On the Road to Payment System Convergence: Where Are We?

According to two top payment software vendors, US banks are increasingly expressing interest in products that represent the first steps in consolidating their disparate payment system silos. A perfect storm appears to be moving the “convergence” dialog into early action: increasingly empowered “payment czars” inside the banks, increasingly urgent fraud and compliance concerns, robust electronic payment volume growth, limitations of existing platforms in servicing customers, and the cost and complexity of managing outdated and duplicative legacy systems.

However, while the vision of a single, centrally managed payment system inside a bank has been talked about for several years, the question has centered on when the dialog would turn to action. For example, last month Financial Insights published a whitepaper titled, “The Strategic Value of Centrally Managing Bank Payment Systems,” which outlines not their take on the key drivers, rationale, and potential benefits, but focuses on the interim phases that banks should target to incrementally overhaul their core processing systems, recognizing that each phase needs a compelling business case to gain support inside the banks.

As banks appears to increasingly recognize the need to start migrating to centrally managed payments, the question remains: is anyone actually DOING anything yet? And if so, where are they along the continuum as outlined by Financial Insights and others? To help answer this question, I met with two executives whose companies are on the front lines of US banks’ investments in convergence: Bert Harkins, vice president of global strategic marketing with CheckFree Software; and Jeff Hale, chief marketing officer with ACI Worldwide.

CheckFree’s PEP+ software processes more than two-thirds of the 14 billion ACH transactions per year. CheckFree also offers their ARP/SMS system, which handles paper check reconciliation in the back office (which includes positive pay functionality for corporate payments). With these two systems, both with roughly 70-80% market share among the Top 50 banks, CheckFree sits on both sides of the move from paper to electronic payments, and has started to respond to customer needs when those channels need to communicate. For example, they recently announced an eCheck Bridge module for their core systems, which actually bridges their ACH system to the paper check reconciliation system to identify and process positive pay checks which have been converted to ACH. Launched a year ago, Bert told me interest from banks has definitely been picking up.

Bert described two factors that he believes are the primary drivers of these initial convergence investments: more powerful bank payment czars who are increasingly capable of breaking down barriers to change which may have existed in the past; and the growing urgency of compliance when faced with literally dozens of disparate and old legacy systems.

Given that 14 of the top 20 US banks use ACI Worldwide’s Wholesale Payment System, Jeff Hale is also on the front lines as banks invest in payment system convergence, although from a slightly different perspective. ACI offers a fairly comprehensive suite of payments software, from switching and gateways products, authorization platforms, as well as back-end processing, including both high-value and ACH-like payments. And a significant portion of ACI’s sales are outside the US.

While Jeff also recognized the increased clout of bank payment czars and noted that ACI is seeing more RFPs from US banks exploring convergence investments, he pointed to Europe as the region where convergence is being aggressively pursued first. In addition to many of the same drivers here in the US, EU countries also face a number of factors that are somewhat unique: EMV compliance is pushing ever more data through outdated payment systems, and EU banks are already investing in SEPA compliance in their wholesale systems, bringing wire and bulk file (ACH-like) systems onto a single platform. In many ways, US banks may end up learning from the experiences in Europe (and their European businesses) in guiding their convergence efforts here.

After years of talk, it appears payment system convergence is gaining traction: first in Europe, but increasingly here in the US. And, as electronic payments of all types continue to grow rapidly worldwide, companies like CheckFree and ACI continue to be on the front lines with banks, coupling “upgrade” investments with increasingly converging platforms that begin to address the cost and compliance issues of legacy systems while beginning to offer new and innovative solutions for customers.