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Education

Moving toward a Modernization and disruption

FIs and businesses alike risk disruption of their back-
real-time payments office operating procedures when they embrace real-time
payment processing. Why? As noted, back-office processes
environment are batch focused, and changing architecture to support
true real-time payments can be daunting. Another major
reason is that real-time payments can occur 24 hours per
By Dr. Jack T. Baldwin day, seven days per week, 365 days per year. Consequently,
unlike the case with daily settlement of ACH-supplied
BHMI transactions, supporting real-time payments for an FI can
require 24/7/365 staffing—a dramatic shift from traditional
he most pronounced movement in payment "banker's hours."
processing today is the adoption of faster pay-
ments by networks, financial institutions (FIs) This includes monitoring reserves on hand and having
T and businesses in general. The need to shorten someone on duty authorized to replenish them so that the
the time between the initiation of a payment and its final Fl does not fall into an overdraft position based on after-
clearing and settlement is compelling and has led to inno- hours outflows. Given that funds settlement is immediate
vations like Same Day ACH and true real-time payments and irrevocable, fraud must be monitored in real time
networks like RTP and FedNow. as well. There is also the question of whether to extend
customer service hours to address related issues.
RTP and the soon-to-be-completed FedNow network
can process payments from initiation to final settlement Similar to FIs, businesses that process real-time payments
within seconds. However, there are obstacles that prevent may also face back-office disruption. Creating and receiving
businesses and payment processors from adopting real- real-time payments would require some adjustment to
time payments operations. The task of integrating new back-office processes to ensure the availability of funds to
technology and practices with existing legacy systems and support payments. However, a number of businesses are
back-office processes without service disruptions can be a using real-time payments as the mechanism to support
significant issue. So, even though there may be advantages the complete order entry, order tracking, order fulfillment
to providing real-time payments services to clients and and order payment process. In fact, this is the primary
others, if not done correctly, integration efforts can leave transaction sequence architected for the RTP real-time
an organization less capable than before. payments network.
Real time meets batch
Few businesses are initially set up to support this
The goal of a real-time payments network is to transfer combination of automated and manual processes. Because
funds from a payer account to a payee account within of this additional complexity, businesses typically
seconds. It is a straightforward, technical process to create introduce real-time payments as simple person-to-person
an interface that accepts payment instructions from a payer (P2P) or business-to-business (B2B) operations.
along with the messaging needed to deposit appropriate Overcoming obstacles
funds into a payee’s account or other value instrument
like a debit card. In effect, payment posting occurs within Given the obstacles to adopting real-time payments, are
minutes or even seconds. there options to ease the process? The short answer is yes.
For example, one approach to addressing the back-office
The basic problem is that most back-office systems cannot batch processing bottleneck that slows down real-time
match the real-time capabilities of faster payments front payments processing is to turn the back office into a real-
ends. Why? Because the back office is where real time time operation. Applications exist that accept real-time
meets batch. A typical back-office system creates batches payments transactions from the front end and process
of funds transfer transactions and processes them at them all the way to completion, including clearing and
specified periods of time—sometimes daily, sometimes settlement. Such applications are based on a continuous
multiple times per day, but never in real time. processing architecture that processes transactions as far
as logically possible.
This means that these back-office systems will never be
able to provide the real-time handling and reporting Additionally, transactions that still require traditional
needed to complete faster payment processing. So typical batch processing can be intermixed with real-time
back-office operations like settlement and reconciliation transactions. Batched transactions can be held for
can only produce results that are available at the end of clearing and settlement during the next ACH cycle, and
one or more periods of a processing day. real-time transactions can be immediately cleared and
settled by available internal or external mechanisms. The
advantage to real-time back-office processing is payments

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