Embracing digital payments

In an increasingly digital age, and with clients becoming ever more reliant on technology, it is essential that insurers embrace new technological advances in order to remain relevant. However, given that the insurance market relies heavily on paper-based transactions, facilitating a move away from manual processing will continue to be a challenge.

The cheque is one of the most commonly used means of transferring money for insurers, and as Spencer Rhodes, director of insurance at Barclays comments: “The fact that change hasn’t occurred more quickly is largely due to a lack of incentive to invest in better payment infrastructures. But, slowly, change is happening.” During this transition period, however, the cheque still poses a number of potential problems for insurers.

The challenges surrounding cheques

It is crucial that insurers understand not only the benefits of moving to a new, digitalised system, but also the risks of falling behind the times. The use of cheques can open insurers up to the risk of fraud, while also limiting the potential of working capital as cash must be held on account for an indefinite period. As Rhodes explains: “Insurers can’t invest the cash to get a decent yield on it, as they don’t know when their client is going to be banking the cheque.”

Insurers working internationally are faced with even more operational problems than those processing cheques solely in the UK. Once a cheque is sent between countries, it becomes a cross-border instrument and, therefore, is subject to a range of charges and delays. Even within the EU, there is no common cheque clearing process.

“A cheque sent between France and Germany could take several weeks to clear and may incur significant costs,” says Bill Wrest, director, non-bank financial institutions. “Each country has its own cheque law and rules on irrevocability, so the use of cheques is laced with the potential for fraud.”

Adding to this, Rhodes highlights how the “switch to digital processing can reduce the chance of falling victim to fraud. It can also provide financial benefits for insurers by cutting back on operational costs, as well as ultimately improving the underlying client experience”.

This message is now filtering through to insurers and there is an understanding within the industry that it must move away from its reliance upon cheques. For those willing to make the change, it presents a valuable opportunity for insurers to reduce pressure on their bottom lines by creating efficiencies in their back office functions, particularly in an uncertain economic climate.

Operational efficiency for corporates and clients

Despite the challenges facing insurers who are looking to modernise, technological improvements are something that the industry is taking seriously, particularly in relation to mobile technology. Several insurers are creating roles, such as head of digital marketing and head of enterprise architecture, to address the shift towards mobile technology.

Many insurers have looked at creating their own mobile applications with limited success, but several are now looking at near field communication (NFC) technology, and are accepting payment via mobile phone swipe, according to Rhodes.

More and more insurers are engaging with innovative payment solutions. One example is in the way breakdown companies are paid. Barclays Pingit, the new mobile payments solution from Barclays Bank, allows customers to scan a QR code to make an instant payment to the breakdown company, instead of providing payment via cash or cheque. Breakdown companies are now using the app to allow their customers to cover their repair costs at the roadside, proving that mobile technology is an efficient and immediate payment method for both the corporate and the client.

This kind of solution can offer significant benefits to insurance companies in terms of reducing paperwork and improving payment processing time, while also providing the convenience that modern customers are demanding.

Rhodes suggests that, in the future, “for travellers, we could get to the stage where you can scan an advert with your phone at the airport and instantly purchase a basic form of holiday insurance. This is something that we see as being a possible next step for certain lines of insurance”.

If mobile payment technology is embraced, the client’s experience with a company will also be positively impacted. Wrest even envisages a time when insurance companies might use technology such as Barclays Pingit to send immediate compensation payments to their customers, as soon as a claim has been approved.

By using mobile technology, insurers can also gain invaluable demographic information about their clients, adds Wrest. “This allows insurers to profile their customers in terms of what they are purchasing and why they are doing things in a certain way. This is not possible through the use of cash or cheques.” Such feedback will enable insurers to progress their product offering in a way which focuses on their customers’ needs and current purchasing trends.

Resistance to change

Reforms in payment processing are being hampered by legacy systems and outdated processes within insurance companies. Changes are being made, with some insurers moving across to the Faster Payments service, which allows them to send money to their clients more quickly. Not only does the use of such systems provide benefits for the insurer, but it also supports an improved client experience as well.

There have been other setbacks in reducing the use of cheques by insurers. In 2011, the Payments Council decided against closing down the cheque payment infrastructure, meaning that there was less incentive for companies to move away from cheques.

However, as easy as it may be to stay with this paper payment method, the cost per cheque is about to rise for insurers. The cheque infrastructure will receive limited additional funding in the future, and the B2C market is seeing double digit declines in the usage of cheques. With a fixed base cost of the infrastructure “this will lead to an increase in the unit cost of a cheque, hitting the bottom line of insurers”, comments Rhodes.

Barclays is planning to take a leading role in allowing insurers to make improvements to their payments processing. The bank has adapted its corporate mobile payments offering, Barclays Pingit for corporates, to suit the needs of its insurance clients, allowing policy holders and investors to purchase or renew products and services (such as car insurance and ISAs) by scanning a QR code.

“We are now looking at disbursements and the ability to send claims payments to customers via Barclays Pingit. This will start to make huge inroads into the reliance upon cheques,” says Rhodes.

Spencer Rhodes is a director in the Non-Bank Financial Institutions Team at Barclays. He can be contacted at: spencer.rhodes@barclays.com

Bill Wrest is a director in the Non-Bank Financial Institutions Team at Barclays. He can be contacted at: bill.wrest@barclays.com