Since the introduction of ACH payments around forty years ago, the infrastructure of the US payment system has remained relatively stagnant. The last few months, however, have seen a significant shift – arguably the most major since the 1970s – with large banks accelerating the adoption of real-time payments (RTP) schemes. Indeed, an Ovum report from late last year found that 50% of US commercial banks plan to increase their IT spending in 2018 to facilitate RTP.
At the forefront of this trend, which is being actively encouraged by the Federal Reserve and National Automated Clearinghouse Association (NACHA), are the 25 banks associated with The Clearing House (TCH), which have all pledged to adopt RTP by the end of the year. BNY Mellon and US Bank have already completed their first RTP transactions, with Citi, JP Morgan, and Sun Trust soon to follow suit. By 2020, THC hopes to offer ubiquitous access to RTP across the United States, making the US and North America the largest RTP market in the world.
Legacy challenge
Real-time, or near-real-time, payments have long-existed elsewhere in the world. The UK for example introduced its ‘Faster Payments’ scheme way back in 2008, which initially reduced payment times from several working days to several hours and, today, a norm of just several seconds. By comparison the US has been relatively slow to move forward, and this can perhaps be explained by several factors, not least of which are the plethora of technical and operational challenges banks face in adapting their legacy IT systems for RTP, and the sheer number of banks and financial institutions operating here.
Indeed, introducing RTP may, for many banks, feel like a gargantuan task; new real-time payments schemes will need to co-exist with others, adding to the burden of managing multiple IT environments with the resultant effect on costs, controls, maintenance, risks and security. Payment solutions capable of ‘bridging the gap’ between legacy batch systems and the always-available requirements of an instant payments environment will certainly be attractive to banks looking to capitalise on the significant growth potential of real-time payments. Techniques such as stand-in mode and account mirroring can help achieve this.
Real-time monitoring and powerful dashboards are essential – how does the bank monitor its performance? Is it processing the transactions within the required time-frame? What are the peak days and times – these capabilities and insights are important for system planning and provisioning. In addition, the ISO20022 standard on which TCH’s scheme is based will be unfamiliar to some banks, so planning needs to be undertaken now to assess how new formats can be integrated.
Inter-bank real-time payments is great, but what about the corporate experience? How will they get connected to banks in real-time to enjoy their slice of the real-time pie? What will the interface between the corporate’s ERP and the banks’ corporate channels look like? Again, banks need to consider how they will provide these services to their corporate clients.
Intelligent fraud detection
Solutions that combine the connectivity, real-time payments processing, and fraud detection capabilities will prove increasingly popular as banks struggle to adapt their existing patchwork and more leisurely compliance processes with the very small review times allowed in a real-time processing environment. The challenge of payment fraud detection is heightened in a real-time environment, and the ability to leverage the unique pattern detection and self-learning capabilities of Artificial Intelligence technology will become essential as banks look to enhance fraud detection and prevention.
The advantages for customers – such as an increase in efficiency, transparency, convenience, and financial control – are many. It is already established that RTP have a lower cost-per-transaction than real-time gross settlements (RTGS), and the reduction in transaction time from days to seconds will help ease the liquidity problems that so many small and medium enterprises cite as a foremost concern. These benefits will, in turn, help banks develop a closer relationship with their customers, particularly in the business sector.
Partnerships
If banks haven’t already undertaken a more fundamental strategic review of IT investment and infrastructure, now is probably a good time to do so. The market expectation and demand for real-time is increasing and inevitable. While a complete overhaul is unrealistic, you can look at enterprise-wide investment and distinguish between high and low value schemes, costs and commercial and strategic partnerships with third-party solutions providers. Solutions capable of filling the void between legacy batch systems and the always-available requirements of an instant payments environment will be an incredibly attractive option to consider.
Real-time payments can be the catalyst for a new wave of innovative corporate banking, payments and cash management services. The banking ecosystem certainly faces significant challenges in the near-term, with an imperative to go beyond the old ‘business-as-usual’ approach in order to adapt and innovate to meet the pivotal digital transformations that are impacting how business and consumers make and receive payments. Another advantage of the ISO 20022 format on which US real-time payments are based is that much more transaction information can be passed through the payments chain. This component within itself means that a plethora of potentially revenue generating products and services can be built on top of the payment instrument. When this new extra data is coupled with processing through powerful analytics and AI tools, a new world of value-add services is opened up.
For smaller financial institutions, there is compelling value in looking at combined, pre-integrated real-time payments and financial crime compliance systems – removing the headache of integration and the need to support lots of vendor contracts. Likewise, real-time solutions that are part of more holistic and larger payments hub solutions supporting multiple payments types can bring real competitive advantage and efficiencies.
How can these be accomplished? This will likely involve collaborating with proven fintech partners – ones that have both the technology and payments domain pedigree. Rather than view the fintech community with competitive suspicion, successful banks have increasingly looked to strategically partner with domain-experienced, agile, and innovative financial technology partners to help them along their digital journey.
It will be the forward-thinking banks, able to see a perhaps longer-term opportunity to innovate and develop new business products and services, that will be the true beneficiaries of RTP.