Traditional payment gateways have often hindered banks in their efforts to modernize their payment systems. Transitioning to real-time payment capabilities demands dismantling outdated procedures, a task many banks are unprepared to take on.
A recent PaymentsJournal webinar featuring Miriam Sheril, Head of US Product at Form3, Peter Gordon, Founder and Managing Partner at Atlantic Fintech Advisors, and James Wester, Co-Head of Payments at Javelin Strategy & Research, took a closer look at how a platform-based approach is helping banks commercialize their value-added services and develop a more client-centric service model when it comes to payments.
Battling the Legacy
For banks venturing into real-time payments, grappling with legacy back-office technology can be frustrating. Real-time payments hinge on delivering seamless end-user experiences, a demand that traditional technologies have long struggled to meet, especially considering customers’ 24/7 expectations. Implementing FedNow and the RTP network effectively necessitates embracing modern technologies.
“In the U.S., we’re going to see more banks needing to modernize their technology at the back end to make this happen,” Gordon said. “The legacy infrastructure that banks have—batch-oriented, mainframe-based systems—can’t handle the 24/7/365 scaling. It also means that we’re moving from silo-based systems to enterprise-based systems and platforms.”
Managing individual transactions for FedNow and RTP differs significantly from the batch-oriented processing typical of ACH transactions. The infrastructure needs to become modern and cloud-based. Regulatory concerns, such as anti-money-laundering laws, further impel banks toward modernizing their architecture. By providing more seamless solutions through better technology, fintechs like Stripe and PayPal have been pushing banks to turn toward cloud solutions and APIs that allow banks to scale and work more directly with fintechs.
“We focus on trying to insulate banks and financial institutions from having to deal with some of the nitty-gritty annoying stuff, so that they can focus on their customers, their end users, and where they want to make money,” Sheril said. “A truly seamless API will cover all the rails, instead of the bank having to worry about ISO spec version this for RTP, and version that for FedNow, and a third version for Fedwire.“
Wrestling With Complexity
Financial institutions are often stymied by the technological complexity of payments. The systems in place worked well for a long time, but banks are beginning to realize they’re being forced along the path to modernization. And it’s not going to get simpler, primarily because of the silos within their operations.
A large financial institution operates numerous disparate channels, each with its own dedicated system tailored for functions like treasury and wealth management. Yet there’s growing desire within banks for payments to present a unified front, emanating seamlessly from a singular source. This entails breaking down the silos so there’s a consistent experience across the middle and back office, as well as throughout the infrastructure and among technologists.
With this push for new technology, many banks accustomed to constructing their own infrastructure are opting against replacing outdated system internally. Instead, they’re forging partnerships with companies specializing in modern technologies.
“Instead of it being one of the 75,000 things I do, streamline the piece that matters to me,” Sheril said. “Now that we have the ability to have better architecture that’s easier to implement, that is going to be helpful in terms of where banks are going across lines of business and tearing down silos.”
Ultimately, customers simply want convenience. However, there’s growing awareness among customers regarding the various payment methods available to them. They can opt for installments plans, direct transfers, or transactions that accrue points. Financial institutions want to present customers with all of these options.
“That’s where that technology kicks in and says to the financial institution, you have more power now,” Wester said. “Financial institutions have always just looked at a payment as a payment. But now that we’re seeing consumers care, there are ways that you can use that to reinforce the relationship.”
In many instances, customers fully appreciate the advantages of real-time payments only once they’ve had the opportunity to use them. Real estate firms, for instance, are showing interest in real-time payments not because they’re concerned about where their settlements occur but because they want to close deals on Saturdays, a day when most realtors are active.
Consider another scenario where instant payments afford retailers the ability to reconcile transactions at the end of the day and receive funds instantly. For example, on a Friday night, a restaurant reconciling its accounts can simply press a button, and the funds are deposited into its account, enabling them to promptly pay the wait staff.
However, many banks have been unable to facilitate such transactions on Saturdays due to wire closures. As a result, these options emerge as new products and services for consumers and represent novel competitive avenues for financial institutions.
Adventures in the Cloud
Conducting operations in the cloud allows banks to integrate many of their services, yet there has been a reluctance to use such services.
“Ten years ago I was at a conference about the cloud, and the CIO of a relatively large bank said from the stage, ‘We will never put any mission-critical stuff in the cloud. It’s just too risky,’” Wester said. “And the bankers in the audience all nodded sagely. ‘No, that will never happen.’”
Yet more banks are discovering that using a platform-as-a-service provider can reduce costs significantly if it’s done right. They can end up paying a fraction of the cost of building and maintaining a data center.
Another advantage of the cloud is translation. It can take an ACH file and convert it to an ISO 20022 format, maybe even enrich the payment instructions with information, then pass it through a payment system. Those who understand how rich this data is will be the real winners.
Piece by Piece
Implementing new processes in today’s payments landscape means dismantling old ones. It’s important for organizations not to underestimate the challenges associated with decommissioning legacy systems and instead focus on this task with purpose.
Organizations should embark on a journey toward modernization, starting by insulating themselves from risks and addressing their least risky areas first. It’s imperative to start with smaller aspects that can coexist alongside the legacy system. This incremental approach ensures that each step is modernized. Not everything needs to be moved at once.
“This is about getting something better out there and not waiting till your customers leave you for someone else,” Gordon said. “There are ways to do this that help you de-risk the whole migration. Some banks have only taken specific accounts and moved them over. Or only real-time payments. You can start real-time there, then move the other aspects over.”
Said Sheril: “The more complex these requirements get, the more modern the technology has to be. You can’t do it on old platforms. You have to do it on things that are quick. We can only do it because we are on a modern 24/7 platform. Banks need to get this modernization done, but they don’t want it to distract from the focus on what’s important to them, which is their customers and their revenue.”