Managing the Gap between Real-Time Payments and Real-Time Information

After decades of “blue sky” presentations and predictions, U.S. Commercial Banking is now transitioning to bank wide real-time processing. A dramatic shift to real-time cores and instant or real-time payments creates acceleration of transaction velocity and compression of processing time, thereby introducing new challenges and risk factors. This shift represents an order of magnitude change to bank transaction and information processing models – one that requires new business, product, and technology strategies.

Impact on Bank Payment Processing and Information Delivery

Our view is that a real-time payment processing strategy is directly linked to a real-time information and data delivery strategy.  Ideally, bank support of real-time payments requires a new and comprehensive payments architecture as well as the ability to provide real-time information to internal reporting, monitoring, and compliance systems applications as well as external customers. If the existing information delivery model is not “real-time ready”, missing data or “blind spots” occur creating unanticipated risk.

This gap represents an opportunity for AI-driven applications that can monitor transactions and decision exceptions in seconds as they occur. Unfortunately, most banks don’t have the necessary level of real-time integration in place yet.

The State of Real-Time Processing

Payment Hubs. To date, leading banks have adopted real-time payment platforms that use APIs to connect with multiple payment applications (RTP, FedNow, wire and ACH) and other bank reporting, monitoring, and compliance applications. While it’s easy to rationalize this approach on paper, the problem lies in the fact that multiple bank applications have been designed independently, so they aren’t necessarily compatible with each other. This creates a complex implementation with significant expansion of scope and cost.

Middleware. A number of top tier commercial banks (with deep IT pockets) developed a modern operating architecture based on third party middleware to support this radical shift.  This approach translates to a major enterprise-wide project with a broader scope, higher costs, resource constraints, and a longer implementation timeframe. 

Vendor Dependencies. Regional and community banks that have used a staggered approach to modernizing their core and payment environments are highly dependent on their core vendors for innovation, system implementation and integration. Historically, core vendors have lagged behind the market when “productizing” and implementing new technologies with less than ideal integration strategies. 

With the possible exception of de novo digital banks free from legacy technology, the alternative for regional and community banks is reliance on manual processes and batch processing instead of real-time data exchange between their payment systems and their reporting applications. This leads to inaccuracies in reporting and inaccurate risk management decisions – which can lead to fraud losses and other problems down the road.

Enabling Real-time Information Processing

Recognizing that real-time payments enable businesses to make and receive (final) payments in seconds creates a zero margin for error environment, it is time to consider order of magnitude innovations in information and data delivery.

One example is cloud based data streaming: a process of continuously transmitting data from one source to another as a continuous flow of data in real-time.  This is useful in applications where data needs to be continuously updated and monitored. Data streaming techniques use efficient and scalable algorithms to process and analyze data “on the fly” so that users can access the most up to date information at any given time.

Value of Integration

Dependency on bank application integration plays a crucial role in the monitoring and risk management associated with real-time payments for business-to-business (B2B) transactions in these ways:

1. Authentication and Authorization: Integration with bank applications allows for seamless authentication and authorization of real-time payment transactions.
2. Risk Monitoring and Fraud Detection: Integration with bank systems enables businesses to access real-time risk monitoring and fraud detection capabilities.
3. Payment Validation and Verification: By integrating with bank applications, businesses can validate and verify payments against their account balances and transaction limits.
4. Transaction Monitoring and Reporting: Integration to monitor and track real-time payment transactions.
5. Reconciliation and Dispute Management: Integration facilitates timely reconciliation of real-time payment transactions. It allows businesses to match payments received or made with corresponding invoices or purchase orders, streamlining the reconciliation process.
6. Security and Compliance: Integration ensures that real-time payment transactions comply with relevant security standards and regulatory requirements. It enables the implementation of secure communication protocols, encryption, and data protection measures to safeguard the confidentiality and integrity of payment data.

However, it’s important to note that dependency on bank application integration also introduces potential risks, such as bank system vulnerabilities or major disruptions. Banks need to consider appropriate safeguards, like regular updates and maintenance of integrations to minimize these risks and ensure the continuity of real-time payment operations.

Scalability is Key to Success It’s easy to rationalize fast adoption of real-time payments with “pilot” project status, limited adoption, and bank-imposed transaction limits.  As an industry, we learned during the pandemic that customers adoption cycles can be rapidly reduced and transaction volume can mushroom at an accelerated rate.  The success of any product is directly related to its ability to scale to maintain quality and acceptable performance.