ATM provider NCR recently announced its acquisitions of Digital Insight and Alaric, which highlight the shift away from legacy infrastructure as banks and other payment providers increasingly focus on payments transformation. The move to an omnichannel banking environment is increasing the need for significant investment in payments infrastructure, including payment switch platforms, and a host of vendors are now keen to seize this opportunity. This may significantly raise the competition levels for dominant switch vendors such as ACI and FIS.
Newer platforms such as Alaric's Authentic switching platform are notable for the added levels of flexibility and configurability that they offer payment providers, with much of this functionality centered around a payments hub approach. Most switch platforms are now pursuing hub strategies in one way or another, and legacy platforms have little choice but to adapt. As payment hub capabilities become more common, the ability of banks and payment providers to provide a wider range of payment services will increase.
The drive toward omnichannel strategies in retail banking is driving demand for payments transformation, and a growing number of payment players such as NCR and Ingenico are expanding their overall payment capabilities to capitalize on this demand, through both organic growth and strategic acquisitions.
NCR's recent high-profile acquisitions of Digital Insight and Alaric, for $1.65bn and $85m, respectively, are an attempt to reposition NCR as a full payment software provider with a "complete enterprise stack of solutions." While Digital Insight focuses on outsourced online and mobile banking services for mid- to lower-tier banks, Alaric provides NCR with a platform aimed primarily at internal payments infrastructure, with its Authentic platform for payment switching and Fractals platform for fraud detection. Alaric's cross-channel activity, including in the retail and hospitality space, further feeds into NCR's overall cross-channel strategy in shifting from a hardware to a software and services provider.
As payments diversification and banking through digital channels continues to increase, a growing number of vendors are now expanding their capabilities into ancillary markets to seize the opportunity. For smaller mid-tier financial institutions and service providers, the growing complexity caused by payments diversification and demands for omnichannel strategies means there is also growing demand for single-point end-to-end service providers. With its recent acquisitions, NCR is attempting to position itself in this space across channels.
The growth in demand for a single-point vendor capable of meeting a variety of needs is also a result of the need for payments infrastructure to be more flexible and channel-agnostic. As payments become more diversified, providers are increasingly keen to use platforms that enable greater flexibility and configurability to help simplify the existing infrastructure and enable changes to be made more easily in future.
In our forthcoming report Ovum Decision Matrix: Selecting a Retail Payment Switch Platform, we highlight the way in which Alaric's key switch platform, Authentic, uses a service-orientated architecture and is designed to serve as a generalized payment platform capable of routing and switching a broad variety of transaction types beyond traditional ATM and POS transactions. These include those for online gateways, transport ticketing, device driving, and POS-based financial services, all through the same switch instance. The Authentic platform is heavily focused on configurability, making it more flexible and future-proofed for emerging payment channels and types.
Alaric's configurability and flexibility in its design, combined with NCR's entrenched position in the ATM space, will give the Authentic platform considerable opportunity to grow as it gains market visibility and resources. The payment switch market is understandably a conservative sector, where reliability and track records count for a lot. The support of a strong brand name, a cross-channel go-to-market strategy, and flexible design suggest Alaric's market impact has the potential to increase significantly in the near to medium term, and provide banks and payment providers with a wider choice of options beyond the dominant incumbent switch platforms.
As omnichannel strategies gain ground across all tiers of payment providers, payment switch platforms have little choice but to adopt a "payments hub" approach to their switch platforms. These payment hubs are designed to be channel-agnostic and simplify existing complex infrastructure by centralizing them through the hub. This leaves legacy providers in a position where they must adapt or die.
Newer platforms such as ACI's Base24-eps, BPC's Smartvista, and Lusis Payment's Tango all aim to provide a wide range of functionality in a highly modular fashion. In many instances, functionality can be deployed on a wraparound basis, leaving the core ATM or POS payment switch intact, albeit with an eye on its eventual displacement. This can ease the payment transformation process while also adding much-needed functionality. Interestingly, even older platforms such as FIS's Connex, Cortex, and IST platforms are following a similar pattern, with these more established platforms increasingly marketed as part of a payments hub. Although the legacy platforms themselves remain relatively unchanged, other applications and software packages from FIS are being designed to work in conjunction with these switches to create a hub-like environment.
Although it seems to be a technical issue, the growth of the payments hub as a model for payment switch infrastructure has wide-ranging repercussions for the wider payments environment. The added flexibility and open functionality of a hub approach greatly increases the range of services that can be provided and lowers the complexity of launching new payment services. This will lead to an overall increase in payments innovation with long-term effects on the payments landscape.
Gilles Ubaghs, Senior Analyst, Financial Services Technology
On the Radar: Alaric, IT003-000568 (July 2013)
The Strategic Implications of Mobile on the Payments Market, IT003-000574 (September 2013)
"Banks' existing relationships give an advantage in mobile payments," IT003-000563 (May 2013)
"Third-party services can help banks stay relevant in mobile payments," IT003-000570 (July 2013)
"Banks are missing the opportunity in remote mobile payment services," IT003-000585 (October 2013)
Ovum Decision Matrix: Selecting a Retail Payment Switch Platform (Forthcoming)
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