From a period of ultra-low interest rates for a long period of time, so much so that it was taken for granted that the interest rates will never ever go higher again, to an era where the rates have gone up over 500% and touching 5.25% within a year, the pandemic era has been marked by some crazy moves in the deposits and money markets over the past couple of years. This blog covers only the impact on banks’ fee billing systems and the challenges to handle such gyrations.
There was a time, not in the very distant past when interest rates went from positive territory to below zero!! This essentially meant that banks were being penalized by Fed and ECB(European Central Bank) for maintaining deposits with them. In the absence of any interest-yielding avenues, this forced banks to start charging corporates for parking excess money with them. This inverted the basic business proposition of bank lending where banks earned money from sourcing deposits at a lower rate and lent them to needy corporates at a higher rate with the difference shown as profits. However, the other part of banks being safe custodians of money and provider of liquidity on demand came to the center fore. Large corporates with significant cash flows with no avenues to park excess funds overnight had no choice other than to pay banks for the same service as they needed the safety and liquidity provided by banks.
One part of the Dodd-Frank Act which allowed banks to pay interest on DDA (Demand & Deposit Accounts) had little use in the ultra-low interest rate and negative interest rates regimes, preventing corporates from earning interest on their deposits with the bank. The very purpose of earnings credit given by banks in lieu of hard interest, which resulted from corporate treasurers and banks sitting together to seek compensation for charging various fees on deposits, on which interest payment was illegal, vanished with Dodd-Frank act allowing interest on deposits. Now, with a sudden spike in interest rates of over 5 % within an year, the interest rates have again made a comeback for corporates to earn decent interest on their DDA (Demand & Deposit Accounts).This has impacted several areas of the banks business including their Transaction Fee Billing Systems. One of the few bright spots in the banks in recent years, has been the performance of Global Transaction Revenues of various banks which continued to show an upswing even as other avenues went down. This forced all banks to continue upgrading their billing systems and separate out the charges part from their core systems across various Processors and channels. This “middle layer” pulled data from disparate customer management systems and transaction processing systems and combined the same to provide complex and personalized pricing and billing. These systems also provided a centralized view of the entire customer relationship of the banks and utilized the same to provide differentiated service.
A key challenge banks face is to seamlessly move from charging earnings credit through Legacy Account Analysis or Fee Billing systems to charging hard interest or a hybrid of the two within their current Fee Billing systems. Billing systems should enable easy migration from ECR (Earnings’ Credit Rate) to a hard interest pricing model for specific products or a hybrid model where the accumulated Earnings credit are either set-off against specific fee lines or paid out as hard interest. The billing systems should enable seamless sunsetting of negative interest rates, if provided for the past years and start paying out hard interest or EC(Earnings Credit).
Another challenge being seen is the increasing requirement to have ESG (Environment, Social & Governance) support for banks customers. An interesting use case here would be for banks to partner green projects and start adjusting the accumulated EC (Earnings Credit) towards such projects resulting in “Green Credits” towards ESG (Environment, Social & Governance) norms. The billing systems should facilitate the on-boarding of such partners and projects and also be in a position to offer the Green Credits to its customers. Banks can also use this as a Revenue earning stream for providing its customers the opportunity to earn Green Credits and share a part of such revenue with the partners.
Banks expect their Fee Billing Systems to now provide ability to easily on-board and revenue share with partners and also present partners with a detailed break up of such revenue share to earn the trust of its partners of being fair.
Thus, Fee Billing systems are now converging towards Bank in a box or BaaS (Banking as a Service) model. Unless Fee Billing Systems of banks evolve and support such requirements, banks will be caught on the backfoot and unable to be nimble enough to capture such opportunities.
Do your Current Account Analysis or Fee Billing systems allow such seamless options without resulting in rewiring or hard coding and resulting in huge maintenance and development overheads? Do your customers get to see their Green Credits and contributing projects? Are your contributing partners able to see their revenue share transparently? Are banks able to leverage and be nimble enough to grab such opportunities?
Infosys Revenue Management Platform is a cutting-edge fee billing solution providing banks expertise and ability to launch such personalised service rapidly.