In the past decade, the payments industry has experienced more change than in the previous 40 years. The number of payment options for consumers is multiplying, and the adoption of real-time payments is soaring.
While this is an exciting time for the payments industry, financial services companies are facing tough challenges as payment processing requirements become increasingly complex—especially in the back office. In a recent PaymentsJournal podcast, BHMI’s Chief Technology Officer, Michael Meeks, and Director of Software Engineering, Jon Protaskey, along with Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research, spoke about these challenges.
The Historic Role of the Back Office
Backoffice transactions are largely hidden. After a payment has gone through a front-end system for authorization, the back office takes over and performs several key functions. It settles the transactions among the financial entities involved and reconciles them with various sources, such as front ends and network clearing files. The back office also charges the appropriate fees, handles transaction disputes, supports transaction research, and allows real-time financial positions to be viewed.
Thirty years ago, when banks were first moving from cash to digital payments and cards, the ecosystem was different. The legacy systems that were built decades ago are just not capable of meeting today’s payment demands. Those systems were written with an isolated perspective and minimal requirements, then added to and pieced together over the years. The gaps in the operation still often require manual processes to be in place.
At that time, nobody could have projected the transaction volumes seen today. As a result, there was no expectation for real-time processing or real-time data access for decision-making. Everything was handled in batches, and the need to support non-card-based transactions wasn’t even an issue. These historical card-based systems were written to support ISO 8583, not the new standard of ISO 20022—which makes it hard for back office environments to adapt and put the new requirements into their systems.
“We have seen many organizations quickly upgrade their front-end client interfaces, but they have been a bit slower to upgrade outdated back office systems,” Bodine said. “Modernizing these systems is all about the elimination of friction, which means improvements in efficiency, accuracy, cost savings, and a variety of other things. As we started to get into the pandemic, we saw more folks working on back office processes. Now we’re really seeing efficiencies throughout the ecosystem by eliminating friction.”
Another challenge is the workforce that was in place more than 30 years ago and initially used those legacy systems is aging and retiring. Those who built the systems are taking most of the historical knowledge with them.
“It’s not a surprise to come into a new client and see them have many different systems that are siloed,” Protaskey said. “They’re all doing different functions of the back office and trying to get those systems consolidated is always a challenge.”
New Solutions for Instant Payments
With instant payments settling in 20 or fewer seconds, the potential for instant fraud is more prominent. Because those funds are irrevocable, fraudsters have the opportunity to increase the amount of money that they’re able to take from organizations. Automation and modernization are imperative to cut into what the fraudsters are doing.
“A modern back office can play a big role in helping to mitigate the risk and reduce the cost,” Meeks said. “The solutions we’re implementing continuously load payment data within seconds of the transaction being processed. When that data arrives in the back office, our software performs the back office processing immediately, including fee generation, reconciliation, and settlement. All this happens immediately after we’ve loaded the transaction rather than doing large batch processing at the end of the day. This provides you a real-time view of all the transactions that have been processed and real-time settlement positions throughout the day.”
Real-time data visibility allows banks to make decisions based on that data. Every business has proprietary data to capture and make decisions on. A system needs to be able to adapt to a given business’ data needs, not just what every other company has out there.
The Cost of Disputes
Another key consideration is the high cost of handling disputes. A modern back office enables companies to manage disputes more efficiently, with a greater degree of automation and accuracy. These systems need to provide quicker ways to research a transaction, audit faster, and offer more automated ways to handle chargebacks.
“I can give an example of one of our current customers, a company that we work with in Australia,” Meeks said. “In 2018, Australia launched the New Payments Platform (NPP), and one of the country’s leading payments services providers faced a lot of challenges in allowing their back office to handle disputes of real-time transactions. We implemented a system that accepts real-time dispute requests, enabling them to meet the requirements of the platform and respond in near real-time.”
The Path to Modernization
Simply having a consolidated system can result in operational efficiency and reduced costs. With one consolidated rules-based back office system, banks can have the flexibility to adapt to industry changes with simple configuration alterations rather than expensive and time-consuming software code revisions.
“The biggest competitive advantage we see right now is scalability and the ability to handle the increased transaction volumes,” Protaskey said. “And there’s always the regulatory compliance and enhanced security that comes with a modern system.”
“We conducted a survey a few months ago, and 80% of the respondents said that modernization of their payment operations was very important, and 46% said it’s currently a top priority for the organization,” Meeks said. “For someone who wants to sell modern back office software, that sounds great, but they also identified a number of hurdles. Most important was the perceived cost—not just the cost of the software to bring in, but the cost of its integration into the organization.”
Another hurdle was limited internal resources. People in these organizations already have day-to-day job responsibilities that keep them busy. They are concerned they won’t have time to take on a significant new project. “We view our job as helping customers overcome these hurdles to implement a modern back office platform to meet these challenges and provide a nice return on their investment,” Meeks said.