Great Payments Transformation

Overcoming legacy: How to leverage the Cloud in China’s changing payments environment 

By James McKeogh, KPMG in China

The pace of change within China’s payments market has been, quite frankly, astonishing. Purchase volumes have been rising meteorically and hundreds of new players have entered the market (thanks largely to the introduction of third party licenses), even while new technologies are disrupting the status quo for traditional payments providers. Simply put, today’s payments environment in China is altogether different to what it was just five years ago.

Overcoming legacy

Held back by legacy?

Against this backdrop, China’s payments providers have come to the rather abrupt realization that their legacy systems have become a real and tangible risk to growth. Some of the more internationally-minded providers even suggest that the coming transformation will be an opportunity to truly leapfrog global and western competitors by developing new systems that harness the transaction volume and embrace technological change to create a future ‘model’ for payments.

Certainly, Cloud computing will act as a catalyst in this legacy transformation. Cloud is itself an enabling technology. By harnessing Cloud, payments providers are seeking to take advantage of its key characteristics such as on-demand self-service, pooled resources, elastic capacity and pay-per-use fee structure to develop scalable, resilient and dynamic infrastructure and systems.

A killer cloud

Cloud also represents a massive opportunity for payments providers to elevate their game and generate new revenue. For example, take the mountain of data collected on payments every day in China: by leveraging Cloud, payments providers can harness that data to generate real-time analytics that can subsequently be sold back to retailers who – also using Cloud technologies – can translate that data into demand forecasting and loyalty programs.

While China’s government has made the development of Cloud a key priority in the 12th Five-Year Plan, uptake has been somewhat slow to date. However, there are clear indications that China’s Cloud is about to rise. While China currently accounts for only around three percent of the Cloud market, most pundits agree that this is likely to rise to 19 percent. As Cloud adoption and utilization rises in China, so too will its attraction as a payments platform.

Bridging the gap

For now, many of China’s banks have been focusing on implementing new systems that will ultimately serve as a stepping stone to the new Cloud-enabled world. However, there is a clear tendency within China’s payments ecosystem towards implementing ‘best of breed’ and ‘off the shelf’ solutions which, while certainly simpler to procure, often results in lengthy implementation periods and significant configuration requirements.

As a result, a number of China’s banks and payments participants have found that swapping their legacy systems is often much more complex than originally anticipated. Learning from these lessons, many of China’s banks are now evolving their systems implementation plans to partner with both vendors and management consultants who can apply global best practices within the context of the local setting to create a truly ‘fit-for-purpose’ solution.

In truth, the transformation of China’s core banking systems will prove to be a significant challenge for most banks. It will require them to first develop a larger holistic plan complete with target operating models and clear KPIs before setting out on the procurement journey. Processes, controls and governance will need to follow.

The merchant and the consumer

One must remember, however, that core banking systems – while certainly the most complex legacy system to overhaul – is not the only piece of aging infrastructure experiencing massive change right now in China. So too are the consumer payment and merchant technologies.

To date, this is where much of the activity in China has focused. Mobile payment technology is rapidly being put into place and adoption is ascending. Internet payments, already a popular channel in China, are also expanding their market share at an impressive speed.

There have also been a number of new solutions offered on the merchant side, but adoption has been slow. This is partially due to the fact that China is still predominantly a cash culture. In addition, China’s merchant acquirers have yet to demonstrate the full value of new technology.

This creates another significant opportunity for banks. By developing and introducing a range of new services for merchants – from programs to manage liquidity and provide real-time views into cash positions to the types of products being purchased and customer purchasing trends – banks and their third party suppliers may quickly be able to grow their market share and gain a bigger slice of China’s payments environment by transcending their legacy platforms.

What to expect at Sibos

Those attending this year’s Sibos conference in Japan should not be surprised to hear lots of talk about the impact of cloud on the payments ecosystem. China will prove to be a rewarding market for those cloud vendors that can create a strong offering to payment providers, so expect to see most – if not all – of the major cloud providers to be in attendance.


Martin Vipond Martin Vipond (KPMG in South Africa) : Transforming the IT environment is a massive and complex task for banks around the world. More than simply plugging in a new platform and starting operations, IT transformation – done right – requires significant effort to be put into developing the right governance frameworks, controls, processes and policies to meet the needs of the future-state business. This cannot be done in a vacuum: it will require all business units and functions to work together to create a common vision of how the bank will operate in the future.

Mark Hale Mark Hale (KPMG in the UK): China’s payments sector will find that transformation success will ultimately depend on motivating merchant adoption and building customer trust. However, this has to be underpinned by resilient infrastructure to support predictable, safe and efficient clearing and settlement. To really outperform northern hemisphere market solutions, success would also be characterized by delivering value through innovation as well as satisfaction through more value adding, relevant and customer led service propositions. Together these are the key ingredients to creating solutions that will drive revenue growth, grow market share and drive brand value.

Daniel Houseman Daniel Houseman (KPMG in Australia) : Banks may also want to consider whether they can potentially purchase processing services from Cloud service providers in order to eliminate the need to develop new payments platforms. Data privacy will be a hurdle to adopting this approach, but – if it can be surmounted – may provide banks with long-term and sustainable savings in the future.

Michael Axarlis Michael Axarlis (KPMG in Australia) : While I agree with Daniel that China’s banks will want to fully understand what they intend to do with the Cloud (is it to store, manage and use data more efficiently, or – as Daniel suggests – to host payments applications). However, it is worth noting that there are other ways to solve the legacy challenge including smart wrappers, better credit provisioning, better predictive data management, better pre-approved transaction profiling, and so on. Our experience in Australia is that core banking systems replacements do not necessarily lead to core payments transformation.

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