Both are key to addressing the modern demands of end-users. Use-cases for real-time payment capabilities continue to grow for consumers, small businesses and corporates, while the open banking business model is proliferating beyond the ability for FinTechs to loop into their customers’ bank account data, and into new opportunities like enhanced small business loan underwriting and automated accounting.
As faster payment networks continue to roll out onto the market, Deborah Kovacs, co-founder and chief product officer of core banking technology provider Finxact, said there is also a growing opportunity for these two trends to converge. Open banking frameworks can support a more seamless integration and on-boarding process for financial institutions looking to loop into new payment networks and offer those services to their own customers.
Although new payment services can indeed jumpstart a financial institutions’ digitization efforts, Kovacs explained that many banks are bogged down by legacy infrastructure that limits their ability to quickly adopt new services and technologies.
“I think a lot of banks are still stuck with their old core systems, and it really does prevent them from innovating — and innovating quickly,” she told PYMNTS in a recent interview. “Where the market is going, consumers and small businesses expect expediency.”
Reliance on older platforms with limited functionality prevents financial institutions from gaining access to efficiencies and technological proficiencies that newer tools and services can offer, leaving them stuck in a loop of inefficiencies and outdated tech.
Looping Into Faster Payments
Kovacs pointed to The Clearing House’s real-time payments service, RTP, as an example of this. While the most highlighted benefit of RTP is the speed with which funds can move, there are add-on benefits that can boost efficiency of banks’ back-end operations.
An open banking framework can address some of the biggest challenges financial institutions have in embracing new payment services like RTP. Last month, Finxact announced a collaboration with The Clearing House that enables Finxact to connect its financial institution clients into RTP via its open APIs.
Financial institutions are increasingly looking at RTP and other emerging payment networks as a key competitive differentiator, including in their small business banking operations, said Kovacs, who commended The Clearing House for being among the first to spark the drive toward faster payments.
But on-boarding into a new payment network is far from the only challenge these FIs face in a faster payments ecosystem.
“A lot of the cores [banking infrastructure] still have one leg in the batch environment,” she explained, adding that this makes the shift toward a real-time payments model more difficult. “I think customers are going to like the immediacy of payments, but on the other hand, I think it’s going to present challenges for customers to become accustomed to that, for banks to be able to train their employees and clients on what it means to be in a real-time environment.”
Without regulatory mandates, competition is undoubtedly the major force behind the U.S.’s embrace of open banking. It’s also driving the introduction of newer, faster payment services, which will continue to add complexity for financial institutions that must not only adjust their liquidity strategies to align with a real-time market, but will have to also juggle the logistics of managing multiple new payment networks.
This is a pain point made worse when financial institutions operate on legacy systems, Kovacs said, while APIs can offer flexibility and scalability for banks to more easily make these changes.
But the financial services market remains in flux, and competitive forces are only amplifying. Initiatives like ISO 20022 can help support standardization in the way financial institutions integrate with various payment works, added Kovacs, while industry innovation and competitive pressures from FinTech will both support banks’ ability to elevate their services, and challenge their market position.
Looking ahead, she said additional faster payments capabilities, digital wallets, and artificial intelligence will continue to drive the evolution of payments and banking in the U.S., opening the doors for non-traditional products and services as customers’ demands change shape, too.
“I think you’re really going to see a much more consumer-focused view on products,” noted Kovacs. “Banks always instill a lot of confidence, but I think banks are going to have to get innovative in the products they offer to be competitive with the FinTechs out there.”
Open banking frameworks and APIs will continue to play a role in this new face of financial services, allowing both banks and FinTechs to connect with each other, and connect into new services like RTP and beyond.
“The trend is, you see a lot of small businesses and retail customers embracing the benefits that real-time payments can bring them,” said Kovacs. “It’s very exciting to see it move in that direction. A whole new generation is going to be using this type of banking functionality.”