card processing

infrastructure change needs

A new wave of urgent business challenges in the card payments industry demands board level attention but its not what you think. The need to migrate to new card processing infrastructure has become one of the most serious business issues financial institutions have faced in a generation. This is not a problem to leave to the techies.
by Adrian Hausser

ver the last 18 months the card payments industry has seen fundamental corporate and IT changes like never before, while economic effects have resulted in an intense focus on cost. The convergence of these two sets of changes is creating very serious business challenges that threaten the very core of many card processing organisations. Bank and processor card processing infrastructures have been built organically over the last 30 years. Business demand over this time has given rise to a niche of specialist card industry software vendors. Many have effectively embedded themselves in large, medium and small card processing infrastructures, enabling business innovation and lowering transaction costs. The banks and processors rely on a balance of infrastructures, products and suppliers to

support both compliance and new business change to their customers a delicate balance that has, until now, been sustainable. Now there is a new level of change that threatens that sustainability. Many front line payments experts foresee many organisations IT and business operations departments having to devote unprecedented time and resources to infrastructure and processes, for a host of complex, interrelated reasons.

a tidal wave of change

Increased regulatory and financial changes, new business demands, and advances in technology and products, have put considerable pressure on the embedded systems in banks and processors. Many organisations have understood the issues associated with

continuing to run costlier older systems for years, but have never had the absolute need to make a large scale move to newer platforms. Todays card processing businesses are underpinned by a delivery infrastructure that is one (or a mixture of) the following: built in-house using a selection of card software vendors products; built in-house using home-grown, custom applications; outsourced to a processor, whose infrastructure is built on one of the two options above. Todays card acquirer software vendors market is made up of around 28 credible product companies, of which only about 14 could be considered plausible international product providers. A handful of vendors account for 80% of market share, hence most

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urgent board support

of the worlds card processing is dependent on a small number of vendors. The commercial and technological activity of the top 14 vendors has been hectic over the previous couple of years and the pace is accelerating. Some key events (alphabetically listed by company) include: ACI (BASE24), being the most dominant supplier, recently announced a major strategic partnership with IBM, and subsequently a roadmap to sunset its original BASE24 product and a migration path to its new product, BASE24-eps. This is built on newer technologies with support for IBM and other platforms; Euronet Worldwide investing globally in its outsourcing processing and software solutions; Fidelity acquired both Efunds (Connex) and Oasis (IST); HPS (PowerCARD) acquired S2M and has expanded successfully overseas in the last few years; Metavante acquired Nomad (Cortex) meaning the considerable clout of Metavante can now be brought to bear on Cortex-type business; RS2 (Bankworks) achieved an initial public offering with the intention of investing to grow; S1 acquired Mosaic (Postilion) and is busy integrating Postilion with its other core products; Tieto (CardSuite) has evolved its products to next generation technologies; new entrants from technology and business perspectives are making good progress in the card market. PayPal, for example, is growing fast and is aiming to replace consumer card payments wherever it can, while technology companies, such as Distra (Distra Switch), are demonstrating new technology products creating refreshing relationships with VocaLink and National Australia Bank; new power players (SAP, IBM, Oracle,

Microsoft) are all actively romancing the payments marketplace, which they see as maturing from a niche vertical business to key infrastructure components in their mega solutions. All of which suggests there is a very high probability that the solutions and products utilised in most banks and processors will change dramatically over the coming years and has already started. This may mean that perfectly good, installed products will have to be replaced (even repeatedly) due to being phased out through corporate or strategic movements in the marketplace. Given that a core acquiring product migration and re-integration can typically take anything from a year to four years, depending on the organisational size and complexity, it is clear why many banks and processors regard these changes negatively; they represent new spend, new risk and limited immediate business benefit. This is not an accurate view. In fact new card payment systems will bring many card processing organisations excellent opportunities to create an effective customer-management environment. The software vendors must continue to pressure their customer base swiftly, but reasonably, to achieve a standardised level purely on the simple business basis that they themselves cannot sustain duplicate product lines indefinitely.

demand will outstrip supply

The sample list of events above include changes that have directly impacted more than 300 banks and processors with the reality that the products they are using to support their client bases today will be phased out in the coming years. Even though organisational responses so far have been luke warm, the reality is that they have to change and most are already building business cases and scheduling changes starting next year.

