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Financial institutions have had a lot to grapple with—from consumer payment habit changes to addressing the issues they had pre-pandemic, and not least the need to modernize their payment solutions to support new payment methods and rails. Two themes, in particular, are being discussed at every bank—cloud and real-time payments. In a webinar with Alacriti, Gareth Lodge, Senior Analyst, Global Payments at Celent discussed how banks should approach this opportunity to be at the forefront of change.
Changes from 2020
2020 changed where we do business and how we pay for things—which changed the revenues of banks dramatically. The revenues for the Coalition Transaction Banking Index showed that cash management was hardest hit. This resulted in significant pressure to cut costs and find new sources of revenue.
Celent did a large global survey (The State of the Nations for Payments Modernization) on 200 banks in different countries. The chart (below) of the survey results shows how banks responded when asked how COVID-19 impacted their investment in payments technology. By late May 2021, 22% of U.S. banks reported IT spending remained on hold, with another 23% seeing their budget priorities changed.
Banks were finding that some of their digital processes weren’t as digital as they assumed they were (e.g., the ability to allow customers to open and close bank accounts remotely). So they went into 2022 with a backlog of items that should have been done over the last two years, and an increasing list of things to do because of the last two years.
Wire modernization is well under way for every region—except the U.S. Twenty percent of U.S. banks reported that they had no plans to update their wire platform. Because of the SWIFT MT to MX conversion, more than 9,000 banks globally had to migrate to that new platform to be compliant with ISO 20022 standards. Real-time payments go hand-in-hand with updating the wire plan. Lodge recommends that in 2022, financial institutions start with wires. “There’s been an awful lot of pressure from banks in the U.S. and other countries around the world to say the U.S. can’t afford not to upgrade its wire system in line with the rest of the world. They will be the only major economy globally that hasn’t.”
Modernizing the payment platform prevents issues with truncation between banks at different stages of their migration. According to Lodge, “There’s no point in the rest of the world sending a data rich message and then reaching a U.S. bank and having to be truncated. We’re losing a large part of the value of the migration.”
U.S. banks should also consider that even European banks who were already doing ISO 20022 for ACH payments for a decade are struggling with the migration. It’s a difficult process with old technology, and there is also the added pressure of a firm timeline. The American Bankers Association told the Federal Reserve in January 2022 that it supports their plan to migrate to ISO 20022 standards for their real-time gross settlement system (RTSG), and that a single-day switch should happen no earlier than November 2023. While 55% of banks have said they are updating wire systems now or over the next five years, the 20% who have no plans at all do not have a lot of time to respond to this.
There is a great synergy between a wire replacement and a real-time payment. They’re not the same, but it’s better to get a system that can do both with an extra spend than going with two completely different systems. There’s an opportunity to piggyback one opportunity on the other.
Real-Time Payments and Revenue
It’s important to understand the revenue model. There is a common misconception that real-time payments are just P2P. Lodge presented modeling that Celent did on the total payments in a number of markets. In most markets, only 6% are really P2P, and they don’t have to pay to receive or send. Consumers on the other hand, generate 8% of all transactions (e.g., bills, shopping, restaurants, etc.). There’s far more consumers than businesses—however, businesses account for 80% of transactions (e.g., payroll, insurance payments, etc). And they always pay to send or receive the money. Consumers are what creates the demand that businesses have to take real-time payments. They go into the business and say, why can I do this as a consumer, but I can’t do it here at work? They’re generating the interest and they’re also generating the payment volumes, which the businesses will ultimately pay for.
Real-time payments are a tool to deliver payment solutions. Overlays are scheme-wide solutions available to all. They include QR codes, Request-for-Pay (RfP) alias directories, etc., and can be available off- and on-line. RfP can mean more sophisticated offerings for your customer, such as a discount when submitting early prompt payment without having to do manual paperwork.
Digital tools reference how the real-time payment is used. Leading banks expose APIs to allow or provide clients to embed real-time payments in their flows, or for themselves to use. Examples include: instant loan disbursal, “pay me now,” and conditional payments (e.g., factory gate release of goods).
Businesses don’t necessarily realize the value of real-time payments at face value, and it’s useful to help them understand what business problems will be solved by real-time payments. For example, a large Indian bank working with the largest internet retailer in India uses real-time payments to reduce significant manual steps in the return of goods chain. The courier presses a button on a hand device to scan the item returned and then everything else is automated. The consumer gets the refund in their account before the courier even leaves the premises. This leads to a much better customer experience, but also allows for automatic reconciliation. So the bank really sold a solution to a business problem rather than just real-time payments.
