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Payment Hub Design
(…or how IT helps solve the credit crunch)

 Gary Farrow
 IET / BCS 7th Sept 2010
Agenda
•   Payment Hub Overview
•   Capability Model
•   Payments Hub Spectrum
•   Design Issues
    – Service Granularity
    – Technology Selection
    – Canonical Data Zone
• Traversing the Spectrum
• Liquidity Problem
• Review




                             2
Agenda
•   Payment Hub Overview
•   Capability Model
•   Payments Hub Spectrum
•   Design Issues
    – Service Granularity
    – Technology Selection
    – Canonical Data Zone
• Traversing the Spectrum
• Liquidity Problem
• Review




                             3
Payment Hub Architecture
               Schemes/3rd Parties
                         Link/
                                                                      Characteristics
                                                  Business
                                                             • Integration Services
BACS       FPS           ATM/    CCCCL            Partners
                         VISA


                                                                 – Routing
                                                                 – Transformation
                                                                 – High throughput
         Gateways                            Channels
                                                             • Payments Business Services
                                                                 –   Liquidity monitoring
             Payments                  Payments                  –   Liquidity information provision
                                                                 –   Scheme cap monitoring
                        Payments Hub                             –   Point of control of other services

                                            Payments
                                                             • Payments Process Execution
           Payments
                                                                 – Payments process orchestration
       Core Banking                          Core Banking
         Ledgers                               Ledgers           – State management
         Legacy                                    Finacle       – View of payments state

                        Decouples ledgers from mechanics of payments processing
                                                                                                     4
Payments Hub Justification
                                                                                 •   Reduces integration complexity
Schemes                                                                              – SxL problem reduced to S+L
                                      Payments Hub                                   – Complexity reduction since not all
                                                                                       schemes connect to all ledger
                                                                                     – Complexity increase due to financial
                                                                                       controls
Accounting Ledgers /                                                             •   Supports ledger migration
Product Systems                                                                      roadmap
                                                                                 •   Supports business strategy of
      Business                                          New      Acquired            acquisition
                           Treasury         Legacy
        Line                                          Platform     Bank
                                                                                 •   Architectural simplicity
       Mortgage             Cards            Inter      GL                           – Single payments process
                                                                                     – Use of a single ‘canonical’ data form
                  Total Number of Ledgers
                                                                                       (ISO20022)
       9

                                                                                     – Master data management issue
       8
                                                                                       reduced (CIF, ISCD)
       7


       6
           2008     2009     2010    2011   2012
                                                     Case for a Payments Hub is compelling
                                                                                                                         5
Agenda
•   Payment Hub Overview
•   Capability Model
•   Payments Hub Spectrum
•   Design Issues
    – Service Granularity
    – Technology Selection
    – Canonical Data Zone
• Traversing the Spectrum
• Liquidity Problem
• Review




                             6
Payments Capability Model

                                        Diary            Mandate       Intelligent
Flow Control    State Machine
                                       Services         Management      Routing


 Destination                                            Enrichment       Repair
                   Router              Almanac
Determination                                            Services       Services


                                                         Settlement
Transformatio   AML Service           Fraud Service                     Excess
                                                           Control
      n          (Façade)               (Façade)                      Management
                                                          Accounts

                                                                        Payment
  Account         Account                                Liquidity
                                     Funds Control                      Message
 Validations      Posting                                Monitor
                                                                       Origination

                            Capabilities are apportioned but how ?
                                                                                     7
Agenda
•   Payment Hub Overview
•   Capability Model
•   Payments Hub Spectrum
•   Design Issues
    – Service Granularity
    – Technology Selection
    – Canonical Data Zone
• Traversing the Spectrum
• Liquidity Problem
• Review




                             8
Payments Hub Spectrum
                                           Position on Spectrum
   Pure                                                                                               Payments
Middleware                                                                                             ‘Engine’

