With new data standard formats taking hold (ISO 20022) and customers increasingly expecting real-time payments, this is a critical time for banks to modernize their processes. Increasing speed and convenience for customers while implementing cost reductions isn’t easy to do, but that’s what banks should aim for in the coming year.
During a recent PaymentsJournal webinar, Stuart Bain, Senior Vice President of Product Management at Alacriti, and Brian Riley, Director of Credit and a Co-Head of Payments at Javelin Strategy & Research, delved into the current trends in loan payments, the influence of credit card debt and consolidation in the market, and what bankers should consider in 2024 as they modernize their payments.
Pressures Affecting Credit Usage
Amid lingering inflationary concerns, widespread talks of a gloomy retail season have emerged. Consumer stress is palpable, budgets are strained, and bankruptcies are starting to rise again. Concurrently, delinquencies have surged to double the 2021 levels, painting a challenging landscape.
”Credit card debt consolidation can be a good strategy for consumers because it allows them to go from a high-interest product to something that’s more planned,” Riley said. “But on the other side of the coin, people don’t always close those accounts after consolidation. If the economy starts to sour next year, consumers will still have that credit available.”
“August saw a decline in non-revolving lending, which was down 9.8% on the year. It could just be people paying off loans,” Bain said. “Perhaps people are paying down their consolidation loans but switching back to using their cards, and card usage will increase.
“The Card Competition Act [still pending in Congress] might change the way we see loan payments processed, specifically towards credit cards. But I don’t think it’s going to impact as many card issuers as the original Durbin Act. If you look at the regulation, it’s targeting basically just the top 10 banks.”
Real-Time Now
From a payments perspective, the imperative phrase is “go real time or go home.” Consumers have come to expect instant gratification. Waiting two to three days for a payment to post to their loan, their credit card, their mortgage, etc., is considered old-fashioned. This applies not just to loan payments but also to person-to-person payments or account-to-account transfers.
“We see feedback from prospects and clients saying they need to make that whole process faster for their customers or members,” Bain said. “If customers can move money essentially in real time from PayPal to their bank account, why can’t they move money from one account to another in real time?”
To accommodate these expectations, payment service providers need to be able to look up accounts in real time, get balances in real time, and settle in real time. And customers expect their payments to be reflected in real time.
“We see banks decide they’re not going to post this payment until the money actually shows up, which is a very old-fashioned view,” Bain said. “People need to get their heads around the mindset that you need to decouple the payment data from the actual dollars. The money is going to show up, but you should be using the data to apply the payments rather than waiting for the actual dollars to arrive.”
True real-time processing is likely to have a sizable impact on credit cards. Customers will start asking themselves, “If I make a payment, when do I get to spend that money again? If I make a payment this morning, can I go out and spend the $363 this afternoon?” Credit card issuers will need to respond to the changes that real-time posting of payments will bring.
Keys to Modernization
What should bankers do to modernize their processes and technologies? Bain outlined six areas to keep in mind:
- Speed and convenience across the value chain are paramount.
- Banks should seek full visibility of a transaction rather than just firing a payment off into a black hole and chasing the biller to find out whether it’s posted. Immediate availability of funds ties back to faster payments.
- Consumers expect real-time solutions like PayPal and Venmo. If an organization’s core is not up to date, it is limited in how it can manage these things.
- New standards are coming. With the Fed’s move to adopt ISO 20022 across the board, some of the banks Alacriti works with have started diverting budgetary funds toward accomodating the upcoming changes.
- The regulatory environment will take a bite. The Consumer Financial Protection Bureau will look at the junk fees for things like delinquency, but it will also move beyond credit cards to other types of fees. We may start to see state regulations address some of those fees that regulators view as onerous for consumers.
- Cost reduction is top of mind. A lot of legacy technology stacks are expensive. They run on big, expensive IBM hardware that has to be hosted and maintained by people. Those overseers are not quick to adapt the change cycle on some of these legacy products, which are measured not in months but rather in years—and require specialized sales stats. For the organizations still running mainframe-based platforms, the people who can program COBOL are retiring and are not being replaced by new people with the same knowledge.
“Once you have some of these things in place, you can start to accelerate innovation,” Bain said. “There are interesting concepts about how to create new payment experiences. Would somebody come along and start to issue a new decoupled debit card because they can check the balance on the account in real time?”
Alias-Based Payments
Alacriti also expects growth in alias-based payments. “If I needed to send money to anybody here, I’m not going to ask you for your bank account or your debit card,” Bain said. “I’m going to ask you for your email, for your cellphone number, and then try and work out which network you’re on. One thing that we’re starting to get asked about is, ‘Well, why aren’t these networks interoperable? Why can’t somebody on PayPal send money to somebody on Venmo without having to go through all the hoops of transferring all the money around?’
“It would be interesting to see whether that sort of alias network interoperability comes to the fore. Can PayPal play nicely with Venmo such that the money becomes interchangeable and interoperable?”