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Payments: supporting the needs of Dutch banks

By Darryl Proctor 22 Feb 2017

An Interview with Darryl Proctor, Product Director – Payments, Temenos

DutchQ. The world of payments is moving very quickly, where do you see the market going and why?

A. The global network payment services market is expected to witness growth at a CAGR of 7.7% over the next five years. This is due to the widespread adoption of digital payment solutions by not just businesses and consumers, but also governments, banks, and financial institutions and the Dutch market is no exception. The Dutch are Europe's biggest users of mobile banking , with 47%of those in the Netherlands using mobile banking against a European average of 25%. Over the next five years , non-banking companies such as device manufacturers, technological firms, retailers, and e-commerce payment providers are set to create new and innovative payment platforms such as mobile wallets, integrated POS systems, wearables, and mobile applications. As a result, digital payments are expected to account for approximately 20% of all retail transactions by 2021 globally.

Real-time payments will also play an enormous role in the evolution of the payments market, particularly within the Netherlands where the Dutch banking sector is currently developing a real-time payments infrastructure (Instant Payments). This new development reflects growing consumer demand for real-time transactions, driven partly by the ubiquity of smartphones and other connected devices, which have catalyzed consumer expectation for immediacy. It also reflects the digitization of the supply chain in which real-time payments enable corporates to collect and analyze financial transaction data in real-time, derive financial insights immediately, and drastically reduce the effort involved in reconciliation. As well as meeting consumers' rising expectations around payments, the banking industry is facing rising pressure from governments to create ubiquitous nationwide and regional immediate payments systems that can be used by all financial institutions.

But it's not just digital and real-time in the traditional sense that banks need to be able to manage. Banks and other financial institutions have been active in investing (time and/or money) in the blockchain space. Blockchain technology allows everyone to hold and make transactions as strangers but in a completely transparent manner without a mediator. This concept can be applied to the entire digital world making any kind of exchange/ transactions secure (and not just cryptocurrencies such as Bitcoin). Only last year the Dutch Central Bank to announced that they plan to create a prototype blockchain-based currency.

Q. Bank needs can vary by region, what requirements does the Dutch banking market have?

A. Building on my last point around instant payments, banks in Holland are now moving quickly to ensure that they are ready to support Instant Payments. The development of Instant Payments kicked off immediately after the announcement in 2015. The first phase (the design of the infrastructure) is now completed and the building phase is now underway. This phase will continue into 2018 after which (around mid-2018 testing is scheduled). 2019 will start with a pilot aimed at gaining experience in practice. In May 2019 the infrastructure will be launched in full swing, enabling in principle all payment service providers to use the new infrastructure and start offering Instant Payment services to their customers.

We understand from our discussions, that some of the larger Dutch banks are already committed to offer Instant Payments via their online and/or mobile channels and will ensure that their accounts can be reached by Instant Payments initiated elsewhere. I can only assume that this means that provision has been made to enable payment orders for Instant payments can be accepted from multiple channels for processing.

This is a great step in the right direction, however, Instant Payments is so much more than channel enablement. The Dutch banking sector aims to process the Instant Payment transactions within strict time limits (5 seconds) and will apply no amount limit. This is unusual in that most countries opt to start with lower amounts thereby restricting it to retail customers. In this case it opens up to corporate payments too. It is also way above the European standard listed within the2017 SCT Inst Rulebook which allows for an average speed of 10 seconds and a maximum amount limit of €15,000 per transaction, so the conflict will present a real challenge to Dutch banks. To ensure these tight requirements, performance of the Instant Payments system must meet SLAs, it must be resilient, and link seamlessly to the banks core banking platform for true, continual straight through processing (STP). But, as important as the ability to offer through a modern payments hub Instant Payments, you need to ensure that your foundational core banking software can cope too. Without real time 24/7 core banking software, the bank will expend huge additional effort in reconciliation and rework. Many Legacy, in house systems, are just not able to cope with this. Core transformation is as important as a modern payments platform in this space.

But real-time isn't just about processing. Remember that Instant Payments are irrevocable, once sent to the clearing Real time accounting with the core back office and real time status tracking must be available. Plus, real-time enquiries, will need to be managed, offering the ability to view unconfirmed Instant Payments with timeout expiry, for monitoring and remedial action. Real-time notification of payment status to payer (for outgoing payments) and payee (for incoming payments), must also be considered.

Q. So how can Temenos support these from a payments perspective?

A. Using "short term fixes" to address the Dutch Instant Payments requirements is not an option. This would result in magnified costs and much lower ROI, than doing it properly the first time with a modern payments platform enabled to do real time payments and a modern core banking platform to support that. Even better is a core banking platform with the ability to offer an embedded payments hub further reducing complexity and integration and allowing faster more efficient, less reconciliatory operations and lower cost per transaction.

