Real-time payments are here. And many banks aren’t ready.

2 April 2020

In the U.S. and across the globe, financial institutions are wrestling with evolving consumer expectations, razor-thin margins and increased competition.

Yet, significant opportunities are there for those who have built a foundation for innovation. Many payments transformation strategies are well underway, working to revamp legacy core architectures to support emerging technologies and business models, set themselves up to harness the power of real-time payments (RTP) and to take advantage of an advancing infrastructure.

The question is – are you ready?

Readiness, deployment and adoption of RTPs varies greatly around the world. In the fast lane we have markets where RTP adoption has been accelerated by regulation, central bank mandates and user-friendly pricing, such as Chile and Mexico. Countries where low bank uptake or overly complex user experiences have stifled growth, like India, naturally sit in the slow lane.

After a steady start, the U.S. is ready to hit the gas and join the many mature markets now comfortably sitting in the middle lane, with RTP on course for 20 – 30% growth. At a recent payments industry event, The Clearing House (TCH) described how “critical mass” for account connections has been reached – an indication that we can expect TCH to start driving volume throughout 2020 and beyond. This momentum will accelerate when the FedNow scheme comes online in a few years. All financial institutions are now in the decision mode of being a “fast follower” and joining the TCH scheme, or being a “patient follower” and waiting for the Fed.

But now that RTPs are here, what does this mean in practice?

It means meeting the customer where they are – with expedited and real-time payroll and (finally) a competitive bank-centric bill payment offering, with the launch of several “Request for Payment” pilots promising to deliver the autonomy, convenience and flexibility increasingly demanded from financial products.

It means not tilting at windmills, such as trying to change entrenched consumer behavior by promoting RTPs at the point-of-sale as a better alternative to cards. It means being open and flexible to use cases that we did not anticipate – such as transferring funds in and out of mobile wallets, which has emerged as one of the leading initial use-cases for retail RTP. B2B payments are also an obvious opportunity, with a staggering 42% still completed by paper check.

The increasing maturation of RTP is an important step in the right direction but represents just one part of a broader journey for banks. In today’s hyper-competitive marketplace, ‘good enough’ is no longer good enough. Enabling the 24/7 real-time delivery of customer-centric, sticky products and services should be a key focus for all financial institutions set on establishing market leadership.

This is not lost on the many banks who are investing in transformation projects. But despite best intentions, it’s clear that some are staying on the same-old technology treadmill. This means the rate of transformation is limited to the speed and capabilities of incumbent core technology providers.

Although transforming legacy architecture and systems can be a daunting prospect, honest and open collaboration is needed to accelerate innovation as there’s no one-size-fits-all answer. On the road to meeting customers’ expectations for quicker, simpler and richer payment experiences, starting the journey in the right direction at the very beginning is the only way to deliver a transformation roadmap that will best navigate, adapt and transform core technology to deliver a platform for future innovation. This is the only guarantee of continued survival.

Building on strong foundations

Along with banks’ own digital transformation initiatives, the foundational enabling industry infrastructures are also advancing to empower banks with new capabilities to deliver for customers.

For example, settlement schemes are expanding beyond traditional business hours in line with the 24/7 on-demand global economy. Thus, as the first step of its modernization, the Fed will make its National Settlement System (NSS) more available. This has allowed NACHA to add a third window to better meet the needs of West Coast financial institutions and consumers. As the Fed continues to evolve NSS, this will allow NACHA and TCH to explore Saturday processing hours and settlements.

The booming information economy is also driving innovation. Despite the absence of formal regulation and official mandates, we are starting to see glimpses of truly ‘open banking’. The recent creation of Akoya and acquisitions of Plaid by Visa demonstrate an increasing focus on securing and managing third-party provider (TPP) access to consumer data.

More broadly, this is an indication that the financial industry is looking beyond transactional-revenue models towards data-driven approaches. For data to be truly valuable, however, it must be machine readable, consistently structured and standardized. The ISO 20022 financial messaging standard, which is being positioned for national adoption in the US, delivers on these requirements. The significance of this shift away from proprietary messaging formats should not be underestimated, so expect ongoing evolution as financial institutions work to meet the specific needs of their customers and solve implementation challenges.

Predicting the future?   

On top of the enabling infrastructure, technological advancement can be carefully and selectively deployed to drive transformation.

Forget the ‘moonshot’ use-cases. As the hype-cycle curve flattens, the practical and immediate value of artificial intelligence (AI) and machine learning (ML) solutions to augment people – yes, really – and existing processes is becoming apparent.

A recent panel at the BAFT Global Payments Conference explored how previously skeptical regulators are recognizing AI and ML tech as vital tools to ease compliance challenges. For example, helping optimize fraud detection to reduce damaging and costly false positives (where a legitimate transaction is flagged as fraudulent), or simplify complex regulatory filings.

Ensuring organizational flexibility and agility to seize the opportunities presented by AI and ML, and other key emerging technologies, should be central to any transformation strategy. But only if they truly add value.

Fighting complexity

The US banking industry, much like the global financial services ecosystem, is undergoing sustained and significant change.

For some, the pace and scale of change will be too much. Financial institutions with simple and practical transformation strategies, however, are well-placed to get ahead of the competition to enable innovative new customer experiences, at lower costs and with reduced risk.

Gene Neyer

Gene Neyer advises financial and technology companies on various aspects of Payment Modernization. He is a current member of the GFFT (successor to the Fed Faster Payments Taskforce) and the president of Supplier Committee at BAFT. Previously, Gene was a Head of Industry and Regulation for Finastra, and an SVP, Head of Product Management for D+H and Fundtech. Gene has almost 30 years of experience in product management and IT Leadership at some of leading financial services vendor and banking organizations. He is a past representative to EBA, Fed, IPFA, TCH and other industry organizations. He has written and lectured on various aspects of global payments, real-time payments and blockchain and is a regular speaker and commentator at business seminars and conferences. Mr. Neyer holds Executive Master in Technology Management from Wharton/University of Pennsylvania and a M.S. & B.S. Degrees in Mathematics from City College of NY.