By Barry Tarrant, Director, Product Solutions, Fiserv
Financial institutions continually balance competing demands for investment in technology maintenance, compliance, innovation and the delivery of value-added services. Delineation between the “need to have” and “nice to have” is difficult when everything feels like a “must have”. For many institutions, outsourcing strategic services such as payments can enable them to strike a better balance of their investment pool, by enabling more efficient operations that allow for more investment to be focused on rapid delivery of new capabilities and innovation that adds incremental value.
Shifting focus to innovation
Financial institutions are facing change on multiple fronts. Customers have quickly come to expect continual product innovation and a consistent experience across multiple channels. And the industry is experiencing structural changes, such as the convergence of payments.
We are witnessing challenger banks and fintechs fully embracing digital tools, such as the cloud, to optimise operations and create transformational customer experiences. Increasing choices available for customers to initiate payments across card and non-card payment rails are leading to further demand for innovation and change. As a result, many financial institutions are reviewing the costs and operational effort required to maintain payments technology in-house and considering how new innovations can be implemented.
Financial institutions have an opportunity to leverage shared innovation to stay ahead of this competition. This can come in the form of payments-as-a-service (PaaS). PaaS can also bring additional benefits such as savings in capital costs, opportunity costs, compliance costs, as well as reduction in one-off costs associated with infrastructure or technology upgrades.
The case for PaaS
Outsourcing payments to a PaaS provider can allow a financial institution to focus more time and effort on customer innovation and experience that drive incremental value. It could also lead to other financial benefits associated with reduced capital expenses, such as increased free cash flow. This is particularly important as financial institutions navigate the current environment and capital investment is being analysed under a microscope.
Another benefit to outsourcing to a PaaS provider is the ability to leverage its expertise. While investing in a robust platform is one of many areas for financial institutions to consider, it is the primary business for PaaS providers. Therefore, it is in the provider’s interest to continually invest in the platform and recruit qualified personnel to support and innovate the technology.
Geographical scale can also provide further opportunities to add value. A PaaS provider with clients around the world enables them to deliver innovation on a global scale, and this can be redeployed elsewhere quickly and at a lower cost than custom developments. Additionally, a global payment processing network enables providers to gather useful insights, such as new payment types, changes in consumer behaviour, and threats, which could then be used for further innovation.
As payments become more commoditised, and traditional payment revenue streams decrease, the case for retaining payment processing in-house may become narrower. By adopting PaaS, financial institutions can benefit from significant cost savings, maximise retained payment margins, and rebalance their resource and investment pool, which can be used to focus on more strategic and valuable activities.
While the business case for financial institutions to adopt PaaS is compelling, some remain reluctant to do so due to certain ‘industry myths’. For example, there are concerns that outsourcing data is inherently risky, however, the reality is quite the opposite. PaaS providers have the scale, resources, and practices to invest in key areas such as cybersecurity, whereas keeping operations in-house could in fact lead to greater risks around data security, especially if resources are limited.
Aside from costs, experience and expertise in delivering transformation of payment technology should also be considered as part of the decision to adopt PaaS. Most IT managers within financial institutions are likely to have delivered few major transition projects in their entire career. However, teams at a PaaS provider will collectively have likely overseen many. They also develop and update a range of specialised skillsets and toolkits to provide additional expertise and a seamless service. The ability to deliver transformation effectively is critical to benefits realisation and PaaS providers are likely to be better equipped to do so.
Innovate and differentiate
The current pandemic has shifted payments innovation into the spotlight. To fully understand how changes can be made and implemented that respond to this shift, a comprehensive assessment of existing technology, and how it will affect business in the long-term, will be needed. Adopting PaaS brings a wealth of financial and operational benefits, enabling a financial institution to be agile and strategic, so that it can devote more resources to innovation, provide services and experiences that customers want, and differentiate from the competition.
FINANCIAL INCLUSION WITHIN DIGITAL PAYMENTS
NICK FISHER, GENERAL MANAGER, SALES AND MARKETING UK, JCB INTERNATIONAL (EUROPE) LTD.
The shift towards an economy that removes physical cash has long been on the horizon in many regions. Sweden is an example of a country rapidly heading this way. Two years ago, just 1% of Sweden’s GDP was circulating in cash compared to 11% in the Eurozone, and research by the Swedish Retail and Wholesale Council showed half of the nation’s retailers saying that they probably would not accept cash after 2025.
