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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.

The Product Innovation Process for Commercial Digital Banking and Treasury Management Products

We are experiencing a new wave of emerging technologies such as cloud, AI, Robotic Process Automation (RPA) and blockchain that challenge our ability to integrate these horizontal components into purpose built vertical solutions, taking the innovation process to higher level of complexity. This is especially true for commercial banks, where digital banking and treasury management products are becoming critical to remaining competitive and meeting rapidly changing customer needs.

In this article, we’ll take a closer look at the process of product innovation for digital banking and treasury management products, highlighting the unique challenges and opportunities associated with new product development.

Overview of the Product Innovation Process

The product innovation process involves several critical steps, including ideation, conceptualization, prototyping, testing, and deployment. Each of these stages is essential for developing and launching successful products that meet customer needs and drive business growth. Here’s a brief overview of each stage:

  1. Ideation: This is the initial stage of the product innovation process, where ideas are generated for new products or improvements to existing ones. During this stage, it is important to keep your customers at the center of innovation to increase the rate of new product adoption. This can be done through brainstorming sessions, customer feedback, market research, or other methods. 
  2. Conceptualization: Once an idea has been identified, it’s important to flesh it out into a more detailed concept. This involves defining the product’s features, target market, value proposition, and other key elements.
  3. Prototyping: In this stage, a prototype or minimum viable product (MVP) is created to test the concept and gather feedback from users. This can be done through mockups, wireframes, or other methods. Again, customer engagement at this early stage can inform the development of key features and functions.
  4. Testing: Once a prototype has been developed, it’s important to test it with real users to gather feedback and identify any issues or areas for improvement.
  5. Deployment: Finally, once a product has been refined and tested, it’s ready for deployment to the market. This involves launching the product and promoting it to customers through various channels.

Challenges and Opportunities for Digital Banking and Treasury Management Products

Digital banking and treasury management products present unique challenges and opportunities for commercial banks. On the one hand, these products offer significant benefits for customers, such as increased convenience, faster transactions, and improved access to financial data. On the other hand, they also require significant investment in technology, security, and compliance, while facing increased competition from Fintechs.

In Accenture’s report Commercial Banking Top Trends in 2023, they state “It’s no secret that small and medium-sized enterprises (SMEs) have a relatively disengaged relationship with their bank.”

According to Accenture Research’s analysis, 47% of SMEs believe that banks don’t

try to understand their challenges and only 9% are comfortable that their current bank meets all their needs.

Stages of the Product Innovation Process

Now, let’s take a closer look at each stage of the product innovation process and how it applies to digital banking and treasury management products.

Ideation

Ideation is a critical stage for digital banking and treasury management products, as these products require a deep understanding of customer needs and pain points. To generate ideas for new products or improvements to existing ones, banks can use a variety of methods, including:

  • Conducting customer surveys or focus groups to gather feedback on existing products and identify areas for improvement
  • Analyzing customer data to identify trends and patterns in behavior
  • Studying competitors to identify gaps in the market or opportunities for differentiation
  • Collaborating with internal teams or external partners to generate new ideas and perspectives

Conceptualization

Once an idea has been identified, it’s important to flesh it out into a detailed concept that defines the product’s features, target market, value proposition, and other key elements. This can be done through:

  • Creating a product roadmap that outlines the key milestones and deliverables for the project
  • Developing a business case that outlines the expected ROI and other benefits of the product
  • Creating user personas or customer journey maps to better understand the target audience and their needs with an eye towards rate of adoption
  • Conducting market research to validate the concept and identify potential challenges or opportunities

Prototyping

In the prototyping stage, a prototype or minimum viable product MVP is created to test the concept and gather feedback from users. For digital banking and treasury management products, this might involve:

  • Creating wireframes or mockups of the product’s user interface and user experience
  • Developing a functional prototype that allows users to perform basic tasks or transactions
  • Conducting user testing to gather feedback on the product’s usability, functionality, and overall value proposition
  • Iterating on the prototype based on user feedback and other insights

Testing

Once a prototype has been developed, it’s important to test it with real users to gather feedback and identify any issues or areas for improvement. This might involve:

  • Conducting usability testing to identify any issues with the product’s user interface or user experience
  • Testing the product’s functionality and security to ensure compliance with industry standards and regulations
  • Gathering feedback from beta users or early adopters to identify any issues or opportunities for improvement
  • Analyzing user data to identify trends and patterns in behavior that can inform future iterations of the product

Deployment

Finally, once a product has been refined and tested, it’s ready for deployment to the market. This involves launching the product and promoting it to customers through various channels, such as:

