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December 9, 2014

Why Banks Need An Internal Payment Utility

Posted by Mohit Joshi (View Profile | View All Posts) at 4:45 AM

The speed at which a bank carries out a transaction can be its main attraction over a competitor

We've all heard the saying: old habits die hard. When it comes to the world of banking, the laundry list of old habits that we hang onto can be impressive - especially when you're talking about American banks.

Most of my American friends conduct their day-to-day, personal banking not unlike Americans before them did, some two-and-a-half centuries ago. Think about it: the banking system in America is older than the United States itself! For example, if someone were to receive a bill for his electric utilities in the mail, he would take the checkbook out of his desk, write a check to the utility company for the amount due, and then affix a postage stamp to the envelope and drop the payment in the mail.

What I've just described could have taken place in 2014 or 1914 or (if there were such thing as electric utilities at the time) even 1714. Now here's the kicker: the back-office banking functions regarding this mailed-in check payment are just as antiquated. Banks have complicated clearinghouse functions that date back to the 18th century.

In the digital era, however, banks would be smart to investigate faster payment systems. And, more importantly, the consolidation of them. After all, consumers are savvier than ever, and the speed at which a bank carries out a transaction can be its main attraction over a competitor in an ever-heated marketplace. Likewise, if you've ever been to an emerging or even a frontier market, it's amazing to see the contrast in banking with the West. An individual can pay his month's utility company bill with a couple swipes of his smartphone. No fountain pens required!

When it comes to their banking systems, the emerging and frontier markets have no old habits, so there's nothing that needs to die first (or die hard) before a slew of legacy systems are replaced with a fast, digital one. Indeed, there is a certain logic for having a single, internal payment utility in a bank. Such a system is a great way to reduce risk in an increasingly risk-filled world. Plus, those banks that are looking for new ways to reduce costs can do so by consolidating all their payment systems into one, streamlined process.

And let's face it: today, it's more likely than ever before that someone in the West will do banking with emerging markets institutions and vice versa. So each bank's cross-border regulatory and compliance standards must be, well, 'multi-disciplinary' in nature. Electronic funds transfers (EFTs) that have become a staple in global commerce can still take days to clear, depending on the countries involved. That's yet another reason for commercial banks to invest in the right IT. They would do well to get their internal systems onto one, seamless utility.


Indeed, explains the change of trends in doing transactions.

When a large western bank's CXO visited India, he was surprised to see people withdrawing Rs.100 from an ATM. He made a comment to the effect: Our cost of an AMT transaction is $1, we can't allow an individual to withdraw $2.5.
Yes India does not carry a banking legacy, but who knows in about 50yrs, India's system might need upgrades too, like the west now needs.
Mohit you have a very good point on need of faster payments. It does bring money quickly back to you, better working capital.

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