 •Routing        •Record Validation    •Payments Almanac •Payments state        •Mandate         •Intelligent scheme
 •Transformation •File validation      •Diary management management             management       routing
                 •Payments             •Enrichment       •Coordination of       •Payment
                 repository                              ‘value-add’ services   origination
                 •Bank                                          •Fraud          •Customer
                 reconciliation data                            •AML            reconciliation
                                                                •Auto-Repair    data
                                                         •End-end process
                                                         control
                                                         •Store & Forward




                                             Increasing Functional Richness
                                                                                                              9
Agenda
•   Payment Hub Overview
•   Capability Model
•   Payments Hub Spectrum
•   Design Issues
    – Service Granularity
    – Technology Selection
    – Canonical Data Zone
• Traversing the Spectrum
• Liquidity Problem
• Review




                             10
Service Granularity
                           •   Service granularity refers to
                               the nature of the service
                               interactions between Hub and
                               Ledgers
Coarse      Fine Grained   •   Scenario shows a simple
Grained                        payment pattern
                           •   Granularity affected by:
                                –   Capability of Hub
                                –   Nature of product systems
                           •   Modern banking packages
                               have rich capability
                                –   Coarse grained services
                           •   Legacy systems provide
                               disaggregated services
                                –   Fine grained services


                                                              11
Technology Selection

                                   Payments Hub Spectrum
Middleware                       Framework                        Engine
Pure middleware product          Pre-build sub-flows, Payments    Pre-built scheme level
supporting messaging/            Repository, Scheme               processing
transformation                   transformations, Stateless/ful   Black box component,
Stateless                        Grey box component               Stateless/ful
Low technology cost              Standard based,                  Low implementation cost if
Relative low cost                Modular                           ‘out of the box’
implementation
Building enhanced functions is   Customisation can still be       Customisation cycle slow
costly                           extensive                        Black box component
                                                                  High product cost
IBM MQ / Message Broker,         IBM Enterprise Payments          Fundtech
Oracle (BEA),                    Platform, Clear2Pay, Dovetail

                                                                                               12
Canonical Data Zone
                                                • Canonical Data is a standardised
                      Scheme                      representation of the key data
                   Specific Format                    – ISO2002 credit / debit transfers
                                                      – Base24 real-time payments
                                                • Canonical Data Zone is the
                                                  architectural layers that make
                                                  use of such data
                                                      – Objective: Reuse of common
                                                        processing steps
                                                • Hub should process payments
          The Canonical Zone
                                                  using canonical data
                                                • Ideal world target system should
          System                                  also process payments in the
      Specific Format                             same canonical format
 Canonical data standard is best defined as an extended version of a recognised standard

                                                                                           13
Canonical Data Design Issues
                                             •   Legacy integration is a neat example
              BACS
             STD18                                –   Three necessary transformations
                                                  –   BACS-Canonical-Legacy
                                             •   Package integration
              The Canonical Zone                  –   Core banking system vendors offer
                                                      scheme modules that already use
                                                      scheme specific format
                                                  –   Transform BACS-Canonical-BACS (-
                                                      Internal)
                                             •   Package design principle
                                      BACS        –   Use ‘out of the box’
                                     STD18        –   Scheme specific interfaces
Universal Scenario                                –   Driver against Hub
•   Merger / acquisition    Legacy           •   Hub design principle
•   Migration               Format                –   Integration ‘heavy lifting’
•   Different systems for                         –   Minimise transformations
    different product                             –   Ideal Canonical Data is an enriched
    types                                             standard form
                                                  –   Driver against package principle

                                                                                            14
Architectural Tension

                                            Package
     Client
                                            Vendor

  Low cost                               Module Sales
  Speed to market                        Customisation development
  Future proofing                        Country Specific Modules


                                 Package principle
                      System     Architectural Elegance / flexibility
                    Integrator   Deliverability
                                 Minimise risk


                                                                        15
Agenda
•   Payment Hub Overview
•   Capability Model
•   Payments Hub Spectrum
•   Design Issues
    – Service Granularity
    – Technology Selection
    – Canonical Data Zone
• Traversing the Spectrum
• Liquidity Problem
• Review




