Instant Payments and Payments Hubs: Is a Payments Hub the Missing Piece to your Payments Puzzle?

This guest blog was written by Greg Lloyd, Head of Banking & Capital Markets Sales, North America, and Monica Velez, Senior Industry Consultant, both payments experts from Endava.

“To be, or not to be." Much like Hamlet's existential dilemma, banks today grapple with crucial choices: whether to implement a payments hub and whether to build or buy one. The rise of instant payment systems (RTP and FedNow here in the US) has intensified this debate, prompting a closer look at the advantages of a centralized payment infrastructure.

First things first, we need to acknowledge the elephant in the room. There is a lot of variability around defining what a payments hub is or does. That could easily warrant its own blog topic, but for the purposes of this article let’s agree that a payments hub is a place where some payment capabilities are centralized (e.g., data, rules, routing, connectivity) and multiple payment types can coexist in a single, consolidated solution or best-of-breed approach.

We see four main reasons why financial institutions (FIs) are taking a renewed interest in payments hubs. 

1. The move to instant payments requires (or at least deserves) modern technology.
2. If an FI is going to open the hood on their enterprise payments systems, then they might as well take a fresh look at moving to a target state.
3. There is a shifting desire for FIs to break from the traditional / siloed vendor approach and gain greater control of their platforms and technology.
4. The future of payments demands a host of new capabilities that require broad changes to underlying core technology.

Let’s look further at this reasoning. 

A move to instant payments requires (or at least deserves) modern technology.

Instant payments have initiated a new era of money movement with many new opportunities for FIs that can only be fully seized with a modern technology stack.  Although I acknowledge that a shift to modern technology is not required to adopt instant payments, there are compromises to be made if you don’t. For the avoidance of doubt, instant payments may not require a core modernization or microservices or even a payments hub but with new rails settling instantly (less than 20 seconds), it is a worthwhile exercise to look for improvements in your architecture for areas that may inhibit your move to instant payments. 

In some cases, this is looking for areas of potential latency. In others, it is about ensuring your organization minimizes risk. These are key areas of opportunity when implementing a payments hub. For example, a centralized rules engine, with event-based actions, can significantly reduce risks of inconsistency across payment types. Similarly, the right hub solution, architected in the right way, can help mitigate the risks with a non-real-time core, or with retrofitting batch processes, or core downtimes etc.  This includes modern technology approaches like microservices, AI, etc., but is also about moving from batch technology and moving to technology that does not need to be taken down for maintenance-related downtime.

If an FI is going to open the hood on their enterprise payments systems, then they might as well take a fresh look at moving to a target state.

Payment systems in general, but especially instant payments capabilities, touch nearly every part of your bank. This is true in all aspects, across people, process and technology. Because of the sheer complexity of an FI, including the aged systems, testing requirements, regulatory expectations, fraud management, etc., there is significant cost added to every system you touch during implementation. Thus, if you are implementing an instant payments rail and you are already incurring those costs, you might as well maximize what you retool while you have the hood open. It is a great time to consider broader enterprise payments strategies, including a payments hub.

There is a shifting desire for FIs to break from the traditional / siloed vendor approach and gain greater control of their platforms and technology.

FIs, particularly those that are in the “I want to acquire” category, are continually pushing to seek ways to differentiate and expand. Part of this includes breaking free from a narrow vendor silo. This could include mixing in additional, more modern, vendors, or go as broad as migrating large capabilities, such as payments. Considering a payments hub provides opportunity to bring a modern approach and a new vendor, or mix of vendors. There is also the opportunity to partner with fintechs to provide your customers with access to additional products and services, so having an open approach will benefit the FI.

The future of payments demands a host of new capabilities that will require broad changes to underlying technology.

Globally, payments are evolving, quickly. When we consider China, Africa and Europe, the quick rise and solidification of peripheral capabilities such as QR codes, digital wallets, APIs, etc., has shown how much further payments have to go. To truly make real-time APIs successful and provide the capabilities the market needs, requires a robust and intentionally designed technology environment. Another example is moving to open banking, including account-to-account (A2A) use cases and fully enabling consumers (and businesses) to interact how they want. Layering on top of this is integration with third-party systems with both the capability and proper management.  A well-architected payments hub can support these capabilities functionally and from a risk management perspective. For example, integrating third-party systems with proper oversight is easier with a centralized, scalable platform.

To build or not to build, that is the question. The decision to implement a payments hub is a significant one for financial institutions. While payments hubs offer numerous benefits, they are not a panacea.

This must be a journey with intention. Before embarking on this journey, it's crucial to define your strategic goals and business objectives. Once you have a clear vision, develop a comprehensive roadmap outlining the necessary capabilities and functions. This will guide your vendor selection and platform architecture.

Remember, with great power comes great responsibility. A well-designed and implemented payments hub can significantly enhance your institution’s capabilities, but it requires a thoughtful and deliberate approach.

For further information, check out the Endava research report Understanding Instant Payments Solutions Providers.