In 2019 in the UK, cash payments decreased by 15%, although physical money was still the second most frequently used method comprising of 23% of all payments. The Financial Inclusion Commission in the UK states that there are over 1 million people that do not have a bank account, and the World Bank estimates that there are some 1.7 billion adults globally that still lack access to a bank account.
The finance industry has collaborated over the years to develop various credit products for affluent communities. These customers are considered a lower risk. However, institutions should continue to prioritise the advancement of services to serve an audience which remains – ‘unbanked’. Research by EY showed that financial inclusion could improve GDP by up to 14% in more rural, developing economies like India, and by 30% in frontier markets like Kenya. While the positive reasons for fully embracing digital payments and eliminating physical cash are plentiful, including lower payment processing costs for the retailer and customer convenience, physical cash provides the ‘unbanked’ with the ability to function day-to-day with a legal tender.
To establish digital solutions for the unbanked, payment players should adopt an inclusive mindset. The race towards a digital cash society will naturally get closer to the finish line with the passing of each generation, but governments could lend a hand to the unbanked by encouraging financial institutions to sponsor organisations that provide legal quasi digital cash products. In my opinion, the financial industry has an important part to play in developing low cost solutions to support the unbanked with authentication tools – such as biometrics and risk tools to manage real-time credit risk reporting with anywhere accessibility.
In both developing and developed countries, QR codes can play a superhero role as they offer simple, low-cost ways of processing payments on basic mobile phones. In June last year, we collaborated with FIS to enable cross-border QR codes in the APAC region. The ‘Worldpay from FIS 2020 Global Payments Report’ found that digital wallets, at the time, accounted for 58 % of regional ecommerce purchases and were expected to reach almost 70 % percent by 2023.
In developed regions, we are issued with a formal identification when we are born, no matter our circumstances, and this comes in the form of a birth certificate or, later in life, a passport. This does not always happen in developing countries as resources are often limited. Yet, advances in biometric technologies, such as fingerprint or palm vein may offer a solution to the requirement for proof of identity to open a bank account or to create a mobile wallet. Biometric organisations, payment leaders and innovators, such as Google Pay and Apple Pay, have partnered to make this a reality, despite the initial cost implications for development.
In summary, understanding the reasons for why some prefer physical cash, and others prefer digital cash, provides holistic learnings to achieve a society that ultimately uses digital cash only. Empathy is paramount for building customer-centric commerce. For me, at least, a world without physical cash cannot be considered responsible, or fair, until everyone can be accommodated.
THE EFFECTS OF JOB HOPPING ON YOUR RETIREMENT OUTCOME
By Neli Mbara, Certified Financial Planner at Alexander Forbes
Job hopping – defined as spending less than two years in one position – is a very controversial subject. It can be an easy path to a higher salary but can also be a red flag to prospective employers, not to mention your future financial goals if you are cashing in your retirement fund every time you make a move.
When changing jobs, whether it be once a year or once every decade, one has to make decisions regarding career growth and retirement plans which affect one’s long term financial plans. One of these decisions is ‘what to do with my retirement fund?’
For many people, the first thing that comes to mind is using their pension money to pay off their debt. Alexander Forbes Member Watch statistics show that 91% of members do not preserve their retirement savings when changing jobs. As we are living in times where most household income is used to finance debt, most people use job hopping to gain access to their retirement funds, and use this money to pay off debt. However, a quick fix and instant gratification comes at a price, which in this case could be a delay in your retirement plan.
Your retirement savings are simply for that, your retirement, to pay you an income once you stop working.
Early access of your retirement fund can result in:
- Not having enough money at retirement – this is simply because most of us are already not saving enough for retirement
- Robbing yourself off the compound interest you could have potentially earned from the investment.
- Never making make up for the lost benefit
- Creating a bad habit that will delay you from achieving your retirement plan and desired income at retirement
It is easy to cash in your money from a retirement fund at resignation but it is much harder to make up for the lost benefit (capital cashed in plus interest). Calculations show that for you to make up the lost benefit depending on your retirement age and investment time horizon, you will likely need to invest more than double your contributions towards a retirement fund.
Since only 6% of the South African population are reported to have accumulated enough to retire comfortably, without having to sacrifice their standard of living, you will most likely have to invest much more towards your retirement fund to make up for the lost savings.
Therefore, leaving your retirement fund invested and preserved in a preservation fund is the recommended option when changing jobs, as this keeps you committed to your retirement plan.
Changing jobs is a life-changing event, and it is therefore important that you seek advice from a professional financial adviser who will guide you in your retirement planning ensuring that your retirement needs are taken care of, by providing solutions that help you to ensure your financial wellbeing.
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