                             16
Moving through the Spectrum

                                Position on Spectrum




Pure Middleware                                                   Payments ‘engine’



    •Product (re-)              •Risk &                •Solution Governance
    Selection                   Compliance                •Policy compliance
    •Supplier re-                   •Payments             •Paradigm alignment
    selection                       Services
                                    Directive

            Implications of moving through the spectrum are significant

                                                                                17
Agenda
•   Payment Hub Overview
•   Capability Model
•   Payments Hub Spectrum
•   Design Issues
    – Service Granularity
    – Technology Selection
    – Canonical Data Zone
• Traversing the Spectrum
• Liquidity Problem
• Review




                             18
Liquidity Monitoring
                           £(Millions)
           BACS                                  CCCCL
                                                          Liquidity varies
  60                                      50
                                                            – Intra-day
  40
  20
                                           0
                                         -50
                                                            – Inter-day
   0
 -20                                    -100
                                                            – Monthly cycles due to corporate
 -40                                    -150
                                                              bureaux services
        ATM/LINK/VISA                            FPS      Settlement risk
 200                                    150                 – Distorted due to Agency Banks
 100                                    100
                                                            – E.g .Northern Rock
   0                                     50

 -100                                     0
                                                          Treasury
                                                            – Monitors Cash / Liquidity position
                        Net Liquidity Position                periodically
              200                                           – Plans for Cash Management based
              100                                             on known liquidity position
                0                                           – Optimises financial investment and
              -100                                            borrowing

Liquidity monitoring and information services are required for pro-active management of
                                         liquidity
                                                                                              19
Consequences of Poor
Liquidity Management
 Payments Schemes
   – Deferred Net Settlement
   – Underwritten by the Bank of England
                                                    One lump or
   – Require daily settlement payments via             two?
     Real Time Gross Settlement
 Once settlement figure are known scheme
  participating Banks have ~20 minutes to make a
  CHAPS payment
 Missing a settlement payment is not
  desirable
   – Repetition will result in scheme expulsion
   – CxO will be ‘invited for tea’ at the Bank of
     England

Payment Hub is the architectural component to provide liquidity monitoring services
                                                                                      20
Agenda
•   Payment Hub Overview
•   Capability Model
•   Payments Hub Spectrum
•   Design Issues
    – Service Granularity
    – Technology Selection
    – Canonical Data Zone
• Traversing the Spectrum
• Liquidity Problem
• Review




                             21
Review
•   Payment Hub Overview
        Understand what a Payments Hub is
        Benefits it can provide
•   Capability Model
•   Introduced the Payments Hub Spectrum
•   Design Issues in placement on the Spectrum
    –    Service Granularity
    –    Technology Selection
    –    Canonical Data Zone
• Issues in traversing the Spectrum
• Liquidity Problem
    – How a Hub can monitor liquidity
•   Solved the Credit Crunch?
        Not quite…..
        But by designing Payments Hubs for our major banks I hope IT make a small but important
         contribution



                                                                                                   22
Thai
                                Traditional Chinese




           Russian
                                                              Gracias        Spanish




                              Thank You       English




                     Arabic
                                        Merci
                                                French
                                                             Obrigado
                                                               Brazilian Portuguese




Grazie                                                                                 Danke
 Italian                                                                                German
                                        Simplified Chinese




                                           Japanese




                                                                                                   23

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IET NW Region - Payment Hub Design

