Three Challenges for Transaction Banking in the New Payments Ecosystem
The payments industry has traditionally been a relatively calm ocean to navigate, with transaction banking being the safe-harbor for revenues in the banking industry. In the last few years a number of regulatory changes have been introduced, but the ecosystem never remains static, it continues to evolve. However, today’s demands on your payment systems, and the demands on your budgets to support them, are increasing the pressure via a new set of rapidly emerging challenges.
There are three key trends that banks need to get ahead of, if they want to thrive in this new marketplace.
- It’s down to the wire
Processing of high-value payments, or ‘wire’ processing is undergoing change with the introduction of new technical standards, new ways of processing cross-border payments, and new operating procedures. With the Fed’s and TCH’s direction towards ISO20022 being introduced over the next few years, and new correspondent banking models with SWIFT’s gpi affecting the very bedrock of how you’ve processed international payments, banks are having to look at rapidly modernizing their environments to even be able to process the simplest of payments, and stay relevant to their customers’ needs. The rise of ISO20022 demonstrates the industry’s desire to build for an increasingly real-time, data-rich world. The advent of more scalable and cost-effective technologies such as Linux offer new possibilities for keeping the costs of operation down. At the same time the pressure on the regulatory and security operation of payments will continue to rise. Banks will need to put even more resources into compliance and fraud protection; causing you to focus on keeping the lights on, rather than innovating for success.
But there is, of course, benefit to customers. All these changes add up to an improved customer experience. Better security, reduced risk, and increased transparency are just some of the benefits on offer, and banks needs to embrace these changes for the modern evolving RTGS market.
- Real-time, right now
With the advent of real-time payments, the lines are blurring between payments for consumers, and payments for corporate customers. This isn’t about one cannibalising the other, it’s about more choice for banks and customers alike. In the UK, it’s not the RTGS network that has been affected by the advent of the UK Faster Payments (real-time payments) scheme; it’s the expensive-to-process cash and check market that has seen reduced processing volumes. Real-time payments, whether they are real-time gross settlement (RTGS) or real-time low-value (RTP), share a common DNA of workflow where each requires very special handling to ensure that there can be no returns, or revocability. It means that banks need to share common processes between the two types of payments, even if the SLA for processing them might be quite different.
In countries where real-time payments have existed for a while, we are seeing the emergence of ‘real-time 2.0’, where new members are joining as direct participants through low-cost entry points (see later), new payment products are emerging that see an increasing need to handle non-STP real-time payments, and the value limits of those low-value payments are now increasing to take over the very traffic flows traditionally sent down the RTGS path. The cross-collaboration of both payment types see a future path where these payment types will continue to consolidate. Indeed, some countries, such as the UK and Canada, are discussing having a single, all-purpose domestic payments scheme that simply differentiates transactions by SLA and price. How you process the payments, and how quickly, will soon become the most important factor, with chosen settlement method being a result, not an up-front decision. Furthermore, the rise in real-time transaction volumes poses challenges around intra-day liquidity management which banks need to be prepared for, as having funds in the right place, at the right time, will become ever more important as the time available to move funds around evaporates, and predicting peaks and troughs in processing will all become real-time decisions.
- Every cloud has a silver lining
As we look to meet the changes in wire processing and real-time payments markets, we cannot ignore the cloud. Cloud-deployment is more than a technology choice, it’s a strategic one that accounts for unpredictable transaction volumes and the need to reduce time to market for new services. But building in flexibility for innovation cannot compromise your key wire-processing business.
Whether you choose to outsource your current hardware environments to a hosted solution; or to deploy a hybrid solution that continues to use the solid foundation you have in-house whilst leveraging the ‘best of the new’ from the cloud; or decide now is the time to embrace ‘true cloud’ pay-as-you-go hosted services - there is a solution available that provides stability and meets the requirements of change. You need to continue to run your profitable transaction banking business without interruption, and find a way to solving your customer’s needs.
These challenges might sound like a perfect storm, but the reality is that banks can meet it head-on. Acknowledging the digital transformation of our industry by laying the foundations needed for a real-time world will be critical to turning disruption into opportunity.
