Time for greater operational efficiency and closer control of the complete transaction lifecycle?
Christian Schiebl, head of the Corona Business Unit at SmartStream Technologies
The retail payments arena is undergoing profound transformation. New market entrants, regulatory change, as well as innovative methods of payment and authentication, are all driving change. With revenues squeezed, business and technological complexity on the up, plus a greater number of players chasing a slice of the same pie, companies find themselves in a challenging and competitive environment. Christian Schiebl, EVP, SmartStream Technologies believes that advanced reconciliations-based technology can improve operational control and cut back office costs, helping firms to compensate for dwindling revenues and growing overheads.
The once quiet world of retail payments is currently experiencing major change. Technological advances, coupled with consumer willingness to make non-cash payments, have led to the development of a wide range of payment means, including e- and m-wallets, digital currencies, and truly alternative payment instruments. The variety of consumer-held form factors has also multiplied, allowing payments to be made using plastic card, NFC sticker, mobile phones, wearables and biometric methods.
Technological innovations have brought with them hugely increased complexity and this is affecting market participants across the board, whether established players or new entrants. Merchants, for example, must wrestle with the task of integrating omni-channel check-out technologies, ranging from online and traditional EFT-POS, through to mobile POS and tablets, near field communication (NFC), beacon and facial recognition.
Complexity is growing in other ways, too. As e-commerce and cross border transactions go up in volume, participants must find ways of efficiently dealing with multiple currencies, varying payment instruments and data file formats, as well as complying with local regulation and VAT rules. The wide variety of data file formats in use, and the lack of a SWIFT-style, universally accepted system of messaging, creates a particular headache for firms operating in the retail payments area.
And the challenges don’t stop there. Traditional incumbents are facing increased competition from household names, for example, Google, Facebook, Apple, Amazon, as these companies extend their reach into payments and financial services.
In addition, regulatory pressure is causing headaches for market participants. In Europe, the Second European Payment Services Directive (PSD2), Multilateral Interchange Fee (MIF) regulation, plus anti-money laundering and KYC provisions are having a particular impact.
The effects of regulation are making themselves felt in a number of ways. In some cases, incoming rules are affecting revenue streams – MIF regulation, for example, is significantly diminishing what was traditionally a major source of revenue for issuers.
PSD2, on the other hand, is likely to bring far-reaching disruption to the retail payments landscape. It envisages a new class of third party service provider made up of Payment Initiation Service Providers (PISP) and Account Information Service Providers (AISP). These providers will, with the customer’s permission, be able to retrieve information from a consumer’s bank account in order to make a payment (PISP) or – in the case of the AISP – to aggregate account information and enable unprecedented consumer value propositions.
For traditional incumbents, such as banks, the advent of PSD2 raises a number of questions. The incoming directive not only breaks the monopoly they have traditionally held on their users’ data but also creates increased competition. Banks will have to provide an open API to third parties acting on behalf of the consumer, allowing them access to proprietary consumer accounts. Creating such access to consumer data is likely to prove technically challenging and expensive. For the new, non-bank players who will become subject to PSD2-regulation there will be implications, too. They will need to be able to present regulators with a fully auditable trail of transactions – which presupposes that they have in place the type of systems which allow them to provide such a level of detail.
Complying with KYC and anti-money laundering rulings places further economic and operational burdens on market participants, as does adhering to data security standards, for example, the Payment Card Industry Data Security Standard (PCI DSS). European PSD2 regulation, which looks to combat fraud and better protect consumer data through the use of Strong Customer Authentication (SCA) methods for electronic transactions, will impose added technical difficulties – and overheads – on financial institutions. And, with methods of authentication becoming ever more sophisticated, e.g. iris scanning or facial recognition, the complexity involved in authenticating the identity of the individual making a payment will surely only grow greater.
So how should firms best cope with declining incomes and an increase in competition? How do they compensate for income eaten up by regulatory compliance or revenue swallowed by keeping pace with technological advances? More than ever, in the author’s view, if firms are to survive, they must better operational effectiveness and avoid operational losses.
In order to curb operational losses and drive up operational efficiency, companies must improve systems and controls. All too often, companies have in place an IT infrastructure that has evolved over the years and is made up of individual processing silos, spreadsheets, multiple databases and historical data. This is unwieldy and prevents organisations from establishing a clear picture of what is taking place throughout the entire transaction lifecycle. What is required, instead, is technology that allows real-time monitoring of transactions and which enables firms to perform reconciliations with ease, on an intra-day basis, rather than just weekly or monthly.
Discussions between the author and institutions active in the retail payments sphere reveal that the complexity associated with performing reconciliations has led to the development of a number of pain points.
One area of concern is the difficulty firms face when trying to reconcile scheme fees accurately. The fees paid by issuers and acquirers to card schemes are highly complex and fee tables can run to several hundred pages in length. Not surprisingly, issuers and acquirers often struggle to reconcile scheme fee invoices with underlying transactions. Companies frequently just resort to applying plausibility checks, for example, comparing the current month’s invoice with those of previous months. Clearly, overpaid scheme bills are a potential danger. Indeed, industry estimates suggest that invoices may be incorrect by some 0.3% – 0.5%.
There are similar industry concerns in relation to interchange fees. With the growth of complexity and regulatory influence (e.g. European MIF regulation) in this area, interchange fees look set to become increasingly difficult to calculate and manage.
Another tricky issue is the reconciliation of authorised and settlement amounts. Each transaction is authorised by the issuer of the payment instrument but, all too frequently, the originally authorised amount differs from the payment amount – consider, for example, blockings for hotel accommodation or rental cars. Investigating these deviations can be an expensive business for market participants.
Chargebacks are a growing problem, too. Should a cardholder dispute a charge, scheme rules are generally in favour of the cardholder and so the onus is typically on the merchant to prove that the debit was legally posted. Money and effort must be spent processing disputed charges, and this represents an increasing burden for the merchants and acquirers that are obliged to investigate such complaints. Clearly, it would be far better if discrepancies could be detected at a much earlier stage – before they even appeared on the cardholder’s statement – and then either rectified or explained to the consumer.
For market participants seeking to meet the challenges outlined above, implementing advanced reconciliations-based technology can be of considerable benefit.
This type of solution automates reconciliations processing by removing manual activities and replacing them with exceptions handling technology. It identifies unmatched items and, using sophisticated workflow, routes them to the appropriate individual or team for resolution, reducing manual effort to those instances where human intervention is strictly necessary.
The benefits for participants in the retail payment eco-system from using advanced reconciliation and exception handling technologies typically come in a variety of forms. These include significant cost savings by reduction of manual effort and intervention, mitigation of operational risks and losses by higher STP-ratios, as well as improved customer service by providing incremental values to cardholders and merchants. Additionally, such systems can support companies in their efforts to comply with regulatory requirements such as PSD2, MIF regulation, KYC or anti-money laundering rules.
The most successful examples of this type of technology can help financial institutions address the specific industry pain points discussed earlier, for example, the difficulties organisations currently face when attempting to reconcile scheme fees or interchange fees. They should also enable organisations to cut the amount of manual effort required to look into discrepancies between authorised and settlement amounts. In addition, a well-designed system will have the capacity to help companies tackle the mounting difficulties caused by chargebacks.
Christian Schiebl is head of the Corona Business Unit at SmartStream Technologies. Corona Retail Payments Control automates reconciliations processing and exceptions handling, helping clients to reduce cost, mitigate risks, improve client value and deliver operational control across the entire retail payments transaction lifecycle.