The rapid pace of changing customer expectations, competition from fintechs and the promise of real-time payments (RTP) are the new normal for banks.
In part one of this blog series, we covered the current U.S. outlook for real-time payments, as well as some of the key use cases driving banks to consider investments to modernize legacy systems and incorporate RTP capabilities. Here, we will review the challenges banks face when implementing RTP, and important lessons learned.
Let’s review the challenges banks face when implementing RTP:
Strategic challenges: As mentioned in part one, The Clearing House (TCH) is helping banks connect to their data center — either directly or through third-party service providers (TPSP). But this requires banks to select one strategy over the other, which has major implications on the underlying technology.
TCH recommends banks asses their own technology stack and technology provider before deciding on the appropriate strategy. Many banks prefer to engage with their existing technology partners, which are already helping with core banking, or payments hub implementations. Choosing a strategy is a critical decision for bank leadership when exploring real-time payments.
Interoperability challenges: Given that the solution is built using ISO 20022 standards, providing interoperability is still a limitation that requires initiative to operate within national borders, which is why interoperability has such a limited role to play. Also, for ease of transaction and settlement, the use of regional currency is only allowed by each national real-time payment scheme.
Technology challenges: Real-time payments must be available for customers even after normal business hours. Banks still running on legacy systems create limitations, since most are still highly dependent upon processing payments in batches and through established systems.
These systems are typically not fast enough to handle each transaction end-to-end at an individual level, including processing, settlement and reconciliation. High availability of the infrastructure is equally important to handle the volume at any point of the day — which continues to be a nightmare with legacy systems. In order to offer real-time payments, banks must address their legacy systems by analyzing how much to implement these services without disrupting current services.
Here’s what we learned
Real-time payment initiatives are works-in-progress on a global scale, and every implementation may differ due to varied capabilities. However, there is an opportunity for these players to embed learnings into their development lifecycle from those who have already implemented similar solutions.
Fraudulent transactions: When implementing real-time payments, banks must identify and mitigate a fraudulent transaction that might be happening at a lightning speed. The ability to identify such transactions in real time requires complex analytical capabilities and use of artificial intelligence and machine learning to be able to assess the transaction and provide predictive insights in real time.
Consistent data formats: When considering real-time payments, it is important for banks to understand that they do not need to re-invent the wheel. ISO 20022 is the standard that is well tested and using it allows a real-time payment network to immediately become ubiquitous due to its global prevalence.
Solution scalability: It is important to note that every RTP system introduced globally has started with low volumes but gradually these volumes have increased beyond expectations. If the solution is not performance-tested to handle large volumes, it may run into an operational catastrophe. Real-time implementers must gather insights and patterns to help them scale-up the solution when the need arises.
Channel Agnostic: While implementing an RTP solution it is important that banks remain channel agnostic and provide a consistent experience to their users. Because the use of smart wearables and mobile banking is growing very fast, the concept of “mobile first” is now at the core of every application development process.
Customer mobility and information availability is driving this focus, so banks will have to analyze its technology stack and ensure that channel siloes are bridged.
Complaints handling: Last but not the least, banks will have to identify ways to manage consumer complaints and queries to avoid regulatory issues that could lead to additional expenses to adjust the system. The account switching service is the best example of real-time payment redirection and the effectiveness of bank’s customer responsiveness.
The inevitability of real-time payments
Regardless of the challenges banks face, real-time payments are becoming a reality, so leaders need to prepare accordingly. The lessons learned above will help guide implementation.
Real-time payments will require an investment — both in technology and process — but they will allow banks to remain relevant as consumer expectations and increased competition drive change.
These systems will help reduce costs and improve system effectiveness by decreasing dependency on cash/checks. However, banks will need to quickly identify opportunities to generate alternate revenue streams for real-time payments. The potential lost opportunity costs are too great for banks to ignore.