Real-Time Payments Need Orchestration Layer to Solve Interoperability Gap

The financial landscape is rapidly evolving in an era of faster payments, presenting a blend of opportunities and setbacks.

One of the major hurdles that U.S. banks are facing today following the FedNow® Service launch stems from the lack of full interoperability between the Federal Reserve’s real-time payment system and the RTP network overseen by The Clearing House.

This has created “a substantial headache and genuine operational and technical challenge for a lot of U.S. banks,” Form3 Chief Product Officer Eimear O’Connor told PYMNTS in an interview, pointing to the separate technical builds and distinct operational processes caused by differences in specifications and rules governing the two instant payments systems.

As a result, managing real-time transaction processing and reconciliation poses a significant challenge for many banks’ back offices which aren’t inherently geared for instant environments, further complicating the operational landscape.

As O’Connor explained, many financial institutions (FIs) are still transitioning from batch and overnight processes — operations that were not time-sensitive and often invisible. Thus, “to suddenly [have them] front and center, with the expectation that processes happen immediately and [more] importantly that funds are applied immediately, is a significant hurdle that many banks still need to overcome.”

To tackle these challenges, she said, the adoption of unified platforms that streamline operational processes across both instant payment schemes would be a “game-changer” for banks, fostering much-needed cohesion that would otherwise be difficult to achieve.

This need for cohesion is also the reason why payment providers like Form3 are developing products that facilitate scheme-agnostic builds, ensuring seamless routing of payments to the preferred scheme based on the beneficiary’s location.

“The objective here is to minimize the operational and technical impacts on banks and ensure that when [it comes to] instant connectivity, [banks] avoid dual projects, dual bills and ultimately dual processes within their back-end systems,” she said.

Microservices and Payments-as-a-Service Models

Despite the challenges, there’s a bright side for forward-thinking banks and financial institutions (FIs): once operational processes are streamlined, they have an opportunity to transform their service offerings, paving the way for enhanced customer experiences and innovative solutions, O’Connor said.

This involves a shift to a microservices-based architecture and payments-as-a-service models, both of which “offer and are designed with flexibility in the future in mind.”

On one hand, microservices leverage cloud development tools to enhance configurability, security and scalability, empowering FIs to tailor specific products for their end customers. Payments-as-a-service, on the other hand, allows banks to delegate round-the-clock technology management, while ensuring platforms evolve to meet future needs and scheme requirements.

And together, the combination of microservices and payments-as-a-service offerings enables banks to seamlessly integrate additional services into their payment flows, O’Connor said, facilitating product customization and data-driven insights for both internal and external use.

Futureproofing as a Strategy and Mindset

Today, FIs find themselves at a pivotal moment, grappling with significant choices concerning their technology infrastructure. As O’Connor explained, these decisions will involve weighing the benefits of in-house development against outsourcing to external technology providers, both of which underscore the need for “futureproofing” strategies.

For those choosing in-house development, understanding the importance of not only initial investments but also ongoing ones as real-time payment systems evolve and adapt to market changes will be crucial.

“It’s not a once and done [process],” she said, “and with the differences that we are already seeing in terms of the instant payment schemes, I think that is becoming very clear.”

Finally, O’Connor emphasized the need for a forward-thinking mindset, urging banks to leverage instant payments infrastructure for future product innovation.

This involves identifying customer pain points and exploring opportunities to develop competitive and compelling payment products, “whether it’s targeting the card space or higher-value payment use cases where instant payments [systems] can play a significant role in reducing the cost associated with delivering those payments in an instant manner,” she said.