As interest in U.S. faster payments systems continues to grow, so too do the questions and concerns many companies have regarding not just its impact on the industry, but specifically on their own businesses. One area that often gets overlooked in these conversations is the impact of the internal back office on the overall success (or lack thereof) of faster payments initiatives.
The Breakdown of Faster Payments
At its most basic, faster payments refers to payment methods that settle and clear faster than current, traditional payment rails with the goal being as close to near- or real-time as possible. Market adoption of platforms like Zelle and Venmo, and systems like the RTP Network and Same Day ACH (SDA) have all helped drive the idea of faster payments to the forefront of the industry.
Though often viewed as bleeding edge technology, many of today’s current faster payment systems and networks have actually been around for a number of years. Beginning with the availability of SDA in 2016, it was followed-up a year later by Real-Time Payments (RTP) and Zelle, and eventually the branded push payment networks that operate in near real-time like Visa Direct and Mastercard Send. The evolution of these platforms and associated technologies has continued to progress despite what could be considered a slow start. As more banks, credit unions and payment service providers have realized the benefits and potential competitive advantages they provide, interest in adopting and implementing these systems has begun to surge.
A major reason for this increased interest has been the Federal Reserve’s recently announced FedNow Service, its payments solution for 24x7x365 real-time gross settlement (RTGS). FedNow is projected to be online by 2025, with the goal of exceeding all four areas of importance for real-time payments: speed, ubiquity, security, and efficiency.
Faster payments are generally segmented into four different types: B2B, B2C, C2B, and P2P. While the complexity of the transactions can vary within each area, each basically accomplishes the same process of transferring funds from one account to another.
Faster payments are conducted more quickly than traditional systems, thus SDA is faster than standard ACH, which can take up to three days to complete. The challenge, however, is that real-time payments require new rails that can handle and distinguish between posting and settlement and can perform the former in real-time (or near real-time). Unsurprisingly, this comes with its own set of challenges.
The Challenges of Real-time Payments
Today’s businesses stand to benefit greatly from faster payments, but to do so they will need to make some significant changes and investments before these benefits can be fully realized. While most understand the need for an attractive, user-friendly front-end interface to begin the payment process, far too few have considered the back end of these transactions and its impact on the entire flow. What’s more, many companies still rely on legacy back-office systems and processes that are decades old – outdated and ill-equipped to handle the new faster payments environment. This will inevitably create a chokepoint in their systems, bottlenecking all payment settlement. The hard truth is that no matter how fast a payment moves through a network, it still must be processed in the back office, and that is what will ultimately decide the qualitative “speed” of faster payments.
One of the hallmarks of faster payment systems is the ability to transfer funds from a provider to a recipient in near real-time. However, this is a feature not yet supported by traditional payment systems, which operate by creating batches of funds transfer transactions and processing them at set, specified periods of time. While there is some variance in when these batch transactions are processed – from every few days to daily, and sometimes even multiple times per day – they are still not real-time in nature. This means those back-office systems that support, carry out and/or track the actual funds movements (and dealing with the consequences of those movements) must also operate in “batch time.” Ultimately, this means that those traditional back office systems are unable to provide the real-time processing and reporting needed to support a modern, faster payments environment.
In order to truly meet the demands (and the expectations) of faster payments, the industry will need back-office systems that better match the front ends of the faster payments environment – ones that operate closer to real-time. Such systems could allow transactions to be loaded and stored while being processed fully (or as close as possible) to completion so that when a cutover moment arrives and the payments are processed, most of the work is already done. This will allow final settlement to occur quickly, even more so if there are multiple cutoff points throughout the day. Doing so enables the back end of a transaction to be as near real-time as possible, removing uncertainty, and presenting a quick, seamless process to both sender and recipient.
Front Ends and Back Offices Needed for Real-time Payments
Whether real-time, near-real-time or same-day settlement, faster payments systems are already here in the U.S. and their rate of adoption is growing rapidly. As the speed and capabilities of our technology evolves, so do the demands from both consumers and businesses for easier, quicker payment options that keep their personal and financial data safe and secure. Though we are starting to see the shift towards this environment, we are still at the beginning stages of realizing the promise that these payments systems enable. Getting connected to these faster payments networks is just the start. While the front-end connection and implementation is important, banks and credit unions cannot neglect the impact of the back office and the role it plays in the timely completion of the transaction process. Ultimate success will require the industry to look at the process as a whole – a complete, end-to-end view of the flow and how to best manage transactions within a real-time environment.
Dr. Jack Baldwin is Chairman of BHMI, a leading provider of product-based software solutions focused on the back office processing of electronic payment transactions and creator of the Concourse Financial Software Suite™.