Is Your Bank Truly a Real-time Bank?

At Nacha Smarter Faster Payments 2024, a panel moderated by Finzly CEO Booshan Rengachari addressed that question. Chris Nichols, Director of Capital Markets at South State Bank, and Tim O'Donnell, Managing Director – Payments at Accenture, joined Booshan to explore the impetus and challenges for banks adopting real-time payments and operations. Their discussion centered on the complex journey toward achieving true, comprehensive real-time banking functionality.

Booshan highlighted the growing dominance of platforms like Stripe and PayPal that offer flexible payment solutions. Additionally, regulations and the emerging real-time payment market infrastructure push banks to rethink their approach to real-time banking.

Challenges and Drivers for Real-Time Banking

Panelists discussed the fundamental challenges in achieving real-time banking. Bank transformation requires more than just surface-level upgrades. Deep changes to core processing systems are necessary to use real-time payment networks. This means technological advancements and significant operational changes are necessary.

For banks with legacy systems, this transformation is a major challenge. These legacy systems do not support 24/7/365 operations. Expanding hours of operation puts a significant strain on all aspects of banking—from infrastructure to customer service. Banks must adopt systems capable of continuous operations and rethink how these changes will impact the overall banking experience.

For example, FedNow® and the RTP® network demand that banks complete payment initiation, processing, and confirmation within seconds. Therefore, banks must re-evaluate their operations given traditional batch systems cannot meet these stringent transaction processing requirements.

Banks need to rethink interaction strategies from the ground up. Employees and customers will engage with payment systems from initiation to completion. Error handling and exception management will require real-time resolutions for issues that arise, necessitating personnel and systems that support continuous operations. Increased automation is beneficial not only for regular payment workflows but also for managing exceptions.

Market Readiness and Implementation Strategies

The panelists delved into market readiness, highlighting disparities across various sectors within the banking industry. The Federal Reserve and the Clearing House have payments infrastructures that support real-time transactions.

However, the true hurdle lies in the lack of readiness for genuine real-time operations within financial institutions. This issue arises from outdated electronic payment processing systems. These systems hinder the ability to introduce new products and services that depend on instant payments. Launching new products and services becomes challenging because of this limitation.

Financial institutions stand apart not by real-time payment systems themselves but in the products developed for customers. Banks want to receive payments instantly through their legacy core processing systems, yet those systems may not be able to process payments around the clock. Many of these core systems experience daily downtime, affecting settlement time and disrupting the continuous availability of instant payment services to their customers.

Banks need to transcend the simplistic question of "Can we complete a payment in less than 15 seconds?" Instead, banks must contemplate processing instant payments from a genuinely real-time and 24/7 platform.

Additionally, the ISO 20022-native data that accompanies real-time payments can provide an advantage. Banks should be analyzing the payment data stream and devising strategies to enhance value for their customers. Forward-thinking banks are already formulating strategies to address these opportunities.

Panelists stressed the importance of a comprehensive strategy encompassing marketing, onboarding, customer service, and digital interfaces. This would ensure alignment across all facets of the organization to support real-time operations. This entails establishing robust systems for handling inquiries, exceptions, and reconciliations in real time, fundamentally transforming the traditional banking service model.

The Future of Banking: Open Banking and Embedded Finance

Looking ahead, panelists discussed the transformative potential of open banking, embedded finance and payment hubs. They noted a competitive race to develop robust API infrastructures, enabling banks to integrate their services directly into the ERP systems of corporate customers and small businesses. This integration allows businesses to easily send and receive requests for payment as part of their daily operations. Real-time payment transactions will improve efficiency, responsiveness, and cash flow.

The future of banking will be shaped by close collaborations between banks, fintechs, and platforms. These partnerships are already helping traditional banks offer custom, real-time payment solutions that meet the expectations of today's consumers and businesses, highlighting the urgent need to adopt real-time banking as the new standard.

Conclusion: A Holistic Approach to Real-Time Banking

The panel concluded that transitioning to real-time banking is a multifaceted challenge requiring a holistic approach. The goal is clear—real-time banking is not just the future; it is the present. Banks need to quickly adjust to the changing world to keep customers happy and stay competitive in the market.

Learn more by downloading an instant payments report from a webinar with American Banker.