By Casey Scheer
Only a few short years ago, it would have been hard to imagine making real-time payments using our smartphones and watches, yet during this time, we have seen the rapid adoption of these technologies. While it is an exciting time for the payments landscape, the industry is facing many challenges as today's payment processing environment becomes increasingly complex—especially in the back office.
The payments back office takes over as soon as a transaction is authorized. The back office performs critical functions like transaction reconciliation, settlement processing and funds movement, and includes the assessment of transaction-based fees and the management of disputes. Additionally, the back office should provide access to real-time transaction data and financial positions, allow users to perform transaction research, provide accurate and timely reports, and many more related functions.
Although a company's back office does the heavy lifting for its payments processing, back-office systems are often grossly overlooked.
With the rapid adoption of real-time payments, companies now must support many new processing requirements. For example, the transfer of funds from a payer's account to a payee's account must occur in a matter of seconds. However, many companies are using back-office solutions, built decades ago, as batch-oriented systems. These platforms were not designed to support the continuous processing requirements for real-time payments and as a result, back-office systems became a bottleneck.
For example, with settlement processing, financial service providers have done a good job of offering applications that allow users to quickly create and post payments (which can be done in seconds). The problem, however, is that the payment is not truly completed until it is settled, and most back-office settlement systems are batch-oriented.
When payments hit a batch-oriented back office, they are not processed to completion. Instead, they are basically gathered into big batch files that are collected throughout the day and then generally submitted for settlement once or twice over this period. Until that point, the payment has not been completed.
Another issue is the inability to change or adjust back-office systems without extensive code updates. Most of these legacy systems were designed for card-based transactions, and modifying them so they can support newer digital and account-to-account payments requires extensive software changes.
One of the biggest challenges companies face is supporting new payment message formats such as ISO 20022. For decades, the industry has used ISO 8583 as the international message standard for payment systems that exchange card-based transactions. However, ISO 20022 is an emerging global standard that is being used by faster payment networks and rails around the world, offering much richer, more robust data capabilities.
Additionally, companies are often unable to provide a real-time enterprise view of all transactions. This lack of visibility into the true status of payments during a processing day means payment positions cannot be truly known until the scheduled, periodic settlement has occurred.
With the growing demand of real-time payments inevitably comes the rise in dispute volumes. While disputes are fairly straightforward for card-based transactions, it is not quite so simple when it comes to real-time payments.
Traditional payment methods have been available for decades, and as a result, the dispute regulations for these programs are well defined with regular updates released at predictable, set intervals. Additionally, most users of these payment methods understand the general risks and financial liability involved and have a high degree of trust that a dispute will be resolved correctly in a reasonable amount of time.
Conversely, real-time payment options such as P2P are relatively new in the marketplace, and the dispute regulations and procedures being created by the different real-time payment networks are still in the early stages of development. Their update cycles are not well defined and the people using these payment methods may not know who has the financial liability for a dispute until they are involved in one (and it can change from network to network). Furthermore, the total time required to research and return disputed funds from a real-time payment is very similar to that of traditional payment methods. This means that even though funds transfers occur in near real time, obtaining a reimbursement for an errored funds transfer can take weeks (or even months) to complete. This out of sync quality between payment processing and dispute processing is one area in need of significant quality improvement.
It is critical for companies to implement strategies that will allow their back offices to be as nimble and flexible as possible so it can meet both current and future payment processing requirements. A few suggested areas companies should focus on to help future-proof their payment back-office environments include:
Faster payments systems, whether real-time, near-real-time or same-day settlement, are now live and processing a growing volume of consumer and business payments. Thus, it is imperative for payments companies to implement the changes necessary to ensure better, more efficient internal back-office processing. This will not only create a compelling experience for both consumers and corporate end-users in the current environment, but also help ensure it in the future, no matter what comes next.
Casey Scheer is the director of marketing & sales at BHMI, a leading provider of software solutions focused on the back-office processing of electronic payments. The company is best known as the creator of the Concourt Financial Software Suite (R) — a unique integrated collection of back-office products that allow companies to adapt to the rapidly changing world of payments. Casey can be reached at firstname.lastname@example.org or 402-333-3300.
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