Wire payments have come a long way since they were first used in 1871 as a way for people to transfer money electronically between a handful of big cities in the United States.
Today, wire transfers represent most value exchanges in the United States and a core banking services for industries ranging from real estate to capital markets.
In 2019, wire payments accounted for approximately 85% of the $1.4 quadrillion worth of payments made in the U.S. (a quadrillion is a 1000 trillion).
During their 150-year history, wire payments and their networks have been at the forefront technology in financial services, including allowing customers to send some of the first emails and voicemails.
Now, wire services and payment services in general are going through another period of innovation and modernization.
The drivers for modernization
A number of factors are driving modernization.
Customer demand is a major driver: business customers, like consumers, are demanding faster, more transparent and cheaper payments. They are also seeking more digital, “straight-through” customer experiences.
With volumes rising faster than revenues, improving operator productivity and reducing the cost of payment processing are important modernization considerations.
Resiliency has become a primary concern during the pandemic. The increase in volumes, and the sudden shift to remote work models, caused some high-profile payment system outages and business continuity challenges during 2020.
Banks are also gearing up for future changes to the Federal Reserve’s FedwireTM Funds Service. These include a migration to the ISO 20022 standard, and the eventual expansion of settlement hours to a 24x7x365 model to support the FedNowSM instant payments service.
What’s holding banks back?
To modernize effectively and meet customer and market demands, banks must increase their investment in digitalization.
There are many avenues to accelerating digitalization, including the adoption of cloud, Application Program Interfaces (APIs) for better connectivity between corporate ERP systems and banks, and using artificial intelligence, automation and data analytics to better understand customers and provide superior services.
Legacy systems, and in particular legacy wire systems, are one of the biggest impediments to banks achieving their digitalization goals. Many older systems cannot be updated to meet the volume, efficiency, and futureproofing needs of modern wire processing.
As a result, banks are beginning to replace ageing and cumbersome legacy wire payment systems as part of larger digital transformation programs.
Banks have two main ways to provide wire services to their customers.
Larger banks will have usually their own direct connection to Fedwire and CHIPS, via a software interface, with wire payment systems running in private data centers.
The second and more common way is to use a third-party service provider (or a correspondent bank) as a gateway connection and front-end interface to Fedwire and CHIPS.
In recent years, a new paradigm for wire processing has emerged, enabled by cloud computing, and based on the Software as a Service (SaaS) platform model. Platform approaches range from providing the entire bank experience at scale (“Banking-as-a-Service”) to the provision of an entire product capability, such as payments, through a cloud “Payments-as-a-Service” (PaaS) environment.
Platform and PaaS approaches have a democratic appeal to institutions in every tier of the asset size spectrum. By adopting wire processing as a service in the cloud, banks can bolster their overall digitalization programs, and address the productivity, resiliency, and future-proofing needs of their wire payment businesses. This promises to pioneer a new and exciting era for providers of wire payment services and their customers.