If we were to pick one word today to capture the mood of U.S. financial institutions around their payments businesses, and particularly wire processing, it would have to be: “resiliency.”
Even as recently as a year ago, the word “resiliency” had relatively little meaning to payments executives. But as we approach the half-way point of 2020, resiliency and business continuity are becoming existential concerns for financial institutions and their payments businesses.
One of the main reasons is that the COVID-19 pandemic has exposed weaknesses in the ecosystem of financial institutions, technology providers, and payment networks that ensure the smooth electronic movement of mission-critical funds from one account to another.
It would be difficult to find a more mission-critical payment channel than the Federal Reserve Fedwire® (“wire”) Funds Service. Wires are high-value payments that settle residential and commercial mortgages, corporate syndicated loans, and capital markets transactions.
2019 saw over 167 million Fedwire® payments executed, with a total daily value of over $2.7 trillion. With the average wire value in excess of $4 million, missed, duplicated, or delayed payments have serious impacts on the ability of banks to support their customers, and on the health of the overall economy.
This is not just a theoretical possibility. In the first half of 2020, due to data breaches at a key vendor in one case, and in other cases financial institutions being unable to transition safely to remote working, a number of payment service providers found themselves unable to process wires, sometimes for multiple days.
The other aspect of resiliency that has come more sharply into focus is with regard to the future direction of the Fedwire® system. Although dates are moving targets, the Federal Reserve has made a clear commitment to modernize the wire payment system in two important ways. Firstly, message formats will be migrated from the current proprietary standards to ISO 20022. Also, to align with the introduction of FedNow, a new real-time payment service, the Fed will be steadily expanding the settlement windows for wires, eventually moving to a 24x7x365 settlement model.
The combination of business continuity stresses and modernization pressures have caused banks to closely examine their systems and infrastructures. They are finding that their current Fedwire® solution cannot be upgraded or modified to deliver the resiliency, reliability, ISO 20022 fluency, and real-time always-on operability that will eventually be required of all wire processing systems.
Fortunately, there is an emerging alternative: moving from on-premise systems or managed service offerings to a modern, cloud-based, payments as a service solution. Long perceived as options only for the largest banks, cloud-based services are now viable options for mid-tier and community banks, helping them reduce their dependency on core and legacy providers.
A case in point is First American Trust FSB, a $4bn-in-assets financial institution that offers banking solutions for the escrow and real estate industries. First American recently selected Volante Technologies’ U.S. Wire Payments as a Service, running on Microsoft Azure, to replace the bank’s legacy Fedwire® processing solution and modernize its payments processing infrastructure.
Robert Lawson, Senior Vice President, Strategic Initiatives at First American Trust FSB, highlighted a number of factors influencing their decision. One of the most important was having “a service-based payments processing capability that would create greater efficiencies within the bank, and enable a superior experience for our clients.” The ability to “quickly roll out new payment services in the future” beyond Fedwire®, such as ACH, SWIFT, and The Clearing House RTP®, was also a fundamental measure.
Caveat emptor however: not all services are created equal. Legacy vendors are trying to keep up by offering their on-premise applications in the cloud, but these are at best rebranded hosted managed services offerings, which cannot deliver either the resilience, future-proofing, or cost-efficiency that banks need.
The best way to deliver maximal resiliency for wire processing is active-active-active cloud deployment with dual Fed connections, based on underlying technology that is cloud-native, cloud-agnostic, and microservices-based. Such services are a natural fit for 24x7x365 operation and ISO 20022 message support, ensuring that bank investments are future-proofed.
Compliance and security must also be placed as front-and-center decision criteria, rather than afterthoughts. Otherwise, the data breaches and system outages that wire rooms across the country have recently experienced will recur.
So if someone were looking to make a mark in the payments industry today, what advice would we give him or her?
Just seven words: “payments as a service in the cloud.”
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