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
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