  • 1. Payment Hub Design (…or how IT helps solve the credit crunch) Gary Farrow IET / BCS 7th Sept 2010
  • 2. Agenda • Payment Hub Overview • Capability Model • Payments Hub Spectrum • Design Issues – Service Granularity – Technology Selection – Canonical Data Zone • Traversing the Spectrum • Liquidity Problem • Review 2
  • 3. Agenda • Payment Hub Overview • Capability Model • Payments Hub Spectrum • Design Issues – Service Granularity – Technology Selection – Canonical Data Zone • Traversing the Spectrum • Liquidity Problem • Review 3
  • 4. Payment Hub Architecture Schemes/3rd Parties Link/ Characteristics Business • Integration Services BACS FPS ATM/ CCCCL Partners VISA – Routing – Transformation – High throughput Gateways Channels • Payments Business Services – Liquidity monitoring Payments Payments – Liquidity information provision – Scheme cap monitoring Payments Hub – Point of control of other services Payments • Payments Process Execution Payments – Payments process orchestration Core Banking Core Banking Ledgers Ledgers – State management Legacy Finacle – View of payments state Decouples ledgers from mechanics of payments processing 4
  • 5. Payments Hub Justification • Reduces integration complexity Schemes – SxL problem reduced to S+L Payments Hub – Complexity reduction since not all schemes connect to all ledger – Complexity increase due to financial controls Accounting Ledgers / • Supports ledger migration Product Systems roadmap • Supports business strategy of Business New Acquired acquisition Treasury Legacy Line Platform Bank • Architectural simplicity Mortgage Cards Inter GL – Single payments process – Use of a single ‘canonical’ data form Total Number of Ledgers (ISO20022) 9 – Master data management issue 8 reduced (CIF, ISCD) 7 6 2008 2009 2010 2011 2012 Case for a Payments Hub is compelling 5
  • 6. Agenda • Payment Hub Overview • Capability Model • Payments Hub Spectrum • Design Issues – Service Granularity – Technology Selection – Canonical Data Zone • Traversing the Spectrum • Liquidity Problem • Review 6
  • 7. Payments Capability Model Diary Mandate Intelligent Flow Control State Machine Services Management Routing Destination Enrichment Repair Router Almanac Determination Services Services Settlement Transformatio AML Service Fraud Service Excess Control n (Façade) (Façade) Management Accounts Payment Account Account Liquidity Funds Control Message Validations Posting Monitor Origination Capabilities are apportioned but how ? 7
  • 8. Agenda • Payment Hub Overview • Capability Model • Payments Hub Spectrum • Design Issues – Service Granularity – Technology Selection – Canonical Data Zone • Traversing the Spectrum • Liquidity Problem • Review 8
  • 9. Payments Hub Spectrum Position on Spectrum Pure Payments Middleware ‘Engine’ •Routing •Record Validation •Payments Almanac •Payments state •Mandate •Intelligent scheme •Transformation •File validation •Diary management management management routing •Payments •Enrichment •Coordination of •Payment repository ‘value-add’ services origination •Bank •Fraud •Customer reconciliation data •AML reconciliation •Auto-Repair data •End-end process control •Store & Forward Increasing Functional Richness 9
  • 10. Agenda • Payment Hub Overview • Capability Model • Payments Hub Spectrum • Design Issues – Service Granularity – Technology Selection – Canonical Data Zone • Traversing the Spectrum • Liquidity Problem • Review 10
  • 11. Service Granularity • Service granularity refers to the nature of the service interactions between Hub and Ledgers Coarse Fine Grained • Scenario shows a simple Grained payment pattern • Granularity affected by: – Capability of Hub – Nature of product systems • Modern banking packages have rich capability – Coarse grained services • Legacy systems provide disaggregated services – Fine grained services 11
  • 12. Technology Selection Payments Hub Spectrum Middleware Framework Engine Pure middleware product Pre-build sub-flows, Payments Pre-built scheme level supporting messaging/ Repository, Scheme processing transformation transformations, Stateless/ful Black box component, Stateless Grey box component Stateless/ful Low technology cost Standard based, Low implementation cost if Relative low cost Modular ‘out of the box’ implementation Building enhanced functions is Customisation can still be Customisation cycle slow costly extensive Black box component High product cost IBM MQ / Message Broker, IBM Enterprise Payments Fundtech Oracle (BEA), Platform, Clear2Pay, Dovetail 12
