Page 31 - GS230401

Education

Real-time payments: half of consumers had used a payment method to send or
receive funds instantly through P2P, funds transfer or bill
Operational readiness pay (see https://bit.ly/40MUgg3).
This momentum and pace will likely increase this year as
unlocks profit potential the FedNow Service expands across the economy. Grand
View Research forecasts the global real-time payments
market will grow at a compound annual growth rate of 35.5
percent between now and 2030 (see https://bit.ly/3FKTeJ6).
The back-office bottleneck

It is no longer a question of if financial institutions need
to adopt RTP methods but how they can adopt them.
The ability to process payments efficiently in a scalable
way will play a critical role in the success of financial
services companies in the coming years. As competition
grows, they will quickly lose market share to competitors
that offer more value-added services and faster money
movement
By Casey Scheer Although organizations have been able to quickly adapt
BHMI their front-end systems to enable real-time payments,
many companies are still using slow, legacy back-office
eal-time payment adoption will grow rapidly systems that cannot keep pace with the front end. Back-
in the coming years, and pressure is mounting office systems are critical to real-time payment methods
for financial services companies to update their because they support reconciliation and settlement
R infrastructure to support it. However, many processing, handle disputes and assess transaction-based
companies still lack the operational readiness to fully take fees.
advantage of real-time payment (RTP) processing.
The problem is these systems were designed decades ago to
For example, most have integrated front-end systems handle card-based transactions. They process transactions
to accommodate instant payments, but their back-office in batches over hours, or even days, while RTP must
systems cannot support real-time settlement. This leaves happen in seconds with 24/7 demands. These systems also
a lack of visibility and an hours-long gap in the settlement require extensive coding to make changes. Some financial
process, opening the door to fraud. institutions try to keep pace with continual updates and
patches but often end up with systems that are siloed and
While a modern payments system can help financial lack integration. These systems can be troublesome to deal
institutions reduce bottlenecks and keep pace, it also with and cannot support new payment message formats
presents new opportunities to profit. By adopting a such as ISO 20022.
modern back-office system, financial institutions can
handle greater volumes, quickly adopt new payment One of the biggest shortcomings of legacy systems is the
methods, reduce costs and gain a competitive advantage. lack of visibility and the gap they leave in the settlement
Rapid adoption of real-time payments process. While users can create and post payments on a
front-end-enabled system, no payment is fully completed
In today’s fast-paced digital economy, neither businesses until it is settled. Legacy batch systems don't allow money to
nor consumers want to wait hours or days for transactions leave the consumer's account or settle until the transaction
to settle. Many are now looking to RTP processing has happened, and they also allow cancellation between
because it offers instant confirmation, faster settlement, payment initiation and settlement.
transparency and greater reliability.
Therefore, in a world of RTP, these old systems open the
The Clearing House launched its RTP network in 2017, the door to fraud, as unscrupulous actors can cancel a payment
first new payments system in the United States in 40 years. after a seller has provided services or goods.
TCH RTP now supports B2B, payroll, request for pay (RfP),
and payroll for several hundred institutions. Turning a cost center into a profit center
Many financial institutions know they need to update or
However, interest in and adoption of real-time payments upgrade their back-office systems, but doing so is often
has significantly increased since COVID due to further easier said than done. Financial institutions are often
digitization, fintech innovation and consumer demand. intricately tied to their legacy systems, both in people and
One study by Javelin Strategy found that in 2022, nearly technology. Competing priorities often create stumbling
31