The industry’s payments ecosystem is developing rapidly in response to increasing consumer demand for faster, smarter payments.
The need for real-time payments was accelerated by the global pandemic — but most banks are moving far too cautiously to respond to market demand, whether that is P2P, B2B, B2C or other segments. Currently, The Clearing House’s RTP® network is the only available real-time payments platform, while the Federal Reserve’s instant payments service, FedNow℠, is in a pilot phase with plans to launch in 2023. FedNow will equip financial institutions of all sizes with the ability to facilitate secure and efficient real-time payments round the clock.
For most banks, operating on core legacy technology has created a payments infrastructure that is heavy-handed, disjointed, costly and difficult to maintain, with no support for future innovation. Most banks, fearing the cost and effort of modernization, have settled for managing multiple payment networks that connect across disparate systems and require the support of numerous vendors. With the introduction of real-time payments, can these new payment rails afford to be a mere addendum to the already-byzantine payment architecture of banks?
Answering “yes” begets more questions. How resilient will the new offering be on the old infrastructure? Can banks afford to be myopic and treat real-time payments as a postscript? Are short-sighted payment transformations elastic enough to accommodate other innovations, like the Central Bank Digital Currency (CBDC) that are in the offing?
Preparation starts with an overhauling of payments infrastructure. If banks are to place themselves at a vantage point, with a commanding perspective into the future of payments, they should consider the following as part of the roadmap to payments modernization:
- From transactions to experience. Payments are no longer merely functional transactions; they are expected to provide qualitative attributes like experience, speed and intelligence. Retail and business customers increasingly demand frictionless and intuitive real-time payments, requiring banks to refurbish the payment experiences delivered to clients.
- The significance of payment data. The ISO20022 data standard for payments is heavier and richer compared to legacy payments data, and is expected to be the global norm for all payments by 2025. Banks are under increasing pressure to comply, with players like SWIFT already migrating to this format and more than 70 countries already using ISO20022. Payment solutions that can create intuitive insights from centralized data stored in ISO20022 format, while also being able to convert, enrich and validate legacy messaging into ISO20022, are essential. Banks can benefit from innovative services like B2B invoices and supply chain finance, as Request for Payment overlay services is a key messaging capability for customers of real-time payments.
- Interoperability of payment systems. The interoperability between payment systems will be an imperative, especially with the ecosystem of different payment rails that banks have to support. Interoperable payment rails call for intelligent routing, insulating the payer and payee from the “how” of payment orchestration, and paving the way for more operational efficiency. Operating costs account for more than 68% of bank payment revenues; centralizing the management of multiple payment networks through an interoperable payment hub allows bankers to minimize these costs and improve their bottom lines.
- Streamlining payment operations. Work stream silos lead to fragmented, inefficient and redundant payment operations, including duplicated fraud and compliance elements. This is where payment hubs can add value by streamlining payment operations through a single, consolidated operation for all payment types. Payment hubs are a great precursor for subsequent modernization: intelligent payment hubs can handle omnichannel payments, as well as different payment types like ACH, Fedwire, RTP and FedNow in the future. This takes care of the entire payment lifecycle: initiation, authorization, clearing, settlement and returns.
- Future-proofing payment systems. Following the path of trendsetters, banks have to equip themselves with future-proof solutions that can adapt to real-time domestic and cross-border payment systems processing multiple currencies. As open-banking trends gain traction, it is important to consider that the winds of change will eventually find payments, too. It is imperative that banks are cloud based and API driven, so they can innovate while being future-ready.
The opportunity cost of not offering real-time payments is becoming more evident for banks, as they wait for their core providers to enable real-time payments. Calls for banks to modernize their payments infrastructure are swelling to a roar; now is the time for banks to define their payments modernization strategy and begin to act.