#payments insights. opinions. Customer expectations, Three forces pushing banks to modernize payments technology and regulation infrastructure demand that financial organizations update payments Payments systems have always been complex and a critical part of the banking world. systems before the next wave But over the past decade, dynamic changes within payments have created even greater challenges for financial organizations and have driven the need for payments of disruption. transformation. In particular, more complex regulation, advancing technology and demands from customers to create a consistent, seamless experience across multiple channels are pushing banks, FinTechs and payment processors to invest heavily in payments modernization. Upgrading infrastructure to address these challenges, while keeping costs under control, requires financial organizations to first understand the drivers of change. Continued on page 3 Volume 26 03 Three forces pushing banks to modernize payments infrastructure Customer expectations, technology and regulation demand financial organizations update payments systems before the next wave of disruption. 05 How Africa’s growing mobile money market is evolving Africa’s fast-growing mobile money market offers opportunities to boost financial inclusion and tap the continent’s economic potential. Editorial 08 Welcome to the first issue of #payments for 2020. Can issuing capabilities strengthen acquirers’ competitive position? In this newsletter, we explore a diverse set of topics that we know are top of mind Since European Union (EU) regulators introduced a for many financial institutions this year. fee cap on credit card transactions, acquirers have been seeking new ways to boost margins. Some are • The ongoing challenge to modernize payments architecture is explored in an now issuing their own cards, to protect profitability and create competitive advantage. article by Mike Chamas that discusses how optimizing legacy assets and taking an end-to-end perspective when planning upgrades are keys to success. • The rapid growth of mobile money schemes in Sub-Saharan Africa is boosting financial inclusion for the region and also attracting the interest of many 10 foreign players. It’s a market that offers new opportunities for growth, but is not without risk — a carefully considered entry strategy is critical to success. M&A activity and deal characteristics Activity increased in the final quarter of 2019, with • The quest to find new competitive advantage is one driver behindsome 46 disclosed transactions, up from 43 in Q3. acquirers taking on issuing capabilities. This article outlines key considerations of the strategy. • Our update on M&A activity and venture capital funding for Q4 shows both remain buoyant, highlighting the strong appeal of the sector to investors and a 12 continuing trend towards consolidation. Venture capital funding activity In the face of this Global pandemic, we understand that firms are focused on what this means for our global economy and how they will need to respond. Our teams are here to help you navigate through these uncertain times. Please do not hesitate to contact me to discuss the challenges you are facing in the current climate. Andreas Habersetzer EMEIA Payments Strategy & Transactions Advisory Leader 03 #payments Volume 26 Three forces pushing banks to modernize payments infrastructure 1. Technology Legacy monolithic payments architecture Client File The legacy payments architecture of Portal Mobile/app API gateway most financial institutions is inflexible, onboarding transmission partly because of dependence on multiple vendors. This both increases the total cost of ownership and creates several Legacy Legacy challenges for institutions: Vendor Vendor in-house in-house application application • Platforms and applications are application application fragmented. • Monolithic architecture does not allow Legacy Legacy Vendor Vendor for nimble changes. in-house in-house application 3 application n application 3 application n • Bringing changed or new products and services to market takes a long time. • Financial organizations depend on multiple vendors, all with aging systems. Database Database Database Database Database Database Database Database 1 2 3 4 5 6 7 n • There is high risk of systems inability to respond to regulatory mandates, and cybersecurity and environmental threats. Clearing and settlement systems and DDA interfaces In essence, legacy systems simply lack Legacy in-house component Vendor component Client interaction channels the agility and scalability required to respond quickly to changing customer demands. Modernizing payments Modern payments architecture infrastructure to meet these demands is fast becoming a competitive imperative Intake Client File for financial organizations, particularly as Portal Mobile/app API gateway new payment channels emerge and gain onboarding transmission traction. Unless these organizations can Omnichannel strategy quickly and seamlessly integrate these new channels, they will struggle to retain Process and grow their customer base. Payments engine framework Foundation Microservices Workflow engine ISO payload Authoriation service Audit service 2. Customer experience Business rules Data enrichment Admin service Import export service Risk/fraud service Reporting service Today’s consumers demand convenience in Data transformation framework almost every aspect of their lives. The rise Alerts service Limits service of on-demand services across mobility, Foundation entertainment, food and beyond means ISO Workflow Reporting store store store payments must also evolve to enable Vendor application n Database these real-time transactions. Customers n want to make and receive payments at any time and via any channel, and they expect Clear funds to be transferred in real time. Clearing and settlement systems and DDA interfaces Legacy middleware In-house component Vendor component 04 #payments Volume 26 But, they are not ready to sacrifice security 1 Customer experience for seamless experiences. Customers have 3 Regulations increasingly high expectations around Heightened customer expectations: Trend toward open architecture: strong authentication measures across • Demand for speed and convenience • Seamless end-to-end user experience • Regulation fast tracking payment channels, and they expect all • Speed to market and faster payments Customer customer-centric banking fraud, risk management, and exception • Immediate availability of funds experience • New, level playing field for management activities to be in place. They FinTechs also value consistency of experience and • Increased scrutiny on privacy, security, resiliency and information across channels. New, innovative products to resolution planning enhance efficiency of payments: • Modernized, secure payments Innovation Regulation Innovation • Need for scalable, real-time that provide customers with and user friendly solutions Innovation is reshaping payments on customizable options • Increased API connector enablement a scale and at a speed seen in few to address system integration needs other sectors. Within just a few years, • New, digitized capabilities that enrich advancing technology has not only current products and payment types changed how we pay, but also expanded the pool of payment players far beyond 2 Innovation the financial sector. Many new providers bring superior understanding of the customer experience deployed in sectors, such as retail, technology and the creation of interoperability technical These costs and metrics will highlight entertainment. standards and harmonization initiatives, priorities for improvement, and ultimately and we expect to see similar activity in enable each bank to understand customers’ The innovation transforming payments the US and other markets. requirements along the entire payment is also increasing the complexity of the journey and across every channel. This can payments environment. Systems must For financial organizations, meeting these allow financial organizations to develop be able to layer in multiple vendors to obligations will require payments systems shared infrastructure and processes to facilitate certain payments capabilities. with the ability to track transactions to exploit commonalities across these paths And nimble, modern and scalable provide the consistency and transparency and channels while building in flexibility to architecture is needed to provide the regulators demand and the options accommodate key differences. A proven “plug-and-play” experience required as the customers expect. framework that outlines how to modernize move to open banking and the emergence legacy systems can help financial An end-to-end business perspective of the banking-as-a-service (BaaS) model organizations make improvements now and drive further sector disruption. drives successful transformation be ready to embrace the enhancements Customer demands, innovation and and technologies that help build a truly regulation have been reshaping payments differentiating customer experience in 3. Regulation since the very first transaction was made. the future. But, the impending disruption of BaaS Following the financial crisis of is creating a new urgency for financial 2008, regulators have held financial organizations to modernize architecture organizations to a new, higher level of at speed to take advantage of emerging accountability. Recently, key regulators trends while controlling costs. With have appeared to indicate