Instant Payments Force Banks to Examine Limitations of ‘Creaky’ Legacy Systems

The July launch of the FedNow® Service — and the fact that The Clearing House’s RTP® network has been operational for six years — underscores the need for banks to examine their legacy payments architecture, Form3 U.S. CEO Dave Scola told PYMNTS.

Scola’s remarks came as part of the continuing “What’s Next” series, examining the looming trends in payments demand and innovations.

And that means looking at what works, what doesn’t and where changes need to be made.

“There’s the desire to meet client demand for real-time payments for enhanced data to capture, and to leverage some additional services on top of the payments,” Scola said.

Addressing the Pain Points and ‘Creaking’ Systems

The “creaking, older legacy platforms,” he noted, are struggling to adapt to new demands, particularly the technological demands that come with 24/7/365 operations. The volumes that are crossing and are expected to cross real-time rails may not be huge at the moment, but there will be a groundswell through the next year, with momentum accelerating into 2025.

The dynamics and demands are leading financial services execs to earmark money for innovation in the year ahead, he said. Among the key initiatives lies a continued shift to the cloud to access core platforms and payments gateways and to use more off-premise options to help them move to market more quickly with new products and services.

“APIs are now moving into the ‘center frame’ in order to facilitate the interaction of those core components,” he said.

No conversation about payments innovation would seem to be complete without at least some discussion of artificial intelligence (AI). Scola observed that AI and machine learning have been tools leveraged in innovation and will continue to prove useful in fraud prevention and risk management.

“AI opens up new avenues for fraud analytics, though the application of AI to payments has yet to be seen,” he said.

The Future of Real Time

As the months roll on, banks will need to monitor a long-term dynamic as to whether (and to what extent) instant payments cannibalize other rails that are still in use today, and whether some card traffic might be cannibalized too, he said.

Cannibalization, he added, “will be a function of the extent to which real-time payments are adopted by consumers and merchants too.”

He pointed to markets such as Brazil and India, where real-time payments are a point-of-sale feature at merchants such as coffee shops. We’re a long way from that ubiquity in the United States, he said, but the emergence of alias directors and QR codes in commerce could help see an acceleration in demand for faster payments.

Scola said that open banking is another area of innovation that holds promise but also may have a long gestation period in the U.S. because there is yet to be a comprehensive regulatory structure developed such as has been seen in the United Kingdom.

The same need for regulatory clarity confronts the transformation of cross-border payments, linking far-flung domestic schemes together, he said.

“We’ll start to see a movement away from traditional correspondent banking,” he predicted, as real-time payments schemes interact and distributed ledger technologies and tokens may have a role in reducing the complexities of cross-border payments, boosting transparency and reducing foreign exchange (FX) spreads, as value is conveyed instantly between senders and receivers.

“But we need consensus around how all this will be handled with a level of regulatory cohesion that I do not see happening in the near future,” he said. “There are a lot of other domestic payment solutions that need to be solved for first before those broader international payment solutions are solved.”

For Form3 itself, the year ahead is a promising one, as Scola pointed to a September investment from Visa and the fact that client firms’ transaction banking and corporate banking businesses are “flush with cash” given the high interest rate environment. That means they’re ready to tackle innovation and upgrade their payments infrastructure.

“Things are looking good,” he told PYMNTS.