By Dr. Jack T. Baldwin
The most pronounced movement in payment processing today is the adoption of faster payments by networks, financial institutions (FIs) and businesses in general. The need to shorten the time between the initiation of a payment and its final clearing and settlement is compelling and has led to innovations like Same Day ACH and true real-time payments networks like RTP and FedNow.
RTP and the soon-to-be-completed FedNow network can process payments from initiation to final settlement within seconds. However, there are obstacles that prevent businesses and payment processors from adopting real-time payments operations. The task of integrating new technology and practices with existing legacy systems and back-office processes without service disruptions can be a significant issue. So, even though there may be advantages to providing real-time payments services to clients and others, if not done correctly, integration efforts can leave an organization less capable than before.
The goal of a real-time payments network is to transfer funds from a payer account to a payee account within seconds. It is a straightforward, technical process to create an interface that accepts payment instructions from a payer along with the messaging needed to deposit appropriate funds into a payee’s account or other value instrument like a debit card. In effect, payment posting occurs within minutes or even seconds.
The basic problem is that most back-office systems cannot match the real-time capabilities of faster payments front ends. Why? Because the back office is where real time meets batch. A typical back-office system creates batches of funds transfer transactions and processes them at specified periods of time—sometimes daily, sometimes multiple times per day, but never in real time.
This means that these back-office systems will never be able to provide the real-time handling and reporting needed to complete faster payment processing. So typical back-office operations like settlement and reconciliation can only produce results that are available at the end of one or more periods of a processing day.
FIs and businesses alike risk disruption of their back-office operating procedures when they embrace real-time payment processing. Why? As noted, back-office processes 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 day, seven days per week, 365 days per year. Consequently, unlike the case with daily settlement of ACH-supplied transactions, supporting real-time payments for an FI can require 24/7/365 staffing—a dramatic shift from traditional "banker's hours."
This includes monitoring reserves on hand and having someone on duty authorized to replenish them so that the Fl does not fall into an overdraft position based on after-hours outflows. Given that funds settlement is immediate and irrevocable, fraud must be monitored in real time as well. There is also the question of whether to extend customer service hours to address related issues.
Similar to FIs, businesses that process real-time payments may also face back-office disruption. Creating and receiving real-time payments would require some adjustment to back-office processes to ensure the availability of funds to support payments. However, a number of businesses are using real-time payments as the mechanism to support the complete order entry, order tracking, order fulfillment and order payment process. In fact, this is the primary transaction sequence architected for the RTP real-time payments network.
Few businesses are initially set up to support this combination of automated and manual processes. Because of this additional complexity, businesses typically introduce real-time payments as simple person-to-person (P2P) or business-to-business (B2B) operations.
Given the obstacles to adopting real-time payments, are there options to ease the process? The short answer is yes. For example, one approach to addressing the back-office batch processing bottleneck that slows down real-time payments processing is to turn the back office into a real-time operation. Applications exist that accept real-time payments transactions from the front end and process them all the way to completion, including clearing and settlement. Such applications are based on a continuous processing architecture that processes transactions as far as logically possible.
Additionally, transactions that still require traditional batch processing can be intermixed with real-time transactions. Batched transactions can be held for clearing and settlement during the next ACH cycle, and 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 are transferred to payee accounts within seconds, and positions are immediately known and available for research and reporting after individual transactions arrive at the back office.
Operationally, FIs and businesses tend to adopt subsets of real-time processing using a staged approach. For example, FedNow will permit participating FIs to implement receipt of real-time payments without having to support origination of real-time payments. This eliminates the necessity of monitoring reserves on hand on a 24x7x365 basis, which simplifies back-office banking operations.
Additionally, FedNow will permit third parties to be FedNow participants. The expectation is that larger processing companies like FIS and Fiserv will offer 24x7x365 back-office services for smaller FIs so they can support real-time payments with reduced disruption to daily operations.
As noted, businesses frequently enter the real-time payments world by adopting simpler, straightforward payment types like P2P or B2B payments. More aggressive organizations that want to eventually take advantage of the complete order processing capabilities offered by RTP are adopting elements of the order processing cycles on a staged basis as they gradually adapt their existing back-office operations to accommodate the full order handling capabilities offered by RTP.
Can real-time payments provide real value to financial institutions, processors, businesses and individuals? Definitely. Do organizations need to be careful in their adoption of real-time payments capability? Absolutely. In the final analysis, different organizations will associate different risk/reward ratios to the adoption of real-time payments.
Aggressive organizations will take pride in "leading the field" with new, innovative features; more conservative organizations will not adopt a new feature or capability unless their market demands it. In the former case, organizations are setting a competitive marker; in the latter, organizations are opting for potentially lower cost of operation and greater stability.
Dr. Jack T. Baldwin is chairman and CEO ofBHMI, a leading provider of product-based software solutions focused on the back office processing of electronic payment transactions and creator of the Concourse Financial Software Suite. For more information, please visit https://www.bhmi.com/concourse-financial-software-suite.
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