Banks Dreading The Real-Time Payments Challenge


Banks may not like it, but the demand is here for faster payments — from businesses, consumers and regulators alike. While they’re apprehensive about the technology, financial institutions are facing pressure to adopt real-time payments capabilities to meet that demand and to comply with new regulations.

In Europe, the driving force behind faster payments is the revised Payment Services Directive, or PSD2, which now includes third-party payment players under its scope. The legislation includes mandates for capital holdings, indemnity insurance, payment data access, security and, of course, access to faster payments.

But between PSD and PSD2, the demand for faster payments began to evolve into a demand for same-day and real-time payments. According to Dion Global Solutions, which provides banks with software to maintain compliance with regulations like PSD2, FIs aren’t exactly ready for this next phase in payments speed.

“Financial institutions are still a little wary about real-time payments,” said Dion Chief Technology Officer Andreas Wagner and Global Head of Financial Messaging and Workflow Jürgen Dahmen, who offered their joint input on the push for payments speed.

The executives said regulators have made real-time payments capability an inevitable requirement, whether banks are happy with that fact or not.

“The increasing regulatory pressure, especially in Europe, over the last couple of years is pushing banks and financial institutions in this direction,” Wagner and Dahmen said, “leaving them with very few options, especially with the deadline for PSD2 compliance inching closer.”

Dion announced earlier this month the launch of its own real-time payments tool, the Real Time Payment Engine, which banks can implement to support real-time payment processing that aligns with EU regulation. According to the executives, while the legislation is Europe-wide, EU member states have taken their own paths to implementing faster payments technologies.

“Regulators in Europe are pushing for real-time payments; however, the approach is not uniform at the country level,” they explained, adding that nations like Spain, the U.K., Denmark and the Netherlands have already begun their instant payments implementations, but others, like Germany, are a bit hesitant.

“A number of our clients have already started using our real-time payment solution,” said Wagner and Dahmen, “but others are waiting and watching the developments.”

That waiting period has a time limit on it, however, with EU member states having until Jan. 13, 2018, to implement PSD2 into their own national legislations. But there’s another factor lighting a fire for national regulators and financial institutions to adopt real-time payments: competition.

According to Wagner and Dahmen, while EU regulators targeted security and transparency with their revision of PSD, they also aimed to boost competition in the market. It has a lot of banks worried that they’ll lose out market share to newer rivals.

Banks “fear losing customers to FinTech companies,” the executives said, citing players like Apple Pay, Google Pay, PayPal and even Western Union as facing traditional FIs with their own faster payments solutions for businesses and consumers.

“Banks need to react fast, or they could lose market share in the future,” warned Wagner and Dahmen.

With the pressure on for banks to implement faster payments to stay competitive and compliant, FIs have a long road ahead filled with challenges that follow once real-time payments capabilities have been achieved. For one, the executives noted, security can cause a headache.

“Sanctions screening becomes a challenge with real-time payments as timing to perform this step is compressed into milliseconds,” they noted. In other words, the faster the payment, the less time there is to screen that transaction to ensure it is legal and compliant. “This poses a significant concern for financial institutions and requires them to review and change their current approach.”

Plus, the path to compliance won’t end for banks once they integrate real-time payments capabilities into their offerings. Wagner and Dahmen pointed to the areas of PSD2 that mandate stronger customer authentication, which could also be a tricky process when it comes to faster payments. “Another aspect is fraud detection,” they added. “With real-time payments, fraud detection needs to speed up.”

Banks’ whole cash management strategy will need to see a revamp as well, they said.

“Liquidity management will also change dramatically — while, in the past, it was a daily disposition, in the future, it will become a real-time challenge,” noted Wagner and Dahmen. “Banks will need new processes and systems to support real-time liquidity disposition.”

Considering the pressures facing banks — competition, compliance and an overhaul of their processes from daily to real-time — it’s no wonder financial institutions may be feeling anxious about real-time payments.

But what banks fail to realize, according to Wagner and Dahmen, is that these challenges pose an opportunity for banks.

“Few financial institutions understand that PSD2 is a chance to provide new services to their customers,” they said. “These include being able to achieve an aggregated overview of all retail customer accounts, including accounts from other banks. Such technology allows for a much more holistic view of client needs and, in turn, the ability to provide much more tailored solutions.”