This amount of change will create unprecedented demand for vendor support, consultancy and third party support from organisations such as Visa, MasterCard and other specialists in this field. There are only about 200 internationally-experienced technical payment systems consultants in Europe with sufficient expert level knowledge on the products concerned. It is clear resources will dry up very quickly. This wave of change will cause two actions: firstly product solution companies will have to implement a queuing or prioritisation system for their customers in an attempt to meet their needs and secondly, the industry will be flooded with companies with new resources claiming to be skilled enough to meet the demand. Many will be unable to deliver on that promise. At the same time the payments industrys scope is widening to offer solutions such as m-commerce and contactless payments, while regulation too broadens its horizons and new card schemes will need to be supported. The magnitude of change over the next few years starts to become obvious. Given the number of banks and processors affected worldwide and with each carrying an initiative of substantial duration, the challenge does not become what to do, but how to get it done. The likely widespread consequences are that a large number of banks and processors will start initiatives, but they will become unable to progress them for extended periods of time perhaps even by a couple of years. This hiatus endangers each bank or processors ability to implement core business change. This means many of them, for the first time in the cards industry, will find themselves in the uncomfortable position of not having a sustainable infrastructure that can support the ongoing changes they need to make to their business. This leaves their core card business open to competitive risk from

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card processing
move out of cards completely; organisations that can deliver and who are only too keen to take on frustrated commerembarking on more creative business solucial customers. Those who act soonest will tion such as corporate acquisition, joint be those who create the best foundations on ventures, revenue/risk sharing business which to build and gain advantage. models and so on. The industry already has some examples The apparently lower risk, more obvious of high profile organisations stumbling with solution may not turn out to be that in future similar issues and the likely result over the as industry dynamics evolve. Each organisacoming years is that that more of todays tion would be wise to take a conscious posisuccessful businesses will be caught out. This tion in the industry rather just address the opens the doors to large scale competitive solution from a single organisational level or moves and the emergence of new leaders. follow the pack. Banks and processors reactions to the situation will vary. Their options include one Victor, not victim or a mixture of: migrating their infrastructure in line with The first and most important action that any their current vendors roadmap; bank or processor should take is to acknowledge that the issues and challenges described migrating their infrastructure to a new supabove are applicable to the total organisaplier that may appear to be a better option; tion (regardless of whatever infrastructure is outsourcing to a processor one that has embedded) as the potential consequences a strong infrastructure otherwise they will are at the highest business levels. face the same issues and risks; six_processing_connect_08.qxd 29.10.2008 9:43 Uhr Seite 1 opportunities underpin The challenges and refocusing the business and elect to

each organisations core card business and should be dealt with from this perspective. For clarity, it must be noted that this is not an IT-only domain challenge, it will require business level solutions and organisational commitment from the highest level. The opportunity is two-fold. Firstly, given the right commitment in terms of funding, timing and focus, card payments infrastructures can successfully support the necessary business change for the next five years and beyond. There are a number of options to implement solutions creatively, such as new business models, acquisitions or joint ventures. This is not a simple matter and no single party has the entire capability. It is a matter of understanding and executing the correct set of actions with the right capabilities to make it happen it is not about following everyone else. Rapid action, considered decision-making and fast movement will be the key to a successful transformation.

WE CONNECT ISSUERS, ACQUIRERS

CARD BASED PAYMENT PROCESSING BY SIX CARD SOLUTIONS.

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Secondly, there are going to be global, regional and country specific casualties to these changes the late starters. They will work with vendors that are already overloaded and spend enormous amounts of time and money trying to correct the situation with little effect. Their struggles will present others with great opportunities: they will be so internally focused and preoccupied that their customer base will become frustrated and keen to change supplier. In these economically difficult times, customers are trying to differentiate their offerings and maintain their own revenues. There will be less tolerance of poor service and products lacking innovation than at any other time. The events of the next couple of years in the card payments marketplace will see successes, bottlenecks and notable failures. The industry as a mass will follow trends as the pendulum swings from popular and perceived low risk, easy options that fail to the next bright idea that comes along, sending the pendulum the other way. This is not a time to be one of the crowd: the industry does not have the capacity to sustain mass, simultaneous change perhaps the most successful organisations will be the ones choosing unique routes with confidence and conviction. are likely to be serious operational problems and even casualties down the line. The better prepared, traditional competitors will simply steal equivalent market share from their competitors in the short or medium term. It is probable that new, disruptive players several of whom are already seizing market share will gain from the situation. They are not hamstrung by legacy infrastructures and could gain the crucial momentum needed to establish themselves as the next generation of card payment businesses. Board level action now, and for a short future window, can counter these risks and turn the situation into an opportunity. Those that act sooner will be the ones to capitalise rather than suffer. These smarter organisations will have a far better chance of customer retention, growth and management. adrian Hausser is md of PayX

He who hesitates
The complexity of the situation and the fact that no-one wants to be the bearer of more bad news, means that although bubbles of concern about these issues are surfacing, they disappear quickly. In the meantime, banks and processors are putting their efforts into executing the standard corrective measures to deal with tough times. The danger to each card organisation is these IT, infrastructure and operational issues are not going away. Without adequate, urgent attention at board room level, there

AND MERCHANTS.

As a Swiss company, we know how to manage the secure and easy flow of money. We link the partners which are involved in card based payments merchants, acquirers, issuers and financial institutes using products, services and solutions that combine experience and innovation. Situated in the heart of Europe, we specialise on pan-European processing with multiple card products, currencies, languages, infrastructures. We offer an efficient, scalable, flexible, crossborder capable processing platform for card based payments. For more information please contact Linus Bertsch, Business Development, Phone +41 44 279 62 22, Fax +41 44 446 71 02 or mail to: linus.bertsch@telekurs.com www.six-card-solutions.com

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