Celent study says banks should put outsourced payment infrastructures into the cloud

Banks need to cross a psychological barrier and embrace the concept of outsourcing their payments operations if they are to compete on product innovation and customer service rather than simply on cost.

Many working in the payments side of banks, particularly in Europe, fear that outsourcing or adopting cloud computing will lead to a loss of control, says Gareth Lodge (right), senior analyst at Celent, in a forthcoming report, Thinking the Unthinkable: banks relinquishing control of their payments infrastructure.

The full report will be formally launched during payment system specialist Clear2Pay’s user group meeting in Madrid next month. Clear2Pay sponsored the report and gave a preview to a selected audience at a private event during the EBAday conference in Berlin this week.

“As a stakeholder in the payments space we thought that we ought to talk about outsourcing in payments in more depth. It is now a board level topic,” said Michel Akkermans, chief executive of Clear2Pay.

Lodge cited a European Central Bank study in 2004 that showed that banks consider payments operations too important to cede control over, according to 72% of respondents. Nine years later, delegates at the International Payments Summit in London this year were saying much the same thing, citing more nebulous fears such as “doing it badly” or “separating service responsibility and accountability” as objections to outsourcing payments infrastructures.

All of which is “odd on a number of levels”, Lodge said, because the concept of outsourcing is already well entrenched in the rest of the banking system: “In cards it is considered odd not to outsource.”

“According to a study presented to the ECB, outsourcing in the US is prevalent in every payment type and every stage of making a payment. Indeed, there are well over 100 entities regulated to do so. Let’s not forget that’s what companies like First Data do, and have done successfully for many years.”

The outsourcing debate is also further obscured by continuing misunderstanding and fear about the adoption of cloud computing – or Software as a Service, or Application Service Hosting – by financial institutions. Again this is odd: “Forms of cloud already exist in payments. Networks such as Swift or BT Radianz or, indeed, just about any payments network, are in essence clouds. The banks don’t own these networks, at least in the case of BT Radianz; nor can the banks say exactly where the data is stored or processed, yet they implicitly trust these networks.”

Overcoming these reservations would address, at a stroke, one of the main issues cited by those working in this area: cost, and the commoditisation of payments. As a rule of thumb, said Lodge, roughly a quarter of bank revenues come from payments, but they account for one-third of costs. “If you can make savings here the effect will be great,” he added.

More importantly, by freeing themselves from concentrating on costs and margins, they would be able to address other areas that may actually yield competitive advantage.

Lodge cited a study of international businesses that concluded that the most successful only succeded in one of three areas: operational efficiency, product innovation or “customer intimacy” – delivering “world-class customer service”.

“I would argue that if the payments industry is trying to operate on the model of “sufficiently good quality” and every bank is competing on the same basis, differentiation will be on price alone and is going to be difficult,” said Lodge.

“A radical change would be to move to one of the other elements – product innovation/customer intimacy,” he said. “Find someone to deliver the operational efficiency improvement that you can’t deliver yourself, and then concentrate on one of the other two. Outsourcing – in the broadest sense – is about how we could start actually doing it.”

Farsighted banking organisations are already doing this, he said, naming Commonwealth Bank of Australia and Deutsche Bank’s Global Transaction Banking division. Both of these were founders of the Enterprise Cloud Buyers Council, and show that many of the commonly raised objections to cloud computing in financial services are largely myths.

“Acknowledging that cloud has actually been more widely adopted than is known should go a long way toward overcoming some of these barriers in banking,” Lodge said.