ANALYSIS: CREDIT CARD MANAGEMENT SYSTEMS

IBS MARCH 2005

The House of Cards

Will the in-house or outsource route prevail when it comes to next generation credit card management solutions, asks Kurt Brenneman
After merging to become the largest US credit card issuer, JPMorgan Chase and Bank One announced that, after outsourcing credit card processing to TSYS for two years, the combined bank will move 51 million accounts to an in-house, licensed version of TSYSs TS2 credit car d management system. This development has heartened card management system vendors. The likes of Computer Sciences Corporation (CSC) are confident that the market is now ripe for in-house licensed solutions. According to George Guzman, senior cards industry consultant at CSC, banks want the, speed, flexibility, and control that an in-house solution brings. Where can card banks look for these solutions and is the trend really for bringing things in-house or is JPMorgan Chase an anomaly? For banks that issue credit cards, the credit card management system is the core banking system. It stores all customer accounts and information; authorises car d purchases; posts balance payments; generates monthly statements; and supports customer service. The system is also used to configure and price new products. Whether run in-house or provided by a third party processor, the system is crucial for the growth and success of a banks credit card programme. Two categories of vendors provide these platforms: software providers and third party processors. Software companies include CSC and CoreCard. These companies target card issuing banks and third party processors that provide outsourced card processing to banks. But many third party processors, such as First Data, TSYS, Experian and Certegy, have developed or acquired their own highly scalable and functionally powerful systems for internal use. Some of this set of suppliers will license the technology to key customers that desire to keep their card platforms in-house. CSCs CAMS II has the versatility demanded of card management systems. Used by large banks, such as Deutsche Bank and Nedcor, and by processors, including the newly formed pan-European processing company, SiNSYS, it is designed to process one million or more accounts and to be deployed anywhere in the world. CAMS II was launched in 1998 as the successor to the popular CAMS I system after three years of co-development with IBM and the old First Chicago. CAMS II runs on the IBM zSeries, leveraging IBMs Parallel Sysplex technology, with DB2 as its core database. It can be fully integrated with CSCs Hogan retail banking system. It processes a wide variety of card products, including revolving credit, debit, gift, payroll, commercial, gas, and prepaid cards. CSC predicts that the latter will be a big growth area. CAMS II is EMVcompliant for smart cards. And, since many bank card issuers run a complementary merchant processing business, CAMS II is equipped with merchant processing functionality, including flexible pricing and hierarchical merchant accounting. CSCs hefty services organisation can perform heavy customisation for specific environments. Guzman notes that CAMS II users have found the systems transaction-level pricing and rules-based architecture to be key, so too its support for loyalty programmes. The rules-driven architecture supports new card product development and card customisation for different market segments. CAMS IIs features for real-time processing make the system as efficient as possible. These features include end-of-day random pass, so that only accounts with some activity are processed rather than all accounts every day. It also includes smart triggers, which forecast next processing dates for accounts based on business rules and a 24x7 continuous posting option. Scalability is crucial for card issuing banks, as mergers create gargantuan card portfolios. CSC benchmarked CAMS II at an IBM lab last October, demonstrating that it could scale to 100 million accounts with a peak transaction rate of 1500 transactions per second. Guzman is convinced that CAMS IIs strengths will tempt large bank card issuers to bring processing in-house rather than outsource to gain control. Also betting on this interest is CoreCard Software. CoreCard is the former R&D group of PaySys International, once the major vendor of credit card management systems. CoreCard was spun off as part of First Datas acquisition of PaySys in 2001. While at PaySys, the R&D group had embarked on a project to write a new credit card management system from scratch, while replicating the extensive functionality of PaySys popular VisionPlus card management system on a Wintel platform with a web-based interface and relational database. The platform was built using C++ and an object-oriented approach, breaking down card management processes into two components - accounts and events - with business rules that define how events affect those accounts. The resulting system, CoreEngine, addresses what CoreCards director of marketing and business development, Jacqui Chew, calls the limitations in technology of the card management systems market. According to Chew, the market is commoditised because older systems were written in Cobol and have become both difficult and expensive to modernise. With card issuers reluctant to spend money on expensive upgrades to these mainframe systems, vendors had no motivation to come up with anything new or cheaper. Y2K remediations in the late 1990s further harmed software vendors, as many banks decided to outsource their card processing or even sell their card portfolios rather than painfully upgrade their systems. Using the CoreEngine components, CoreIssue, a bank credit card management system, was built. Chews assertion that new architecture is rare in this market is reasonable. CoreIssue can run on Windows 2000, various Unix flavours, and Linux,

