Real time Payments
| Monica Velez |
13 July 2023
As we introduced in our first post, the time is now for financial institutions (FIs) to start thinking about real-time payments and consider the different areas that might be impacted when introducing them.
For FIs of all sizes, creating a strategy to introduce this payment type is needed to start identifying how to engage and, if not, what the long-term cost of not participating in this type of payment rail will be.
As real-time payments adoption increases, that cost could be significant. FIs are now realizing this is not a “nice to have” service—it’s necessary if they want to be competitive in the marketplace.
Expanding on our last post, we’ll explore four more questions and considerations that FIs should explore when implementing real-time payments, as well as some of the key benefits of doing so.
4 More Areas to Consider on the Path to Real-Time Payments
Last time, we covered user experience, ISO 20022 standard adoption, risk and fraud, and connectivity and technology—but there is much more for FIs to prepare for when building plans to implement real-time payments, including the areas we’ll explore in this second edition.
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Funding, Settlement, and Reconciliation
Regardless of the real-time network used, financial institutions will need to review and revise current funding, settlement, and reconciliation processes as needed. It doesn’t matter if the funding is done via a pre-funded account, with their master account, or even with a funding agent—real-time processes and controls need to be in place to ensure obligations are met.
Due to the nature of real-time transactions, liquidity management needs to be closely monitored; liquidity can increase at any time during the day, at short notice, outside of business hours, or on weekends. Current systems and processes that utilize regular business hours or depend on end-of-day processing will be impacted.
Considerations around settlement might also play a part. It is important that FIs understand the different options both networks provide. The crucial fact to keep in mind is that settlement between financial institutions is immediate. The final funds between payer and payee’s FIs’ occur with the transmission of the payment message.
In addition to updates to funding, liquidity, and settlement, changes in reconciliation processes will be required, like:
- Introducing new transaction codes to differentiate these transactions from other types of transactions
- Extra efforts to handle invoice reconciliation with payment (e.g., a company responding to a Request for Payment [RFP] can either accept the request in its entirety, or select only certain items in the invoice to pay immediately)
- Reporting and Data Analytics
Often, reporting can be an afterthought, but when deciding to offer real-time payments products, this should be a fundamental area to define. The richness of the data that travels along with the transaction will be vital for financial institutions to get more insight into their customers’ behaviors. This data will also allow FIs to see how they can add value to their customers.
As part of a broader real-time payments strategy, FIs will need to understand how this new data will be consumed and processed within the organization. This includes:
- Identifying how this data can be integrated with current data coming from other payment types, and who will consume it and act upon it
- Asking whether there will need to be new systems and integrations to provide the reports and insights the business needs to understand the customer
- Operational Support
Operational support covers the infrastructure/connection support, and the back-office processes, teams, and applications that will be impacted when introducing this new payment type. On the infrastructure side, planning for better systems resiliency and stability (knowing that there will be millions of transactions executing instantly), and making sure systems are prepared for constant volume is fundamental to proper recovery processes.
In the back-office space, it is important to identify the challenges this new payment type will bring on the current systems, processes, and the teams involved in supporting these payments. This new environment means a shift from working in a batch environment to an instant one. In some cases, this may require modernizing processes, automation, and introducing more dynamic software to manage transactions at scale.
- Customer Education
Finally, customer education is an essential consideration to increase the adoption of real-time payments. Financial institutions should consider creating a clear communication plan promoting the advantages, benefits, and risks of this payment type for different customer segments.
What to Gain
For many financial institutions, the idea of starting down the real-time payments road might be full of unknowns and fear of increasing internal costs due to the potential impacts on processes and technology.
However, the benefits of implementing real-time payments are plenty:
- Acquire new customers: Providing advanced payment options integrated with traditional payment services will help attract new customers.
- Gain better insight into customer behavior: Real-time payments provide more detailed transaction data that will help FIs move toward a data-driven model and offer more targeted products that will help improve/customize financial services offerings.
- Reduce manual reconciliation and exception processing.
- Gain a competitive edge and create new revenue streams.
- Help small businesses and corporates improve account receivables by:
- Enhancing cash forecasting by having a real-time view of cash positions.
- Accelerating DSO by having instant payment acknowledgement, transaction data linked with remittance information, and two-way communication with customers around the transaction.
Moving Forward with Real-Time Payments
Overall, what we’ve seen in the market is that the most successful real-time payment adoptions are those that are planned, defined, and designed to fit each FI’s unique and specific needs, taking into consideration all the impacted areas within the organization.
Successful implementations can also include an implementation partner with the experience and knowledge to guide an FI through this new era of faster payments using a holistic, customer-first approach.
To learn more about the current state of global payments, including real-time payments, download Endava’s Global Payments Report.
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Monica Velez
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.