There are constantly new use cases coming out for real-time payments. For example, TD Bank’s auto finance division offers access to real-time payments nationwide to its network of car dealers. The pilot programs that Verizon ran with BNY Mellon and Chase for B2B are good examples of how Request for Pay can be used.
Demand for Real-Time Payments
Celent conducted a survey in 2021 of more than 200 corporates and banks globally where they asked questions on payments and data monetization. The research clearly showed that corporates are asking for what they think banks can deliver, but they have pretty low expectations about what a bank can deliver. So Celent redefined the type of thing they might want to buy. In the chart below, it’s very clear that the top box is related to real-time payments. The value comes from getting the payment, seeing who it’s from, that it can be reconciled, and the ability to use the money. The top box shows real-time consolidated data, real-time cash forecasting, real-time cash balances, automated reconciliation—all things that are driven by real-time payments that a financial institution can deliver. A good number of corporates are saying they would swap a bank if their bank can’t provide it.
Urgency for Modernization
Preparation is critical with so much that has to get done in such a short period of time. With the Fed migrating to the ISO 20022 standard for their RTSG, there is little time to get a new UI system live, which most likely means that financial institutions can’t use an on-premise solution.
Lodge shared that in other countries (e.g., Malaysia, India, China, Europe, Australia), there have been companies that use the real-time rail to bypass the card networks. In Hong Kong, there was a noticeable drop in card volume at all the major banks when companies like Alipay and Tencent bypassed the card networks with QR codes. Financial institutions can assume that if they don’t offer real-time payments, behemoths like Amazon or PayPal will. Also consider those who do have this capability are going to be attracting more customers, making modernization a must.
Current systems can’t be simply updated for ISO 20022. Now is the time to choose a vendor who can support your transformation. Lodge also predicts that the cloud will increase in significance. “Everything’s going to be cloud going forward. In the last 18 months, probably even just 12 months, every single RFI we’ve worked on or seen has gone to a cloud service, every single one. And that’s from the biggest banks globally.”
When RfPs come in they will need to issue, making the need for payments modernization urgent. If a bank waits too long, they’ll be too far back in the queue to meet deadlines. The TCH RTP® network has 200 FIs right now with the volume growing at a double digit CAGR month on month. 2022 is a year of action for starting your projects or at the very least planning for your projects.
A New Perspective
Instead of looking at the systems independently, view them as part of a modern, holistic payment platform. Real-time payments that are ISO 20022-based can lead to interoperability. With all of the use cases, revenue opportunities and risk of churn—all of that data needs to come through one system.
The key is to take a customer-centric approach when looking for a new faster payment solution. Think about the user experience and its orchestration of the payment from the clearing and settlement. A platform that has multi-rail access with a fast time to market is going to be key for a lot of banks who don’t have the budgets to build independent connections and bring them back together through a middleware technology layer.
Which Network is Best?
When asked if financial institutions should choose TCH, FedNow or Zelle, Lodge explained that it’s not as simple as one being “better” than the other. “I think increasingly we will see vendors who integrate all of them, with the routing decision done by the vendor. So I think at the moment it’s about understanding what you need today, but the landscape is going to look quite different in 2-3 years time. And it’s likely we’ll end up with all of them. So it’s really the prioritization rather than saying, ‘I can only choose one going forward’.”
“What does a migration project actually take?” is a common question. Every financial institution is different. But with cloud-based deployments, it’s significantly different than the on-prem or even data center deployment for the last 10 years. Thinking about these things as projects that will take months to years is not the case with a lot of modern technology. With the cloud-based providers it’s more weeks to a few months, or a quarter at the most to get the project up running.
With the upcoming ISO 20022 migration of FedWire, and the growing importance of RTP and volume growth, and the FedNow pilot now in full gear and getting ready to launch, it’s really time to take action. It’s a short project to connect for receive only—Alacriti has had clients that take as short as ten weeks. So from a project planning perspective, it’s not a heavy lift. By not starting now, you’re losing out on deposits and the customer base that’s looking to get their funds immediately into their counts.
To learn more about what 2022 has in store for payments, watch the full webinar, Payments in 2022: What You Need to Know, featuring Aite-Novarica Group and Alacriti.
Today’s legacy and siloed banking technology infrastructure limit financial institutions’ ability to rapidly innovate. It’s time to look at money movement in a new way. Alacriti’s Orbipay Unified Money Movement Services does just that. Whether it’s real-time payments, digital disbursements, or bill pay, our cloud-based platform enables banks and credit unions to quickly and seamlessly deliver modern digital payments and money movement experiences. To speak to an Alacriti payments expert, please call us at (908) 791-2916 or email [email protected].