Real-time payments processing is one of the fastest-moving developments in the financial industry. Consumer and business preferences for real-time payments have led to a steady flow of announcements about new payment networks and service providers.
The Clearing House (TCH) launched a real-time payments network in 2017, that, by August 2020, had reached 54 percent of U.S. demand deposit accounts. The Federal Reserve also announced plans to develop and launch the FedNowSM Service real-time payments system by 2023 or 2024.
Whether the preference is payments innovation or protecting existing business, analyzing payment systems and infrastructure can help financial institutions prepare to meet the demand for instant payments.
Consumers want a consistent way to quickly move money, whether it's to pay a neighbor or make a last-minute bill payment. The same applies to corporate customers seeking streamlined banking processes. Real-time payments help businesses manage cash flow by holding onto funds until the moment they must be disbursed, similar to just-in-time inventory practices. Fund recipients, such as contractors, suppliers and hourly workers, appreciate the immediacy of real-time payments.
Financial institutions that lack agility risk losing to new and innovative market entrants.
With their infrastructure in place, financial institutions can consider how to develop real-time payment capabilities.
Getting Ready for Real-Time Payments
Infrastructure is a critical piece of moving to real-time payments. Many financial institutions have core systems and digital channels that are ready or almost ready for the switch to real time. Others have ground to make up.
To assess real-time readiness, consider four critical infrastructure components:
1. The core banking system – The core banking system is the foundational piece for real-time payments. It has to be able to send and receive payments and instantly credit or debit accountholders. Hard posting doesn't have to be instant, but financial institutions do need the ability to adjust access to funds on the spot.
2. Network connectivity – Real-time payments require connection to a real-time system or network, such as TCH or another gateway, to facilitate payments to and from the core banking system.
3. Digital channel capabilities – Digital channels should be able to display payments and messages associated with TCH or any other real-time network. There are multiple ways to achieve connection, such as API calls or database pushes. See what works with existing digital channels.
4. Risk – Evaluating new risks associated with real-time payments is just as important as with any new payment type. Every channel has risk nuances to be reviewed and mitigated.
Given global momentum and rising digital expectations, it's really a matter of "when" and not "if" real-time payments will grow.
Choosing the Right Strategy
With their infrastructure in place, financial institutions can consider how to develop real-time payment capabilities. Some service providers offer turnkey solutions that can be launched quickly and with relatively low investment. Tech-confident financial institutions can build and integrate their own enterprise solutions for a more customized experience.
Many financial institutions are using real-time payments as the impetus for a more cohesive payments strategy, one that combines several payments channels into a single platform or payments hub.
By using one system to manage multiple payment strategies, financial institutions can lower the overall cost per transaction, improve processing efficiency, simplify back-office operations and create a consistent user experience. That approach also serves as a foundation for competitive differentiation.
Hub strategies are usually implemented one payment channel at a time, so connection to a real-time payments network is a reasonable place to start.
Investing in the Future of Payments
Financial institutions that build a payments strategy around future-focused channels such as real-time payments can pace their rollouts and have greater potential to grow with the service. It's still early in the real-time payment product life cycle, which means volume should go up.
Given global momentum and rising digital expectations, it's really a matter of "when" and not "if" real-time payments will grow. Financial institutions that invest in real-time payments now will find opportunities for longer-term return on that investment.