The Instant Payments Dilemma

End-customer value is clear, yet many banks find building a robust business case tricky.

Temenos – Company

End-customer value is clear, yet many banks find building a robust business case tricky. Could ROI model act as their crystal ball? Writes Shrey Rastogi, Payments Strategist at Temenos.

The date was 9 Jan 2007. Dressed in his trade-mark black turtleneck, Steve Jobs unveiled the first iPhone and said:

“every once in a while, a revolutionary product comes along that changes everything”.

It was not just a new product launch, we were ushered into the smartphone era.

While the arrival of Instant Payments (IP) on the global scene did not generate the same level of fanfare or interest on day 1, its eventual impact on the entire payments ecosystem may not be very different from what smartphones have had on our lives. A game changer.

At the last count, 45 IP schemes are currently live around the world, another 11 expected to launch in near future and many others in advanced stages of exploration. This speedy uptake of IP is testament to customer’s affinity towards its attributes like real-time transfer of value, instant confirmations, freedom to make payments anytime (24/7/365) and innovative value-add services like request-to-pay.

Notwithstanding this strong momentum towards IPs across markets, there is a palpable “wait-n-watch” approach adopted by a number of banks in fully embracing IP as the ‘new norm’. Some are waiting to see how competition reacts to these developments while some are looking for a regulatory push (read deadline). Still others have taken the stance to continue with their incremental plans to extend legacy systems to ‘keep the wheels turning’ rather than taking a strategic long term view of the seismic shift that IP brings in, where banks need to handle significant volume jumps with extremely high straight-through-processing (STP) rates and zero down-time while being fully compliant with AML, sanction screening and fraud considerations. All at real-time.

One of the challenges often cited by banks is while they fully appreciate the transformative power of IP and its benefits to all customer groups whether retail, corporate or SMEs, its building a compelling business case that can be their ‘achilles heel’. Given IPs are often free for retail customers and can substitute for other fee generating payment rails, building a business case that can stand the scrutiny of rigorous funding approval processes can be daunting. A challenge especially when banks today have multiple competing priorities to address with a finite resource-base (often it’s not just funding, but critical people and internal capabilities that can be scarce).

To support banks in better visualising and articulating their financial benefits story arising from building Instant Payments (IP) capability, we at Temenos have developed a holistic ROI model. This flexible model can be adapted to the bank’s chosen business strategy and payment transformation approach. Acting as a crystal ball for decision-makers, it provides them with an ability to transparently view the value that payment modernisation and IP can bring to their organisation for multiple business scenarios.

So how do we do it? In a nutshell, it is a discounted cash flow (DCF) based model that calculates multi-year financial impact across 3 mutually exclusive dimensions involved in an instant payment transformation journey.

The dimensions are:-

  1. Modernisation benefits from IP capability
  2. Operating model benefits and revenue uplifts
  3. Customer Experience and Service Improvements

Each of the above dimensions is underpinned by multiple value levers that ensure holistic impact is captured (without any double counting).

The methodology is as follows:

  • We set out by asking key inputs from the bank (current volumes by payment type with growth rates, key operating metrics etc.) to build a clear profile of their payment business
  • The bank selects which dimensions and levers need to be modelled in line with their chosen strategy
  • The ROI model then leverages internal benchmarks, mined from our experience of working with a wide range of banks across the world, to create a granular view of financial benefits over selected timeframe.

Note: all benchmarks and assumptions made by the model are completely transparent to the bank and can be modified, if required, to ensure the outputs reflect to their ground realities.

Having IP capability is now not about early adoption, but a must-have for banks as they compete not just with their peers, but Fintechs, big techs and even telcos in the payments space. By leveraging this unique modelling asset, payment leaders can now reliably test financial impact of their chosen strategy as well as build a more compelling business case for their payment transformation journey.

There are no prizes for coming in third…

If you are interested to learn more about our Payments Transformation ROI model or explore how it can help you, please get in touch.

Filed under:

Temenos – Company