|Real-time financial services changing the face of commerce
|Vice President for International
|Kabira Technologies, Inc
Frederic Aries is the Vice President for International at Kabira Technologies, Inc. Mr Aries is responsible for all EMEA and Asia-Pacific operations, excluding Japan. Previously, Mr Aries served as Kabira’s Managing Director for the EMEA region. Mr Aries began his career at Unisys and later moved to Sun Microsystems in France, where he rose to the position of Sales Director for France and, then, Marketing Director for Southern Europe. Mr Aries created the Southern Europe subsidiary of Illustra Information Technologies (acquired by Informix and later by IBM), which developed object-relational databases. Mr Aries holds an MBA from ESSCA, in France.
The financial services industry consolidated significantly through bank mergers in the past decade. This has concentrated payment and settlement processing among fewer parties, which now process much higher volumes. Debit cards, online bill payment and electronic payments have significantly reduced paper cheque payments. By 2007, P2P (peer-to-peer) payments will comprise at least 10 per cent of online payments to e-tailers. This rapid increase in electronic payment volumes indicates that legacy payment systems must evolve to meet the demand.
High-performance payment processing solutions The financial services industry evolved significantly in the past decade. The sector sharply consolidated through a large number of bank mergers in the late 1990s and the more recent economic downturn. This consolidation has concentrated payment and settlement processing among fewer parties, which means that the payment systems of today’s players are processing much higher volumes. In addition, technology improvements enable new financial products and services as well as new ways of conducting financial business. Electronic payments have increased dramatically. In the year 2000, the US alone processed 29.5 billion in electronic payments, with a value of US$7.3 trillion. Debit card growth in the US quadrupled in four years, from 2.5 billion transactions in 1996 to almost 10 billion transactions in 2000. E-Commerce transaction volumes continue to rise around the world. According to IDC, worldwide e-Commerce increased 68 per cent from 2000 to 2001. Total spending was US$600 billion in 2001 and over US$1 trillion in 2002. The introduction of the Euro has increased cross-border purchasing, with a resulting increase in transaction volumes. In the US, England and Canada, significant progress has been made to reduce the number of paper cheque payments through the increased use of debit cards, cheque truncation and online bill payment. The Internet has opened a new market with the advent of e-Commerce payments and the market for these card-not-present transactions has barely been tapped. Wireless, proximity and peer-to-peer payments (P2P) are expected to gain significant popularity in the next few years. By 2007, P2P payments will comprise at least 10 per cent of online payments to e-tailers. In the developed countries, card issuers are trying to transfer consumer payments from cash to card and card-like payment methods. The trends in developing countries are even more radical: virtually without planning of any kind, cards are replacing not simply cash, but currency as well, enabling consumers to convert local purchases to more stable foreign currencies instantly. Thus, as long-term trends toward cash replacement play out, the average transaction size is destined to decline. The market for cups of coffee is much larger than the remaining market for purchases of clothing or durable goods. Because electronic payment transaction volumes are increasing so rapidly and because new products and services are being developed to meet changing consumer desires, payment-processing systems must evolve to meet the new demands. Existing payment systems were developed decades ago and the technology is now outdated. Those systems simply cannot keep up with the explosive growth in electronic payments. In order to succeed in the future payments processing world, payment solutions must be able to provide the following functions: √ Augment existing legacy systems without requiring ‘rip and replace’; √ Support high-volumes with real-time response; √ Five 9s availability–the system can never go down; √ Ensure that transaction processing is secure and reliable; √ Provide real-time authorisation and near real-time settlement; √ Provide access to data in multiple systems; √ Flexibility to enable rapid development of new products and services; √ Fill the role of a ‘Network Payment Switch’ to connect business transaction systems with broadband networks. Only those systems that provide this robust functionality will enable financial institutions and third party processors to meet the financial objectives required in today’s competitive environment, including: √ Improve operational efficiency; √ Ensure superior customer service; √ Reduce ‘time to market’ for new products and services; √ Increase market share; √ Decrease transaction costs. Legacy impact on payment processing Challenges and opportunities in the five key payment-processing areas, as electronic payments expand, include: 1. Cheques–Cheque usage is beginning to decline in the US, as it has in several other developed countries. There are several reasons for this decline, including: use of debit cards as a substitute for paper cheque payments and electronic transactions at the point of sale. These transactions are cleared through Automated Clearinghouse (ACH) or Electronic Funds Transfer (EFT) networks. Finally, Electronic Bill Presentment and Payment (EBPP), better known as online banking, is finally gaining traction. Currently, 25 million US residents pay bills online and that number is expected to increase to 33 million people by the end of 2003. With exponential volume increases, legacy card processing systems will be stretched beyond capacity. Additionally new systems will be needed to support cheque truncation and imaging. 