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.