COMMENTARY: Helping Banks Deliver a U.S. Real-Time Payments Scheme

Real-time payments have existed in various models for a long time. In fact, they’re probably most familiar to consumers as card payments, something that has been embedded in consumer culture for decades. However, in the United States, the development of real-time payments has lagged behind some areas of the world, a situation that will be helped by the new real-time payments scheme being developed under the auspices of the Federal Reserve.

The scheme is similar to those deployed in the U.K., Australia, Singapore, and Mexico, and is a large undertaking for the U.S., where there are thousands of banks serving consumers.

There has been a lot of talk about the size, complexity, and cost of the effort to implement the scheme, but not a lot of talk about the real reasons for it. Of course, it’s a fundamental change, but it doesn’t have to be large, complicated, or expensive for banks to participate and provide value to customers.

It seems that the main reasons for cost and complexity concerns are simply banks’ adversity to change and their inability to implement changes efficiently, a situation only exacerbated when changes are non-mandatory.

But real-time payments aren’t unachievable. Organizations such as PayPal, Ripple, and Transferwise, alongside Apple Pay and Facebook, have successfully delivered real-time payment solutions to U.S. customers. If banks can adopt the change attitude and strategy of these organizations, which efficiently deliver value to consumers, then there are clear benefits.

Yes, the U.S. real-time payments initiative has some unique challenges. In other regions, consumer reach and adoption were achieved through a relatively small number of key banks, thanks to the fact that those banks had at least 90% of the market. The sheer number of U.S. banks, and the distribution of customers across those banks, means that the situation is different. For adoption to happen in the U.S., it’s important that banks have the ability to quickly and efficiently deliver real-time payment to their customers.

Clearly, U.S. banks have some challenges to face. But they’re not new and, in fact, many already have defined solutions. Even if a bank has not solved the problem for itself, the wider industry or other real-time payments implementations may have reached an answer.

Here are some of the key challenges and solutions:

Real-Time Interactive Payment Execution: Traditional U.S. payments models are batch in nature. Not only does the execution engine need to handle the full lifecycle of a payment across banks in near real time, it also has to respond to the customer in near real time, ensuring a deterministic outcome to that customer. Payments are now a commodity product, even real-time payment, which means a bank can accelerate implementation through existing commercial products.

Real-Time Accounting vs Batch Accounting: This is believed to be one of the more complex challenges. Customers must be provided with real-time transactional and balance information following payments. Many banks have implemented shadow-account models to support the real-time nature of cards. Many banks in the United Kingdom, Singapore, Mexico, and Australia use a fast-batch model for real-time payments.

Operational mismatch: Operations and customer-service models in the traditional U.S. payments domain have not operated a 24/7 service to end customers, due to the nature of the payment schemes. Real-time payments schemes require a 24/7 operational and customer-support model, similar to that of cards and digital channels. The challenge here is not the ability to operate 24/7 but the efficacy of operations to ensure costs are controlled.

Digital Channel Integration: Integration of real-time payments into the bank’s digital channels is challenging, as this is where users are most concerned with them. Digital channels must provide clear deterministic outcomes of a payment to help meet customer perception and expectation. This way, banks can improve efficiencies in both customer support and operations.

Financial Crime: The card industry has had to deal with financial crime in real time to protect banks, merchants, and consumers. This now extends to all payments. However, cards do have some differences from the real-time payments model. These differences provide a greater degree of flexibility. Detection and management of financial crime can improve greatly with that flexibility.

Just like the card industry and many other bank services, the payments industry is becoming a commodity. Banks should take advantage of commercial, off-the-shelf solutions to accelerate and ensure change. They should also bear in mind their mission statements and visions to put in place an agile evolution of a payments business to deliver real value to their customers.

—Trevor Belstead is a partner and global head of transaction banking solutions at Delta Capita, London.