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ANALYSIS: CREDIT CARD MANAGEMENT SYSTEMS

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using any relational database. It supports a range of card types, including consumer, commercial, gas, private label, debit, gift, and smart cards. With rules-based processing, new card products can be created easily. CoreIssue processes transactions in real-time and uses internal workflow for managing accounts. As Chew points out, Everything is a process and they are all integrated. CoreEngine was also used as the basis for CoreCollect, a debt collections system for card issuers. However, at present, CoreCard only has a single, non-bank customer, but the supplier is marketing CoreIssue as both a scalable solution for large banks and a cost-effective platform for smaller banks and credit unions. In the 1990s, CoreCards parent, PaySys International, and its innovative CardPac and VisionPlus systems, dominated the global market, but the Y2K tipping point claimed PaySys as a victim when it was acquired by third party processor, First Data, for use in its international business. Indeed, the PaySys name is gone. VisionPlus is primarily sold outside of the US, particularly in Asia and Latin America, but often as a platform for First Data ultimately to provide outsourced card processing. For example, in 2003, First Data and Banco General of Panama formed a joint venture called Procesa to process bank card transactions in the Latin American and Caribbean regions using VisionPlus. In 2002, using VisionPlus, First Data set up a data centre in Shanghai to offer card processing and merchant processing to Chinese banks. ACET Processing is a similar joint venture in South Africa. Since many countries regulations require that customer information be stored within that country, thereby preventing First Data from using its USbased platform for outsourced processing, VisionPlus gives First Data a scalable, industry-tested, global platform to use in new markets. VisionPlus has traditionally been known for its complete functionality, with modules for transaction authorisation, merchant processing, new application decision making, debt collections, and customer service. It could process retailers private label cards as well as those of banks, which in the mid-1990s was a startling

Business-to-business head e-payments

New research reports by TowerGroup and Celent say that electronic payments are about to overtake paper cheques for business-to-business payments in the US. By 2010, Celent predicts, only 42 per cent of the US dollar value of corporate payments will be made by paper cheque. The remainder will be electronic, with automated clearing house (ACH) payments making up 43 per cent and commercial cards the remaining 15 per cent. Though paper cheques are still the leading type of business-to-business payment, TowerGroup feels that the tipping point is approaching, with electronic payments poised to explode. According to TowerGroup analyst, Susan Feinberg, author of the report, I would project that well reach the tipping point within two-to-four years. It could be on the early end of that range if Nacha rules are changed to allow conversion of business cheques to ACH, which I believe will drive more businesses to start issuing ACH transactions in the first place. Since wholesale banking product development of a significant nature tends to be a multi-year effort, it is critical that banks stay ahead of that tipping point. ACH and commercial card transactions will increase due to more integration with corporate accounting systems, standardisation, and cost savings. According to TowerGroup, US corporations are quickly integrating the parallel business processes that are used to process electronic payments alongside paper cheques. These electronic payments were once the exceptions that required special, expensive treatment, but no more. TowerGroup found that most corporations plan to move to electronic payments within three years. In some cases, corporations are looking to third parties to help them accomplish this by outsourcing their accounts payable and/or accounts receivable processing, Feinberg notes. There are several solutions available in the market that facilitate Order to Pay in a fashion that insulates (to a certain degree) the corporation from the hassles of dealing with multiple payment types and the associated costs. But their ability to completely operate in an integrated, end-to-end fashion requires that banks develop new solutions to address the issue.