  • 13. Canonical Data Zone • Canonical Data is a standardised Scheme representation of the key data Specific Format – ISO2002 credit / debit transfers – Base24 real-time payments • Canonical Data Zone is the architectural layers that make use of such data – Objective: Reuse of common processing steps • Hub should process payments The Canonical Zone using canonical data • Ideal world target system should System also process payments in the Specific Format same canonical format Canonical data standard is best defined as an extended version of a recognised standard 13
  • 14. Canonical Data Design Issues • Legacy integration is a neat example BACS STD18 – Three necessary transformations – BACS-Canonical-Legacy • Package integration The Canonical Zone – Core banking system vendors offer scheme modules that already use scheme specific format – Transform BACS-Canonical-BACS (- Internal) • Package design principle BACS – Use ‘out of the box’ STD18 – Scheme specific interfaces Universal Scenario – Driver against Hub • Merger / acquisition Legacy • Hub design principle • Migration Format – Integration ‘heavy lifting’ • Different systems for – Minimise transformations different product – Ideal Canonical Data is an enriched types standard form – Driver against package principle 14
  • 15. Architectural Tension Package Client Vendor Low cost Module Sales Speed to market Customisation development Future proofing Country Specific Modules Package principle System Architectural Elegance / flexibility Integrator Deliverability Minimise risk 15
  • 16. Agenda • Payment Hub Overview • Capability Model • Payments Hub Spectrum • Design Issues – Service Granularity – Technology Selection – Canonical Data Zone • Traversing the Spectrum • Liquidity Problem • Review 16
  • 17. Moving through the Spectrum Position on Spectrum Pure Middleware Payments ‘engine’ •Product (re-) •Risk & •Solution Governance Selection Compliance •Policy compliance •Supplier re- •Payments •Paradigm alignment selection Services Directive Implications of moving through the spectrum are significant 17
  • 18. Agenda • Payment Hub Overview • Capability Model • Payments Hub Spectrum • Design Issues – Service Granularity – Technology Selection – Canonical Data Zone • Traversing the Spectrum • Liquidity Problem • Review 18
  • 19. Liquidity Monitoring £(Millions) BACS CCCCL  Liquidity varies 60 50 – Intra-day 40 20 0 -50 – Inter-day 0 -20 -100 – Monthly cycles due to corporate -40 -150 bureaux services ATM/LINK/VISA FPS  Settlement risk 200 150 – Distorted due to Agency Banks 100 100 – E.g .Northern Rock 0 50 -100 0  Treasury – Monitors Cash / Liquidity position Net Liquidity Position periodically 200 – Plans for Cash Management based 100 on known liquidity position 0 – Optimises financial investment and -100 borrowing Liquidity monitoring and information services are required for pro-active management of liquidity 19
  • 20. Consequences of Poor Liquidity Management  Payments Schemes – Deferred Net Settlement – Underwritten by the Bank of England One lump or – Require daily settlement payments via two? Real Time Gross Settlement  Once settlement figure are known scheme participating Banks have ~20 minutes to make a CHAPS payment  Missing a settlement payment is not desirable – Repetition will result in scheme expulsion – CxO will be ‘invited for tea’ at the Bank of England Payment Hub is the architectural component to provide liquidity monitoring services 20
  • 21. Agenda • Payment Hub Overview • Capability Model • Payments Hub Spectrum • Design Issues – Service Granularity – Technology Selection – Canonical Data Zone • Traversing the Spectrum • Liquidity Problem • Review 21
  • 22. Review • Payment Hub Overview  Understand what a Payments Hub is  Benefits it can provide • Capability Model • Introduced the Payments Hub Spectrum • Design Issues in placement on the Spectrum – Service Granularity – Technology Selection – Canonical Data Zone • Issues in traversing the Spectrum • Liquidity Problem – How a Hub can monitor liquidity • Solved the Credit Crunch?  Not quite…..  But by designing Payments Hubs for our major banks I hope IT make a small but important contribution 22
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