In terms of how Temenos can support, to enable Instant Payments, Dutch banks need to have the right infrastructure to be able to manage these payments according to the schemes rules. We have seen that historically, these rules change continually right up until their launch and regions will have their own particular needs as well. Dutch banks need to be looking now at their payments systems and understanding if they are sufficiently agile and importantly what the cost is to adapt quickly to these changing requirements avoiding any impact on their service. Straight through processing is of course key here.

Quite often the cost of adapting is greater than that of replacement, however, with the Instant Payments scheme now committed it has never been more important to ensure banks have the right systems. In fact, it is believed that more and more use cases for Instant Payments within The Netherlands will be discovered. As a result the use of new infrastructure will grow rapidly, making Instant Payments the 'de facto' standard i.e. the 'new normal' for payments in the Netherlands. It is therefore essential for a banks payments system to be easily adaptable to the changing needs (and strategies) the bank, their customers and regulations (including schemes such as instant payments). And at Temenos we have ensured that these requirements can be met.

Q. The digital bank of today / tomorrow needs a digital real time core, how does the payments hub support the world of tomorrow?

A. Being a truly digital bank is no longer a differentiator, it is essential to service delivery and banks are now realising this. To survive (and profit) banks must transform their customers' experience and offer innovative banking solutions:

  • Offering the right customer insights at the right moment, via the right channel.
  • Drive massive efficiencies in the back-office; ultimately, front office differentiation with back office automation.
  • Draw insights in real-time and from multiple datasets; to ensure a quality, user experience.
  • Speed of fulfilment is also critical; the digital solution must therefore be front-to-back.
  • Stay ahead of market trends; with tools to design and deliver new banking products.
  • Open API's must be accessible; ensuring that easy access to innovation and services from third parties using APIs is available.
  • Other elements such as modularity, deployed in stages, allow for faster time-to-value and lower risk and upgradability (perhaps independently).

This ultimately comes down to using a single platform, a recent shift in banks decision making highlighted within the recent Ovum Decision Matrix: Selecting a Digital Banking Platform, 2017–18. The Temenos Payments Hub offers this seamless integration with the core banking platform to ensure this level of straight through processing that's needed for a truly harmonious, customer experience; one that is truly digital.

Q. So 2017 will be a key year in the world of payments, but what makes the Temenos Payments Hub solution so different?

A. We live in a digital world. We offer a true real time digital core banking system that uniquely operates with an embedded enterprise payments hub. This combined, single solution gives greater efficiency and return on investment as well as the most practical solution within the market. This additional value and uniqueness allows those banks with our core solution to have a complete, seamless banking system without complex integration associated with separate systems. Banks can now offer their customers a harmonized payment experience with true straight through processing, not available anywhere else today.

However, despite these benefits, our Payment Hub solution is also sufficiently agile to work with any core banking solution; so any bank can fully benefit from this solution designed by banks, for banks. It offers excellent breadth and depth of functionality as well as flexibility through configuration is the only way banks can meet the demands of their customers., In addition, the solution provides fully centralised control with a 360° view of all transactions in real-time and weight based processing enabling easy prioritization at customer level or according to payment volume or value.of course.

Q. Payments Hub may offer something extra in the market, but Temenos is very new in the world of payments isn't it?

A. Temenos has actually been processing payments for well over 20 years through our Core Banking solution. We learnt through our core banking software which supports many millions of payments a day across the globe, that building a highly configurable, scalable, resilient, real-time 24/7 platform that supports innovation has to be at the foundation of a payment hub. Temenos built the Payments Hub from the ground up to support that. Instant payments is one such innovation that for a modern platform like ours allows us to easily and readily adapt it to the various types of instant payment schemes on offer, or being developed around the world. Most if not every transaction that is generated in our core banking solution results in a payment. With our Payments Hub solution, we take that one step further servicing a critical part of the bank in a way that no other software vendor can.

Q. You've highlighted the elements that Dutch Banks need to consider from a payments perspective and what the Payments Hub solution offers, but what is Temenos doing to support the Dutch market?

A. Temenos have played an integral part in conversations associated with Instant Payments for the Dutch market since our payments relationship with ABN Amro commenced back in 2013. Since then we are continually involved in conversations with the Dutch market, providing guidance from both an infrastructure perspective but also based on best practice from other regions.

Temenos has always considered the Netherlands as a key and strategic country in Europe. Some of our first clients in Europe were in the Netherlands, we have an office there, and have always looked at the Netherlands as a hub of innovation and forward thinking. To that extent, working with ABN Amro in their relaunch after Fortis collapsed showed our commitment to the Dutch market. We were able to bring a full corporate banking offering live for ABN Amro very quickly and as a result of this, partnered with ABN to develop a modern payments platform as the "off the shelf" offerings in the market were not able to meet the needs of the bank. Since then the Dutch market, through the financial crisis has grown from strength to strength and we see the instant payments initiative as another economic growth strategy in which Temenos is proud to be involved and take part in.

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