  • Developing a clear migration path for current customers
  • Creating marketing campaigns that highlight the product’s features, benefits, and value proposition
  • Leveraging social media and other digital channels to reach a wider audience
  • Offering incentives or promotions to encourage adoption and usage of the product
  • Monitoring customer feedback and usage data to identify areas for improvement and inform future iterations of the product

Importance of User Feedback and Iteration

Throughout the product innovation process, it’s important to gather feedback from users and incorporate it into the product’s development. This helps ensure that the product meets customer needs, delivers value to the business, and lends itself to rapid adoption. To gather feedback effectively, banks can:

  • Conduct user testing and surveys throughout the development process to gather feedback on the product’s usability, functionality, and overall value proposition
  • Monitor customer feedback and usage data after the product has been launched to identify areas for improvement and inform future iterations of the product
  • Leverage customer feedback to inform other areas of the business, such as marketing, sales, and customer support

Conclusion

Innovation is critical to the success of any business, especially in the fast-changing landscape of digital banking and treasury management products. By following the product innovation process outlined in this article and incorporating user feedback and iteration, financial institutions can develop and deploy successful products that meet customer needs and drive business growth.

Treasury Management Opportunities Behind the Mystique of Open Banking

Open banking can mean different things to different audiences. In the United Kingdom, where it was ushered in by government mandate, it’s about allowing consumers to share their financial data with non-bank providers of financial and payment services. European Union regulators have issued similar edicts focused on the retail financial services market.

Much of the talk of open banking in the United States to date has focused on retail banking applications as well. However, some of the most significant opportunities for U.S. banks arise from the ability Open Banking offers to better serve their commercial customers.

Banks and their commercial customers were plagued by numerous stressors brought on by the COVID-19 pandemic. With growing demand for remote, just-in-time service delivery, capabilities such as online account opening, and digital onboarding have fast become table stakes.

Commercial customer demands aren’t all that different from the demands of retail customers: they want innovative solutions that support more efficient finance processes. Unlike consumers, who have few qualms about relying on nonbank financial technology firms, however, commercial clients prefer working with banks on the digital transformation of finance.

That said, Accenture conducted a survey of over 300 US businesses about their treasury functions and according to their report, “Unlock the Treasury Management Treasure Chest,” Accenture states “Fintechs are offering competitive treasury services and businesses are taking note. Cost, ease of use and ease of integration are the primary reasons they would consider moving their treasury services to a fintech.”

Here is what their survey revealed: 

  • 60% of respondents are aware that fintechs offer treasury services that could reduce their reliance on their banks 
  • 44% have considered moving to a fintech provider in the past year  
  • Nearly 50% of businesses with less than $250 million in revenues considered switching 
  • 60% of businesses less than 20 years old are likely to move   

Open Banking Basics

Open Banking platforms are built around several new and emerging technologies, including the cloud, artificial intelligence (AI), robotic process automation (RPA), and open APIs. These technologies are agile enough to support rapid deployment of data-driven products and services accessible using any type of device through any channel. They also allow for open access to customer financial data in collaboration with customers’ fintech partners. And they create new opportunities to grow through data-driven solutions, pricing and risk profiling, thereby improving the customer experience. But knitting bank, customer, and fintech securely is key. Close integration helps.

Open Banking uses a microservices architecture. Microservices are individual services and functions culled from larger applications and combined to create new applications using special APIs. These APIs (known as REST, or Representational State Transfer APIs) contain the routines, commands and protocols that integrate microservices so that they work together as a single application deployed through the cloud. The host operating system constrains access to physical resources thereby limiting consumption of the host’s physical resources.  Open Banking also uses APIs to connect to bank and partnered solutions.

To demonstrate how this works in practice, consider the client onboarding process. In a traditional banking environment, this is a time-consuming, largely manual process requiring substantial documentation and verification steps. As a result, it can take between 20 and 90 days to onboard a new commercial customer, resulting in as much as $25,000 in lost revenues from that customer, according to an analysis by Deloitte. Using technologies like AI and RPA (think workflow automation on steroids) eliminates much of this friction, leading to improved customer satisfaction and greater cross-selling opportunities leveraging data digitized during the on-boarding process.

Open Banking will drive significant value to banks’ bottom lines. The journey to Open Banking will not be a speedy one, however, as it premised on new sets of business principles and IT philosophies. Understanding where your bank’s core technologies reside on the IT continuum offers insight into how to map out the journey to Open Banking. This will be the focus of my next blog post.

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