the location of a transaction is one of the fundamental requirements to eliminate paperless transactions. While the security of such a handheld device that will transact on wireless technology is being formalized mobile banking is a reality and more and more banks are using this technology for providing services to their customers. On the one hand, access to funds are being provided for transactions for accounts held with the bank, on the other hand there are initiatives of Pre-paid cards either sponsored by the banks or by governmental agencies. These cards can themselves be accessible for payments increasing the coverage of electronic payments.
The nature of transaction varies with the needs of the business. The transactions could be an immediate payment, payment with a fixed schedule or based on a template made on a need basis on satisfaction of a condition. Many payment schemes provide value added services on their normal transfer functions to support Bill Payments, loan repayments, payments against invoices and many others. Banks can augment these features by providing the customers with services to define on a self help channels recurring scheduled payments, options to manage liquidity across accounts, ability for all customers – retail, SME or corporate in reconciling the books against the payments made and collected. These features are available in the automated systems deployed at the banks and when offered as liquidity management tools will provide their customers the tools to define payment terms based on the needs of their business.

The regulators on the other hand are acting as the dams against this flow controlling illicit transfer of money for illegal activities. A transparent system of money transfer would reduce tax avoidance and black money. As in the modern society these dams helps aid the society but none the less weakens the flow down streams and increase the cost of building these large infrastructure that encompasses central infrastructure changes and also at the level of every consumer and supporting system.

The new reality has however dawned. People are seeing lesser and lesser of currency notes, mobile banking is becoming a reality and customer is getting full control of the funds. The speed may make one bankrupt but one cannot complain that the river is flowing rapidly.

IT-Banking-Payments A Potent Mix

...and this mix is has transformed the world of finance. The scale that banks have achieved and the reach that the system has stretched to is phenomenal. In most economies that are talked about, it is today inconceivable to be in a Business without a bank's support and banks cannot support its operation and remain competitive without IT support. Over a period of time banks have become a major carrier of payments and payment has become an intrinsic part of banking.

This is the area that I work in, Banking IT with a good part of the last three years on this changing landscape of payments. This mix is heady and after a certain number of years overwhelming....and requires maintaining a log.