Real-Time Payments Go Beyond The Need For Speed

Is real-time ready for prime time?

The pandemic has exposed glaring points of friction in any number of verticals – including banking, where it’s apparent that legacy systems and processes were not designed to handle real-time anything, and certainly not payments. Banks have been playing catch-up with FinTechs in the bid to bring speed to their processes, especially when it comes to B2B payments.

In a panel discussion with Karen Webster, observers from the front lines of real-time payments said the shift will require new approaches by banks and corporates toward liquidity, receivables management and partnerships.

Panelists included Sarah Billings, PNC’s senior vice president and head of payments product, operations and strategy; Bridgit Chayt, Fifth Third Bank’s senior vice president and director of commercial payments and treasury management; and infrastructure expert Domenico Scaffidi of Volante Technologies.

The conversation came across a backdrop of more than 50 real-time payment systems currently live around the world, although largely domestic and regional in nature.

Awareness of those differences is key. In the United States alone, for example, The Clearing House’s RTP network serves 70 percent of all DDAs. But the Federal Reserve has its own horse in the race, called FedNow, which is on the horizon.

Panelists agreed that to get more adoption by stakeholders, banks must leverage real-time infrastructure to unlock value for corporate clients that moves well beyond the confines of simply being fast.

Fifth Third’s Chayt said the need for speed might have gotten real-time payments initiatives off the ground, but that’s just a starting point.

That said, the U.S. economy is proving to be a tailwind for faster payments and processes. Real-time payments rails and functionality have enabled corporates to pay workers on time and get PPP loans quickly and on a large scale.

The Three Is

PNC’s Billings said that the overarching theme of real-time payments – “in addition to the economy, which we see is changing by leaps and bounds every day” – involves “a phrase called the three Is. It’s immediate, it’s interconnected [through AP] and it’s interrupted.”

On that last point, the “interrupted” leg of the trio, Billings contended that new business models are taking shape, disrupting the way the banking industry has operated for years. She said the digital age has ushered in the expectation of instant gratification, where daily life – and banking – occurs across mobile phones.

“One common thread is that we don’t look at payments just as back-office payments anymore,” Billings said. “They need to be looked at as a component of client experience.”

But she added that “we do lose a lot when we talk just about speed.” Billings noted that corporate clients are also interested in the data that real-time payments can provide across a multitude of payment types, spanning requests for payments, remittances and other transactions.

She said data can be the glue that helps ensure payments are interconnected and reconciled automatically – and reconciliation can be likened to the “holy grail” of treasury management.

Chayt added that the move toward real-time reconciliation marks a new phase in the evolution of real-time processes.

Not all that long ago, the first use cases of faster payments were promoted and embraced by payments-focused firms such as payroll providers or third-party payment processors. But Chayt said that more recently, treasurers have started to speed up processes in-house as well.

As she told Webster: “When you start to think about corporates and middle-market companies, that’s when you start to understand that infrastructure, the straight-through processing, the managed-service wrapper that a bank can bring is where the real efficiency and value are seen.”

For the banks themselves, noted Volante’s Scaffidi, there is the opportunity to offer a range of value-added services to their clients – but he added that 40-year-old legacy systems serve as hindrances to moving quickly toward innovation.

On the other side of the equation, corporates want to better manage liquidity and avoid paper-based processes. “Many financial institutions understand this and are trying to modernize this system, moving from batch to real-time,” noted Scaffidi.

He said the movement toward standards – particularly the messaging standard ISO 20022 and its marriage of data to payment flows – will enable banks to help their clients reduce manual reconciliation and expand their own businesses.

Scaffidi said the security and transparency embedded in ISO 20022 are especially valuable for cross-border B2B payments. “If we change the way we bank, then it’s possible to think about the new business model, where new, fresh revenues are coming in.”

Eyeing Efficiency

Faster back-end processes and real-time reconciliation also point the way to greater efficiencies throughout organizations, freeing up companies to capture those new revenue opportunities.

Fifth Third’s Chayt noted that many of the bank’s customers are excited about deploying real-time analytics to use insights that can be monetized, especially when immediacy becomes a differentiator.

“The idea that they could use the experience on the front layer of payment as a differentiator – for example, in a real estate firm with an escrow or a down payment experience, or in the insurance industry, where they can actually advertise and build a brand off of how you pay and are reimbursed – is extremely powerful,” she said.

In B2B, faster and more agile infrastructure also enables senders and receivers to negotiate payment terms when invoices are presented and paid. And as Chayt told the panel, the ability to finalize terms and agree on discounts amid requests for payments – automatically and digitally – have proven beneficial to distribution and logistics companies, among others.

The Rails Themselves

Bringing the new, agile infrastructure to banks and corporates also boils down to the rails themselves. As Webster noted, where once the conventional wisdom was an “either-or” mindset – one rail was the enemy of another rail – that concept no longer holds. Rails themselves, in a way, can co-exist and even work together as “frenemies.”

As Chayt stated, from the bank’s point of view, it’s important to make sure they’re using the right rail for the right reason. As financial institutions (FIs) look to provide more advisory value, they also need to ensure true intelligent routing for customers – and to allow corporates to make payments choice available for their receivers.

As PNC’s Billings observed: “We as banks have made the core corporate clients learn our silos – what’s different about a wire, then an ACH, then a check, then a credit card. That was then, this is now.”

The “now,” according to the panelists, demands interoperability between rails, which is an eventuality.

As Scaffidi said, different payments systems across Europe are not yet talking to one another, which means banks have to join several in order to be competitive – linking to all of them with cloud-based solutions.

“The bank can plug the legacy system, the solution in the cloud, and everything trends off the new functionality,” he said. Speeding time to market is critical as corporates are pushing banks for more innovation.

Said Fifth Third’s Chayt: “It became very obvious for a large segment of our client base that they weren’t interested in us simply providing another way to move money. They weren’t interested in just the introduction of a new payments rail. … The ability for that to touch the entire payments value chain – from purchase order to invoice to payment to reconciliation – and then archiving that information so they can make better purchase decisions in the future has been critical for them.”

Looking Ahead

Scaffidi predicted that as the industry works through what are hopefully the pandemic’s remaining few months, real-time digital payments will find increasing adoption as we move away from cash, and as banks find it easier to onboard new corporate clients and tailor services to them.

“There is no digital transformation without payment modernization,” he told Webster.

The shift toward real-time payments and reconciliation will come as a snowball effect – in a vivid illustration embraced by the panel, moving from horse-drawn buggies to Model Ts to souped-up Lamborghinis.

“You just need to show them that Model T car instead of that horse – and then people’s imaginations really can comprehend it and make use of it,” Billings said.