Anthony Walton, Chief Executive Officer, Iliad Solutions
Despite the surge in instant digital transactions driven by the pandemic, a fascinating 39% of demand deposit accounts (DDAs) in the US are still not connected to the Real-Time Payment RTP Network. According to US Bank, The Clearing House’s RTP Network has reached 61% of DDAs yet is actually accessible to banks that hold 75% of these accounts.
It’s likely that more institutions will jump on board when the Federal Reserve’s instant payments network, the FedNow Service, launches in 2023. Nonetheless, in this age of contactless, account to account (A2A) and peer to peer (P2P) transactions it comes as a surprise that potentially nearly two fifths of bank customers are using products that don’t settle payments immediately.
Barriers to progress: confronting the legacy challenge
Network rollouts aside, one of the key reasons for this slow uptake among some banks could relate to the technical challenges facing large financial institutions - and the cost of implementing digital transformation in the context of widespread dependencies on legacy infrastructure.
Indeed, research by Capgemini and Sogeti has shown that organizations are plowing around 40% of their budgets into hardware and infrastructure and in excess of 35% on tools - with human resources taking a much smaller allocation of annual spend.
And there are also likely to be banks that may wonder what the benefits of adopting real-time payments are - but more on that later.
So it’s entirely understandable that a number of players could be holding back amid reasonable worries that implementing instant payments is a project too far.
What the UK’s adoption of real-time payments teaches us
Iliad Solutions helps banks to test and launch new technology. The business worked closely with the UK banking industry when it went through the process of implementing faster payments infrastructure more than a decade ago. During this experience lots of lessons were learnt.
For instance, in the early days it quickly became apparent that instant payments represented a fraud risk. This was because transactions were authorized based solely on the account numbers provided. Just one or two incorrect digits and money would be sent to the wrong account. As a result, fraudsters were able to develop new ways of tricking people into making payments. Without the three to five-day settlement period, there was no time to stop suspicious payments and funds were easily transferred instantly into criminal accounts. Thankfully, systems have been put in place to ensure account matching across a number of key data points and scamsters now struggle to get away with deciphering funds via instant payments.
Talking of scrutinizing the process, sending a payment that needs to settle in real time requires a whole sequence of checks with around half a dozen back-end systems. Simulating these checks before going live is no mean feat with a legacy framework, and is a huge undertaking if attempted manually.
How banks can successfully implement instant payments
With technological innovation continually accelerating, new functionality and products are being added and iterated at lightning speed. Working practices in which developers code for six months and then test for several weeks need to become a thing of the past, as they are a significant threat to modernisation - and commercial viability.
There is a way to overcome this challenge: the technology now exists that allows banks to simulate instant transactions across multiple endpoints. Virtualization of testing saves vast amounts of time and hugely simplifies what is a complex process.
Designed for today’s Agile and DevOps world, automated testing engines reach every corner of an institution’s infrastructure, not just the new component or module, to ensure modern and old tech are capable of working seamlessly together. As functionality is added to, say, a debit card product, tests can be run automatically.
This type of approach is backed up by Capgemini and Sogeti’s World Quality Report 2021-22, which revealed that a key benefit of test automation was better control and transparency of test activities (according to 1,750 tech professionals surveyed). It seems people feel it improves the process of testing rather than its outcomes.
Crucially, banks should test to prove that new software doesn’t work rather than confirm that it does, for example by simulating unexpected rapid increases in transaction volumes. This way, tests are deeper and more reliable, assessing a wide variety of unforeseen scenarios.
Real-time payments will deliver benefits to financial institutions
Some banks may be delaying their adoption of instant payments, as they’re unsure about the benefits. After all, enabling customers to settle funds in real time doesn’t generate revenue, right? Actually, real-time payments provide an opportunity to incorporate complementary services such as insurance, investments and foreign exchange. This keeps customers on a platform longer and appreciative of the convenience multi-service offerings brings.
It also presents a chance to deliver embedded payments benefits to consumers who are becoming increasingly used to accessing financial services within non-financial platforms such as Amazon and eBay.
With that in mind, there are few reasons to delay adopting instant payments and giving customers - both business and retail - the same kind of modern digital experience in banking that they encounter in other areas of their lives, such as with Netflix, holiday reservations, or clothes purchases.
And thanks to modern tools, those banks that are yet to join the Real-Time Payments Network can ensure even more DDAs can send and receive funds instantly.
World Quality Report 2021-22
The Clearing House
Independent Banker, February 2022