In my last blog on payments transformation, I had explained how a state-of-the-art payments platform can help win the race to deliver real-time or immediate payments. Three key characteristics of real-time payments (we will use the terms ‘real-time’ and ‘immediate’ interchangeably across the blog) are:
So, what has driven the need for immediate payments? Changing consumer behavior coupled with the ubiquity of connected devices, especially mobile phones, has driven the need to interact and transact in real-time. Consumers want a Facebook-like experience with their banking transactions. Millennials are impatient; with fintech players like Xoom and Venmo offering all of the above three characteristics associated with immediate payments, banks face the risk of losing market share, revenues and most importantly, customer relationships.
Banks are under pressure from governments to create nationwide systems that can facilitate immediate payments. Countries across the world are rolling out payment schemes that facilitate immediate payments. For example, ‘Faster Payments’ in UK – It was launched in 2008 by the government to enable real-time payments through Internet, mobiles and phones. As of today, close to 100 million payments are processed in a month. Eleven leading UK banks along with 400 FIs, including payment service providers are participating in this scheme. Clearly, when enabling real-time payments, it is not just the bank that undergoes transformation, but the surrounding ecosystem too.
Implementing immediate payments is not easy as it requires holistic transformation across banks’ operations. It’s a cultural change as all customer touchpoints, operations, processes and technology platforms need to be upgraded and consolidated to service the customer round the clock. In addition, banks will also need to invest in new products and services and onboard customers seamlessly to use these products and services. Banks will have to scope, plan and develop immediate payment-related products and services to fend off the fintech threat.
How should banks approach the transition from a legacy payments model to a real-time payments platform?
Listed below are the four steps vital for successful transition to real time payments platform.
Transition to real-time payments (RTP)
Step-1: Outline a clear vision for real-time payments
The move from legacy payments model to a real time payments platform is a complex one. Banks need to chart out their vision, outline the importance of the journey and their expectations in terms of products, channels, revenues and customer relationships and draw clear timelines around realization of the vision. For global banks, geographical locations also plays an important role. As part of the vision, banks should outline a clear scope, define business requirements and assess the change impact based on the products and channels that the customers want. Since the change is extended to the ecosystem, banks needs to have a clear understanding of what is possible from a regulatory standpoint and how prepared the partners are to implement the change. E.g. adoption of ISO 20022 by banks required support from central banks, clearing houses and other PSPs; today, ISO 20022 is a key building block for immediate payments across the globe
Step-2: Identify gaps and opportunities from a product and channel perspective
As banks transform to newer platforms and offer new products across channels, they will need to let go of legacy products and channels. For e.g. Checks have become redundant with the advent of electronic payments and credit cards. Banks need to take a hard look at what products and channels make sense from a customer experience perspective. In some cases, banks may have to partner with fintechs to get to the market ahead of competition. Banks would also need to look at Blockchain, APIs to connect and collaborate. Essentially, banks will need to assess their existing platforms to understand what can be leveraged and what can be retired to make way for immediate payments.
Step-3: Address platform and component gaps to transition to real-time
This is probably one of the most critical and difficult steps for banks. The payment platform includes payment systems, payment types, payment formats, channels and the associated interfaces like fraud detection systems, core banking systems and risk and compliance systems. Banks needs to analyze every component to see if they can support straight-through processing and immediate payment requirements. This will lead to retiring or redesign of legacy systems and introduction of modern components to support the need. This is critical as banks needs to assess what systems fits into the short term strategy and what makes sense in the long term for immediate payments.
Step-4: Implement the best real-time payments solution
“No one can whistle a symphony, it takes the whole orchestra to play it”. When it comes to implementation, banks needs to implement the change across people, processes and technology. It calls for cultural change within banks. The changes have to be extended across the ecosystem. From banks’ perspective, the changes will need to be implemented to Payment Operations, Fraud and Risk Operations, Treasury Operations and Customer Service. New processes would need to be put in place to support the three key characteristics of immediate payments (as defined in the beginning). Banks will need to work with PSPs, clearing houses and fintech providers to ensure that the transition is smooth.
Banks have been trying to move to real-time payments model for quite some time now. While some banks have implemented this successfully, a lot of them have tried and failed. But today, the move is no longer an option but an imperative. With a clear vision, product and channel strategy, platform re-design and internal and external ecosystem changes, banks can successfully move to real-time payments platforms.