Related content: How SWIFT gpi Will Change the Cross-Border Payments Market
Related Blog Posts
How India is Tackling the Challenges of Digital Payments Growth
India’s massive transformation from a cash-based society to a cashless society is underscored by the rise in fintech adoption and the growth of the Unified Payments Interface (UPI) platform, which is now processing more than one billion transactions each month.
Deep Dive: Latin American Fintech Market (Part 2)
To support fintechs’ development and create a more inclusive financial system, governments across the Latin American region should adopt different regulations. Some good practices implemented in other countries, like the U.K. or Singapore, could also be adopted in Latin America, such as temporary exemptions on fintech authorizations on behalf of regulating entities, or the creation of temporary regulation sandboxes in which fintechs can operate, evaluate their business models and offer their innovative products in supervised environments.
Deep Dive: Latin American Fintech Market (Part 1)
There is a gap between what financial institutions currently offer versus what today´s customers want in Latin America, and this is where fintechs are earning a reputation for customer-centricity, personalization, quick response and seamless delivery. The relationship between fintechs and traditional financial institutions in Latin America has evolved from competition to collaboration, with the aim of efficiently working together and effectively scaling innovation, while also driving financial inclusion for the underbanked.
From API to AI to I: Banking Tech Gets Personal
Tired feet. Running out of business cards. Countless LinkedIn connections – sound familiar? This time of the year is conference season; the annual SIBOS (SWIFT) and Money20/20 USA gatherings spanning the autumn give attendees plenty of hot topics and talking points. My American colleagues refer to this season as “the fall.” I trust this to be an observation on leaves and fruit rather than a sequitur on the state of the fintech industry. Either way, it’s a good time to harvest, to take stock and to work out what we should be doing with the apparent abundance of innovative produce.
How to Maximize the Value of Partnerships Between Fintechs and FIs
The LATAM Open Banking & Fintech Partnership, organized by Connect Global Group, was held earlier this year in Mexico City, and ACI participated as one of the forum partners driving discussions on how to maximize value from collaborative partnerships between FIs and Fintechs. We explored the invaluable benefits of open API and strategies to differentiate the offerings of FIs and Fintechs, address consumer demands, and best practices for implementation aligned to regulatory requirements.
A Deep Dive into the Payment Tendencies in the Mexican Market (Part 2)
While the sheer volume and age of potential shoppers makes México an attractive market, there is another component to the viability of eCommerce: México is mobile. A recent study performed by the Asociación de Internet.mx, shows that México is one of 22 countries leading the trend toward mobile commerce, with young adults making 88 percent of smartphone purchases. The country has one of the largest mobile markets in Latin America, with one-third of all residents using smartphones.
A Deep Dive into the Payment Tendencies in the Mexican Market (Part 1)
The population of México is the second largest in Latin America, with 122 million residents, 39 percent of whom are considered middle-class. The population is relatively young, with an average age of just 27, and one-third estimated to be millennials, which is often a factor in driving the popularity of eCommerce. Last year, 56 million people accessed the internet in México, though despite the high number of internet and mobile phone users in the country, nearly two-thirds of the population do not have bank accounts (source: Banco de Mexico).
How to Be a Payments Trailblazer – The Seven Habits of Highly Innovative Organizations
The new Culture of Innovation Index from Ovum and ACI identified segments—from banks to intermediaries to merchants to corporates—at the cutting edge (of innovation) across the payments ecosystem. But what is most notable about those segments that have reached ‘trailblazing’ status is the apparent lack of commonality between them. No one segment, nor one region fosters better innovation. In fact, what’s driving these segments/organizations to be best of breed is their own culture of excellence. The only thing they have in common is their attitude.
Customer Innovation: Erste Bank [Q&A]
The global banking sector is becoming both more strategically focused and technologically advanced, responding to rising consumer expectations while trying to defend market share against an increasing array of competitors. A great deal of emphasis is being placed on digitizing core business processes, and reassessing organizational structures and internal talent to be better prepared for the future of banking.
Regulating for Real-Time: The Role of Government in Payments Modernization
Dr. Leo Lipis and Craig Ramsey, Head of Real-Time Payments for ACI Worldwide, continue their discussion on real-time payments and the findings of the new white paper, Get More from Real-Time.