3 Risks Billers Need to Manage to Optimize Payments
Companies are struggling to optimize payments in a rapidly changing payments landscape which is creating incremental risk and impacting costs that payments professionals must understand to succeed.
3 Point Alliance recently issued a white paper, “Building Optimal Bill Payments Environments: Strategies for Managing Payments Types, Compliance and Risk,” to provide some insight into two major challenges facing the payments industry today:
- Keeping pace with new enabling technologies that is fragmenting the payments landscape; and
- Compliance with an increasingly complex regulatory environment impacting risk profiles and costs.
A Fragmented Payments Landscape
Today’s payments landscape is a mix of cash, checks, and electronic payment types. Each payments type, system, network and platform contains inherent risks.
The scope of innovation – from remote deposit capture to Square and alternative currencies like Bitcoin along with other numerous examples – is fragmenting a once ubiquitous market and poses different challenges for consumers, billers and payments providers alike.
In the same way more touches in the payments process increases the likelihood of exceptions, each payments type is subject to known (and unknown risks) which can come from any functional area including fraud, credit, operations, liquidity, data security, legal and/or reputation risk.
But some risk is more easily managed by payments providers than billers and companies. The most common reasons for outsourcing to a provider are:
1. Lack of biller knowledge surrounding compliance with current rules and regulations (and the impact on processing costs);
2. Billing volume is not high enough to achieve economies of scale and therefore billers cannot invest in infrastructure or make other capital improvements; and,
3. Inability to leverage business intelligence to manage risks, costs, and/or critical payments processing-related decisions.
In a study published by the Federal Reserve Bank of Chicago in 2012, a plan to unify the U.S. payments system to reduce fragmentation was published. The report provides industry guidance on medium- and long-term payment industry improvements that would, if implemented, accomplish its over-arching goal, and summarized as follows:
Given the rapid pace of technological change, symposium participants agreed that U.S. payments system participants, including consumers and businesses, would benefit from the industry having a unified strategy.
The Fed has recommended a phased approach to wide-scale payments industry improvement. Most industry experts believe the timeline for implementing improvements is at least 10 years away. In the meantime, billers and payments providers alike are seeking out their own solutions.
When Outsourcing: Consider Asking About
Tracking inflows and outflows, calculating float, maintaining spreadsheets, cost-cutting by staff reductions are still common ways CFOs manage the payments function, but does it work today?
The future of payments may never achieve a ‘one payment for all’ marketplace, instead consumers may prefer choosing from a menu of payment options which is why so many industry experts caution that the traditional check may have unexpected staying power.
Some questions payments professionals might ask to help navigate the new payments landscape include:
• If checks continue to decline, will all remittance processing be outsourced?
• What happens if checks don’t disappear and consumer demand remains steady? Can you still process paper cost-effectively and efficiently?
• Can you calculate year-to-year unit costs with the advent of new technology coupled with large-scale regulation?
• Is your organization lean enough to capture the benefits of ‘future state’ processing?
• Do you have a long-term strategy for continuous improvement in the face of myriad market pressures?
• Cost to an organization for developing and maintaining a current business continuity (BC) and disaster recovery (DR) solution in light of the probability of an event that would disrupt the payments operation. Outsourcing would reduce BC/DR risks and costs because disruption scenarios are on-stream.
This paper describes what to look for in a payments provider and offers strategies for framing the payments outsourcing business process to control costs, reduce risk, manage compliance issues, and free up resources to respond to new marketplace opportunities.