In a world of immediate payment options like Venmo and Zelle, most U.S. banks are still using the same payment-processing technology they installed in the 1980s. Consumers have come to embrace real-time payments, looking increasingly to digital-first nonbank financial players for increased speed and convenience. It has created a landscape where many legacy banks are lagging behind both their customers’ expectations and their competitors’ capabilities.
To explore how legacy banks can get up to speed on real-time services, PaymentsJournal sat down with John Brady, Chief Architect and Head of Engineering at BillGo, as well as Elisa Tavilla, Director of Debit Payments at Javelin Strategy & Research.
Moving Away from Batch Processing
Legacy U.S. banks have several real-time payment options right now, with FedNow going live in July as well as other options like working through the Clearing House and debit card and credit card networks. The key question is whether banks’ legacy infrastructure can truly process real-time payments.
As Brady explained, most banks’ payment processing today is still batch-oriented. But for the first time in over 40 years, there’s a new real time payments infrastructure and technology that can move money in real time, whether that’s through RTP or FedNow. “The rest of the financial infrastructure as well as operation needs to catch up and update to a 24/7/365 environment in order to get the most value and benefit out of real-time payments,” Tavilla said.
Most banks handle Same Day ACH by running batches multiple times a day. “To get to a truly real-time system, you’re not going to be able to run the batch for every single transaction,” Brady said. “Some of that fundamental infrastructure really needs to change in order to handle real-time payments going forward.”
The Components of Real-Time Banking
For legacy institutions to truly come up to speed, they need to address real-time payments, real-time settlement, and real-time core processing. Given the demand for faster as well as actual real-time payments, the infrastructure behind the scenes will need to be caught up.
“As more systems process transactions in real time, it’ll be increasingly important for the legacy core systems to be able to clear and settle in real time,” Tavilla said. “Otherwise, the lag and the complexities where the different types of payments and transactions aren’t aligned in terms of the actual movement and settlement time can pose challenges, whether it’s fraud or insufficient funds or other issues.”
Many banks will rely on a memo post so the customer perceives the transaction to be happening in real time, but it won’t actually post against the core system in real-time. “So the banks are kind of faking it in terms of this real time aspect of things,” Brady said. “As payment products get more sophisticated, it’s going to be harder for banks to do that fake-out type of real-time posting.”
According to Tavilla, consumers in recent years have become accustomed to being able to send money to friends and family or other uses in real time, although behind the scenes. The money might not be moved and or cleared and settled in real time,” Tavilla said. “That emphasizes the importance of financial institutions adopting systems that are actually able to move the funds in real time.”
In today’s world, these banks impose transaction limits, putting a dollar limit on Zelle or debit card transactions. As banks move toward real-time settlement, those limits could potentially be increased because there is more of a guarantee that the funds will clear.
The Impact on Legacy Infrastructure
Real-time capabilities are having an impact on legacy infrastructure. Under normal payment flows in bank systems today, a bank will process an ACH transaction in a batch file, then pass it to a money movement hub or run it through its fraud systems. These fraud systems are necessarily designed to expect a delay in settlement. Once the transaction goes into the core systems, there are multiple balances, including the memo balance, available balance, collected balance, and available balance. Those balances are updated multiple times through multiple batches throughout several days as the various funds settle and clear with other banks.
“If you think about a true real-time settlement, that whole payment processing up front is going to have to change,” Brady said. “The fraud models are going to have to change, the funds availability models are going to have to change, and the core processing on the back end is going to have to change as well.”
Said Tavilla: “The top real-time payments use case for both FedNow as well as RTP is the ability for consumers to be able to make a last-minute, real-time bill payment. Based on Javelin’s research as well as other studies, one of the aspects that consumers appreciate most about paying bills is the instant notification or confirmation. With real-time payments, the messaging and the finality of instant bill payment would improve the customer experience as well.”
Breaking Free from the Silos
Another impediment to the full embrace of real-time payments is the siloing that is prevalent at banks.
“I’m concerned that a lot of these systems today are owned by different departments within the bank,” Brady said. “If banks don’t take a holistic approach, each of these departments is going to devise their own strategy for how to deal with real-time processing.”
There is broad agreement on what needs to happen: Bill pay needs to be fully integrated with payment acquisition systems, risk systems, and core systems. Banks also need to consider how regulations interact with that. It’s only within that kind of comprehensive framework that banks can continually improve and, ultimately, provide their customers with better service.