2. Cards–Included in this category are credit cards, debit cards and stored value (prepaid) cards. Card transaction volumes in the US alone increase by 10 per cent each year and that trend is expected to continue. In 2001, Visa and MasterCard transactions totalled over US$ 3 trillion worldwide. Supporting the number of new cards issued will require more robust card management and authorisation systems. Current systems are strained by increases in overall transaction volume and requirements for near real-time settlement. Debit card growth has been explosive in the past few years. Debit card use in the US grew from near zero, at the beginning of the 1990s, to nearly 10 million transactions, in 2000. Consumers are using debit cards for payments made previously by cheque and are using them for small value transactions made previously paid by cash–fast food stores, fuel stations and grocery stores. The use of stored value cards is being led by the rapid growth in popularity of gift cards. Prepaid gift card sales alone surpassed US$38 billion in 2002. Other stored value products include payroll cards, cards for healthcare spending accounts, phone cards and child-support payment cards. These cards use the existing credit card infrastructure and can often be used wherever major brand credit cards are accepted. 3. Funds Transfer–ATM transaction volumes continue to increase due to consumer demand for 24 hours a day, seven days a week service. Internet enabled ATMs, among others, can sell or dispense stamps, phone cards and transit tickets in addition to cash. Funds are also transferred between banks through approximately 50 shared regional networks. As transaction volumes rise, those systems will need to be upgraded to support them. Automated Clearing Houses (ACH) are used in the US and Europe to process many types of payments, including direct deposit, pre-authorised direct payment, online banking, electronic cheques and Electronic Government Welfare Program Benefits Transfer (EBT) payments. In 2001, 7.99 billion payments, worth US$22.2 trillion, were processed by the ACH. SWIFT processes international bank-to-bank transfers. In 2002, SWIFT processed 1.8 billion transactions. As Internet usage increases around the world, bank account-to-bank account (A2A) funds transfers, which in the EU comprise 32 per cent of all non-cash payments, will increase. Payments systems will need to support these transfers in addition to the increased transaction volumes for existing systems. 4. Real-Time Risk and Fraud Management–Fraud is an area of high risk for card issuers and merchants. Card authorisation and settlement transactions are processed on mainframes by merchant acquirers and then routed to the appropriate card issuer using an interchange carrier. Many loopholes exist in this process and can expose merchant acquirers and issuers to millions of dollars of fraud per week. Real-time risk management systems can mitigate the chance of fraud. On the card issuing side, these systems can flag individual cardholder accounts based on fraudulent trends and decline real-time authorisations. On the merchant acquiring side, these systems can stop payments to a merchant based on fraudulent merchant activity. 5. Emerging Payment Vehicles–Consumer usage and demand for services delivered through the Internet and wireless technology are increasing at a rapid rate. Payment systems are required to support payments for those services, while at the same time providing security to reduce fraud. Internet payment transaction volumes increase exponentially every year. Currently, most Internet transactions are card-based, but new payment options are coming to the market. Included are A2A (bank account-to-bank account) transfers, Internet currencies and electronic cheques. A2A payments will likely become the preferred payment method for e-Commerce outside of the US. These payment networks leverage existing online banking and bill payment systems, but the legacy systems will need to be enhanced to support the high transaction volumes that are anticipated. Peer-to-peer/person-to-person (P2P) transactions are also becoming very common. The clear market leader in this area is PayPal, with over 25 million users. Payments based on Mobile Devices, either account charges or smart card, are expected to exceed US$7 billion, US$15 billion and US$12 billion, respectively by 2005, in the US, Western Europe, and Japan. Technical issues The authorisation systems are expanding to handle hundreds of actively managed connections. Any underlying change in the system can have a ripple effect for each modified customer/partner interface–a typical program bug fix can take 10 to 12 weeks to implement and test. This problem will grow as the number of unique connections/interfaces increases. There is currently no way to make many types of changes globally, because each component may require unique changes to support customer and partner custom requirements. It takes, on average, 60 to 90 days to implement, test and deploy a new connection and each new customer adds further management complexity. Further, systems must adhere to Quality of Service standards calling for 99.999% uptime, reliability and availability. Protocol and connection changes, which will become more common, can be time consuming and integrating new protocol and communications mechanisms, such as encryption, can be challenging. Summarising the infrastructure gap Most authorisation and messaging implementations are really point-to-point connections between business level applications and the network. The lower-levels of such systems are often the logically indicated place to add new features for payment processing, fraud or risk management application, but it is difficult to add real-time applications that low in the network. Application servers and hand-coded applications cannot keep up with the performance requirements low in the network. One major card reported that it needed to increase its capacity from 4,000 transactions per second (TPS), in 2002, to 40,000 TPS, in 2007, a tenfold increase–and very difficult to deal with using current low-level systems. Data trapped in third-party applications and stored on disks is too slow to access and cannot keep up with network speed requirements. A new generation of payment switching software will be required to handle this infrastructure gap.