development. It was the first system to support transaction-level pricing. The product was eagerly adopted by large issuers such as Citigroup and Household. First Data continues to adapt VisionPlus to the international market, announcing that it would enhance VisionPlus to suppor t issuing and acquiring for the Japanese credit card brand, JCB. A First Data spokesperson indicates that the company continues to fully support the enhancement and development of the VisionPlus platform. The JPMorgan Chase/Bank One decision was a triumph for First Datas main competitor, US-based processor, TSYS. In early 2003, Bank One, which had outsourced the processing of its massive card portfolio to First Data, announced that it would switch to competitor TSYS at the end of 2004, but with a twist: in two years, Bank One would move this processing inhouse with a licensed version of TSYSs TS2

credit card management system. The merger did not change this. Indeed, the giant firm retains an option to migrate the old JPMorgan Chase card accounts inhouse in 2007 as well. Why the switch? It may just be the corporate culture at the new JPMorgan Chase: James Dimon, Bank Ones CEO, will take the reins in 2006 and analysts have noted that he does not like to outsource key operations (this was clear in the notable decision in the second half of last year by JPMorgan Chase to unwind its major IT outsource relationship with IBM IBS, October 2004). In addition, the strengths of TSYSs TS2 platform was another key factor. But, in published research, analyst Aaron McPherson of research firm, Financial Insights, insisted, it signals a fundamental shift toward in-house processing of credit cards. Like CAMS II, TS2 is a mainframe-based system, though it relies on IBMs Information Management System to stor e

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Blue = In-house on VisionPlus Red = Outsourced to TSYS (TS2) (after complete conversion at JPM/Bank One) Green = Outsourced to First Data Purple = In-house on CSC platforms (CAMS I or CAMS II) Yellow = Outsourced to Certegy (Base2000)

account information, in combination with DB2 tables for easier data access. TS2 is noted for its rewards and loyalty points tracking capability, sophisticated transaction authorisation functionality, parameterised product creation, and strong customer information management. TSYS incurs heavy R&D each year to keep TS2 in tune with marketplace demands, working closely with its bank customers. Bank Ones staff felt that TS2s flexibility was superior to that of First Datas platform, particularly in its support for rewards and loyalty programmes. This appeal has extended to Europe. Bank of Ireland recently completed a switch of its portfolio from two in-house systems to outsourced TS2, citing its superior functionality and flexibility. Another high volume system developed by a processor is Experians GEMS, which

was launched in 2000. GEMS, which stands for Global Enterprise Management System, was developed as a pan-European card management system, with a browser-based front-end that could be quickly customised to meet local language demands. Another processor, US-based Certegy, like TSYS and First Data, is seeing more success outside of the US offering its Base2000 platform as an outsourced service. For example, in 2001, National Australia Bank became a major user when it outsourced its global cardholder account processing to Certegy, with 4.5 million accounts to be processed on Base2000. Within the US, Certegy offers outsourced card processing to community banks and credit unions. In many emerging markets, banks ar e testing the credit card waters, and their card portfolios number only in the

thousands of customers. Some banks must purchase credit card management systems because their countries lack a third party processor or because their corporate culture insists they control their own processing. For these banks, a group of vendors sell credit card management systems for non-mainframe platforms, including IBM iSeries, Windows 2000, Unix, and Linux. These vendors include Fiserv (MetaCard), Card Tech Ltd (Prime), RS2 Software Group (BankWorks), Credics (Credics Payment Management System), Nomad Software (Cortex), Tietoenator (Card Solution), GFG Group (UniCard), Euronet Worldwide (ICCS), and Essentis Ltd (Essentis). Whether the decision of JPMorgan Chase/Bank One represents a shift in this market away from third party processors to in-house credit card management systems remains to be seen. Looking at the systems that process the bulk of US credit card receivables (see chart), a thin majority are processed on in-house systems. Below this tier, most smaller issuers in the US outsource their card processing, leveraging the advances in functionality and architecture made by processors like TSYS and Certegy, which would normally be beyond their financial reach. With their international efforts, First Data and TSYS are hoping that this market model will flourish in non-US markets as well.

Publication: International Banking Systems Journal. Editor: Martin Whybrow. This article has been extracted from the International Banking Systems Journal. March 2005 issue 14.6 The International Banking Systems Journal is dedicated to the wholesale, retail and private back office banking systems market and related topics. IBS Publishing. Publishing office: IBS Publishing, 11 Mount Street, Hythe, Kent, CT21 5NT, UK. Tel. +44 1303 262 636 Fax. +44 1303 262 646 Email. info@ibspublishing.com www.ibspublishing.com Copyright IBS Publishing 2005 - Material may not be reproduced in any form without the written permission of the publisher.

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