As U.S. banks focus on business continuity and keeping money flowing through a rapidly contracting economy, it is unlikely that many will be spending much time pondering the future of real-time payments.
After all, the coronavirus is battering the economy. In a little more than a month, between Mid-March to Mid-April about 26 million Americans registered for unemployment benefits, raising fears that the global epidemic may cause an economic crash more severe than even the Great Depression.
However, now is still an appropriate time to discuss the state of bank payment systems—indeed, in some ways more appropriate than ever.
Bank payment and back-office IT systems are under growing pressure to distribute loans and stimulus payments fast, to help struggling businesses survive the next few months and hopefully beyond.
The growing demand for payment services is straining banks’ legacy payment infrastructure, some of which can be thirty-plus years old.
For all the talk in the U.S. and elsewhere about how financial technology companies (“fintechs”), and technologies such as artificial intelligence, will disrupt traditional banking and usher in an era of 24×7 instant payments, the reality is far different.
Real-time payments in the U.S. and many other countries, are far from standards, despite major advances in payment technology and the automation of many tasks in the payment and clearing cycle.
Reasons to be cheerful
However, there are some encouraging signs.
Around the world, payment markets are rolling out real-time payment networks.
Europe already has the Target Instant Payment Settlement (TIPS) and RT1 schemes live. Canada is creating a new real-time payment infrastructure.
In the U.S., The Clearing House (TCH) RTP® network is now in its third year of operation, with over 50% of U.S. accounts already connected to RTP.
To further expand the range of options available to U.S. consumers and businesses, the Federal Reserve is due next year to extend the operating hours of its Fedwire® payment service, and is expected to introduce a 24×7 real-time payment service within the next few years.
New payment platforms − such as Visa’s B2B Connect, a cross-border corporate payment system running on blockchain technology − are emerging.
The move to real-time payment services is being supported by industry standards such as ISO 20022 (a messaging standard for electronic exchange of data between financial institutions).
And, the price of real-time payments has begun to fall.
Is the curve too flat?
Despite these encouraging developments, adoption has remained slow in the U.S., primarily because there is no regulatory requirement to offer real-time payments, and—particularly in the current pandemic environment—budget priorities are being directed elsewhere.
Associations such as the Faster Payments Council are enabling the industry and vendors to collaborate to raise awareness of the benefits of faster payments, and to resolve the issues that are inhibiting broad adoption in this country.
Are bank IT systems prepared?
While all banks will need to conform to the same rules operationally, some will struggle to get all their business processes to work around the clock. Doing so impacts not only the payment system, but core banking, channels, and every other component and department involved in providing payment services.
Also, the move to ISO 20022 is a major task for banks’ IT and operations.
ISO messages enable substantially more data to be bundled into transactions (for example, remittance data, extended payee information, supply chain data, and so on). While financial institutions can opt to just translate messages to the new format, that is not a viable response in the long term.
Sticking with already creaking, on premise, legacy systems is not viable in the long-term either.
The answer is in the cloud
The alternative? We at Volante believe the future of payments, particularly real-time payments, lies in the cloud.
Cloud-based payment services are more cost-effective than on-premise ones, requiring fewer resources to operate. They are more resilient because computing power can quickly be ramped up to meet surges in demand. They are also easier to maintain and keep current with the latest features.
A growing number of banks are realizing the importance of modernizing their payment services with real-time payments, and are seeing the cloud as the fastest way to achieve this.
In response to this demand, and to make cloud-based payments services accessible to banks of all sizes, we have launched a free, cloud-based real-time payment service.
Our service runs on Microsoft Azure, and we can get it up and running for your bank within 60 days or less, for free. So, no expensive and complex software integration or up-front capital expenditure costs.
We appreciate that it is not business as usual now. But when COVID-19 recedes and we can hopefully return to something closer to normality, banks will face growing pressure to improve their payment services.
Delaying decisions about updating old payment systems could be a very costly one. In the long term it could even pose an existential risk to some banks as customers demand fast, simple, and reliable real-time payment services to match an increasingly on-demand world.
What’s your view? Email us.