While real-time or instant payments are not a new concept, the US is still lagging behind in adoption among small- and medium-sized financial institutions.
Volumes from the TCH RTP® rail have been on the rise, and this tendency is expected to continue due to the upcoming FedNow service entering the real-time payments space later this year.
However, some financial institutions continue to be hesitant to engage and offer this type of payment for a variety of reasons, including:
- Competing internal transformation projects
- Not enough resources to drive product development
- IT and project management resource constraints
- The question of how to drive new revenue streams from real-time payments
Increasing demands for speed, transparency, and lower transaction fees from retail and business customers are driving financial institutions to consider leaving those hesitations behind to embrace real-time payments.
In this post, we’ll explore four of the main questions and considerations financial institutions of different sizes must ask when embarking on this journey.
THE FIRST STEPS
Preparation is crucial when thinking about entering the real-time payments space. Exploring opportunities by listening to customers and analyzing current gaps and pain points are just a few of the initial steps financial institutions can take to develop a real-time payments strategy.
Conducting internal discovery sessions to uncover gaps and opportunities is a good way for product owners/managers, business stakeholders, and technology partners to start envisioning the benefits and practical applications for real-time payments and facilitate future expansion for client-facing product development.
Apart from the opportunities, financial institutions must assess current systems and processes and start evaluating how ready the organization is for the logistical and operational implications of a 24x7x365 payments environment. Conversations with other institutions, service providers, and trusted advisory companies will help determine how to move forward, and if the organization will need to engage other parties/partners to offer real-time payments.
TOP CONSIDERATIONS AND CHALLENGES
While technology is a top-of-mind consideration when thinking about implementing real-time payments, it should not become the only driver. Having a clear understanding of all the different touchpoints in the payment process and how they will be impacted by introducing the complexities of an irrevocable 24x7x365 payment is a must.
Here are some of the top areas within the end-to-end payment flow financial institutions must consider:
1. User Experience
Having a seamless payment experience is indispensable in today’s world. Apart from speed, customers are expecting less friction and better experiences. Financial institutions should evaluate and understand how their customers will onboard or register to access products that will use this new payment type. Balancing how much friction to introduce in the channel to reduce risk and potentially fraudulent activity will be another important feature to address.
FIs should also consider clear communication of fees and expectations in terms of payment execution and the introduction of real-time payment status notifications to the customer.
2. ISO 20022 Standard Adoption
The ISO 20022 standard provides consistency and richness of information that flows along with transactions, enabling both senders and receivers to have a more detailed “conversation” about each payment.
The messages in this standard facilitate communication throughout the lifecycle of the transaction: from successful completion to exception communication. The ability to handle ISO messaging will become crucial for financial institutions. Organizations should determine how their systems and processes might be migrated to start “speaking” this language.
Both real-time payment rails in the US (TCH RTP® and FedNow) use this standard. While there is no interoperability between them, the fact that both are based on this international standard paves the way for future development and interoperability. It is important to note this standard is being used by other payment types, such as wires and for cross-border payments (the SWIFT network has a deadline of November 2025 to fully comply).
3. Risk and Fraud
There’s a saying in the industry: “Faster payments…faster fraud.” However, the reality is that fraud is inherent to any payment transaction and is part of the cost of doing business. On average, fraud related to ACH, wire, cards, and checks is higher than fraud related to immediate payments. According to the 2022 AFP® Payments Fraud and Control Report, faster payments (e.g., same-day ACH and TCH RTP®) have 5% of actual or attempted fraud compared to 66% on checks and 37% of ACH debits.
It is now up to the FI to identify and create better customer intelligence strategies by leveraging predictive and behavioral technology to identify patterns and trends in real-time to stay ahead of the fraudsters.
In the real-time payments space, it’s necessary to analyze system readiness to handle instant transaction scanning and verification, and to review operational processes and teams available to respond when quick decisions need to be made. The major shift will be to be proactive instead of reactive when it comes to fraud.
Networks can play a role in helping financial institutions combat fraud, and they have some provisions in place, but at the end of the day, the responsibility lands on the institution. Financial institutions have taken note and are using more intelligent fraud detection systems with adaptive machine learning, artificial intelligence, and customer behavioral analytics to position themselves to handle real-time transaction scanning.
4. Connectivity and Technology
It is important to differentiate between connectivity and technology. Connectivity relates to all the queues, VPNs, MPLs, and other infrastructure requirements needed for the actual connection to the networks. Financial institutions must analyze how they could connect to the network by balancing control, cost, time, and future growth.
Both real-time networks in the US offer the possibility to connect directly or via a third-party service provider. These options need to be evaluated by the institutions to understand which alternative aligns better with their vision. Regardless of the decision, discussions around resilience and scalability are critical to allow the institution to grow.
On the technology side, there are multiple considerations, especially around the “no downtime” premise that this type of payment requires. Normally, financial institutions have some maintenance downtime in their systems to perform certain tasks, so this new premise requires institutions to rethink how to approach those banking processes.
Additionally, all the integration points and downstream systems that will be receiving, processing, or reporting this type of transaction will require additional considerations, as well as the current technology stack and API strategy. For some financial institutions, this also might be an opportunity to explore new and more modern payment hubs that will provide flexibility and scalability.
MORE QUESTIONS TO CONSIDER
From user experience to connectivity, there’s a lot to consider on the path to implementing real-time payments—and each area can make a significant impact on an FI’s success.
In our next post, we’ll explore four more areas that FIs should take into account when deciding to embark on their real-time payments journey, as well as some of the key benefits this payment type can bring.
Until then, for more information about the current state of global payments, including real-time payments, download Endava’s Global Payments Report.
Monica Velez is a senior industry consultant at Endava with over 20 years’ experience in the digital transformation space with a specialty in payments. As an industry professional, Monica has worked with several financial institutions from strategy all the way to implementation of payment hubs, treasury management solutions, and payment processing from ACH to real-time payments. She is passionate about payments and how they can bring benefits to society. When not talking about payments, she enjoys traveling, cooking, and spending family time with her husband and two girls.
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