COVID-19 a catalyst to transform bank payment operations

A powerful catalyst for modernization | Infrastructure level enhancements needed | Significant shifts coming down the line | From threat comes opportunity

As we set out in our previous article, while banks have maintained their payment operations successfully to date during COVID-19, it has nevertheless exposed the fact that certain aspects need to be modernized and configured for a more digital – and unpredictable – future.

The remote working brought about by COVID-19 has resulted in longer cycle times for areas such as exceptions processing and some regulatory and compliance checks. Present payment operations are typically geared around physical co-location, but COVID-19 has shown that more agile workforce set-ups are needed to function effectively in circumstances that traditional payment operations simply were not designed for.

The COVID-19 situation, therefore, has the potential to become a powerful catalyst for banks to address their modernization needs. This is also an imperative from a financial point of view: operating during COVID-19 has resulted in significant cost increases. Efficiencies are needed to protect profitability, even more so as the outlook for payments income looks challenged. Profitability is set to take a hit through reduced net interest margins, reduced interchange fee income and fewer point-of-sale purchases across the board as we likely enter a recessionary period in many parts of the world. At the same time, new mobile and e-wallet payment services from tech players and fintechs are eating into the pie.

These new players are here for a reason: they are servicing an ever-increasing demand as consumer behavior changes. Across both the consumer and business sectors, the trend towards digital channels and payment methods – and away from physical instruments such as checks and also, progressively, cash as well – means that banks simply have to gear their payment operations for this more fluid and real-time world.

Regulators are increasing the pressure around this too. In Europe, there is growing political consensus in the European Commission, as well as in the European Central Bank (ECB), that a pan-European innovation payments offering is needed, instead of the present system of largely standardized but local systems. In the US, the payments industry has been less heavily regulated than some other parts of the financial ecosystem, but we could see growing pressure to speed up the adoption and roll-out of faster payment capabilities.

These factors coming to bear simultaneously mean that we expect a renewed focus from banks to transform elements of their payments operations.

What we have seen in the last couple of months is an increase in manual processes that has resulted in cost increases across multiple areas of payments operations including workforce capability, workforce capacity, workflow controls and customer servicing. Inefficiencies have resulted too. Many of organizations’ processes today are not sufficiently agile, with any optimization efforts performed in silos that may have only produced ‘surface level’ enhancements rather than ‘infrastructure level’ resiliency improvements.

This lack of agility has meant that institutions have found it challenging to flex to the new requirements that have come with COVID-19, requiring many workflows across areas such as fraud management, investigations and regulatory reporting to be ‘broken’ just to continue delivering services.

These broken processes and controls introduce not only significant amounts of manual intervention but in some cases remove steps entirely, substantially increasing business risks and potential associated losses.

As a result, we anticipate some significant market shifts in how payments are operationalized. One effect is likely to be a growth in the use of managed services to support specific areas such as customer service or aspects of payment processing itself (some ‘lockbox’ operations, for example).

We also expect that banks will leverage the services of to augment existing capabilities, creating more agile environments that do not require huge integration efforts and, therefore, helping to realize quick wins across the enterprise.

However, we also expect to see significant investment from banks in their own systems, introducing new automation and digital labor technologies to address some of the pain points revealed by teams working remotely during COVID-19. We are likely to see an incremental approach here starting by modernizing specific tasks performed by specific teams rather than a ‘big bang’ approach of replacing systems wholesale.

It also seems inevitable that payments operations teams themselves will become smaller as increasing numbers of processes are automated. Some 88 percent of job losses in the last three recessions in the US occurred within automatable jobs¹. Most economists are already predicting an acceleration in the trend towards automation during the post-COVID recovery. Many banks already find it difficult to attract new talent into payments operations roles, while existing teams may have a significant proportion set to retire from the workforce in the coming years. Technology could, in fact, fill a growing talent gap and leave teams with more time to focus on value-adding tasks requiring judgment such as investigating exceptions and suspicious transactions.

Payments is an area that has seen rapid developments in recent years as new technologies and service providers have come on line.

Now, through the COVID-19 experience, we could see the major banks reinvigorating and digitizing their payments operations as they grasp an opportunity to drive efficiencies, provide enhanced services to their customers and gain new market share.