Great Payments Transformation

Building future-proof operating models in wholesale transaction banking 

By James O’Callaghan, KPMG in China

Given the recent transformation of China’s markets and the payments market in particular, many banks and payments processors are now seeking to build a level of ‘future-proofing’ into their transaction banking operating models. This is a welcome trend.

The timing of this is very appropriate given that many Western banks are also looking at their strategy to decide what to do with their legacy core banking platforms, many of which were implemented during the 1980’s or inherited through acquisitions. These systems are now struggling to support organizations as they transition through the evolution of mobile payments and technology and respond to the demands and volumes of clients and transactions.

Building future

Advantage China

China has a clear opportunity to harness its considerable advantages (such as the evolution of mobile technology, increased transaction volumes, rapidly developing Cloud infrastructure and a comparatively stable economy) to develop flexible, scalable and adaptable operating models capable of lasting a generation or more.

However, building future-proof operating models requires China’s banks to have a high level of awareness, both of their own structural advantages and limitations, as well as the direction of the changes going on around them. China can also learn from lessons learnt by Western organizations regarding the challenges faced when undertaking such large transformational initiatives.

Look inside and out

To start, banks will need to gain a clear understanding of their long-term strategies and objectives. Is the over-riding goal of the organization to increase transaction volumes or expand into new markets? Is international expansion on the horizon or are all eyes focused on domestic growth? Does the bank have a clear vision of what their clients need now and in the future and how they want to be serviced?

This will allow banks to start to envision their future operating model and develop a framework against which they can properly align their decision making process and design principles. In turn, this will lead to the creation of a target operating model that will act as a roadmap for all future decisions and investments.

Taking a holistic view

Banks will, however, need to be aware of the impact these changes will have on the broader organization. Indeed, given the interconnectedness of today’s banks, true future-proofing cannot successfully occur in individual silos; it requires banks to take a holistic view of the organization to understand the dependencies of the change and its impact on suppliers, customers, stakeholders and employees.

Of course, a range of other considerations must also be overlaid. For example, take regulation: banks that either have, or plan to have overseas operations, will need to carefully consider how regulation in foreign jurisdictions may influence their operating models. Many markets now require sensitive payment systems and processes to be conducted within the jurisdiction itself, which will impact the ability to centralize operations. In much the same vein, data and security are also key concerns for regulators, possibly requiring the establishment of local data warehouses and new controls and governance systems.

Assessing the dependencies

All of this will naturally impact the sourcing decisions that must be made. Some systems and processes will need to be maintained on-shore, while others may be centralized and put into a shared service model that serves as a regional – or even global – hub. The introduction of Cloud computing into the payments ecosystem (a topic which was discussed earlier in this article series) will also add a new dimension to the sourcing decision process.

Key to developing a successful future-proof operating model will be securing the buy-in of senior leadership and the various lines of business. As with any transformation project, the direction and strategy will need to be led and communicated by the business itself, and so tight collaboration between the functions will be critical, especially with the technology partners. Architects of future-proof operating models will also need to dedicate resources towards helping the business to understand the implications of the change, developing future-proof processes and communicating the change throughout the organization.

Regardless of the shape of the operating model, the bottom line is that – to last into the future – operating models will need to be flexible and agile to ensure that any environmental changes can quickly be absorbed into the daily operations. Ultimately, the ability to adapt will be the only true test of how ‘future-proof’ the eventual operating model will be.

Yvon Audette Fred Schneidereit (KPMG in Germany): Our experience working with leading payments participants around the world shows that developing a successful future-proof operating model demands the buy-in of senior leadership across operations and the various lines of business. As with any transformation project, the direction and strategy will need to be led and communicated by the business itself, and so tight collaboration between the functions will be critical, especially with the technology partners.

Mitch Siegel Kim O'Donoghue (KPMG in the UK): In the West, transaction banking operating models have developed based on opportunities to standardize, automate and centralize. All three of these help lower the bank's overall risk, reduce costs and – ultimately – deliver a better customer service. Standardization, automation and centralization also tend to lead to a simpler operating model which, as James and Chris rightly note, delivers more flexibility and adaptability to respond to changes in the ecosystem.

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